Treasury Practice

Problem Solved: Jane Pilcher, Anglian Water Services

Published: Jun 2006

Anglian Water had to prepare two sets of accounts – one under IFRS and the other according to UK-GAAP, making it a labour intensive process. Reval’s Hedge Rx risk management system allowed the company to link its debt to the retail price index, offering a near perfect hedge for the company.

Jane Pilcher

Group Treasurer

Part of the AWG Plc Group, Anglian Water Services is one of the leading providers of water and wastewater services in the UK. The company is located in the east of England and serves the needs of around six million industrial, commercial and domestic customers.


As a subsidiary of AWG Plc Group, which is listed on the London Stock Exchange, Anglian Water has to apply International Financial Reporting Standards (IFRS) for the first time for its accounting period starting on 1st April 2005. While the Group will report consolidated group accounts under IFRS, Anglian Water Services Ltd will continue to report its accounts according to UK-GAAP.

In addition to having to prepare two sets of accounts, Anglian Water faces the problem of having to comply with IAS 39. Anglian Water has a large debt portfolio and hedges its interest rate and economic risk exposures extensively with derivative instruments, in particular swaps. In order to qualify for hedge accounting under IAS 39, and to avoid volatility in the company’s profit and loss accounts resulting from the accounting changes, all hedging instruments need to be tested for their hedge effectiveness.

According to Group Treasurer Jane Pilcher, the accounting changes proved a challenge for Anglian Water’s treasury. “We do monthly accounting under IFRS and UK-GAAP and the way we were doing this, using spreadsheets, was pretty labour intensive. The effectiveness testing, with spreadsheets and Bloomberg data, was also quite piecemeal. We required a simpler and more robust system, which reduces the risk of error.” This system also needed to be able to consolidate the previously disparate data in one place.


Jane Pilcher talked to the Group’s auditors to obtain their recommendations and spoke to peer companies about the systems they were using. Ultimately, Anglian Water opted for Reval’s Hedge Rx risk management system. “When we were doing our testing last year, Reval’s was the only system that we were satisfied with.”

A key functionality requirement for Anglian Water was related to the company’s debt structure. 43% of Anglian Water’s debt is linked to the UK’s retail price index (RPI), as the value of the capital and the interest element of these loans is directly linked to RPI movements. The company’s revenue is linked to RPI through a pricing formula determined by UK’s water regulator OFWAT. This pays a rate of return based on the company’s regulated asset value (RAV), the underlying economic asset against which the company borrows, which is also linked to RPI – this makes RPI index-linked debt a near perfect hedge for Anglian Water.

“It is important to us to have our debt and our asset base linked together. But RPI debt is not used by many corporates and there are not many treasury management systems that are able to deal with index-linked products. One of the things that we have been working on with Reval is to develop the RPI functionality, so that we would be able to put our index-linked bonds into Reval and then do the valuations from there.”

Instead of spreadsheets, Anglian Water now uses the Reval system to perform the statistical analysis for the effectiveness testing automatically. “Having put your transactions into the system, it values the exposure you have got to a standard set of yield curves. You don’t have to re-input things. It basically does it all for you.”

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