Liquid assets

Organisation: awg plc

Sector: Water and asset management

FTSE 250 ranking: 30

Market capitalisation: £1.6bn

Employees: 4,000 in the UK and a total of 10,000 worldwide

Legal capability: 11 solicitors and 10 support staff

Head of legal: Patrick Firth

Reporting to: Group finance director Elliott Mannis

Main location for lawyers: Huntingdon

Main law firms: Herbert Smith, Osborne Clarke, Hunt & Combs

Anglian Water is no longer just Anglian Water. Now part of awg, the company with a turnover of £434.5m has aspirations beyond water and wastewater management. The vision of its chief executive officer Chris Mellor has the company expanding to develop into a broad-based utility services group with three core areas: the UK's regulated water industry, international concessions and asset and facilities management.

The water industry was privatised in 1989, when Anglian Water Services was created out of a number of municipalities that had been managed from local government. For more than 10 years, the company has held the licence to abstract, treat and supply drinking water and dispose of domestic and industrial effluent in the East Anglian region. It is currently developing its presence around the UK in addition to providing concessions, process design and contracts from South America to Asia.

Late last year awg acquired Morrison, which provides asset creation and management services to the utility, transport and property sectors, for £262.5m. This acquisition is the first step in the move to create an asset management and asset creation business. It will expand the group in the UK utilities market and provides a link with seven other water companies. This has led to contracts with other utility sectors, notably gas, electricity, telecommunications and highways. Head of legal Patrick Firth hopes the expanded capabilities will enable it to provide a better service to core business customers.

Water regulator Ofwat recently commended awg for service and quality. It has the lowest leakage record among its peers and has achieved a 27 per cent reduction in some pollution categories, earning a place on the Dow Jones sustainability index. But turnover is down and operating costs are up, which the company puts down to inflation and a reduction in customers' bills.

Firth's team is split into four: commercial, litigation, property and regulatory. Firth joined the company before privatisation in 1988 as a litigator and was then charged with the task of creating a full litigation team. From there, he transferred into international and is now mainly involved in corporate and commercial work. He was made head of legal in 1999. The current challenge is to grow the team and its panel of external advisers.

“Our main corporate firm is Herbert Smith, who we used for the Morrison deal,” explains Firth. “That relationship goes back so far in time that I don't know when we first created it. It was at the time of privatisation in 1989 or before. Clearly, what we're looking for in our main corporate solicitor is first-class expertise, experience in the industry, reputation and credibility. It's very much a case of relationship as well. We must also be able to trust our main corporate solicitor implicitly. Trevor Turtle is our main point of contact, who has a fantastic knowledge of the industry.” Firth expects value for money from the firms that he chooses and discusses the matter regularly with Herbert Smith.

He has praise for the innovative tactics of one unnamed City firm. “They offered us a particularly novel way to structure fees with them. They'd do the work and then tell us what it's worth to them on an hourly rate. We then pay them what it's worth to us. The proposal indicated an end-of-transaction review, whereby on the completion of the work they'd invite us to assess the workload, their performance, the value of their advisory input and to propose a level of remuneration reflecting those factors. An outline of their hourly rate regime would be included; there would also be the option of the customary retainer and success fee.” Firth was unable to accept this method for the particular project in hand, but was undoubtedly impressed by its innovative nature. As a result, he is very likely to approach the firm in question for subsequent deals.

Before privatisation, awg used very few external firms, having a substantial internal team, but now Firth needs to extend his panel of advisers. Osborne Clarke has been one firm to profit. The relationship came about when awg acquired MVM, a facilities management company based in Bristol. MVM used Osborne Clarke, and Firth says that he “was particularly impressed with Simon Beswick”, so has used it for subsequent deals. “They're very down-to-earth, straightforward, no-nonsense people,” he says. Awg also uses Peterborough-based Hunt & Combs for smaller acquisitions of up to about £10m in value.

“We use many other firms and are actively considering setting up a more formal panel. With the acquisition of Morrison, the time is right, and I fully expect to be doing it some time this year. We'll establish who's going to be our main corporate, then we'd consider who would act for us internationally, then we'd establish who would be on the second tier,” says Firth

“We have businesses now in Europe, the Asia Pacific and Latin America. Prague is the main focus in Europe at the moment, where we use local firm Vana Pergl & Partners. In Chile we use Del Rio Morgan Peralta & Toro, and in Brazil we have a firm called Bekin E Gennari. They're mainly used for concessions: contracts to run water and wastewater businesses. We use Clifford Chance for work in China, we've used Herbert Smith in Singapore and we're using Freshfields in Vietnam. When we come to the international choice of solicitors, expertise, experience, reputation and trust are important, as in the main firm, but geographical location clearly becomes an issue.”

In addition to the transactional activity at awg, the company is regularly involved in litigation. One recent case that ended in a £20,000 fine for awg was a particular disappointment for Firth.

The Environment Agency (EA) recently prosecuted awg when sewage sludge liquor was found to have escaped from an old outfall channel at the Braintree sewage treatment works. “It was a relatively rare and highly regrettable incident as the result of improvement work being carried out,” says Firth.

According to the EA press release, it was due to faulty pumps. The pollutant stretched about five kilometres down the River Brain and into the River Blackwater. Nearly 1,000 fish were killed as a result. The EA acting area environment protection manager Pat Ripton says: “The basic cause of this pollution was the inappropriate system of transferring the sludge using a temporary pump, coupled with the failure to ensure the bung and pipe within it were secure enough to contain any spillage.”

Firth says that there was never any question regarding responsibility. He is keen to note that “it physically cannot happen again. We've spent over £10,000 on remedial works to make sure. One incident like this is one too many. Our business is to protect the environment while handling waste 24 hours a day, 365 days a year. We're necessarily very close to water courses; I'm afraid occasionally accidents do happen. I don't intend to minimalise these things, but we are occasionally prosecuted.”

A Lands Tribunal case in January had a more positive outcome for awg. A sewer which had to be laid over land owned by Kettering Borough Council led to the council seeking compensation. “They're quite entitled to do that, but they claimed a ransom value. This is where you think that a piece of land has an additional value for particular reasons. If you have to pay a ransom value, then you can have to pay considerably more for that land than its market value would otherwise be. We said that we'd compensate, but that we wouldn't pay a ransom value. The Lands Tribunal agreed, and although the council was claiming a ransom value in excess of £40,000, the award only came to £355.”

Firth cites another case involving the EA, when a judicial review was undertaken to challenge four of its decisions. “They had required that Anglian Water Services lay public sewers in four villages within certain time limits. If the company had been forced to do that, it would have required us to abandon about £3m worth of projects elsewhere. The judgment was issued in October 2000 and the judge quashed all four decisions by the EA and awarded us costs. The EA's appealing two of those decisions, so that will be dealt with in the Court of Appeal in March.”

A diverse range of legal problems indeed, and that is only set to grow as the company expands. The challenge for Firth, then, is to build a legal team – from in-house and from the company's external advisers – that is capable of handling them. n