Water company to syphon off its assets

Water company AWG has taken a step closer to a radical break-up by etching the fault lines in its business.

The company, formerly known as Anglian Water, is expected to make a formal approach to the water regulator Philip Fletcher within a month to seek permission to demerge its assets into a separate company.

AWG has just completed an internal restructure, placing staff of its regulated business into a separate vehicle called Fountain, controlling reservoirs, sewerage plans and pipes.

AWG now hopes to carve off the group, which is subject to strict price caps, from the rest of the lightly regulated operations business. Investment bank Schroder Salomon Smith Barney is advising AWG on the plans.

A spokesman for AWG confirmed that the company was pressing ahead with a demerger but refused to reveal when a formal approach to Ofwat would be made.

It is understood that AWG's chief executive Chris Mellor has already held informal discussions with Ofwat officials.

Talks of demerging operations from assets is very much in vogue in the water industry, following Welsh Water's restructure last year.

However, cynics argue that the restructure was only allowed because the company was on its knees

Kelda, owner of Yorkshire Water, also proposed a split last year, but its plans were rejected by Ofwat.

Kelda still hasn't given up hope of a restructure operation, but its chairman John Napier has warned that UK water companies could fall into foreign hands unless the Government and the regulator act to make the sector a more attractive proposition for investors.

A spokeswoman for Ofwat said it was concerned that plans to split up water companies could affect service.

"We have to look carefully at the plans to ensure that the companies will still be able to carry out their day-to-day responsibilities," she said. Last month Ofwat passed its verdict on the financial performance of the water companies.

It revealed that the companies' operating expenditure had fallen this year to its lowest level for more than a decade. But it also revealed that aggregated turnover fell 12 per cent this year compared to last.

AWG's demerger plans emerge two months after the company was forced to admit that it would make a £23m charge for the write-down of assets following its £263m acquisition of Morrison Construction.

The news, that was accompanied by the resignation of Gordon Morrison from the AWG board, was greeted with dismay by many shareholders.

They argued that there was little logic in a water company owning a construction business and proceeded to lash out at Mr Mellor.

The company also revealed that its full-year pre-tax profits had plunged by a third.