The company has decided to reduce annual real dividend growth to 6 per cent compared with the 11 per cent that investors were promised when North West Water and Norweb merged two years ago. United is also cutting the level of customer rebates under its "Progress with Responsibility" campaign.
The decision follows a five- month business review by the new chief executive, Derek Green, which will also see further cost-cutting and a more cautious approach to developing its unregulated activities.
United hopes the review will draw a line under a torrid two years of share price underperformance and boardroom battle culminating in the ousting of Brian Staples, its former chief executive, in July. Mr Staples is suing the company and taking it to an industrial tribunal hearing, scheduled for the end of the year.
Mr Green said that had the dividend increases remained at the higher level then the company's balance sheet would not have been able to cope.
The City reacted positively, marking United's shares up 52p to 777p, a 6 per cent increase, as analysts concluded that the group's dividend policy was now credible and sustainable.
Mr Green maintained that the multi-utility strategy, which also takes in gas and telecoms, remained "cohesive" but conceded: "Expectations were raised that outstripped the ability of the strategy to deliver."
Mr Green rebuffed suggestions that this was an indictment of Sir Desmond, who is known in the City as "King Des" and retires as chairman next March to be succeeded by Sir Christopher Harding, chairman of Legal & General. But he added: "We cannot absolve ourselves of responsibility and by that I mean the royal we."
United said the cost savings it had targeted at the time of the merger, pounds 145m a year by 1999 and pounds 474m in total, had been achieved through the programme of 1,500 job cuts. It has identified additional annual savings of pounds 40m.
But Mr Green said its international and facilities management divisions had not delivered the profits at the rate expected. It had also been knocked off course by the windfall tax, the electricity supply review and the prospect of a further savage attack on water and electricity charges when simultaneous price reviews take place in two years' time.
United estimates that the two forthcoming price reviews could knock pounds 100m off its profits. Had the payout been kept at the higher level then dividend cover would have fallen below acceptable levels.
In line with the modified policy, the increase in the payout for the first half has been cut to 9.7 per cent, giving an interim dividend of 13.16p. Profits before tax for the period were up 4 per cent to pounds 233.6m.
Although customers will still receive a rebate, it is being cut from pounds 10 last year to pounds 6.50 next year. Mr Green said that if shareholders were going to get lower dividends then customers had to share some of the pain.
Mr Green said the review had concluded it would be more difficult to deliver substantial profit growth from its regulated water and electricity distribution businesses while the non-regulated businesses were not living up to expectations because of "lack of sufficient focus in the application of the strategy". United was forced to take an pounds 83m exceptional charge against a sewage contract in Bangkok and overall operating profits from the international division are just pounds 1.9m.Reuse content