(Bloomberg) -- Thames Water is waiting for a verdict on whether it broke regulations by paying millions of pounds to investors last year. A ruling against the company may mean more fines or, at worst, push it into administration.

Water utilities with a poor financial and environmental record aren’t allowed to pay dividends. Industry watchdog Ofwat is investigating whether Thames, the UK’s biggest supplier, breached license conditions by funneling a payment to its parent, Kemble Water.

A ruling is expected in weeks. A fine would further squeeze the debt-strapped utility but also choke off a crucial source of finance for Kemble, which ultimately may trigger an administration process and the sale of Thames.

“This decision is incredibly important,” said Tim Whittaker, research director at the EDHEC Infrastructure & Private Assets Research Institute. “If the dividends are found to be improper or blocked, then life will get very interesting for shareholders,” who could lose control of the water company, he said.

Financial instability at Thames is not new. The firm, recently slapped with fines for dumping sewage, has long been identified by Ofwat as one of the most indebted and least well-run utilities. This raises uncomfortable questions for the watchdog about why it hasn’t done more to stabilize the industry. 

One issue is the complex ownership structure of Thames, which has made it more difficult for regulators to spot weak points. Many of the firm’s operating assets sit within one entity, while it’s issued debt through a number of others.

Risk to Creditors

The Ofwat probe centers on a £37.5 million ($47.5 million) payout made in October to investors at Kemble Water, which has its own loan repayments due in April. As Kemble’s financial position has deteriorated, government officials have drawn up contingency plans that would see Thames put into special administration, investors wiped out, and Kemble bondholders swallowing losses.

The regulator has declined to specify the exact timing for its ruling, describing the matter as sensitive and pivotal for Thames.

It’s the first time that UK rules governing dividend payments, brought in last March, have been put to the test. The government wants Ofwat to take a firm hand following criticism of the industry and public anger over polluted waterways, leaky networks and frequent supply outages.

Yet on Wednesday, members of parliament urged Ofwat to listen to Thames shareholders when they request a “lighter touch” on enforcing regulation, a sign that there are concerns about pushing the company toward administration.

Read More: Thames Water May Run Out of Money by April, Group Auditor Warns

There are more fines coming down the track. Thames is subject to a separate probe by the regulator — and a criminal investigation by the Environment Agency — over sewage spills. Credit rating agency S&P Global has warned that sizable penalties could lead to a further downgrade for the utility, which has £16 billion of debt.

Thames Chairman Adrian Montague this month stepped down from running the board of Kemble to quell concerns over a conflict of interest. Montague had told parliament in December that the parent company’s only income was the dividends from Thames, and “we paid that £37 million to keep Kemble secure.”

It’s not clear how Kemble will repay a £190 million loan due April 30. Fitch Ratings, which downgraded the company late last year, has said that while Kemble could probably adjust and extend the loan with syndicated banks, its bigger problems would continue.

Kemble also has a £400 million bond due May 2026. The price of that security plunged last June when the government considered nationalizing Thames and Chief Executive Officer Sarah Bentley abruptly resigned. The bond sank again last month when the UK proposed new special-administration rules for utilities.

Kemble declined to comment on Friday.

A Kemble default wouldn’t necessarily mean Thames stops supplying its millions of customers in and around London. The water firm — viewed by the government as too big to fail — is governed by the same regulations that protected UK utilities Wessex Water and Welsh Water when their parent companies collapsed.

But Thames desperately needs to finance its £18.7 billion turnaround plan and it’s uncertain how a new owner would contribute to the funding required.

Read More: Thames Water Races to Secure Equity Investment as Debt Rises

Thames has worked to appease the regulator, saying it hasn’t paid dividends to external shareholders since 2017 as it focuses on improving customer service and environmental protection — and that will be the case until at least 2030. Yet Ofwat’s new rules don’t distinguish between internal and external payouts.

“We take our license obligations very seriously, including those relating to the declaration and payment of dividends,” a spokeswoman for Thames said.

Kemble holders last year promised to pump £750 million into Thames by March 2025, pending Ofwat approval of the utility’s investment program. The company needs a further £2.5 billion from Kemble to actually deliver on that plan, underscoring its precarious position.

“The most dangerous scenario for investors would be if Ofwat decided to put Thames into special administration,” said Colm Gibson, former head of economic regulation at Thames and now managing director at Berkeley Research Group. “They would potentially lose control.”

--With assistance from Ronan Martin and Chris Miller.

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