(Bloomberg) -- A UK water regulator told parliament it was “absolutely prudent” to prepare for the failure of Thames Water Ltd. as questions surrounding it’s financial resilience remain.

David Black, chief executive officer of the Water Services Regulation Authority, or Ofwat, told a committee the utility faces being taken into a special administration regime, a form of nationalization. A key point is if the company makes dividend payments to service £500 million ($628 million) of debt to Kemble Water Holdings Ltd. that is being cascaded down a complex corporate structure as equity, Black said.

Thames Water has been at the center of a crisis that’s roiled the industry this year as calls from the public and politicians to stop releasing sewage into waterways coincided with soaring debt costs. Ofwat also has been called out for allowing the situation to unfold and putting the company, which supplies 15 million customers in and around London with water, at risk.

“We will only allow dividends to be paid if it’s in the best interest of consumers and it meets the obligations,” Iain Coucher, chair of Ofwat, told the committee.

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

Member of Parliament Barry Gardiner described the situation as a Catch-22 where any attempt by Ofwat to limit dividends would send a “direct message” to shareholders to stop investing into the company, putting water infrastructure at risk. In a previous hearing, Thames Water’s co-chief executive officer Cathryn Ross said Ofwat was not obliged to use this power and it was merely an option.

A recent dividend of £37.5 million was called into question by the committee with Adrian Montague, chair of Thames Water, saying it was necessary.

“We need to keep Kemble secure because a failure to do so will prejudice our new equity and our new equity is needed to sustain the provision of services in the long term,” said Montague. “Thames is faced with a pretty unappetizing series of choices on the way forward.”

Alastair Cochran, interim co-chief executive officer and chief financial officer of Thames Water, said his firm’s parent company does not have the £190 million needed to repay lenders in April. 

“Whilst the Conservatives preside over this busted flush of a system, we will not get the change we need to protect our rivers and seas, or our pockets.” Labour Member of Parliament Cat Smith said in a post on X following the session.

(Updates with reaction in final paragraph. A previous version of this story corrected a reference to Thames Water’s parent company.)

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