The Exeter-based water group returned to profit in the year to March 2026, helped by higher regulated revenues, stronger cash generation and tighter cost control. Statutory pre-tax profit reached £114.4m, compared with a loss of £72.7m a year earlier. Revenue rose 23% to £1.29bn, while underlying EBITDA increased 55% to £519.2m. This is a visible improvement for a business that had looked financially stretched only a year ago.

Pennon's new chief executive, Keith Haslett, who took over on April 1st, has inherited a company with rising revenues, a large capital programme and a damaged reputation. He remained cautious after releasing the results, saying that there was "more work to do".

A profit built on higher bills

The main engine of Pennon's rebound was the new regulatory period, known as AMP8. It allows water companies to raise more revenue in return for heavier investment in infrastructure. Pennon's regulated water revenue rose by about a quarter, helped by higher allowances and customer consumption. South West Water, the group's largest business, reported revenue of £937.8m, up from £737.7m.

Pennon is entering the largest investment programme in its history. It plans to spend £3.2bn by 2030, with the aim of improving water quality, reducing storm overflows and strengthening ageing networks. Capital expenditure was already high at £643.6m in 2025/26, including £588.5m in the water businesses.

The case for that investment is clear. Britain's water networks face growing pressure from old assets, population growth and more volatile weather. Pennon said heavy rainfall in the South West put pressure on both water and wastewater systems. The company also cut pollution incidents by about 34% and reduced storm overflow use by 17%, with spill duration down by about a quarter.

But the financial recovery has a political cost. Higher revenues mostly mean higher bills, which is sensitive in a sector already facing public anger over sewage discharges, dividends and executive pay. Pennon has increased the number of customers on support tariffs by about 11%, but affordability will remain a problem as investment is paid for through bills and borrowing.

A long history of reinvention

Pennon began life as South West Water after the privatisation of the water industry in England and Wales in 1989. It became Pennon Group in 1998, after expanding beyond water into waste management. For years the group's identity rested on two pillars: the regulated water utility and Viridor, its waste business.

That changed in 2020, when Pennon sold Viridor to KKR for £4.2bn. The sale simplified the group and left it more clearly focused on water. Since then it has expanded through acquisitions. It bought Bristol Water in 2021 and SES Water in 2024, adding customers and regulatory capital value. It also invested in renewable energy projects through Pennon Power.

The result is a larger, more water-heavy company. That gives Pennon a clearer story for investors: regulated assets, inflation-linked revenues, and a growing regulatory capital base. But it also concentrates risk. When the water sector is under pressure, Pennon has fewer places to hide.

Its balance sheet shows the strain. Net debt rose to £4.51bn at the end of March 2026, from £4.08bn a year earlier. Water Group gearing stood at 61.8%, within the company's target range, but debt will keep rising as the AMP8 programme is delivered. Pennon raised about £640m of new debt during the year and expects to raise similar amounts annually through the AMP8 period.

MarketScreener's valuation data suggest investors are paying a middling-to-high price for that regulated growth. For 2026, Pennon shows a P/E ratio of 20.2 times, a price-to-book ratio of 1.67 times, EV/revenue of 5.4 times and EV/EBITDA of 13.1 times. That is not obviously cheap, particularly for a highly indebted utility with negative free cash flow. But the yield and regulated asset growth help explain why investors may still give the shares some support.

Trust is the hardest asset to rebuild

South West Water was fined after the 2024 cryptosporidium outbreak in and around Brixham, where drinking water was contaminated and customers were told to boil supplies. Pennon has apologised, and Mr Haslett said the group must learn lessons and rebuild trust with customers and communities. The company also booked costs linked to the Drinking Water Inspectorate prosecution and Ofwat wastewater undertakings.

The financial results are better, but partly because the regulatory system has allowed more revenue. The company must now prove that higher bills bring better service.

Pennon's near-term outlook is cautiously better. It expects water revenue to rise by £50m-£70m in 2026/27 and underlying EBITDA to grow by 5%-10%. Capital expenditure is guided at £620m-£700m. That suggests the profit recovery can continue.

Chart Pennon Group Plc