Executive Summary / Key Takeaways

• Strategic Reorientation for Growth: National Grid ($NGG) has completed a significant strategic pivot, transforming into a pure-play networks business with a strong emphasis on electricity. This reorientation positions the company to capitalize on the accelerating energy transition across the UK and US Northeast.
• Unprecedented Capital Investment: The company is embarking on an ambitious £60 billion capital investment program from FY2024 to FY2029, nearly doubling its prior five-year investment. This is expected to drive annual regulated asset growth of approximately 10% and underlying EPS growth of 6% to 8% from an FY2025 baseline of 73.3p.
• Robust Financial Performance and Funding Clarity: National Grid delivered strong FY2025 results, with underlying operating profit up 12% to £5.4 billion and record capital investment of £9.8 billion. A comprehensive financing plan, including a £7 billion equity raise, provides funding clarity to at least 2031, underpinning its investment-grade credit rating and inflation-protected dividend policy.
• Technological and Operational Leadership: NGG is leveraging advanced technologies and innovative delivery models, such as the Great Grid Partnership and HVDC framework agreements, to manage complex, large-scale projects like the ASTI program and Smart Path Connect. Its role as a leading Distribution System Operator (DSO) and efforts in connections reform highlight operational excellence.
• Navigating Regulatory and Market Dynamics: While facing challenges like affordability pressures and regulatory scrutiny on returns (e.g., RIIO-T3), NGG actively engages with policymakers to shape supportive frameworks, including for data center demand and planning reforms, aiming for an investable environment that balances investment needs with customer affordability.

The Pure-Play Networks Vision: A Foundation for Future Energy

National Grid plc, founded in 1990, has evolved into a critical infrastructure giant, primarily focused on the transmission and distribution of electricity and gas across the United Kingdom and the Northeastern United States. The company's strategic journey culminated in a pivotal reorientation, completed around 2023, to become a "preeminent pure-play networks business." This transformation involved significant portfolio adjustments, including the divestiture of its Rhode Island business and a majority stake in its UK Gas Transmission business, alongside the acquisition and integration of the UK Electricity Distribution business. This strategic shift has reshaped National Grid's portfolio to approximately 70% electricity and 30% gas, aligning it directly with the accelerating global energy transition.

The overarching strategy is to be at the heart of a clean, fair, and affordable energy future, enabling decarbonization, bolstering energy security, and ultimately reducing long-term consumer bills through substantial, regulated capital investments. This vision is supported by a robust business model that offers strong regulatory protections from macroeconomic uncertainties and limited exposure to energy prices or merchant risk. The company's dual geographic presence provides diversified revenue streams and strategic adaptability across varied regulatory environments, a key differentiator in the utilities sector.

Broad industry trends are significantly shaping National Grid's operating landscape. Governments on both sides of the Atlantic are demonstrating increased urgency to accelerate the energy transition, incentivizing renewable generation and evolving regulatory frameworks to unlock necessary network investments. The UK government's Clean Power Action Plan and Ofgem's connections reform, which prioritizes "ready and needed" projects, are prime examples. In the US, states like New York and Massachusetts are progressing plans to align economic growth and system reliability with ambitious clean energy and climate goals. A notable emerging trend is the increasing demand from data centers, with National Grid reporting 15 gigawatts of signed contracts in its UK Electricity Transmission pipeline alone, necessitating significant investment in new and upgraded substations.

Technological Edge and Operational Innovation

National Grid's ability to execute its ambitious growth strategy is underpinned by its differentiated technological capabilities and innovative operational approaches. The company is not merely building infrastructure; it is transforming how energy is delivered and managed.

A core technological differentiator lies in its advanced network management systems and its pioneering role as a Distribution System Operator (DSO). In UK Electricity Distribution, for instance, National Grid operates the largest flexibility market across all DSOs, which has enabled the avoidance of over 200 gigawatt hours of renewable generation curtailment. This directly translates to lower costs for consumers and more efficient integration of intermittent renewable sources onto the grid. The "technical limits initiative" implemented by Electricity Distribution has also accelerated connection offer dates for approximately 3 gigawatts of distributed generation and removed over 4 gigawatts of capacity from connections queues, demonstrating a tangible improvement in grid efficiency and responsiveness.

