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Severn Trent lifts dividend payout as bills soar

Severn Trent, the country's biggest quoted water company, sparked fresh controversy yesterday by announcing plans to lift its dividend and make a one-off return of capital to shareholders at the same time as customer bills and leakage rates are rising.

The company, still the subject of a Serious Fraud Office inquiry into dubious reporting of regulatory information, said once the merger of its Biffa waste business was complete in October, it would rebase its dividend policy so that the payout grew by 3 per cent a year in real terms. It also plans to raise its level of borrowings to fund a cash return to shareholders.

The announcement came as Severn reported an 18 per cent rise in pre-tax profits to £270m last year after lifting domestic bills by 15 per cent. Over the 2005-10 period, bills will increase by 24 per cent to fund a £2.4bn investment programme.

But Severn warned it was struggling to meet the efficiency targets set by the industry regulator, Ofwat, because of increased energy prices which are likely to add £25m to costs this year.

Colin Matthews, the chief executive, said it had been a "challenging year for leak management" blaming the 3 per cent increase in leaks on a dry summer followed by short bouts of severe cold which had created greater-than-usual ground movement. But he said the company's performance had improved since April with a leakage reduction of 20 megalitres per day in that month alone.

Mr Matthews also defended Severn's dividend policy, saying investment in the network, at £500m a year, was three times the amount being returned to shareholders.

Biffa is expected to be valued at £1bn to £1.5bn when it is demerged in the autumn. The precise level of capital return will depend on the amount of group debt Severn decides to leave in the waste business.

Severn also announced it planned to dispose of its troubled US laboratories business which is no longer seen as core.

The division has been hit by the decline in environmental testing as more of the US federal budget has gone on homeland security. Severn's laboratories division made operating profits of £11m last year on sales of £167m, of which the US accounted for 81 per cent.