Pennon Group Returns to Profitability with Strong H1 2025/26 Results

Pennon’s half-year scorecard: back in the black, investing hard, and cleaning up performance

Pennon Group has posted a solid return to profit for H1 2025/26, the first half of the new K8 regulatory period. The numbers show revenue growth, a sharp step-up in underlying profitability and a continued push on capital investment. Just as importantly for sentiment, operational metrics in wastewater are moving the right way.

If you’re new to the jargon: K8 is the five-year price control period running to 2030. RORE is return on regulated equity – the sector’s key yardstick for shareholder returns – and RCV is regulatory capital value, the asset base on which companies earn returns. ODIs are outcome delivery incentives, the reward/penalty mechanism tied to service levels.

Headline numbers investors should care about

The jump in underlying EBITDA – up 55.6% – reflects tariff increases, higher summer demand and disciplined cost control. Regulated water revenue was up about 26% year on year even after reprofiling roughly £20 million of allowed revenue into 2026/27 bills.

Profitability is back – and guidance is confident

Management says the Group is “on track” to deliver around 60% year-on-year growth in underlying EBITDA in FY 2025/26 (assuming normalised H2 demand). They are targeting a 7% RORE for K8, with this year underpinned by efficient financing and totex efficiencies offsetting other cost pressures.

Adjusted earnings are positive again at 14.0p per share, and there were no non-underlying charges this half. That clean print matters – it supports the case that the reset of the past 18 months is feeding through to sustainable profitability.

Cash, debt and dividends: steady footing with active funding

• Group gearing at period end stood at 63.2% based on net debt to expected shadow RCV. Water Group gearing was 59.8% and South West Water 60.1% – all within policy parameters.
• Net debt on a statutory basis was £4,339.3 million, with strong liquidity of £1,107.2 million (cash and committed facilities).
• September saw a £300 million 6-year South West Water bond with 109 bps outperformance versus the iBoxx benchmark. Total new borrowings across the Group to September were £515 million.
• The Water Group’s effective interest rate was 5.6% (South West Water 5.5%).

The interim dividend is 9.26p per share, consistent with the CPIH-linked policy. On coverage, underlying EBITDA covers the interim 5.8 times, which is a comfortable cushion in a capital-hungry year.

Operational delivery: wastewater turning a corner, water resilient through heat

The wastewater story is the standout. Pollution incidents are down by about 50% versus last year and storm overflow spills down by roughly 45%. Spill duration fell by a quarter over the bathing season and existing bathing waters achieved 100% compliance on a like-for-like basis. Management expects a net neutral ODI position in wastewater for 2025/26 – the first time South West Water has achieved that since ODIs were introduced.

On water supply, the hot, dry summer lifted consumption but there were no usage restrictions across operating areas. Leakage was held at 2024/25 levels despite more bursts from changing weather fronts, and the business is targeting improvements in H2. One-off customer compensation from the Dousland incident cost about £4.0 million within one-off costs included in underlying operating costs.

Investment: fast start to K8 and momentum in renewables

Capex came in at £304.8 million in H1, in line with plans and continuing the K7 run-rate into K8. Over 1,000 schemes are in flight and more than 60% of the K8 price control delivery programme is already in progress. Management has identified around £100 million of totex outperformance as projects move from design to delivery.

Pennon Power saw £25.2 million invested, with two of four sites fully constructed and Aberdeenshire now energised. The Fife site – including a 60 MWh battery – is in final commissioning. By 2030, these sites are expected to generate the equivalent of about 40% of current Group energy consumption, with equity returns guided at 11%-15%.

Customers and affordability: support scaled up

With bills rising to fund record investment, Pennon emphasised support for customers. About 164,000 customers are now on affordability and payment-assistance schemes – up roughly 20% year on year – and the Priority Services Register covers 266,000 customers. Cash collections remain robust, with debt charges at 1.4% of revenue.

Regulatory backdrop: reform and reporting

Pennon is supportive of the Government’s regulatory reform agenda and is active in Defra’s Transition Planning. The company also flags that the EA’s updated environmental performance assessment will raise reportable incidents across the sector from 2026-2030 due to methodology changes, though South West Water’s underlying performance should be better reflected.

For investors tracking progress, the results presentation and Q&A are available at www.pennon-group.co.uk/investor-information.

Risks to watch: investigations and enforcement

• Ofwat’s investigation into South West Water’s 2021/22 leakage and per capita consumption data remains ongoing. Outcomes range from no action to fines up to 10% of regulated water revenues. The company says third-party experts found calculations within tolerance and no detrimental ODI impacts, but the eventual outcome is “unknown”.
• EA prosecutions relating to alleged non-permitted discharges: South West Water has pleaded guilty to 24 charges, with sentencing due in March 2026.
• DWI proceedings connected to the May 2024 cryptosporidium outbreak are due in early 2026. Potential obligations cannot be estimated at this stage.

None of these matters had a quantified provision in the half-year numbers, so they remain external uncertainties to keep on the radar.

Outlook and what it means for shareholders

• Guidance points to Group underlying EBITDA up about 60% year on year for the full year, assuming normalised H2 demand.
• RCV growth of about 8% this year, rising by over a third by 2030 – a key driver of long-term returns.
• Targeting 7% RORE over K8, with FY 2025/26 supported by financing outperformance and efficiency gains.

In plain terms: higher allowed revenues, early mobilisation of the K8 programme and cleaner wastewater metrics are supporting both earnings and regulatory credibility. The dividend policy remains intact and well covered, and the balance sheet – while geared, as you’d expect in utilities – sits within policy with ample liquidity.

My take: a constructive reset, with clear watchpoints

Positives:

• Return to statutory profit before tax of £65.9 million and clean H1 (no non-underlying items) builds trust in the reset.
• Wastewater performance is improving meaningfully, supporting a net neutral ODI expectation this year.
• Funding is efficient – the £300 million SWW bond priced well, and the Group’s effective cost of debt is competitive.

Negatives and watchpoints:

• Regulatory/legal matters introduce tail risk with timing into 2026.
• Retail EBITDA dipped to £3.4 million as IT upgrades go in; benefits should follow, but it’s an execution point.
• Weather volatility continues to test networks; leakage improvement targets in H2 will matter for credibility.

Bottom line for investors

This is a reassuring set of half-year results from Pennon. Earnings momentum is back, service metrics are heading the right way, and the K8 capex engine is humming with early efficiency wins. The dividend is steady under the CPIH-linked policy and well covered today.

The overhang is the suite of investigations and prosecutions, where outcomes are not yet known. If you can live with that regulatory noise, the investment case is now anchored in growing RCV, targeted 7% RORE and a pathway to self-help efficiency gains – all while wastewater performance visibly improves.