Mellor bangs the drum for AWG

Crash, bang, wallop ... how the water group's chief executive will answer his critics

When Chris Mellor gets stressed, the chief executive of water company AWG locks himself in the back room of his home and beats the hell out of his drum kit.

A one-time aspiring rock musician, Mellor has been playing a lot on his kit recently.

He's partway through a complex company restructure to create two separate businesses within AWG (snare, tom-tom, hi-hat cymbal ...).

The thorny issue of the £22m write- down against the acquisition of Morrison Construction still dogs AWG (... bass, snare, ride cymbal ...).

And the shareholders who last year told this paper that AWG's decision to buy Morrison was "showing incompetence", "stupid" and "dripping with arrogance" still aren't happy (... snare, snare, crash cymbal).

The 51-year-old Mellor is undeterred. "Playing the drums is good therapy, particularly when The Independent on Sunday writes something nasty about me," he says with a smile.

Within the water industry, Mellor has been hailed as a "visionary". Realising that AWG as a simple water company is at the mercy of the gruelling five-yearly regulatory reviews, he has set about re-inventing a large part of the company as a racy support services business.

AWG, once Anglian Water Group, could be relisted in the support services sector of the FTSE in up to three years' time, says Mellor. But he acknowledges there's a lot of work to do, especially in convincing sceptical shareholders.

"Visionary" isn't a word some of AWG's institutions would use when describing Mellor. They are still smarting over the Morrison deal and some still find it hard to figure out why AWG bought a construction firm in the first place.

Mellor says: "Yes, I think the reaction from some investors was understandable. [Buying Morrison] was an unusual move and nobody saw it coming. To some extent it has taken time for people to understand what we were about. But having spent a lot of time face-to-face with investors, the overwhelming reaction is that they are prepared to give us the benefit of the doubt."

One shareholder, recently schmoozed by Mellor, gives his verdict: "Mellor has been seduced by support services. Quite a number of companies have tiptoed down that path. It is very high risk and we are still to be convinced."

If the Morrison deal hadn't proved so troublesome, then perhaps shareholders would be prepared to give him the benefit of the doubt. After all, Morrison does a lot of Private Finance Initiative work, the staple diet of any aspiring services company.

Once the ink was starting to dry, however, AWG discovered damaging cost overruns on six Morrison contracts. As a result, Mellor says that possible legal action against Morrison's founders is still a "live issue".

How did AWG miss the gremlins in Morrison's books? "Well, erm, that's a very good question," says Mellor. "Bear in mind that [Morrison] was a publicly quoted company. It wasn't a trade sale, so you don't get a huge amount of access to records. All I can say is that all the inquiries we made and all the answers we received led us to conclude we were doing the right thing, That is all I am prepared to say."

Shareholder ire towards AWG and Morrison has softened recently now that plans to return more than £400m have been made public. But keeping bondholders sweet is just as important.

As part of the restructuring, debt will be ring-fenced in AWG's regulated water business, leaving the services side free of borrowings. As a result, existing bondholders will be asked to swap their debt for new bonds in the restructured group. If they say no, then Mellor's grand plans will come to nothing. The vote could come shortly after AWG's next set of results, due out at the end of the month.

Mellor joined Anglian Water Authority in 1979. Some 11 years later, shortly after the business was privatised, he became finance director. In 1998 he was promoted to chief executive.

An accountant by training, he doesn't display the usual characteristics of a bean-counter. Associates say he is driven by a quiet desire to win and isn't afraid to take risks. But he dismisses the claim that he's arrogant: "People who know me say that is a very strange tag."

Mellor cites sport and music as two of his main interests, and in his younger days he notched up achievements in both fields. An only child, for a brief period he was a semi-professional footballer. His rock band, The Envoy, meanwhile, appeared at more than just the odd talent competition. "We used to play regularly at the weekends in all sorts of clubs and weird places."

He hasn't kept in touch with the band members as "a couple of them might be dead, given the lives they led. It's very much like the old Who song; I don't suppose many of them lasted beyond 40."

Mellor has three grown-up daughters, one of whom is a member of Surfers Against Sewage. Given that AWG has been in trouble with the Environment Agency on four occasions over pollution, it's an issue Mellor is acutely aware of.

But he warns that price controls imposed by the regulator, Ofwat, could make future investment in water and sewerage infrastructure difficult.

The 1999 Ofwat price regime was condemned by the water industry as way too tough. It is partly as a result of this that companies like AWG are today restructuring to squeeze value out of their non- regulated businesses.

Mellor warns that if water firms have to make further reductions to bills in the next review, this could restrict infra-structure investment. "The regulator has got to realise that this is a hugely capital-intensive industry and unless we have sufficient money to continue to invest in maintaining that stock, then over time it will deteriorate. It would be foolish if the regulator, in the interests of knocking a fiver off the average bill, damages infrastructure investment."

For the time being, however, water isn't the most important thing on Mellor's mind. In his Cambridgeshire office he is working flat out on the final draft of the AWG restructuring plan, which, in the coming weeks, will be put before the regulator and bondholders.

You can bet that when he finally gets home at the end of the day, his house will be filled with wild drum beats.