NextEra: Republican Tax and Spending Bill Could Damp NEER’s Growth Outlook

Key Morningstar Metrics for NextEra Energy

• Fair Value Estimate: $75.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

The Senate voted to advance the Republican tax and spending bill past its first procedural hurdle. The bill materially reduces the length and quantity of clean energy credits from the Inflation Reduction Act.

Why it matters: Approximately 30% of NextEra Energy’s NEE growth comes from its renewable energy development arm, NextEra Energy Resources, which has materially benefited from clean energy tax credits.

• We currently estimate that NEER will achieve its midpoint of 36.5 GW-46.5 GW in development expectations, supporting our estimate that the company will reach the high end of management’s 6%-8% annual earnings growth target.
• The legislation weighed by the Senate would keep current tax incentives in place only if the project is operational by the end of 2027, a change from earlier drafts. Additionally, taxes would be imposed on wind and solar projects that include specific foreign components, starting in 2028.

The bottom line: We are reaffirming our $75 fair value estimate, narrow moat rating, and Medium Uncertainty rating for NextEra.

• NextEra stock is down 2% at the time of this writing and has significantly trailed the Morningstar US Utilities Index in the year to date. The stock trades at an 8% discount to our fair value estimate as of June 30 and remains in 3-star territory.
• We are leaving our long-term estimates unchanged as we wait for a final bill to be signed into law. If the bill is signed as is, we would reevaluate our long-term growth assumptions for NextEra, which remains at a premium relative to its peers.

Coming up: If the legislation passes the Senate, the bill would be sent to the House, where final passage remains uncertain.

• We expect management to discuss potential offsets to growth headwinds at NEER during its second-quarter earnings call. Other growth opportunities include natural gas generation development and continued investment at Florida Power & Light.