Pennon shares slide as performance underwhelms

(by Verity Mitchell)

Pennon shares have slipped over 4% since the company reported profitable full-year results on 11 June. Significant operational challenges present a baptism of fire for incoming chief executive Keith Haslett.

The south west of England experienced five named storms with around 150% of average rainfall during November and December 2025, rising to 190% in January and February 2026, placing significant pressure on water and wastewater networks.

Management confirmed that South West Water would again score only one star in the annual Environmental Performance Assessment (EPA). A factor in this disappointing outcome was that Pennon failed to complete four of its Water Industry National Environment Programme programmes by March 2026.

The continued low ranking was deemed an unacceptable metric by Haslett, who pledged to deliver “material improvement”. The disappointing EPA, lack of resilience, an investment programme behind schedule, and the need for improved customer service are all areas requiring significant improvement, he acknowledged.

Investors were underwhelmed by the £51m of performance penalties (including customer experience metrics), the missed return on regulatory equity (RORE) target (despite the 30bp uplift from submitting an “outstanding” business plan) and the dilutive rebasing of the dividend per share to 29.29p from 31.57p. This was despite a CPI-indexed increase in the cash dividend payout, up £4.5m to £138.2m.

Group underlying operating profit more than doubled to £326m, up £176.5m, far exceeding the 23% increase in revenue. Profit before tax for the year ended 31 March 2026 was £135m (versus a loss of £35m in the prior year), driven by higher regulatory revenue allowances, improved cost management, and stronger volumetric water consumption. Exceptional storms, higher rainfall, and a step-up in regulatory targets were partly blamed for the ODI performance penalty, while guidance for EBITDA growth of 5-10% was lower than analyst expectations, dampened by the likelihood of further penalties exacerbated by new EPA scorecard measures. Regulated water generated a real RORE of 6.7% on a notional company basis, and 12% on a nominal basis including gearing impact and inflation. 

Key operational improvements included:

• South West Water’s Pollution Incident Reduction Plan is delivering measurable improvements with a 34% reduction year-on year in pollutions, and normalised pollutions down 53%.

• Storm overflow use reflected a 17% reduction over the past year, with spill duration reducing by 25% as a result of continued investment, despite the higher than average rainfall.

• During the 2025 bathing season, storm overflow usage at bathing water sites reduced by more than 25% year-on-year, and 96.2% of bathing waters in the south west were classified as Excellent or Good. South West Water maintained 100% bathing water compliance for the fifth consecutive year.

• Although Bristol Water met its leakage targets, South West Water’s efforts were impacted by adverse weather conditions, and SES Water fell slightly short of the reduction required to meet the year one target.

The regulated businesses invested only £588.5m compared to a planned £3.2bn capital programme for AMP8. A chief asset officer role has been created to strengthen environmental performance and asset management capability.

Pennon is also pursuing additional growth opportunities. The group has submitted price re-opening proposals worth around £250m to Ofwat for further investment in asset health and resilience, which it says could support additional expansion of its regulated asset base. Across the industry, the UK water utilities say that this additional investment is predicated on further bill increases in the current five-year period, and cannot be funded under current financing plans. 

As regards the group’s debt load, management said it was “happy at the minute” with the stable net debt to RCV ratio of 61.8% within the water business.

With a strategic update expected before the end of September 2026, analysts at the results presentation were keen to explore whether that might include asset disposals, now that the group consists of three regulated water businesses, a non-household retail water business, and a renewable power fleet.

Pennon’s greatest challenge, however, remains operational, and unless it accelerates investment and operational transformation, the penalties will keep arriving.

Key data:

• EBITDA growth: 55% increase year-on-year.

• Underlying operating profit: more than doubled to £326m.

• RORE: 6.7% for the year.

• Group capex: £644m invested in asset improvements.

• Gearing: stable at 61.8% for the water group.

• Dividend: proposed at 29.29p per share.

• Revenue increase: 23% increase in water tariffs.

• Non-underlying costs: £20m, including restructuring and regulatory investigation costs.

• Net debt: increased to fund asset base investment.

• Regulatory return: 12.4% allowing for inflation and balance sheet adjustments.

• Anticipated revenue growth: expected increase of £50m-£70m next year.

• Anticipated EBITDA growth: 5% to 10% year-on-year.

• Anticipated capex: between £620m and £700m next year.

• Pollution reduction: absolute number of pollutions reduced by around a third.

• Spill reduction: 17% fewer spills and 25% reduction in spill duration.

• Customer support increase: 11% increase in customers receiving support year-on-year.