plan for collapse of Thames Water

[Minusorange]

If the company was attracting the best “talent” it wouldn’t be in a mess.

To be fair it takes a special talent to get paid hundreds of thousands of £'s for seemingly doing nothing

 

[dlockers]

So the in the interim; they'll continue to pay subpar individuals at the talent rate soaking up the coins?

Man's gotta eat!

 

[dlockers]

At this point, they're not paying for talent, they're probably paying out of desperation - how much would you want to be paid to be charged with going in and somehow sorting that mess out? It's hardly the most attractive job in the industry at the moment

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

 

[ttaskmaster]

Something that happened more than 20 years ago for reasons that you aren't aware of is not exactly the smoking gun.

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.

Man's gotta eat!

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.

 

[MichaelAwkward]

I work in this field and personally I disagree. I’m struggling to think of comparable examples, so feel free to share some if it happens so frequently.

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

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.

Since Trimpley was added to the accounts in 2017, Severn Trent Water Ltd has paid out £1.615bn in dividends.

Profits over the same period were £1.246bn, so Severn Trent Water has paid out £369m more than it made in profit during that period. It looks like cash is being drained from the regulated water company.

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.