Pennon Group Resets Strategy With £550M Rights Issue, Dividend Cut and Asset Investment

Key Points

• Pennon will raise £550 million through a fully underwritten rights issue, cut its dividend by about 10% to roughly 18 pence per share, and plans to sell Pennon Power to help reduce debt.
• The company plans approximately £1 billion of additional investment through 2030, targeting more than 40% growth in regulatory capital value and improvements in water quality, leakage, pollution control and infrastructure resilience.
• Operational performance remains under pressure, with expected regulatory penalties and challenges at South West Water and SES Water. Pennon maintained its current-year outlook for 5%–10% EBITDA growth but also expects £13 million of provisions and a £33 million impairment related to its halted desalination project.

Pennon Group LON: PNN outlined a strategic reset focused on operational recovery, increased asset investment and a revised funding plan that includes a £550 million rights issue, a rebased dividend and the planned sale of Pennon Power.

Chief Executive Keith Haslett said the six-month strategic review identified weaknesses in leadership, operational discipline, asset management and customer service. The company has refreshed its senior management team, established a new target operating model and begun bringing certain functions back in-house, including leakage operations and asset-delivery roles.

“We are now resetting Pennon and are ready to capture the growth opportunity provided by the reopeners,” Haslett said. He described the plan as an operational reset, targeted investment program and balanced funding package intended to build a “stronger, more resilient Pennon.”

Investment plan targets more than 40% RCV growth

Pennon said its strategic review identified about £1 billion of additional investment through 2030. Of that total, approximately £400 million is associated with Ofwat’s Cost Change process, while £600 million is intended to improve performance and compliance in its clean-water and wastewater operations.

The company has received a draft determination for £230 million of Cost Change investment this year and is targeting a further £170 million over the remainder of the AMP8 regulatory period. It said its representations were submitted to Ofwat on Sept. 24, with a final determination expected around Dec. 15.

Haslett said the additional investment is expected to support water-quality improvements, sewer rehabilitation, lower groundwater infiltration, reduced pollution spills and improved reservoir resilience. Pennon secured £62 million through the Cost Change process for sewer rehabilitation, which it said could reduce flows in its wastewater network and lower treatment costs.

Based on the revised plan, Pennon now targets at least a 40% increase in regulatory capital value, or RCV, by 2030, compared with its previous expectation of 34% growth at the outset of AMP8.

Operational performance remains under pressure

The company said operational performance continued to be challenging in FY2027 following a difficult FY2026. Areas requiring improvement include the Compliance Risk Index at South West Water, leakage in the South West, supply interruptions, pollution incidents and customer-service measures in the South West and SES regions.

Pennon expects operational recovery to take the remainder of AMP8 and forecasts ODI penalties across the period. It said it expects the penalties to decline by at least half from current levels by 2030, but acknowledged it is no longer likely to achieve the four measures required to receive a 30-basis-point benefit for an outstanding business plan.

In response to analyst questions, Haslett said the company’s current forecast implies approximately £28 million of operational performance penalties in the fifth year of AMP8, before additional customer-measure impacts. He said Pennon is aiming to improve its performance faster than its current forecast but does not intend to repeat what he described as a history of over-committing and underperforming.

The company is introducing a Maintenance Excellence program designed to shift operations from reactive asset replacement toward planned maintenance. It is also implementing technology initiatives, including a new customer and billing platform known as Project Fusion, a planning and scheduling system and upgrades to its asset geographic information system.

Rights issue, dividend reset and Pennon Power sale

Chief Financial Officer Laura Flowerdew said the funding package combines operating cash flow, debt funding, the £550 million rights issue, divestment of Pennon Power and reinvestment of expected efficiency savings. The rights issue is fully underwritten, with results expected Oct. 27, she said.

Pennon plans to sell Pennon Power after completing its four development projects, which is anticipated by spring 2027. The group plans to reinvest £25 million of proceeds into behind-the-meter renewable-energy projects at high-energy regulated water sites, while using the broader disposal proceeds to reduce group debt.

Flowerdew said Pennon is targeting water-business gearing of no more than 65% and group gearing of no more than about 70%. She said the group-gearing target is not dependent on completion of the Pennon Power sale.

Moody’s downgraded South West Water and SES Water to Baa2 with a stable outlook, Flowerdew said. She added that investment-grade credit ratings remain critical to the group’s funding approach.

The dividend will be reduced by about 10%, or £13 million, from the FY2025-26 absolute dividend. Taking account of new shares issued in the rights issue, Pennon expects to rebase the dividend to approximately 18 pence per share. The company said dividends are expected to increase from that base in line with CPIH inflation during the AMP.

Current-year outlook maintained

Pennon said it remains in line with market expectations for the current year, with group EBITDA expected to rise between 5% and 10%. It expects capital expenditure to be modestly higher than previously anticipated due to the ongoing investment program.

The company also expects to recognize about £13 million of provisions at the half year for fines and legal costs, including an Environment Agency fine of just under £8 million relating to historic prosecutions. Separately, Pennon expects a £33 million half-year impairment charge after determining that its desalination project, previously committed to following the 2022 drought, is no longer viable.

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.

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