Clearway Energy, Inc. (CWEN) Q3 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Clearway Energy, Inc. Third Quarter 2021 Earnings Call. [Operator Instructions]. I would like to turn the call over to your speaker today, Chris Sotos, President and Chief Executive Officer of Clearway Energy, Inc.

Good morning. I want to first thank you for taking the time to join today's call. Joining me this morning is Akil Marsh, Investor Relations; Chad Plotkin, our Chief Financial Officer; and Craig Cornelius, President and CEO of Clearway Energy Group. Craig will be available for the Q&A portion of our presentation. Before we begin, I'd like to quickly note that today's discussion will contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. Please review the safe harbor in today's presentation as well as the risk factors in our SEC filings. In addition, we refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's presentation. Turning to Page 4. For Clearway Energy, the last quarter has been historic in terms of strategic execution in providing the company with an unprecedented level of financial flexibility to allocate toward growth in CAFD per share. I'm also very proud of and want to thank our teams who have operated safely for the past 1.5 years in the face of a pandemic. Their continued work on behalf of the company during this difficult time is of immeasurable value. I'm pleased to report that Clearway's financial results year-to-date are in line with our sensitivities, and we are maintaining guidance for 2021. Clearway has announced an increase in its dividend by 1.6% to $0.34 per share for the fourth quarter of 2021. This achieved our goal of growing the dividend at the upper end of our long-term target in 2021, establishing a new baseline of $1.36 dividend per share on an annualized basis. Chad will review the results in more detail later in the presentation. I'm pleased to announce that Clearway has agreed to sell our Thermal business for $1.9 billion with an expectation of $1.3 billion in net proceeds after the assumption of nonrecourse debt, estimated state taxes and other transaction costs. This transaction which represented approximately 20% of our market capitalization prior to announcement compared to 10% of our current CAFD affords C1 extraordinary level of financial flexibility, allowing us to drive long-term shareholder value while increasing our renewable portfolio footprint. Due to this flexibility, we acquired the remaining 50% interest in Utah on an unlevered basis for $335 million, adding $30 million of CAFD on a 5-year average basis, thereby replacing approximately 75% of the annual thermal CAFD contribution of approximately $40 million while only utilizing 25% of the $1.3 billion of thermal proceeds, an asset that has the benefit of 15 years remaining on its PPAs and a stable generation profile. Clearway will also fund its remaining capital commitments for previously announced drop-down transactions with this capital, allowing for $680 million of proceeds remaining to be allocated after funding all of these current growth investments. Let me be clear, we at Clearway do not take this capital as a license to lower underwriting standards and return targets or to grow simply for the sake of size. We will allocate this capital with a core focus on driving sustainable per share CAFD and dividend growth. Hand-in-hand with this flexibility in capital allocation, Clearway Group continues to expand its development pipeline, including over 1.9 gigawatts of late-stage development projects with an anticipated funding between now and 2024. We have been working with our Clearway Group colleagues on potential drop-down investments, and tend to finalize economics when tax policy becomes more transparent. In addition, over the past quarter, we have executed -- we have further executed on contracting a significant amount of the financial position at our California natural gas assets beyond the expiration of their existing contracts in 2023. Specifically, we now have resource adequacy contracts for approximately 80% of Marsh Landing's and 100% of Walnut Creek's net qualifying capacity at terms that maintain project-level CAFD through the end of 2026. For those of you who have been following Clearway for some time, the success on a significant amount of previously open megawatts at strong prices is a significant step in maintaining the stability of CAFD per share for years to come. As a result of this as well as the unprecedented financial flexibility afforded to Clearway via the Thermal transaction, I'm pleased to announce that we now see the ability to support our CAFD per share on our corresponding dividend perjured growth in the upper range of our 5% to 8% long-term growth objective within our payout ratio targets through 2026. I will review in a couple of slides, our potential path to target per share CAFD in excess of $2.15 when the capital from the thermal sale is deployed. Turning to Page 5. This provides an overview of the Thermal transaction. As discussed previously, Clearway has signed a binding agreement with KKR to sell the Thermal business for $1.9 billion of total consideration, resulting