Segmentation
Following the acquisition of Inenco on 5 November 1999, the business has been divided, for reporting purposes, into three separate segments. The results of the 51% owned joint venture with Halcrow, which were previously included with water supply and related activities, have now been included together with those of Inenco in a newly identified Consultancies segment. The comparative figures have been adjusted accordingly.

Water supply and related activities
The segmental results, adjusted to exclude the Halcrow joint venture, show turnover increased by 5.2% to £43.1m. Regulated water prices increased by the maximum permitted amount of 4.01%, additional revenue increases being derived from demand growth and from related unregulated activities. Operating profits in this segment increased by 4.6% to £18.1m after absorbing costs of £0.3m relating to a supply restriction incident last summer and £0.2m in respect of the appeal to the Competition Commission.

Scientific Services
Turnover increased by 6.5% to £6.8m following the inclusion of a full year’s trading for Voelcker Scientific which was acquired on 31 October 1998. Market led price reductions restricted further growth. Operating profits for the fully integrated scientific business reduced from £1.0m to £0.9m, reflecting the lower margins available and further investment in autonomous management resources.

Consultancies
Sales revenues in this segment totalled £9.5m, of which £6.5m related to the newly acquired Inenco, and £3.0m to the Halcrow joint venture. This latter amount compares with £2.6m last year. Operating profits within our consultancies amounted to £1.2m before writing off £0.2m goodwill.
Inenco was acquired on 5 November 1999 for £11.3m, of which £10.8m was goodwill. The goodwill will be amortised over its useful economic life, currently considered to be twenty years. Inenco contributed £0.7m operating profits, net of goodwill charge, in the period since acquisition.

Sale of fixed assets
Profits on the disposal of properties surplus to the Water Company’s operational requirements, together with other small disposal surpluses, amounted in total to £0.8m in the year. This compared to £0.4m realised in the previous year. New offices have been completed at the Group’s headquarters in Snodland permitting more of the Water Company’s activities to be centralised.

Finance costs and taxation
Net interest payable amounted to £1.3m in the year compared with £0.7m in the previous year. The increase is mainly due to the high level of capital expenditure in the Water Company, together with the cost of financing the acquisition of Inenco. The effective tax rate of 24.9% compares with a rate in the previous year, after adjusting for the ACT write back in that year, of 25.8%. The effective rate remained below the standard rate of corporation tax due mainly to the capital allowances available on the Water Company’s capital expenditure. The Group has no further surplus ACT available for offset against its tax liabilities.

Financing and cashflows
The principal changes in cashflows compared to those in the previous year related to outflows on acquisitions (£12.0m: 1999 £1.0m), and dividends (£8.8m: 1999 £3.4m). The acquisition of Inenco was additionally satisfied by the issue of unsecured loan notes (redeemable before 31 December 2004) amounting to £1.0m, and deferred consideration payable on the achievement of certain profit targets in the period to 31 March 2002, amounting to £0.3m. The increase in cash outflow on dividends reflects payment of the previous year’s interim dividend which was deferred until April 1999. The net resulting cash outflow of £14.0m has been financed as to £2.0m mainly by use of existing overdraft facilities, and as to £12.0m by an unsecured loan from the Group’s relationship bankers.

Financial instruments
The Group’s financial instruments comprise borrowings, some cash and liquid resources and various items, such as trade debtors and trade creditors, that arise directly from operations. The main purpose of these financial instruments is to raise finance for the Group’s operations.

The principal risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board manages each of these risks as summarised below.

Interest rate risk
The Group finances its operations through a mixture of retained profits, bank borrowings and long term debenture stocks. The Group borrows in sterling at both fixed and floating rates of interest. The Group has not set a formal policy as regards the proportion of fixed versus floating rate borrowings, with the current priority being to maintain flexibility pending the outcome of the Competition Commission appeal, at which time an evaluation of the Group’s long term financing requirements will be undertaken. At 31 March 2000, 21% of the Group’s borrowings were at fixed rates (1999: 65%).

Liquidity risk
The Group’s policy is to maintain a significant proportion of its borrowings at a maturity of no less than five years. Following the acquisition of Inenco during the year, the actual long-term proportion decreased. This position will be re-evaluated as soon as the outcome of the Competition Commission appeal is known.

Bob Atwood

Group Finance Director

5 June 2000