Severn Trent, Britain’s second-largest water company, reported a 13 per cent plunge in profits yesterday, blaming weaker demand for water from consumers and rising bad debts because of the recession.

The company said that demand had fallen by about 5 per cent because of the economic slowdown, although there were signs that conditions were starting to stabilise.

Severn Trent, which supplies water and sewage services to more than 3.7 million customers across Central England and Wales, reported a 13 per cent fall in pre-tax profits to £168 million for the year to March 31, from £192 million the previous year.

Its customers include Jaguar Land Rover plants that have cut production, as well as many manufacturing industries, including glass and brickmakers. These have been hit by the collapse of the property market.

Severn Trent had warned earlier that the closure of High Street stores such as MFI and Woolworths had also reduced water usage. The company said that lower commercial consumption of water had cost it £20.8 million in lost income. Tony Wray, the chief executive, said: “We’re currently seeing 5 per cent [monthly decline, year on year].” Bad debt grew by £6.6 million to £34 million, representing 2.3 per cent of total turnover.

Despite the weaker performance, the company announced an increase in its full-year dividend of 2.6 per cent to 67.34p a share. Turnover increased by 5.8 per cent to £1.6 billion.

Sir John Egan, the chairman, said: “Despite the impact of the economic environment on consumption and bad debts, and our already announced increase in investment in infrastructure, Tony Wray and his team delivered stable underlying group profits. That’s because we continue to deliver on our plans to raise standards and keep down charges through our focus on continuous improvement in all our processes.”

Severn Trent, which serves a population of more than eight million, is awaiting a response from Ofwat, the industry regulator, over its investment plans for the next five years. In April, the company submitted final plans to Ofwat, which it said would push up average household bills by 4 per cent over the period.

The group encompasses two main businesses: Severn Trent Water, its regulated water and sewage supply business; and Severn Trent Services, which offers customers specialist water treatment products and services. Severn Trent said that it plans to invest £20 million, compared with its previous expectation of about £12 million, to deliver an additional £5 million of cost savings in 2009 to 2010.

United Utilities Group, Britain’s largest water company by market value, reported on Thursday that net income for the same period had dropped to £179.4 million, from £909.2 million a year earlier.

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