Severn Trent supplies water to 8 million customers

Shareholders will receive a payout of 17.77p per share - up 2.5% - countering forecasts for an unchanged dividend.

The UK firm also reported a rise in half-year, pre-tax profits to �151.1m ($262.3m) from �131.8m.

Water regulator Ofwat is currently deciding how much companies can charge customers in the period 2005 to 2010.

Biffa boost

Severn Trent, which has eight million water customers between the Bristol Channel and the Humber, had previously warned that it faced a "challenging year" ahead.

But chairman David Arculus said renewed confidence in the company's core business had led to the unexpected rise in the interim dividend.

Severn Trent said it had also been buoyed by an improved performance at its Biffa waste management business, where operating profits rose 13% to �39m, aided by the takeover in June of rival waste firm Hales.

Price increases introduced in April helped turnover at Severn Trent Water improve 4.6% to �477.8m.

Meanwhile, Severn said its non-regulated businesses now accounted for half of group turnover and 27% of underlying profits.

In August, the bosses of the UK's major water companies asked the regulator for an inflation-busting price increase.

The companies said that an average price increase of �15 a year is necessary in order to fund vital maintenance work.