Water
Mid Kent Water has experienced both an increase in water demand from customers and a growth in developer construction activity, confirming the Government’s policy for housing and economic growth in Kent is biting. Capital expenditure was significantly increased over the previous year with greater emphasis on infrastructure renewals to maintain serviceability to meet growing demands and support the achievement of mandatory leakage targets set by Ofwat.

It was not necessary to impose any hosepipe bans during the year. However, the much publicised Kemsing incident last summer where 3,500 properties (1.5% of our customer base) faced interruptions to their water supply over several days led to an Ofwat investigation which pointed to management failures. Whilst accepting some of these findings, particularly on customer communications, the unprecedented demand for water over a very hot period identified severe weaknesses in the water supply infrastructure not previously experienced. As more houses are built in our area of supply we are bound to experience more interruption incidents at times of high demand because the ageing infrastructure is unable to carry the increased volume of water required by the growing number of customers. The need for maintaining capital investment to ensure sustainable supplies was made most strongly to Ofwat as part of the Price Determination. However, Ofwat decided that our investment plans must be reduced by 36% to contribute towards the reduction in water prices – 19.7% real price cut for the year 2000/2001. This major cutback in the Company’s investment plans was one of the reasons why we requested a referral to the Competition Commission, and they are due to publish their report in August this year.

Over the years the Water Company has been improving efficiencies by various means, including reducing the number of operating locations and moving staff into temporary buildings at Snodland. Most of the vacated locations have now been sold with some of the proceeds going towards the construction of a new office complex bringing together all the major activities under one roof. A combination of staff working in closer proximity, together with a major upgrading in communication systems implemented as part of the building construction, will provide further efficiency improvement opportunities whilst sustaining standards of service.

Scientific Services
Sales grew by 6.5% in Eclipse Scientific Services, our laboratory testing, analysis and consultancy group. However, during the early part of the year our rate of increasing orders slackened which gave rise to a review of our sales policy. Promoting high quality accurate analysis and rapid turnaround times, both of which are key requirements in this business sector, were not sufficient and in the latter part of the year we took a more aggressive pricing stance winning more business, albeit with some reductions in profit margins. This strategic decision, together with incurring costs on some internal restructuring to improve efficiencies for the future, reduced the operating profit compared to the previous year. However, all laboratories are busy and we expect to see the benefits of improving plant utilisation flowing through to increase profits in 2000/2001.

Producing new testing and analysis procedures continues for a broadening range of products. Eclipse is developing further product services for the pharmaceutical industry and is establishing test/analysis procedures for nutraceuticals used in the growing ‘healthy’ foods sector.

Part of the capital investment in the year was for a new self-contained facility for milk testing in our laboratory at Castle Cary. The break up of Milk Marque presents a business opportunity and we will be offering competitive prices and rapid turnaround times to dairy farmers in the South and South West of England when the plant becomes operational in July 2000.

Eclipse continues to grow its environmental testing business and has established itself in land contamination analysis and consultancy. The Company is increasingly being specified on major civil contracts, including assignments undertaken on the Millennium Dome site and the Bluewater shopping complex in North Kent.

Consultancy
Inenco was acquired in November last year and I am pleased to report that performance in the first five months of ownership achieved expectations. The Company provides a service to industrial clients on purchasing and tariff management of utilities, which is normally the first ‘entry’ to offering further consultancy capabilities on efficiency studies and facilities management. Inenco’s focus has been mainly on electricity, gas and fixed telephone systems with some water consultancy. Amalgamating the Company’s sales and marketing skills together with Mid Kent Water’s expertise means we are now able to expand their consultancy business to include water services and provide more of a utilities’ ‘one-stop-shop’ for a much wider range of industrial clients.

Inenco also has a diesel bunkering and fuel cards business. Although somewhat different to the main services from Inenco, diesel is a significant utility cost to many companies. Sales are growing and the expertise of this part of the business makes a good contribution to Inenco’s performance.

Halcrow Water Services, our 51%-49% joint venture with the international Halcrow Group, is now established as a provider of water engineering and operating solutions worldwide through the Halcrow sales network. The business started almost five years ago managing Mid Kent Water’s capital expenditure programme with a small team of engineers. Since then it has progressively grown its third party business and trebled the number of staff to almost 60. In addition to winning business in its own right, Halcrow Water Services adds a further capability on water engineering, operations and consultancy that we can also make available through Inenco to its own market sector.

Outlook
Mid Kent Water expects a favourable outturn to the Competition Commission’s review to contribute towards a more robust supply capability in meeting growing customer demands. It must also strive for improved efficiencies and has a major project in hand using external expertise to help identify cost reduction opportunities and assist in introducing ‘smarter’ business processes. Eclipse is well established in legislation driven laboratory analysis and consultancy activities. It operates in growing markets but faces increasing competition. In the next year we plan to expand our geographic coverage and continue to develop further product testing techniques for our growing range of clients.

Inenco will continue to develop new products for rapidly changing markets such as mobile communications. Their many years of experience growing a business out of the emerging competition in other utilities will be a major contributor in establishing further business opportunities for us as competition develops in water supply.

Halcrow Water Services will see third party growth outstrip intercompany work for the Water Company and already has a substantial order book to deliver its 2000/2001 budget.

After nine years as Chief Executive of your Company I have decided to retire. During this time we have moved from being a former statutory water company focused on supplying mainly domestic water in Kent to a business which has retained its original roots but now operates in growing allied business activities serving a very wide range of industrial clients. We now have less reliance on the regulated business for returning value to shareholders, and in 2000/2001 our existing non-regulated businesses will account for approximately 45% of revenues and generate more than 20% of the operating profit with a growing contribution in years to come.

I have thoroughly enjoyed contributing to the development of Mid Kent Holdings plc and would very much like to express my sincere thanks to staff throughout the Group and to shareholders for their support during my tenure as Group Chief Executive.

Geoff Baldwin

Group Chief Executive

5 June 2000