Pennon Group is asking shareholders for around £550m, rebasing its dividend and selling its power business as new chief executive Keith Haslett sets out a larger investment plan for South West Water.

Pennon Group (LSE: PNN) delivered one of the most significant announcements in the UK water sector this autumn when it published a strategic update on 7 October. Alongside an operational turnaround plan from chief executive Keith Haslett, the group launched a fully underwritten £550m rights issue, cut its dividend and confirmed plans to sell Pennon Power. The package is designed to fund a substantially bigger investment programme over the current regulatory period while keeping borrowing within target levels.

Rights issue terms

Shareholders are being offered seven new shares for every 15 they hold at 250p each, a 44.7% discount to the 452p closing price on 6 October and a 35.5% discount to the theoretical ex-rights price of 387.73p. The issue involves around 220 million new shares and is expected to raise approximately £530m after costs. It is fully underwritten by Barclays and Morgan Stanley. The shares went ex-rights on 12 October, when dealings in the nil-paid rights began, and the final acceptance deadline for most holders is 26 October, with fully paid dealings expected to start on 27 October. A regulatory filing on 12 October showed Barclays holding a 5.5% interest in the company, mostly through financial instruments, a position that crossed the disclosure threshold on 8 October.

Bigger investment, lower payout

The money will fund a markedly larger capital programme. Pennon now expects to invest about £3.6bn in its regulated water businesses over the AMP8 period running to 2030, roughly £1bn more than the plan based on Ofwat's final determination. As a result, it expects growth in its regulated capital value across the period to exceed 40%, compared with 34% previously.

The trade-off is a lower dividend. The total payout for the 2026/27 financial year will be around £125m, down from £138m. Adjusted for the rights issue, this implies a cut of about 30% in the underlying dividend per share, to roughly 18p, and the board intends to grow the payout in line with CPIH inflation from that rebased level. The group is targeting gearing of no more than 65% of regulated capital value in its water businesses throughout AMP8, with group gearing expected to remain below about 70%. Proceeds from the sale of Pennon Power will be used partly to fund around £25m of on-site renewable generation and partly to reduce debt.

The update also covered the regulatory cost-change process. In a draft determination published in August, Ofwat provisionally allowed £230m, about 76% of what Pennon had requested. The company submitted representations on 24 September and expects a final decision by 15 December, while it estimates a further £170m of investment could follow through cost-change processes in 2027 and 2028, subject to approval.

Operational turnaround and broker reaction

Haslett has built his plan around five themes: people and culture, operational excellence, asset management and reliability, the environmental programme and customer transformation. Early steps include appointing a new chief asset officer and chief people officer, centralising asset management and bringing leakage technicians in-house. He acknowledged that the group had real strengths but needed to improve outcomes for customers and communities.

According to a report from Proactive Investors on 8 October, analysts at Citi and Deutsche Bank both rate the shares as a buy, and they note that the rebased dividend yield still looks attractive relative to peers, even though asset growth is expected to be slightly below that of other water companies.

The success of the rights issue, Ofwat's December decision and evidence of better operational performance at South West Water will be the key markers for investors over the coming months.