Pennon Group H2 Earnings Call Highlights

Pennon Group (LON:PNN) reported a return to profitability for the 2025/2026 financial year, while new Chief Executive Officer Keith Haslett said the company must improve operational performance, customer service and environmental outcomes following a challenging year for the U.K. water utility.

Haslett, who joined Pennon on April 1, used his first full-year results presentation as CEO to outline an operational review focused initially on the regulated water businesses. He said Pennon has “strong foundations and strategies in a number of areas,” but added that “other performance areas require improvement plans.”

“I am very focused on reviewing our group strategy as a priority, starting with the regulated business,” Haslett said. He added that outline improvement plans are now in place after his first two months in the role, with further details expected in the next quarter.

Profitability Improves, Dividend Rises With Policy

Chief Financial Officer Laura Flowerdew said Pennon delivered a 55% increase in EBITDA and more than doubled underlying operating profit to GBP 326 million. The company’s return on regulatory equity, or RORE, was 6.7% on a real basis, slightly below its 7% target, reflecting financing and TotEx outperformance offset by operational penalties.

Group capital expenditure totaled GBP 644 million as Pennon continued to invest in its water asset base. Flowerdew said Water Group gearing remained stable at 61.8% at year-end, while group-level debt was around 65%. The company raised GBP 635 million during the year through its bond program and other bilateral or lease arrangements to fund capital investment.

Pennon proposed a dividend of GBP 0.2929 per share, in line with its policy and increased by CPIH, according to Flowerdew.

Revenue growth was a major driver of the improved earnings. Flowerdew said water tariffs increased 23%, reflecting Pennon’s regulatory determination and, to a lesser extent, increased customer consumption. Underlying operating costs rose 8%, driven by the reset of regulatory and environmental charges, inflationary increases and operating pressures.

Non-underlying costs of about GBP 20 million included implementation costs for a new customer experience platform, restructuring costs and costs tied to two regulatory matters. Flowerdew said the company recognized the income statement impact of Ofwat wastewater enforcement undertakings agreed last August, as well as a GBP 1.9 million fine related to the Brixham water quality event judgment received on June 2.

Weather, Network Resilience Weigh on Operational Performance

Flowerdew said operational performance was “challenging” and affected by localized and extreme weather, particularly in Devon and Cornwall. While the U.K. overall saw lower-than-average rainfall, she said the southwest experienced above-average rainfall, including 190% of normal rainfall across January and February in Devon and Cornwall.

She said hot summer weather, freeze-thaw conditions and heavy winter rainfall pressured Pennon’s networks. January was especially difficult, with five named storms, including Storm Gerrit, which heavily affected power supplies in Cornwall.

These conditions contributed to material penalties for supply interruptions, mains repairs and leakage. Flowerdew said network resilience and asset health will be key areas of focus going forward. She added that water quality remains sector-leading in SES, while South West Water retained a top-quartile position and Bristol showed underlying year-on-year improvement.

Looking ahead, Flowerdew said Pennon expects group EBITDA growth of around 5% to 10% next year. Revenue is expected to rise by GBP 50 million to GBP 70 million, while Water Group costs are expected to increase by up to 5%. Depreciation and financing costs are also expected to rise by up to 10% and 15%, respectively, as the capital program continues. Pennon expects capital expenditure to remain in a range of GBP 620 million to GBP 700 million.

Flowerdew said underlying operational performance is expected to improve, but the Water Group is still anticipated to remain in a net ODI penalty position next year because of stretching targets and lingering impacts from extreme rainfall in the first quarter of 2026.

Environmental Rating Draws Sharp Response From New CEO

Haslett addressed Pennon’s provisional one-star Environmental Performance Assessment rating, saying he does “not tolerate or even recognize” a one-star rating given his past experience delivering four-star performance in other roles.

“Performance will certainly improve,” Haslett said. “The bar has been raised to meet the expectations of myself going forward.”

Flowerdew said Pennon made progress in reducing pollutions and storm overflows during the year. The absolute number of pollutions fell by around one-third, while normalized pollutions declined by around 53% year-on-year following a revised sewer length agreement with the Environment Agency. Spill numbers from storm overflows fell 17%, and spill duration declined by around 25%.

She said action at the company’s top five spilling sites reduced spills across those locations by more than 50%, through targeted operational interventions and focused investment. However, Pennon still recorded a net wastewater ODI penalty because extreme rainfall reduced rewards and increased penalties.

Flowerdew also said four WINEP-related projects were not completed by year-end, affecting the EPA scorecard. Alongside normalized and serious pollution performance, this contributed to the provisional one-star assessment.

Operational Review Targets Customers, Assets and Investment

Haslett said his operational review will focus on five areas: customer transformation, people and culture, the target operating model, asset management and reliability, and the capital investment program.

He said Pennon’s Project Fusion customer relationship management system is expected to go live in October and is intended to transform customer experience. The next phase will introduce more customer channels and use artificial intelligence applications built into the Salesforce platform, with the goal of improving service while reducing costs through AMP8 and beyond.

Haslett said he has completed an employee survey and introduced a new scorecard from CEO level to the front line to build a more performance-led culture. He also said Pennon has recruited a new Chief People Officer, added the Chief Information Officer to the executive committee and appointed a new Chief Asset Officer.

On asset management, Haslett said Pennon is centralizing asset management functions, including the capital delivery team, and recruiting additional asset leaders. He said the company is building a clearer picture of asset health to inform current and future investment plans.

Energy management is another area of opportunity, Haslett said, noting potential for behind-the-wire solar generation at high-energy sites. He said five sites have already been identified and are being implemented, using the skills of the Pennon Power team.

Reopener Claims and Sector Reform in Focus

Pennon has submitted just over GBP 250 million in 2026 cost change claims to Ofwat as part of the reopener process. Haslett said the company requested in-AMP funding and targeted most of the proposed investment toward asset health, including sewer rehabilitation, network storage and rapid gravity filters for water assets. The submission also includes a discrete growth claim for new key sewage treatment works and a cybersecurity claim.

During the question-and-answer session, Flowerdew said Pennon has caveated the submission to Ofwat to state that if in-period revenues are not achieved, the company does not need to proceed with the investment. She said the process has “quite a long way to go” before the outcome is known.

Haslett also said Pennon remains supportive of water sector reform and is engaging with government and regulators. He cited increased staffing at Defra, the appointment of Dame Julia Black as senior adviser on water reform transition, and expected publication of a transition plan and introduction of the Clean Water Bill by the end of the year.

Haslett said Pennon’s results show a “positive shift in profitability,” but emphasized that performance must improve across regulatory commitments for customer service and the environment. He said he plans to provide an operational and strategic update in late September.

About Pennon Group (LON:PNN)

At the top end of the FTSE 250, Pennon is an infrastructure group, focused on the UK water market is one of only three listed water companies in the UK. Operating in a stable regulatory environment with a positive outlook, we are focused on long-term sustainable growth, through disciplined capital allocation, organic and acquisitive. Our 25-year rolling licence provides predictable index-linked growth and visibility over future revenues. We provide clean and wastewater services through our businesses across the Great South West.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to [email protected].

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