in $1.3 billion of net expected proceeds. This results in a very accretive implied CAFD yield, with the transaction expected to close in the first half of 2022. These net proceeds eliminate the need for Clearway to issue any new equity to fund the remaining $620 million of committed growth investments resulting from the previously announced transactions with CEG and the acquisition of Utah on an unlevered basis. After allocating capital to existing commitments, Clearway has remaining $680 million of excess proceeds or more than $3.30 a share to allocate to maximize shareholder value. This capital will be deployed with an adherence to our core underwriting standards that have served Clearway well in a variety of market conditions, focused on driving sustainable CAFD and dividend per share growth. As a result of our current NOL position, excluding the impact of any new business activity or deployment of the $680 million, we anticipate our tax runway to come in by approximately 3 years to approximately 6.5 years with some potential state tax obligations. It's important to note that while the NOL will move inward because of the strong economics of this transaction, we see the ability to maintain or lengthen that tenor depending on our deployment of capital and growth in the future. In previous years, we have been able to maintain our NOL runway through investment in additional assets. Looking at the right side of the page, this transaction allows us to improve the balance of the platform that comes from renewables. As a result of the transaction, our investment in committed investments, but not unallocated capital, our pro forma CAFD contribution from renewables will increase for approximately 62% to 75% and our adjusted EBITDA from 59% to 82%. Following the economic logic of the Thermal transaction, the ability for Clearway to emphasize renewables as a part of its growth story is another key benefit to the portfolio as it focuses the company's future, more centered on the highly growth -- on the higher growth renewable sector. Page 6 provides an illustration of Clearway's allocation of $620 million of the Thermal sale proceeds. Turning to the left side of the page, our remaining commitments from drop-down transactions account for $286 million of capital. These transactions have been factored into our growth outlook into 2022 and are on track for closing by year-end. These commitments will be funded under our revolver until repaid with the final proceeds of the Thermal sale. On the right side of the page, we are now showing our Utah acquisition on an unlevered basis, allowing for $30 million of asset CAFD or a 9% asset-level CAFD yield. And this replaces 75% of the Thermal CAFD contribution while only allocating 25% of the proceeds by redeploying the capital into an operating solar portfolio with 15 years remaining under its PPAs and low operational volatility. Clearway has a high degree of confidence in the Utah asset's performance, having owned 50% of it since 2017. The ability to deploy capital at a strong unlevered CAFD yield and operational asset and if we have significant operating history and the ability to drive operational synergies, creates a strong investment opportunity for the company. We'll fund this acquisition through a bridge facility that will be repaid upon closing of the Thermal transaction. The allocation of $620 million of the Thermal sale proceeds to these investments allows Clearway to eliminate the need to issue any equity to close these transactions, while leaving $680 million of capital remain to be profitably deployed. Page 7 provides an update to our pro forma CAFD outlook with the allocation of the thermal sale proceeds. With this allocation and from the recontracting of the majority of our California gas assets, we see a path to be in the upper range of our 5% to 8% dividend growth target through 2026. Starting with our current $1.85 of CAFD per share pro forma guidance, we have reduced CAFD of $40 million from the sale of Thermal but regained $30 million of that with the acquisition of the 50% of Utah we don't already own. This combined with the avoidance of issuing approximately 11 million shares that underpin the investment that produced the $395 million of CAFD in the first column versus an updated pro forma CAFD outlook of $1.90 with $680 million left to be deployed. If one assumes that Clearway allocates $680 million and 8.5% CAFD yield, that drives our CAFD to $440 million in absolute terms and north of $2.15 on a per share basis. This financial flexibility affords Clearway the ability to maintain its underwriting standards while not requiring additional capital. This ability to be efficient with our capital base will be employed as we look to identify drop-down opportunities that we're working on with our colleagues at Clearway Energy Group. Clearway has always emphasized that it's per share CAFD that drives dividend growth and returns for our investors and our focus on acquiring attractive assets as well as being disciplined with capital deployment in our NPV and IRR targets are the driving forces behind quality growth. With that, I'll turn it over to Chad. Chad?

