Stock Story: National Grid
Growing electricity demand combined with the desire of governments to decarbonise their economies has presented substantial opportunities for capital investment in energy infrastructure. National Grid is a major beneficiary of these trends. The company is poised to grow the scale of its operations at a record pace over the next six years, with expectations they will commission more new and upgraded infrastructure than in the previous 30 years. National Grid has posted strong operating and financial performance over many years and now faces a prolonged period of unprecedented investment that will lead to long-term earnings growth.
Background
National Grid is a UK-based multinational whose primary activities are the operation of transmission and distribution of electricity and gas across the UK and Northeastern USA.
National Grid operates through the following business units:
- UK Electricity Transmission operates high-voltage electricity transmission networks in England and Wales.
- UK Electricity Distribution operates the electricity distribution networks in the East Midlands, West Midlands, southwest of England and South Wales.
- New England business operates electricity transmission networks in Massachusetts, New Hampshire and Vermont, and electricity and gas distribution networks in Massachusetts.
- New York business operates gas distribution networks, electricity distribution networks and high-voltage electricity transmission networks in New York.
- National Grid Ventures develops, operates and invests in large-scale clean energy infrastructure. It operates separately from the core regulated operations of National Grid. The unit has a diverse group of businesses including subsea electricity interconnectors (interconnectors are high-voltage cables used to connect the electricity systems of neighbouring countries), wind and solar power generation, competitive electricity transmission, battery storage, conventional generation and liquified natural gas (LNG) regasification and storage.
In the year ended 31 March 2024 (FY24), the Underlying Operating Profit for Continuing Operations for National Grid increased by 6% at constant exchange rates to £4,773 million. Capital investment increased to a record £8,235 million, an increase of 11% on the previous year.
National Grid delivered good operational performance over FY24 with high levels of network reliability; for example, Transmission and Distribution reliability remained steady at 99%-100% across all company-owned networks. The company is committed to achieving net zero and Scope 1 and 2 emissions fell by 6% in FY24.
Opportunities
The critical need for economies to invest in energy infrastructure has never been more pressing. Investment in an economy’s energy infrastructure promotes economic growth, improves manufacturing and technology capabilities and enables decarbonisation – a key step in addressing climate change.
Governments in the company’s key jurisdictions have all made ambitious climate targets – the UK government has targeted a fully decarbonised electricity system by 2035 and New York has targeted a 100% zero emissions electricity sector by 2040 while Massachusetts has targeted a 50% reduction in carbon emissions by 2030. New York, Massachusetts, Vermont and New Hampshire all have ambitions to reach net zero by 2050. This decarbonisation in the US northeast and the UK is the dominant driver of growth for the company’s business portfolio with the expansion and strengthening of energy systems being critical to the wider energy transition.
"...artificial intelligence and advanced computing has led to increased growth in underlying electricity demand..."
The impacts of decarbonisation on the energy infrastructure sector are enormous. Across the UK, New England and New York, National Grid expects electrification of heat and transport to increase electricity demand from its networks by between 37% and 51% by 2035. In the US, renewable energy capacity could almost triple by 2032 to 110 gigawatts (GW) as the Inflation Reduction Act and Infrastructure Investment and Jobs Act encourage investment in the sector.
In addition, the development of artificial intelligence and advanced computing has led to increased growth in underlying electricity demand, placing further demands on the capacity and reliability of existing power systems.
As a consequence, policymakers in the UK and the US are encouraging investment in electricity transmission and distribution and other energy infrastructure. Given the bulk of earnings generated by National Grid are derived from regulated energy utility businesses, this encouragement can be expected to lead to increased investment, which leads ultimately to earnings growth.
Capital Investment Plan
National Grid invested £33 billion across its businesses over the past five years. In May 2024, the company announced that it expects to invest £60 billion in the five years to the end of March 2029, approximately double the level of investment of the past five years. The significant step up in capital investment will deliver annual group asset growth of around 10% and 6%–8% underlying EPS CAGR from a 2024/25 baseline. The scale of the investment is staggering. For example, the company’s UK Electricity Transmission business is expected to install more than 12,000 kilometres of new cables across 17 new projects – the equivalent to the diameter of planet Earth.
This investment plan is dominated by investment in electricity networks and will mean approximately 80% of group assets will be electric by 2029 compared to approximately 70% of assets today. Given the commitment of governments to ongoing decarbonisation, the increased exposure of the company to electricity networks positions them well to benefit from ongoing capital investment over the coming decades.
By Gerald Stack, Head of Infrastructure & Portfolio Manager
Sources: Company filings
Important Information: This material is not intended to constitute advertising or advice of any kind and you should not construe the contents of this material as legal, tax, investment or other advice. In making an investment decision, you should read and consider any relevant offer documentation applicable to any investment product or service and must rely on your own examination of the same and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision.
The investment program of the strategy or strategies presented herein (‘Strategy’) is speculative and may involve a high degree of risk. The Strategy is not intended as a complete investment program and is suitable only for sophisticated investors who can bear the risk of loss. The Strategy may lack diversification, which can increase the risk of loss to investors. The Strategy’s performance may be volatile. Past performance is not necessarily indicative of future results and no person guarantees the future performance of the Strategy, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs and such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of the Strategy or any financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. The Strategy will have limited liquidity, no secondary market for interests in the Strategy is expected to develop and there are restrictions on an investor’s ability to withdraw and transfer interests in the Strategy. The management fees, incentive fees and allocation and other expenses of the Strategy will reduce trading profits, if any, or increase losses.
