Severn Trent, the UK's second biggest water company, today reported a fall in profits following a record fine from Ofwat and last summer’s flooding.

Pre-tax profits after exceptionals fell by 41 per cent to £192.4 million for the year to March 3, although the company made a 16 per cent improvement in underlying profits, which rose to £469.5 million.

Severn was fined £35.8 million in April for deliberately providing false information and poor customer service in a period up to 2005. The water company also incurred £13.6 million of costs as a result of flooding in summer 2007, when the rivers Avon and Severn burst their banks and forced the evacuation of the Mythe Water treatment works near Tewkesbury.

Severn also took charges amounting to £14.9 million relating to investment designed to raise the company's operational standards.

Tony Wray, chief executive of the group, said that it had turned a corner. "We are starting to see improvements and to raise standards. The long-talked about legacy issues are nearing completion," he said.

The Serious Fraud Office's case against Severn Trent will come to court on July 1, after it was adjourned earlier this week.

The water company, which supplies eight million customers, pleaded guilty to two charges of making false returns to Ofwat earlier this year. The data was faked during 2001 and 2002 and came to light when a whistleblower accused the company of manipulating its figures.

Severn pointed out it had achieved a 34 per cent reduction in the number of written complaints in the past 12 months.

Mr Wray said: "In particular, customer service standards are rising and we have outperformed against a tougher leakage reduction target.”

Mr Wray added that the company was well placed to deal with rising energy prices, as it was almost fully hedged for the current year and 86 per cent hedged for next year.

Severn Trent managed to buy most of its energy needs at 45p per kilowatt hour, before wholesale energy prices doubled.

"Energy prices will certainly factor in our business plan for the next price review," Mr Wray said.

Ofwat, the water regulator, begins the process of setting bills for the five years between 2010 and 2015 in August.

Shareholders were rewarded with a 6.8 per cent increase in the full-year dividend.

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