FTSE 100-listed water firm Severn Trent PLC (LSE:LON:SVT) has been accused by BBC Panorama of inflating its balance sheet by £1.68 billion through a complex accounting scheme intended to justify higher shareholder returns.
According to the investigation, the water company incorporated a shell entity called Severn Trent (NS:TREN) Trimpley in 2017.
Another Severn Trent-owned company called Severn Trent Draycote then agreed to buy Trimpley for £2, after which Trimpley issued £3 billion worth of shares.
Draycote paid with a £3 billion loan note which Panorama said was effectively an IOU. Although no cash was exchanged, Trimpley was immediately valued at £3 billion.
Severn Trent then reportedly acquired 49% of Trimpley for £1.47 billion and added the asset to its balance sheet. It has since appreciated in value to £1.67 billion.
Put simply, Severn Trent appears to have a multi-billion-pound asset on its balance sheet based on an IOU between two of its subsidiaries.
Panorama theorised that this complicated accounting trick was pulled off to inflate Severn Trent’s retained earnings, thus justifying higher dividends paid out to shareholders.
Severn Trent called Trimpley “an entirely legitimate, legal and transparent structure”.
“Any suggestion that we have misled our investors, regulators and customers on the company's finances is false,” it added.
Although water companies are regulated by Ofwat, the regulator does not have a say in their dividend policies.
However, Ofwat states: “As monopoly providers of essential public services, it is crucial that each company is transparent to customers and other stakeholders about their dividend policy and the dividend decisions they make.
“When paying a dividend, each company and its board must comply with all relevant legislation, standards, and duties. They must also meet the conditions of their licence, including taking account of company performance for customers and the environment in their decision to pay a dividend.”
"All dividends paid by Severn Trent are justified by earnings and any assertion otherwise is unjustified and wrong,” said the water company.