No representation or warranty is made with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this material. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. This material may include data, research and other information from third party sources. No guarantee is made that such information is accurate, complete or timely and no warranty is given regarding results obtained from its use. The issuer of this material and its related entities and affiliates will not be responsible or liable for any losses, whether direct, indirect or consequential, including loss of profits, damages, costs, claims or expenses, relating to or arising from your use or reliance upon any part of the information contained in this material including trading losses, loss of opportunity or incidental or punitive damages.
This material and the information contained within it may not be reproduced, or disclosed, in whole or in part in any circumstances. , Further information regarding any benchmark referred to herein can be found at www.magellaninvestmentpartners.com/funds/benchmark-information/. Any third-party trademarks contained herein are the property of their respective owners and are used for information purposes and only to identify the company names or brands of their respective owners. (080825-#i1)
United Kingdom: This material has been prepared by Magellan Asset Management Limited (ABN 31 120 593 946 AFSL 304 301) doing business as Magellan Investment Partners and is distributed in the United Kingdom by Magellan Investment Partners (UK) Limited (FRN: 1037936), an appointed representative of Sentinel Regulatory Services Ltd (FRN: 1007093) which is authorised and regulated by the Financial Conduct Authority. This material does not constitute an offer or inducement to engage in an investment activity under the provisions of the Financial Services and Markets Act 2000 (FSMA). This material does not form part of any offer or invitation to purchase, sell or subscribe for, or any solicitation of any such offer to purchase, sell or subscribe for, any shares, units or other type of investment product or service. This material or any part of it, or the fact of its distribution, is for background purposes only. This material has not been approved by a person authorised under the FSMA and its distribution in the United Kingdom and is only being made to persons in circumstances that will not constitute a financial promotion for the purposes of section 21 of the FSMA as a result of an exemption contained in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) as set out below. This material is exempt from the restrictions in the FSMA as it is to be strictly communicated only to ‘investment professionals’ as defined in Article 19(5) of the FPO.
United States: This material has been prepared by Magellan Asset Management Limited (ABN 31 120 593 946 AFSL 304 301) doing business as Magellan Investment Partners (‘Magellan’) which is a registered investment adviser. The investment strategies described herein are distributed in the United States by Frontier Partners, Inc. (‘Frontier’), a U.S.-registered investment adviser. For the purposes of the US Securities Act 1933, Magellan and Frontier are affiliated entities. Registration as an investment adviser does not imply any level of skill or training. This material is not intended as an offer or solicitation for the purchase or sale of any securities, financial instrument or product or to provide financial services. It is not the intention of Magellan to create legal relations on the basis of information provided herein. Past performance does not guarantee future results. Where performance figures are shown net of fees charged to clients, the performance has been reduced by the amount of the highest fee charged to any client employing that particular strategy during the period under consideration. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Fees are available upon request and also may be found in Part II of Magellan’s Form ADV.
Canada: This material is provided to you by Magellan Asset Management Limited (ABN 31 120 593 946 AFSL 304 301) doing business as Magellan Investment Partners (‘Magellan’). Magellan is not registered in any province in Canada. The head office of Magellan is in Sydney, Australia and all or substantially all of its assets are situated outside of Canada. Due to the foregoing, there may be difficulty enforcing legal rights against Magellan.
South Africa: This material is provided to you by Magellan Asset Management Limited (ABN 31 120 593 946 AFSL 304 301) doing business as Magellan Investment Partners, who in accordance with FAIS Notice 55 of 2023 issued by the Financial Sector Conduct Authority, Magellan Investment Partners is exempted from section 7(1) of the Financial Advisory and Intermediary Services Act, 2002 (Act No. 37 of 2002). This material is not an offer in terms of Chapter 4 of the Companies Act, 2008.
UAE: This material has been produced by Magellan Asset Management Limited (ABN 31 120 593 946 AFSL 304 301) doing business as Magellan Investment Partners. This material is not for distribution to any other person. This material, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in the United Arab Emirates (‘UAE’) and accordingly should not be construed as such. Any offer of securities or financial services is made only to a limited number of exempt Professional Investors in the UAE who fall under one of the following categories: federal or local governments, government institutions and agencies, or companies wholly owned by any of them. No securities or services have been approved by or licensed or registered with the UAE Central Bank, the Securities and Commodities Authority, the Dubai Financial Services Authority, the Financial Services Regulatory Authority or any other relevant licensing authorities or governmental agencies in the UAE (the ‘Authorities’). The Authorities assume no liability for any investment that the named addressee makes as a Professional Investor. This material is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the addressee’s consideration thereof). Other jurisdictions: This material is provided to you by Magellan Asset Management Limited (ABN 31 120 593 946 AFSL 304 301) doing business as Magellan Investment Partners.
No distribution of this material will be made in any jurisdiction where such distribution is not authorised or is unlawful. This material does not constitute, and may not be used for the purpose of, an offer or solicitation in any jurisdiction or in any circumstances in which such an offer or solicitation is unlawful or not authorized or in which the person making such offer or solicitation is not qualified to do so. (080825-#W17)