Pennon: the end of overpromising and underdelivering

(by Verity Mitchell)

Pennon Group’s share price had fallen 19.9% to a 15-year low five days after a £550m rights issue and the announcement of a strategic review in which chief executive Keith Haslett outlined a “self-help” plan to right-size the group.

Just six months into his tenure, Haslett’s review amounts to an indictment of the current state of the group. Among the key problems he identified were a lack of performance culture, an investment strategy not linked to performance, ineffective outsourcing, the existence of a power business with no links to the core water utility, and inadequate asset management.

Haslett communicated his wish to end a culture of overpromising and underdelivering. He has refreshed his executive team as part of the strategy. The current operational problems will only be resolved, he concluded, by committing an additional £1bn of investment to reduce leakage, curb pollution incidents, improve water supply resilience and boost asset reliability.

A £230m asset programme allowance – confirmed by Ofwat under its cost change programme – has encouraged management to apply to the regulator for a further £170m of cost change investment. It also plans to make an additional £600m of investment to prepare the group for the next decade. This will increase growth in its regulated asset base to 40% over the current five-year period, during which spending will now total £3.6bn.

To help fund this, Pennon announced a £550m 7-for-15 rights issue (at a 35.5% discount to the theoretical ex-rights price), the divestment of Pennon Power (its renewable energy generation arm), and a rebased dividend policy.

For 2026-27, the dividend pool has been cut to £125m from £138m. This equates to a 30% cut in the cash dividend to around 18p, taking into consideration the dilution from the rights issue. Pennon management also announced that it will fail to achieve its aspiration to secure an Environment Agency Environmental Performance Assessment (EPA) ranking of four stars by 2028 from one star at present, and will incur Outcome Delivery Incentive penalties for the rest of the current asset management period. For the current financial year, it will incur a penalty of £58m.

The financial burden of these penalties has led Moody’s to downgrade the group’s credit rating to Baa2 (with a stable outlook) from Baa1. In addition, Pennon is no longer planning to invest in a desalination plant in Cornwall, and has written off the development costs incurred thus far.

Analysts on call with management were unhappy with the lack of guidance on earnings, and on the returns that might result from the additional investment. 

Haslett has drawn a dramatic line in the sand, on which the future performance of the group will now be judged. His challenge is to restore investor confidence by delivering on the improvement he promises.