Soldato
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To be fair it takes a special talent to get paid hundreds of thousands of £'s for seemingly doing nothing
plan for collapse of Thames Water
- Thread starter Mrwong
- Start date
Man's gotta eat!
100%. These guys careers are all but over with Thames Water on their CV. Might as well make bank before you are forced to retire
Soldato
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Presumably the sale was to lower the value of the company pre-purchase, and then artificially re-inflate it before it was subsequently sold on a couple of years later.
It may not be as desperately damning as with other companies, but it certainly is an example of using accounting tricks to create company value out of thin air.
Unlike most Thames sites, there's a perfectly good canteen downstairs in Clearwater Court... and the execs all have offices on the top floor, where there's a bijou coffee-wagon selling frappe frippery and frangipane finery.
Soldato
Sorry for the late reply -
You only need to look at basically any group of companies to see this sort of thing with holding companies all the time. What sort of accounting are you doing?
The reason this is "normal" in my opinion is that it's entirely down to the fundamental principles of assets and liabilities, and the economic substance of the transactions. If you start to question those unfairly and unreasonably in my opinion, the whole thing falls down.
Look at the facts of these arrangements - mostly from the BBC article, although I'm sure the filed accounts are a thrilling read.
Severn Trent Trimpley (one of many subsidiaries of Severn Trent plc) set up in 2017 and becomes wholly owned by Severn Trent Draycote. Trimpley then issues new shares and Draycote buys them with an IOU for £3bn. Severn Trent Water (which is the regulated entity and a subsidiary of Severn Trent Draycote) later buys 49% of Severn Trent Trimpley (worth £1.47bn based on the IOU of £3bn).
No cash has been involved in any of this.
The IOU pays a bit of interest that gets recorded in Trimpley's accounts. Therefore the value of Trimpley fluctuates naturally. I assume the interest payable actually just gets recorded in an intercompany balance somewhere rather than being physically paid.
This is all accounting 101 and nothing really that unusual.
Severn Trent Draycote is a holding company for Severn Trent Water and Severn Trent Trimpley (and several other subsidiaries). It's actually also wholly owned by another holding company (Severn Trent Investment Holdings Limited).
All of which is owned by Severn Trent plc which is the only entity that shareholders are really interested in at the end of the day. In group accounting, what goes on at individual subsidiary level often becomes irrelevant (and their individual accounts become messy as a result because nobody pays a lot of attention to them when everything gets consolidated) unless it's crossing international borders or part owned.
The article says
Aside from the mistakes in the first sentence (retained earnings are not a pot of cash and dividends are paid from distributable reserves in the form of cash or other assets), who are the shareholders for Severn Trent Water? Severn Trent Draycote. What's also on Draycote's balance sheet? Oh yeah, a £3bn liability (the IOU). So when Severn Trent Water Ltd paid out £1.615bn (and I'm not sure this is correct, they may be referring to the plc in which case it's doubly irrelevant) in dividends it gets recorded as investment income in Severn Trent Draycote and makes its way to retained earnings, partially offsetting the £3bn reduction that would've occured several years earlier.
I like also how they use the phrase "made-up £1.68bn" as if it's some sort of gotcha. How else should they treat the increase in the asset value of their 49% investment in Trimpley? In Trimpley's accounts they'll be judging that the £3bn IOU is recoverable and therefore still worth something like that. Severn Trent Water will be doing the same for their investment asset per IFRS 9.
The story is trying to manufacture outrage at a dividend that in reality doesn't actually exist when everything's consolidated in the group. It's fundamentally misunderstanding what's going on and jumping to a conclusion that isn't there. And this is just one transaction - if you look at Severn Trent Water's (not the plc) accounts, there's all sorts of intragroup balances, loan balances, etc going on. Because that's how large group entities operate. I'm currently working for a small SME that has like... 7 companies in the group and half of them are holding companies which own a bit of another one set up as part of the private equity deal that capitalised it several years ago. And this is a group generating multiples less revenue than a water company. Holding companies are useful in limiting creditor liabilities and the impact of one trading company getting into trouble amongst other things but I've seen some structures bordering on the ridiculous.
The only dividend that the news should be interested in is that which is actually paid to shareholders of Severn Trent plc, which last years looks to have been around 100p per share, or roughly £300m, or just over 4% which is a lot lower than other FTSE100 companies and basically the same as any other utility company.
That's my take anyway. Maybe I've got it all wrong though as I have only been qualified for a few years now.
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Soldato
I think the point you are missing is that Severn Trent Water Limited ("STWL") is an Ofwat regulated entity and therefore is restricted by the regulator on what dividends can/can't be paid. Its parent company is Severn Trent Draycote Limited ("STDL"). By STWL acquiring 49% of the shares in Severn Trent Trimpley Limited ("STT"), it recognises the value of its investment (which is solely derived from the intragroup loan asset) without having to consolidate the STDL liability, so the transaction is a net positive in the consolidated accounts of the regulated entity. It artificially boosts the balance sheet of the regulated company, which presumably Ofwat review to assess whether or not the company has sufficient financial resilience etc to support dividends paid up the chain.
I agree this will all net out in the consolidations further up the group, but that's not what the purpose of this transaction is.
I agree this will all net out in the consolidations further up the group, but that's not what the purpose of this transaction is.
Soldato
I've had a quick skim through the Ofwat dividend guidance and PR24 in particular but I can't see much that would restrict Severn Trent in this case. It seems more focused on long term sustainability and non-financial aims around customer service than anything really technical (except the bits around debt and agency ratings I guess).
