One of England's top-rated water companies is using an accounting trick to artificially inflate its balance sheet by more than a billion pounds, BBC Panorama has discovered.
The water company - which is regulated by Ofwat - is part of a complex web of companies in the wider Severn Trent plc group. Severn Trent Water then acquired 49% of Trimpley - and that investment was valued in the water company's accounts at £1.47bn. A hugely valuable asset appears to have been created for Severn Trent Water out of thin air.He told the programme: "This is as near to an unreal transaction as you can get - that has just been made up and put into the accounts to make the accounts look better.
Draycote has agreed to pay Trimpley interest on the £3bn IOU, which means the IOU gets bigger each year. So why do it? Severn Trent told the BBC that Trimpley was set up to allow the water company to legitimately account for future earnings, but that it has never been used for that purpose.As well as bolstering the balance sheet, the made-up £1.68bn has also been added to Severn Trent Water's retained earnings - that is the pot of money from which cash can be paid out to shareholders. The more money there is in that pot, the easier it is to justify large dividends.