UK's Thames Water in crisis after shareholders refuse to pay up

By Sarah Young

LONDON (Reuters) -Thames Water, Britain's biggest water utility, said on Thursday its shareholders had refused to pay 500 million pounds ($631 million) promised to stabilise its finances, heightening concerns over its survival.

The company, which supplies a quarter of Britain's population in London and its surroundings, said it had until late next year to secure more funding or risk nationalisation.

But a standoff between the company, its shareholders and the regulator over whether it can hike bills to fund investment in its crumbling network of pipes has left it in financial limbo.

Chief Executive Chris Weston said Thames Water was not about to collapse, but if it did not receive new equity it could be forced into "special administration".

"We are a long way from that point at the moment," he told BBC Radio on Thursday.

Stating that the company had 2.4 billion pounds of liquidity, he added: "We remain in a solid financial position."

Special Administration allows regulated entities like water and energy companies to operate while their future is settled.

"The outcome of Special Administration may be to break a large company into a suite of smaller local companies – this could provide opportunities for new investors to enter the industry," said Colm Gibson, managing director at consultancy Berkeley Research Group and former head of economic regulation at Thames Water.

The company has become emblematic of the failures of privatisation in Britain, as the challenge of servicing its 15 billion pounds of debt, keeping customer bills at an acceptable level and investing to stop sewage spills has overwhelmed it.

Finance minister Jeremy Hunt said on Thursday the government was monitoring the situation "very carefully". Communities minister Michael Gove blamed "serial mismanagement".

"For years now we've seen the customers of Thames Water taken advantage of by successive management teams that have been taking out profits and not investing," Gove told reporters.

Thames Water has not paid a dividend to external shareholders for five years, but it paid out substantial sums before that.

BUSINESS AS USUAL

Thames, which says it is "business as usual" for its 16 million customers, wants to hike bills by 40% over the next five years, and said the regulator's plan was "uninvestible".

Weston, who did not give further details on the tensions between the parties, said Thames would "pursue all options to secure the required equity".

He expects to receive Ofwat's five-year determination on future bills, investment and returns in June.

"Our current shareholders will have the opportunity to look at it again and decide whether they want to invest, or indeed we can go to the market and see what other providers of equity are out there in the market," he said.

He said Ofwat, which wants to keep prices down for consumers but also oversee a sustainable water system, should recognise the need for investor returns.

"You have to ask yourself the question why would an equity holder who is taking all the risk take on a lower return than buying a bond in the market," he said.

COMPLICATED STRUCTURE

Thames Water's nine shareholders include Ontario Municipal Employees Retirement System, the UK's Universities Superannuation Scheme, a unit of the Abu Dhabi Investment Authority and the China Investment Corporation.

They said in a statement that Ofwat had failed to provide regulatory support and they could not provide further funding.

Under a complicated structure, Thames Water is owned by Kemble Water. The shareholders, who own both, said Kemble Water would not be able to repay a 190-million-pound facility due on April 30 and it would ask lenders for an extension.

Asked by reporters about what would happen to Thames Water if Kemble went bust, Thames Water said it was ring fenced, would owe "no residual obligations" to Kemble and could continue as a going concern supplying water to customers.

The shareholders had agreed to invest 750 million pounds last July, with 500 million pounds expected by the end of this month. Thames Water said at that time it would need further equity of around 2.5 billion pounds between 2025-2030.

Ofwat said Thames Water would operate whatever its shareholder issues.

($1 = 0.7926 pounds)

(Reporting by Sarah Young and Paul Sandle; additional reporting by William James, Editing by Kate Holton, Paul Sandle and Emelia Sithole-Matarise)