Utility group Severn Trent said it was ready to pass through the industry's quality frontier as it reported "very satisfactory" profits.
The Birmingham firm insisted that customers had not been overcharged, and pledged to improve efficiencies in its capital expenditure programme over the coming year.
The company, which serves around eight million customers between the Bristol Channel and the Humber, announced profits before tax and exceptionals of £262.2 million, down 3.8 per cent on a year earlier because of higher pension charges.
It added that it was one of only two companies to pass capital expenditure and quality targets set by industry regulator Ofwat, while it finished only five per cent short of operational expenditure hopes.
Severn Trent said overall confidence was illustrated by its full-year dividend payment, which it increased by 3.5 per cent to 30.30p.
As well as its regulated water and sewerage arm, Severn operates the Biffa-waste management business.
The division improved underlying profits by 5.3 per cent to £83.4 million, following a ten per cent rise in revenues to £696.3 million.
In water and sewerage, Severn said turnover lifted 6.1 per cent to £1.01 billion, with profits before exceptional restructuring costs up by 0.6 per cent to £339.3 million.
Managing director Tony Wray said: "This has been a very satisfactory performance. The results were ahead of expectations."
Saying the firm was well positioned for the delivery of the new Ofwat imposed standards known as AMP 4, he went on: "There is a huge amount of investments, about £2.6 billion going to improve infrastructure." Severn Trent was recently given the goahead to lift customer charges by 20 per cent over the next five years, as part of a regulatory review that will also force the company to meet tough efficiency targets over the same period.
But Mr Wray insisted it was not overcharging its customers, despite a 14 per cent rise this year to make the average household bill £252.
He said: "Prices have risen, and are likely to rise again by five per cent next year. But customers are not being overcharged. Our bills are the second lowest in the country.
"The water business is doing very well. We have delivered all the things we were supposed to do with the AMP3 regulatory targets.
"We have improved the quality of the drinking water, reduced the level of leakage and improved the quality of sewage treatment.
"We now have plans in place to meet the operational expenditure frontier by reducing the headcount and looking at a number of our properties."
He added the company had pledged to at least maintain its dividend in real terms up until 2009/10.
Turnover at the company's laboratories division - the largest environmental testing company in the world - fell 4.4 per cent to £162.6 million, although the figure was 2.7 per cent higher when stripping out currency fluctuations.
Profits decreased by 30.9 per cent to £15 million amid tough market conditions in the United States, where the division generates around 82 per cent of revenues. It blamed lower Federal environmental spending for putting pressure on the sector.
Shares in Severn Trent closed last night down 6.5p at 1002.5p.