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www.ofwat.gov.uk
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www.ofwat.gov.uk
Perhaps you can educate me as you seem to know more than me about this.
In the latest accounts they've got an investment balance of £1.685bn per the BBC article and note 19 confirms that it's Trimpley making up most of that investment figure. Gain in the year was only £81m though.
So going back to the 2017 accounts when it was first added, in the equity statement there's two lines:
And note 30 explains that the consideration of £1.47bn for the investment in Trimpley was funded by issuing shares to Severn Water Draycote and then redenominating them.
Looking at some of the other group companies at this time, this appears to have been a part of a larger restructuring of their equity (with Draycote notably also redenominating shares and cancelling their share premium) and making more efficient use of financing from elsewhere in the group.
At the point this was done, they had £900m in retained earnings and had paid out £310m in dividends. After the investment, they paid out £195m and then in the years since then it's gotten back up to around £300m. If the purpose of the investment was to allow dividends to be paid when they shouldn't have been, then it seems ineffective as I can't see anything that would've stopped them paying dividends without the investment there anyway. Certainly the fair value movement each year isn't funding much compared to everything else.
I just fail to see this as some sort of smoking gun that's behind their very normal and expected dividend at an industry standard rate of around 4%. There are far bigger movements in the annual accounts of these companies which would affect their dividend policies. This arrangement/transaction has been through several years of being audited by different firms at this point as well as an FRC Audit Quality Review.
If it wasn't legitimate surely someone other than a retired ex-PwC Russia auditor (who definitely doesn't have an agenda and too much time on their hands) would've picked up on it?
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Soldato
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The Telegraph had a Jeremy Warner article on nationalisations addressing the suggestions that Thames Water could be returned to public ownership: “The bottom line is that Western governments no longer have the money or indeed the expertise for the high quality public service demanded by voters, let alone for indulging themselves in state-owned and run enterprise. The ship has sailed, and there’s no turning back now.”
Soldato
Yet the only Western government with privatised waters (England specifically) is the UK. I concede, the situation is utterly dire but I'm not so sure a publicly managed solution is entirely untenable. The whole water sector in England is in such disrepair, that the idea or thought of simply continuing with an obvious failing or corruptly managed status quo is equally untenable from a customer / national security perspective yet the only solution offered in town is seemingly to hike prices for all customers across all regions and shrug.
Soldato
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Arguably, the main driver behind privatisation was that standards and quality had fallen so low that the government couldn't afford to fix it... which would be the same situation here, even if they were somehow able to magically force-purchase the industry for a nominal £1, as has been suggested.
Either way, it will cost a bomb to fix.
right... but backwards governments like Libya could ? good job we are importing people from those countries en mass then isn;t it.
I'm sure they'll have all the experience needed to advise our gov
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This is a thread about Thames Water mate, not sure where Libyan governments come in to it
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They did good things with water that apparently western governments can't run a water company according the quoteThis is a thread about Thames Water mate, not sure where Libyan governments come in to it
Great Man-Made River - Wikipedia
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Soldato
Enjoy.
news.sky.com
Water bills to rise by average of 36% over next five years, says water regulator Ofwat
The biggest rise in bills will be borne by customers of a firm, some of whom are currently without water because of a "technical issue".
Thats an average too.Enjoy.
Water bills to rise by average of 36% over next five years, says water regulator Ofwat
The biggest rise in bills will be borne by customers of a firm, some of whom are currently without water because of a "technical issue".
My bills will go up nearly 60% a year as we're served by Southern.
Soldato
Couldn’t write it… same day.
Southern Water outage hits thousands of homes around Southampton and New Forest
Southern Water supplies issues across Southampton and Hampshire following fault at a supply depot in Testwood.
www.bbc.co.uk
Couldn’t write it… same day.
Southern Water outage hits thousands of homes around Southampton and New Forest
Southern Water supplies issues across Southampton and Hampshire following fault at a supply depot in Testwood.www.bbc.co.uk
My wife and I were having a nice chuckle about this on the way in to work this morning whilst stuck in traffic on the A3 as a result of Thames Water shutting a lane for the last 3 months or so.
Honestly you couldn't make this **** up, we're becoming the world's most expensive 3rd world country
Associate
We're impacted by this; It's currently impacting nearly 80,000 houses. We're lucky that we've always got bottled water and hot tub water to flush toilet as the free water stations are completely overrun and there is no water left in any of the local shops.Couldn’t write it… same day.
Southern Water outage hits thousands of homes around Southampton and New Forest
Southern Water supplies issues across Southampton and Hampshire following fault at a supply depot in Testwood.www.bbc.co.uk
Perhaps the most amusing thing is that my step father in law works for Hampshire Fire and Rescue command and they've had quite a few calls with Southern Water. Turns out the part that failed has zero redundancy or spare parts stored. A key part that impacts over 80,000 homes not having redundancy is madness
Soldato
It boggles the mind how almost all infrastructure services are busted, from upgrading archaic water ways to planning energy distribution networks. Nothing works as expected and it is all brutally expensive when compared to other comparable economies. A complete and utter shower from governments, regulators and providers for decades.
Yet, zero effort to make any changes, hold providers to account or to proffer a strategy to turn things around across all or any sectors. Just repeated cycles of investment promises and improvements that never materialise yet all while milking the customers for all their worth and keeping the tax-payers on the hook for all liabilities.
Yet, zero effort to make any changes, hold providers to account or to proffer a strategy to turn things around across all or any sectors. Just repeated cycles of investment promises and improvements that never materialise yet all while milking the customers for all their worth and keeping the tax-payers on the hook for all liabilities.