Severn Trent pipes in pounds 1m a day profits

Severn Trent, the Birmingham-based water company that last month told customers to concrete over their lawns to save water, ran into fresh controversy yesterday when it unveiled record profits of more than pounds 1m a day.

The company, which last year imposed a hosepipe ban on millions of customers, also promised to pursue a more generous dividend policy by cutting dividend cover from almost three to twice the level of earnings by the year 2000 - regardless of the outcome of its bid for South West Water.

"We will still have a strong balance sheet whatever happens," said Vic Cocker, chief executive. "But it will be easier to get to two times cover if we buy South West because we expect that deal to enhance earnings."

Severn's bid, and a rival offer for South West from Wessex Water, are being investigated by the Monopolies and Mergers Commission. But news that Severn's pre-tax profits soared by 40 per cent to pounds 373m in the year to March provoked an angry response from Clive Wilkinson, chairman of the industry regulator Ofwat's central customer services committee.

"When customers think of how many of them had periods without water because of poor service they are bound to wonder whether Severn Trent are making extra money by cutting corners in the delivery of their service," he said.

"It seems that the balance between customers' needs and shareholders' needs are not in the right perspective and that the shareholder is getting the better deal."

But Mr Cocker responded by saying Severn was spending pounds 1m a day on capital expenditure to improve services to customers. He also noted that despite rainfall in the region 70 per cent being below the long-term average, the hosepipe ban introduced in August had been lifted at the end of April: "I view that as a vindication of the action we have taken over the winter."

The rate of water leakage fell from 24 per cent to 21 per cent, while measures taken to increase water supply by 5 per cent include plans to use the River Trent as a source of drinking water for the first time.

As a result of these improvements, Mr Cocker remained confident there would be no repeat of the hosepipe ban, even though one reservoir - the Derwent, which supplies Derby - is only 60 per cent full.

Last year Severn's total dividend rose by 12 per cent to 32.4p, covered 2.8 times from earnings per share 10 per cent higher at 89.6p.

Severn has been rumoured as a possible takeover target for electricity generator Powergen, but Mr Cocker denied the more generous dividend policy was defensive in nature.