Shares in Pennon Group PLC (LSE:PNN, OTC:PEGRY) rose 3.4% to 553.5p on Tueaday morning despite the owner of South West Water saying full-year profitability would come in at the lower end of market expectations.
The FTSE 250 water company said exceptional rainfall and storm-related disruption have pushed up costs.
Underlying EBITDA was tracking around 55% higher year on year, but operational cost pressures from storms Goretti and Chandra, which caused widespread power outages and a spike in mains bursts and leakage repairs, are expected to weigh on returns.
The group also flagged a net penalty position on its outcome delivery incentives, or ODIs, for the full year, reflecting the difficult operating conditions.
ODIs are a system of financial rewards and penalties set by Ofwat based on company performance across metrics including leakage, pollution and supply interruptions, meaning poor weather can translate directly into lower revenues even where the underlying operational response has been strong.
On the environmental front, Pennon said pollution incidents had fallen around 40% year on year and storm overflow spill duration was down 25%, progress it attributed to ongoing investment in infrastructure despite south-west England receiving around 150% of average rainfall in November and December.
The group said its capital programme for the new regulatory cycle was on track and that early mobilisation was helping to secure project efficiencies, with its balance sheet described as robust enough to fund what it called its largest ever investment programme.
Pennon also said it expected to conclude outstanding Environment Agency prosecutions relating to wastewater incidents dating back to 2015 to 2021 during 2026, with a separate Drinking Water Inspectorate court process expected to conclude in the summer.
The progress comes against a backdrop of sustained criticism of South West Water, which Ofwat found to have "systemic failings" leading to illegal sewage spills, and where chief executive Susan Davy resigned last July following a cryptosporidium outbreak.
The latest enforcement case was last year. Critics argue that years of dividend payments came at the expense of sufficient infrastructure investment.