However, the company said it will maintain its dividend and has decided not to "press the nuclear button" and appeal to the Competition Commission over the prices ruling by Ian Byatt of Ofwat.
Severn Trent said it was accepting the new curbs - which will cut bills by 14 per cent next year - because of the complexity of appealing, the distraction it would entail and the uncertainty of the outcome.
The job losses - equivalent to about one-fifth of the workforce in its regulated water business - will be phased over two years. Severn Trent warned that compulsory redundancies could not be ruled out. The company is setting aside pounds 50m this year to pay for the restructuring, but it estimated that the cuts would yield savings of pounds 40m a year when fully implemented.
Brian Duckworth, managing director of Severn Trent Water, denied that the workforce rather than shareholders were paying for Ofwat's price curbs. "It is not a question of dividends or jobs, but delivering against a very prescriptive Ofwat agenda," he added.
The company said it intended to maintain dividends at least at this year's level for the next five years. Dividend cover will fall next year as a result. However, Severn Trent said it would not have to resort to paying dividends out of reserves.
The company has ruled out a big US acquisition to fill the hole in earnings, opting instead to build up its Biffa waste treatment business and its US-based services business. Severn Trent intends to build turnover from the two divisions to just over pounds 1bn by 2005, by when it estimates that non-regulated businesses will account for just over half its revenues, a quarter of operating profits and 60 per cent of total staffing.
The company plans an aggressive campaign to win industrial and business customers from rivals when competition steps up from March. It is hoping that Northern Foods will become its first "national account" enabling it to supply all the company's 50 sites throughout England.
Pre-tax profits for the first six months were flat at pounds 154m, but profits from its non-regulated division grew by 45 per cent to pounds 24m. An interim dividend of 17p was declared, 4 per cent up on last year.
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