Committee publication · Correspondence · 16 July 2025
Correspondence to Ofwat regarding Severn Trent Trimpley, dated 16 July 2025
From: Environment, Food and Rural Affairs Committee
Inquiry: Reforming the water sector
Summary
Correspondence from Severn Trent to Ofwat and the Financial Reporting Council regarding complex intra-group transactions executed in March 2017. The company created £1.6 billion in distributable reserves through capital reductions and share transfers involving subsidiaries Trimpley and Draycote, ostensibly to offset pension-driven reserve depletion from falling interest rates. The arrangement required detailed accounting and legal justification.
Key findings
- Severn Trent Water created approximately £1.6 billion of additional distributable reserves in March 2017 via capital reduction without court approval, following a pension deficit spike caused by post-Brexit interest rate falls.
- The structure involved establishing Severn Trent Trimpley Limited with £3 billion of shares, issuing a loan note to Draycote, then having Severn Trent Water acquire 49% of Trimpley for £1.47 billion by issuing shares to Draycote.
- The intercompany loan between Trimpley and Draycote bears interest at Bank of England base rate plus 1.375%, with unpaid interest rolled up and accruing further interest rather than settled in cash.
- Since 2017, Draycote received £1.8 billion in dividends from Severn Trent Water and is expected to repay borrowings from future dividend streams and equity contributions from parent company Severn Trent Plc.
- Severn Trent's fair value assessment of the Trimpley investment uses an asset-based approach valuing the underlying loan note receivable by discounting contractual cash flows, with fair value assessed to be consistent with the loan's carrying amount.
Tone
ProceduralTopics
Key actors
Severn Trent Water Limited, Severn Trent Draycote Limited, Severn Trent Trimpley Limited, Ofwat, Financial Reporting Council, Liv Garfield, Helen Miles, Deloitte LLP
Notable line
“… the Board was concerned to make sure that this was not in breach of any regulatory requirements or would be perceived negatively by Ofwat.”
Key Quotes
“The impact of falling interest rates on the pension deficit in the run up to the half year had resulted in a depletion of the company's distributable reserves. Therefore a plan had been developed in conjunction with PwC to create approximately £1.6 billion of additional distributable reserves with no adverse impact on earnings, cash or tax.”
“Whilst this was normal practice and it would be clearly shown in the year end accounts, the Board was concerned to make sure that this was not in breach of any regulatory requirements or would be perceived negatively by Ofwat.”
“The arrangement has created approximately £1.6 billion of additional reserves in STW, using a well-established process that several other WASCs have used over the last few years.”
“Regulated water businesses in England and Wales are valued based on a multiple of RCV, (typically ranging between 1.1 – 1.4 times) in market transactions. Severn Trent Water's RCV at 31 March 2017 was £8.2 billion, an increase of 5.3% over the previous year.”
“The retained earnings created from the capital reductions were intended to provide a buffer to absorb short-term earnings fluctuations and were not intended to provide an additional source from which to pay dividends.”
“Since there had not been a significant increase in credit risk since initial recognition, under paragraph 5.5.5 of IFRS 9 Trimpley measured its loss allowance for the loan at its 12-month expected credit losses.”
Source · parliament.uk record ↗