Thames shares fell as it announced charges of pounds 35m, about pounds 10m higher than estimated, due to restructuring in its international division.
The company said there would be no more surprises, but because of the increased charge the dividend rise was pegged at the lower range of analysts' forecasts.
Pre-tax profits in the year to 31 March were down 4 per cent to pounds 242m, after exceptional items. Stripping out the charge, profits rose 10 per cent to pounds 277m.
The operating loss in the international and contracting division was pounds 43m ( pounds 1.4m profit) after exceptionals, on turnover of pounds 120m ( pounds 182m).
Mike Hoffman, chief executive, said: 'Turnover declined largely as a result of withdrawing from unprofitable activities. We have restructured some companies to provide a better match of resources with changing market conditions.'
The bulk of the losses were from unprofitable contracts awarded to subsidiaries before their acquisition by Thames. The rest cover the cost of restructuring companies in the UK and overseas.
Mr Hoffman said: 'We did not know at the half-way stage whether we would take all the exceptionals this year. But I do not think there will be any more. We believe we now have a platform for non-regulated growth beyond 1995 (when new price regulations come into effect).'
Thames, like other big UK water companies, has been developing its non-regulated activities to provide an alternative income when price controls come into effect on regulated water and sewerage supplies in 1995. Mr Hoffman expected the non-regulated companies to break even in 1994/5.
The regulated business had a good year, increasing operating profit by 16 per cent to pounds 317m. Costs were tightly managed, rising 0.7 per cent excluding depreciation and infrastructure renewals.
The Thames Water Ring Main, designed to improve distribution around London, is due to be opened this summer, almost two years ahead of schedule and within the original budget of pounds 250m.
Debt climbed to pounds 671m, up from pounds 516m, reflecting mounting capital expenditure to improve the water system, and gearing rose to 37 per cent from 31 per cent. Group turnover rose 5 per cent to pounds 1.09bn.
Companies in the products and services division made operating profits of pounds 2.3m ( pounds 2.4m) after charging exceptionals of pounds 1.8m. Environmental services broke even, against a pounds 300,000 profit.
Thames raised the full-year dividend by 7 per cent to 22.5p, an increase at the lower end of expectations. Shares fell 8p to 519p.
Pre-tax profits at Bristol Water rose 18 per cent to pounds 8m in the year to 31 March. Turnover rose 15 per cent to pounds 59.9m. A final dividend of 22.4p makes 33.5p for the year.
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