Are These 3 Companies the Best Way to Play Alternative Energy?

Renewable energy such as wind and solar are growing at 100 gigawatts (GW) of capacity annually. This $200 billion in yearly green energy spending represents immense opportunity for long-term investors, but figuring out which companies to invest in can be fraught with peril. 

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Solar and wind companies are usually highly speculative, non-profit-earning, momentum stocks that can easily lose investors all of their money.

However, there are ways for long-term investors to grow rich from the green energy revolution with far less risk and generate substantial income to boot. This article outlines three securities who are poised to profit from this energy megatrend and take income investors along for the ride.

A new kind of utility, a new kind of security
NextEra Energy Partners (NYSE: NEP  ) is a recent YieldCo from NextEra Energy Inc (NYSE: NEE  ) , one of my favorite alternative energy companies. YieldCos are similar to REITs or MLPs in that they are income oriented securities that own cash-generating assets, however they don't have any of the tax benefits (or headaches) related to MLPs. 

The reason NextEra Energy Partners isn't an MLP is because its solar and wind assets don't qualify for MLP status under the US tax code. Although taxed as a regular corporation, NextEra Energy Partners doesn't expect to pay any taxes for 15 years due to net operating losses it will be able to claim. The net effect of NextEra's Energy Partners' structure is that it will be a fast-growing solar and wind pure play, with a decent but fast-growing yield. Income investors may want to consider owning both for two simple reasons: income and growth potential. 

Company Yield 10 year Projected Distribution Growth Expected Total Return
NextEra Energy 2.90% 6.47% 9.64%
NextEra Energy Partners 2.24% 13.50% 16.10%
Brookfield Renewable Energy Partners 5.30% 32.34% 39.63%

Sources: S&P Capital IQ, Yahoo Finance

NextEra Energy is one of the best electrical utilities in America. With 42 GW of capacity in 26 states and four Canadian provinces, it represents one of the cleanest power generation portfolios in the country (56% natural gas, 24% wind, 14% nuclear).

Part of that portfolio is 11 GW of solar and wind capacity, representing 17% and 14% of America's utility scale wind and solar capacity respectively. 

NextEra Energy Partners is the first YieldCo with incentive distribution rights (IDRs) to its general partner, NextEra Energy.

This means that, once NextEra Energy Partners' distribution reaches a certain point, 50% of marginal cash flow will go the general partner. This will help NextEra Energy maintain one of the fastest dividend growth rates in the utility sector and keep it an exceptional dividend growth stock, one that's generated 13.4% total returns over the last 21 years compared to the market's 9.7%.

What should get income investors excited however, is the fact that NextEra Energy has 4.4 GW of additional solar and wind capacity scheduled to be completed by 2016. That's a 40% increase in renewable energy capacity and NextEra Energy Partners, which just IPOed with 990 MW of capacity from 10 wind and solar projects, has right of first offer on 2.539 GW of additional capacity that NextEra Energy has pledged to drop down to it over the next three years.

That 160% growth in capacity means distribution growth of 12%-15% annually, which will cause quick growth in IDR fees to NextEra Energy, enriching investors in both. Impressive growth to be sure, yet by 2016 NextEra Energy Partners will only own 23% of NextEra Energy's total renewable generating capacity. With IDR fees as an incentive, NextEra Energy Partners is likely to eventually receive all of its general partner's solar and wind assets, resulting in 10 to 15 years of exceptional distribution growth.

Brookfield Renewable Energy Partners (NYSE: BEP  )  is an MLP that's 65% owned by Brookfield Asset Management, operator of one of the finest real estate and infrastructure empires in the world. Brookfield Renewable Energy Partners owns $17 billion in assets, including 216 hydroelectric and wind facilities that generate 6 GW of electrical capacity in the US, Canada, and Brazil. Not only do these assets represent geographical diversification, but their cash flows are 93% contracted to inflation-indexed power purchase agreements with a weighted average length of 17 years. Not only does this secure a very generous distribution (that's been growing at 5% annually since 2011), but analysts are projecting Brookfield Renewable Energy Partners will experience truly stunning growth over the next decade; 40% annual earnings growth fueling 32.34% annual distribution growth. 

With Q1 results showing 14% annual growth in funds from operations/unit (which pays the distribution), growth appears to be accelerating, and if analysts are even close to right in their projections, Brookfield Renewable Energy Partners could be one of the best income investments of the next decade.

Foolish takeaway
Renewable energy represents an incredible opportunity for long-term investors to profit from a major energy megatrend. NextEra Energy, its YieldCo NextEra Energy Partners, and MLP Brookfield Renewable Energy Partners represent three of the best ways I've seen for income investors to cash in on the ocean of money that's flowing into green energy. 

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