Thank you, Chris. And turning to Slide 9. For the third quarter, Clearway is reporting adjusted EBITDA of $337 million and cash available for distribution or CAFD of $161 million. Year-to-date results continue to be within the company's sensitivity range, having now realized $900 million of adjusted EBITDA and $301 million of CAFD. For the third quarter, the company benefited from excellent performance of the Conventional segment and higher volumetric sales of the Thermal segment. However, this was in part offset by low resource across parts of the Renewables portfolio as well as the timing of project-level debt service, which occurred in the third quarter versus the fourth quarter. For the Conventional segment, availability across the California natural gas assets was above 99%, again, demonstrating their value as critical reliability resources in the state. For Thermal, the business continued to realize higher volumetric sales with an increase through the third quarter of approximately 6.5% versus the same period last year due to favorable weather and ongoing recovery from the COVID-19 pandemic. At the Renewables segment, challenging wind conditions observed in June extended into July where resource was exceptionally low. However, the wind portfolio did produce above-average generation combined in August and September, bringing total wind portfolio performance during the quarter to around 91% of median expectations. For the Solar segment, irradiance was also below expectations as performance was at 94% of estimates. That said, on a year-to-date basis, the strength of the Alta Wind project through most of the year and solid first half solar production has insulated overall financial results. Lastly, results relative to estimates were impacted due to the timing of a debt service payment at a nonrecourse entity. However, this will offset in the fourth quarter, so there is no change relative to full year expectations. Given these factors, overall year-to-date CAFD is in the company's sensitivity ranges, so we continue to maintain CAFD guidance of $325 million. As a reminder, this guidance does continue to assume P50 median renewable production for the full year and is also affected by the approximate $25 million impact in the first quarter due to the February winter event in Texas. Moving to the balance sheet. During the third quarter, the company successfully refinanced the outstanding the 26 senior notes with a new green bond that matures in 2032 at an interest cost of 3.75%. With this refinancing, the company has now cost effectively extended the maturity of all its outstanding corporate indentures, with the earliest maturity now in 2028. For capital formation, since the company now intends to fund all committed growth using cash proceeds from the Thermal sale, whereby eliminating the need for new equity issuances, we will utilize existing and new temporary facilities to close transactions during the interim period. In that regard, we currently have $375 million available under the revolver, and we are working through an expected bridge financing facility to support the funding of the Utah transaction until the Thermal sale closes. Now turning to Slide 10 to discuss the update to the company's long-term pro forma CAFD outlook and 2022 expectations. Today, we are announcing a revised view of our pro forma CAFD outlook to $385 million. As noted on the slide, this figure captures the full exit from the Thermal business, the expected average contribution from all committed growth investments and continues to assume P50 median production estimates. It also assumes the California gas assets operate within current run rate profiles post contract maturity, which is now significantly mitigated given success in recontracting. This figure does, however, exclude any further growth that may be realized from the deployment of the $680 million of excess proceeds from the thermal transaction. While the pro forma CAFD outlook and further growth potential is most critical for the company's ability to meet its long-term commitments, today, we are also establishing '22 CAFD guidance. As noted on the slide, we provide a summary explanation from 2021 to 2022 CAFD guidance, including the effect of growth realization, the Utah transaction net of bridge financing cost and a reversal of the February '21 winter storm event impacting current year results. This leads to the establishment of 2022 CAFD guidance of $395 million. However, please note that due to the timing of uncertainty of when the Thermal sale will close, current 2022 CAFD guidance does factor in an expected $40 million on a full year basis from the Thermal business. As is our normal practice with strategic transactions, we will provide an update to current year expectations upon the closing of the Thermal sale. But as noted, the exit of the Thermal business has already been accounted for in the $385 million on a pro forma CAFD basis. Now turning to the next slide to summarize where we stand from a balance sheet perspective relative to our pro forma CAFD outlook. Balance sheet management and the maintenance of our long-term credit metrics continue to be core strategic principles for the business. This is critical to grow the company over the long run as adherence to these standards supports the most effective cost of capital for the enterprise. As we evaluate where we stand today versus where we will be in the future, the trajectory is not only favorable relative to Clearway's ability to meet its growth objectives, but also as it relates to maintaining its credit ratios and maximizing balance sheet flexibility and capacity over the long run. Using our pro forma outlook today, you will note on the left side of the table, that relative to our targets, we are in range as corporate debt to corporate EBITDA is around 4.5x, and FFO to corporate debt is at 18%. Importantly, this excludes the impact to net debt, given the excess $680 million in proceeds from the Thermal sale that has yet to be allocated. As noted on the right side of the table, as we begin to allocate that excess capital and put consideration into the potential CAFD that can materialize from the deployment of this excess $680 million, not only will we be in a better position to expand the dividend growth run rate, but our credit metrics will also improve. This is evidenced by the presentation of a potential reduction in our leverage metric to 4.0x and an improvement in FFO to corporate debt to 21%. Given the strength of these potential metrics, the company will build even further flexibility to execute on growth and maximize financing capacity while importantly adhering to its long-term balance sheet targets. And with that, I'll turn the call back to Chris for closing remarks.