Furthermore, National Grid is at the forefront of deploying High Voltage Direct Current (HVDC) technology for long-distance, high-capacity transmission. The completion of the Viking Link to Denmark, the world's longest onshore and subsea HVDC cable at 765 kilometers, showcases its world-class capabilities in this area. The company is also establishing a £59 billion HVDC framework agreement to secure critical equipment for future offshore projects, including Eastern Green Links 3 and 4 and Sea Link. This strategic procurement ensures a robust supply chain for complex, large-scale offshore infrastructure, a competitive advantage in a global market with increasing demand for such specialized components.

Significant R&D and new technological developments are embedded in National Grid's strategic initiatives. The company is actively developing offshore hybrid assets, exemplified by its LionLink project, which represents a next-generation interconnector. These projects aim to enhance grid resilience and capacity by combining interconnector functions with offshore wind farm connections. The "Great Grid Partnership" and a £9 billion enterprise partnership model for onshore projects reflect an innovative approach to delivery mechanisms, securing supply chain capacity and fostering collaboration to accelerate project execution. These initiatives are designed to reduce delivery times, enhance efficiency, and ensure the timely deployment of critical infrastructure, directly contributing to National Grid's competitive moat by enabling it to deliver projects at a scale and pace that few rivals can match.

For investors, these technological and operational differentiators are crucial. They contribute to National Grid's competitive moat by enhancing operational efficiency, reducing costs, and improving network reliability, which are key factors in regulatory performance and allowed returns. The ability to integrate more renewables efficiently and manage complex grid dynamics positions National Grid as a leader in the energy transition, securing its long-term growth prospects and justifying its significant capital expenditure.

Competitive Positioning in a Dynamic Energy Market

National Grid operates within a highly regulated and capital-intensive industry, facing competition from both established utilities and emerging players. Its competitive standing is shaped by its dual-market presence, strategic focus on networks, and technological adoption.

In the United States, National Grid's New England and New York segments compete with major utilities such as Duke Energy (DUK), Southern Company (SO), American Electric Power (AEP), and NextEra Energy (NEE). National Grid's diversified operations across both electricity and gas, coupled with its international experience, offer a unique value proposition. For instance, while Duke Energy demonstrates strong expertise in stormproofing grids, National Grid's broader scope in balancing services and system operations, leveraging its UK experience, provides a competitive edge in managing diverse energy sources. This transatlantic presence allows for greater adaptability to regulatory changes compared to more domestically oriented players like Southern Company.

However, National Grid faces challenges in innovation speed for renewables compared to NextEra Energy, a leader in clean energy generation. NextEra's focused strategy on renewables and grid modernization could offer advantages in clean energy deployment efficiency. National Grid's strategic response involves significant investment in its own networks to integrate renewables and support decarbonization goals, as seen in its $4 billion Upstate Upgrade program in New York and the Electricity Sector Modernization Plan (ESMP) in Massachusetts.

In the UK, National Grid's Electricity Transmission and Distribution segments operate under specific regulatory frameworks (RIIO-T3 and ED3). The company's proactive engagement with Ofgem on an "investable financial framework" for RIIO-T3, seeking a real 6.3% allowed cost of equity, is critical for attracting capital in a competitive international market. The company's efforts in connections reform and its role as a Distribution System Operator (DSO) demonstrate its commitment to operational excellence and efficiency, aiming to outperform allowed returns.

Indirect competitors, such as renewable energy providers and tech firms focusing on decentralized energy solutions, also pose a threat. Companies like Tesla (TSLA), with their energy storage and solar offerings, could impact traditional grid reliance. National Grid's strategy to counter this involves investing in grid modernization and smart network technologies to ensure the centralized grid remains the backbone of the energy system, while also supporting distributed generation. The increasing demand for data centers, which could strain existing infrastructure, presents both a challenge and an opportunity. National Grid's RIIO-T3 plan explicitly addresses this demand, including proposals for AI growth zones, positioning it to capture this significant load growth.

