Earnings per share have reduced from 91.2p to 84.0p, mainly as a result of the increased tax burden foreseen last year. Underlying earnings, when adjusted for Competition Commission costs, asset sale profits and last year’s exceptional tax credit, have increased by 5.0% from 76.2p to 80.0p per share.

Dividend
As I indicated at the half year review, your Board will propose at the Annual General Meeting a final dividend of 21.78p, which together with the interim dividend of 14.52p makes a total of 36.3p for the year. This retains the total at the same level as the previous year except for the 0.25p added last year as compensation for the delayed interim payment.

Water supply and related activities
Income in this area increased by 5.2% to £43.1m. Water prices increased by their permitted maximum of just over 4%, with additional revenue being generated from growth and from related activities.

Operating profits increased by 4.6% to £18.1m, after absorbing extra costs in respect of the supply incident at Kemsing, and our appeal to the Competition Commission in respect of the Regulator’s determination concerning prices.

The Water Company continued with its heavy investment programme during the year, the gross cash spent by the Group on tangible fixed asset additions increasing from £20.8m to £26.0m, most of which related to the Water Company.

Related activities continued to develop well, good progress being made with our plumbing and pipeworks operations. Similarly, activities relating to mains diversions, chiefly resulting from the Channel Tunnel Rail Link and to new housing developments, have also increased, with our first multi-utility contract already under way.

Several months ago, I announced that the Water Company was concerned that the Regulator had given inadequate consideration to the particular demographic and water resource characteristics of its area, implying increased risk to its operations and to its customers in terms of continuity and quality of supply, and had therefore appealed to the Competition Commission against its final price determination. The results of this process are expected in August, and I will ensure that you are kept informed. Further costs in respect of this appeal will be incurred during the current year.

Continuing efficiencies within the Water Company have enabled the further release of now redundant operational properties, resulting in disposal profits of £0.8m (1999: £0.4m) in the year.

Scientific Services
Our newly formed Eclipse Scientific Group has now completed a full year with all its acquisitions fully incorporated into a single integrated unit, managed centrally from its principal offices in Chatteris near Cambridge.

Total sales have increased by 6.5% to £6.8m, which includes the full year effect of the acquisition of Voelcker Science in October 1998. Sales to external customers have increased to 88% (1999: 82%) of the Scientific Group’s activities.

Operating profits have declined marginally to £0.9m (1999: £1.0m) due partly to an increase in competition affecting both prices and margins, and partly to our further investment in sales and marketing skills. While the increase in competition caused a temporary loss of customers, it is pleasing to report that the Scientific Group’s policy of putting quality and service first has encouraged a return of a significant number of those customers. Volumes increased markedly towards the end of the year.

Consultancies
At the beginning of November last year we acquired Inenco, a consultancy specialising in utility tariff and cost control services to industrial and commercial clients. Covering consultancy in electricity, gas, communications and water consumption together with the sale of diesel fuel to fleet operators, it has contributed £6.5m sales and £0.7m operating profit (after goodwill write off of £0.2m) in the five months since acquisition. We are pleased with these results, which are in line with our expectations, and we have already developed further interesting synergistic opportunities with other parts of the Mid Kent Group.

We are continuing to grow our engineering consultancy venture with Halcrow and to increase the proportion of third party work obtained. For the first time this year, and in order to give more visibility to our non-regulated activities, we have shown the results of this enterprise separately as part of our consultancy activities. The venture earned more than £3.0m fees in the year and grew its operating profits by 34.6% to £0.3m.

Financing and outlook
As I have already announced, the overall level of profit of the Group will be reduced next year following the Regulator’s imposed reduction in water prices, against which we have appealed to the Competition Commission. Whatever the outcome of our appeal, the reduced profit in Mid Kent Water will necessitate a reduction in dividend levels in order to maintain appropriate dividend cover. I have already announced an expected reduction of 25% next year to reflect this.

However, your Company has a strong balance sheet with limited borrowings, which positions us well to manage the significant further investment which we believe will be required in the Water Company’s infrastructure and operating plant. For the present we propose to continue to finance our capital expenditure requirements through our existing bank facilities.

It is also pleasing to note that our policy of diversification into areas which have a logical fit with our core business, or which can be linked to and develop our core skills, is starting to bring its rewards. Next year I expect our operating profit from non-regulated activities to increase both in absolute terms and as a proportion of the total, thus reducing the Group’s exposure to regulation, and widening the scope for future profit and dividend growth.

Our announcement of 27 April referred to discussions concerning a possible restructuring of the Company, subject to regulatory consent, designed to release capital to shareholders. At the time of writing, these discussions continue, but whether or not they result in a transaction being completed, we will persist in our efforts to explore all possible avenues for maximising shareholder value.

Board retirement
Geoff Baldwin, Group Chief Executive, retires on 31 July shortly after this year’s Annual General Meeting. Geoff joined us in 1991. There have been significant achievements during his period of office, including taking the Water Company into its new regulated environment and increasing earnings from non-regulated activities through diversification. Geoff leaves us now as planned, in order to retire as closely as possible to his 60th birthday, and I would like to take this opportunity to thank him for his dedication and hard work over the past nine years. I expect to make an announcement concerning his successor very shortly.

Robert S Leigh

Chairman

5 June 2000