Overall, National Grid's competitive advantages lie in its established regulatory licenses, extensive network effects, and diversified operations. These strengths provide stable, recurring revenues and a strong foundation for growth. However, the company must continuously enhance its operational execution and innovation speed to maintain its competitive edge against specialized rivals and adapt to evolving market demands.

Financial Performance and Liquidity: Fueling the Future

National Grid has demonstrated a strong financial trajectory, particularly in its most recent fiscal year, reflecting its strategic pivot and substantial capital deployment. For the fiscal year ended March 31, 2025, the company reported an underlying operating profit of £5.4 billion, marking a 12% increase at constant currency compared to the prior year. This growth was primarily driven by increased regulated revenues and effective cost control, with controllable costs remaining broadly flat. Underlying earnings per share (EPS) for FY2025 reached 73.3p, slightly exceeding guidance and representing a 2% increase, even after accounting for a higher share count following a significant rights issue.

The company's commitment to infrastructure development is evident in its record capital investment of £9.8 billion in FY2025, a 20% increase from the previous year. This investment fueled a robust 10.5% growth in the regulated asset base. Segment-wise, UK Electricity Transmission saw a 57% increase in capital investment to £3 billion, contributing to an 8.3% return on equity (ROE), outperforming its allowed return by 100 basis points. UK Electricity Distribution, despite facing headwinds from Storm Darragh and lower-than-anticipated allowances from the Real Price Effects (RPE) mechanism, achieved a 7.9% ROE on £1.4 billion in capital investment. In the US, the New York segment's capital investment surged 24% to £3.3 billion, yielding an 8.7% ROE, while New England invested £1.8 billion, achieving a 9.1% ROE. National Grid Ventures, following the completion of Viking Link, saw its capital investment decrease by 43% to £378 million, with underlying operating profit at £455 million.

Liquidity and capital resources are robust, designed to support the ambitious investment program. The £7 billion equity raise, completed in the past year, provides funding clarity to at least 2031, reinforcing the company's strong investment-grade credit rating. Net finance costs in FY2025 were £1.36 billion, £116 million lower than the prior year, benefiting from reduced net debt post-rights issue and lower inflation on index-linked debt, partially offset by higher refinancing costs. Cash generated from continuing operations stood at £7 billion, a 4% decrease due to timing-related returns of balancing charges within the Electricity System Operator (ESO) prior to its sale. However, a net cash inflow of £954 million, significantly higher than the prior year, reflects the impact of the rights issue proceeds. Net debt was reduced by £1.7 billion to £41.4 billion, also benefiting from disposal proceeds from the ESO and the remaining 20% stake in Gas Transmission. National Grid's strategy of hedging approximately 70% of its US gross assets with dollar-denominated debt effectively limits exchange rate volatility, demonstrating prudent financial management.

Outlook and Strategic Imperatives

National Grid's forward-looking strategy is anchored by its reconfirmed five-year financial framework (FY2024-FY2029), which projects approximately £60 billion in capital investment. This monumental investment is expected to drive annual asset growth of around 10% and underlying EPS growth of 6% to 8% from the FY2025 baseline of 73.3p. The company aims to grow its dividend in line with average UK CPIH inflation, maintaining an attractive proposition of growth and yield for investors.

For FY2026, capital investment is projected to exceed £11 billion, driving asset growth of approximately 11%. However, EPS growth is anticipated to be at the lower end of the 6% to 8% range, primarily due to the headwind of a slightly weaker US dollar. Net debt is expected to increase by just over £6 billion in FY2026, excluding proceeds from the planned sales of National Grid Renewables and Grain LNG.

Key strategic initiatives for the coming year include:

• UK Electricity Transmission: Ramping up capital delivery, including commissioning two further circuits for the London Power Tunnels project. A primary regulatory focus is to secure an investable RIIO-T3 framework from Ofgem, with a draft determination expected in June 2026 and a final decision in December 2026. The company's £35 billion RIIO-T3 business plan aims to nearly double power flow and connect significant generation and demand, with proposals expected to avoid £12 billion in constraint costs.
• Strategic Infrastructure (ASTI): Accelerating the ASTI program, with all six Wave 1 projects under construction and efforts to finalize procurement contracts for remaining offshore projects. The goal is to secure Tier 1 supplier contracts for all 17 ASTI projects.
• US Operations: Engaging with the New York Public Service Commission (PSC) for approval of the Niagara Mohawk joint proposal, which includes an improved 9.5% ROE and a 50% increase in CapEx over three years. In Massachusetts, the focus is on agreeing recovery mechanisms for the up to $2 billion Electricity Sector Modernization Plan and preparing the next rate filing for Massachusetts Gas.
• National Grid Ventures: Prioritizing the completion of the sale of National Grid Renewables (already completed by May 2025) and the agreement of the sale of Grain LNG, while continuing development of the LionLink and Propel transmission projects.

Risks and Challenges

Despite the compelling growth narrative, National Grid faces several pertinent risks and challenges. Regulatory outcomes remain a significant factor. The ongoing RIIO-T3 negotiations with Ofgem are critical, particularly concerning the allowed cost of equity and cash generation characteristics. While National Grid advocates for a real 6.3% allowed cost of equity, the final determination will influence future returns. Similarly, the UK Electricity Distribution segment's ROE was impacted by lower-than-anticipated allowances from Ofgem's Real Price Effects (RPE) mechanism, a sector-wide issue that the company is working to mitigate.

Affordability for customers is another key concern, especially in the US, where high commodity prices have led to pressures. National Grid actively engages with regulators to balance investment needs with customer affordability, implementing measures like smoothed bill increases and assistance programs for low-income households. The Massachusetts Governor's initial affordability bill is an example of ongoing policy efforts that National Grid will need to navigate.

Operational risks, though well-managed, persist. Severe weather events, such as Storm Darragh, can cause significant network damage and incur substantial costs. The investigation into the North Hyde substation fire highlights the importance of resilience in an increasingly electrified society. Supply chain constraints, while largely mitigated by proactive procurement strategies and framework agreements, remain a global challenge for large-scale infrastructure projects. The delay in the Eastern Green Link 1 (EG1) project, though attributed to its unique history and not indicative of other ASTI projects, underscores the complexities of such undertakings.

Finally, policy uncertainty, particularly in nascent areas like offshore wind, can impact investment decisions. The accounting impairment related to the Community Offshore Wind joint venture due to "significant nearer-term policy uncertainty" illustrates this risk. However, National Grid's diversified portfolio and strong regulatory relationships provide a buffer against such localized challenges.

Conclusion

National Grid stands at a transformative juncture, firmly committed to its vision as a pure-play networks business driving the energy transition across the UK and US Northeast. The company's strategic pivot, coupled with an unprecedented £60 billion capital investment plan, underpins a compelling investment thesis centered on high asset growth, strong earnings expansion, and an inflation-protected dividend. Its robust financial performance in FY2025, marked by a 12% increase in underlying operating profit and 10.5% regulated asset growth, demonstrates effective execution of this strategy.

Technological leadership in areas like HVDC transmission and innovative DSO functions, alongside proactive engagement with regulatory bodies, positions National Grid to capitalize on the immense opportunities presented by decarbonization and increasing electricity demand, including from emerging sectors like data centers. While challenges such as regulatory negotiations and affordability pressures persist, National Grid's resilient business model, diversified geographic footprint, and comprehensive financing strategy provide a stable foundation. The company's ability to deliver large-scale, complex projects efficiently and adapt to evolving market dynamics will be crucial in sustaining its competitive advantage and delivering long-term value for shareholders in the decades to come.