Thank you, Chad. Turning to Page 13. I cannot overstate how critical our accomplishments this year have been toward achieving our goals not only in the short term also for years to come. In 2021, we've been able to maintain our guidance and deliver on our commitment to grow the dividend at the high end of the range for 2021. During 2021, we have continued to optimize the balance sheet through our issuance of the 2031 and 2032 green bonds with a result in interest savings and extension of our maturity profile. Clearway has also benefited from the success in third-party M&A through the acquisitions of Mount Storm and the remaining 50% of Utah, resulting in $40 million of CAFD for Clearway at attractive returns. As a result of our successful Thermal transaction and the extension of our contracts on our California gas fleet, for the first time as I've had the privilege of becoming CEO of this company in May of 2016, Clearway has the visibility to confidently see a path forward, being able to support per share CAFD and dividend growth in the upper range of our 5% to 8% long-term growth target through 2026. We look forward to continuing to grow and achieve our goals around shareholder value creation. Thank you. Operator, open the lines for questions please.

[Operator Instructions]. Our first question is from Colton Bean with Tudor, Pickering, Holt.

So just on the RA agreements at Marsh Landing and Walnut Creek, can you characterize the interplay of rate in tenor, if any? Or asked differently, were the counterparties solely focused on that 3 to 3.5-year time frame? Or was there some consideration of longer-term agreements split at a lower rate?

There's, I mean, a wide range of outcomes. They basically ask you to bid. I think the counterparties were focused on that 3.5-year time frame, but we provide them a variety of bids with a variety of tenors and that's where we ended up.

Got it. And then just on the dividend guide now excluding through 2026, guided to the upper end of the range, can you speak to what level of coverage do you think about needing at that point in time with the recontracting window now aligning in 2026 as well?

You may phrase differently. We think that the dividend growth rate we've talked about at the upper end of the range can be achieved between our 80% and 85% payout ratio, if that was kind of your question.

Okay. Yes, that makes sense. And really just trying to understand how you think about growing the dividend through '26 with natural gas now aligning with the 2026 recontracting window as well.

Yes. I think from our view, it's almost that we now have confidence because of, a, the amount that we have been able to contract through 2026 and b, obviously, the Thermal proceeds from a great transaction that gives us the confidence in that visibility through 2026. So I think to your point, it's almost that now that we've reduced the risk significantly in our California portfolio through the contracting of those two gas assets, we feel much better about the volatility or lack thereof through 2026.

Our next question comes from Julien Dumoulin-Smith with Bank of America.

Well done on all these updates really. Kudos. So perhaps if I can kick things off first on the remainder of the cash here that you guys are raising from the Thermal sale. I mean just any further thoughts on just the direction that you guys want to talk to? I mean, it seems, obviously, like the pipeline itself is growing organically. I mean should we expect this just to be feathered in, in the normal course? Or is there some sort of accelerated pace of either acquisitions from the sponsor or frankly, third party that we should be watching here? As well as if you can comment. Now that you've contracted up, again, kudos on California, is there any thought process around further monetization of those assets? Open question.

Sure. So a couple of different questions there, Julien. So I think part one, as we think about the remaining cash, it's not as though -- I think what I tried to emphasize was the flexibility it affords us. There isn't necessarily -- and I think, importantly, as I also tried to talk about on the call, it's not we're going to deploy the cash simply to deploy the cash, right? We're going to remain very disciplined in how we think about IRR, NPV and CAFD accretion. This isn't an opportunity to say, well, I'll do things at a 6.5% CAFD yield, for example, simply because it's accretive. And so from our view, we're going to continue to work with our colleagues at CEG around the development pipeline to kind of ultimately be able to allocate some of that capital there, work through third-party M&A, and keep in mind, we talked about that the transaction would close kind of in the second half of '22. Just for clarity, that's -- if you said, is that -- what's the probability of February? That's not really a fair probability. It's much more the second quarter than probably the first half in terms of the more probable outcome. So to me, we're going to continue to work on with CEG, any drop-down opportunities that they might have, third-party M&A and also see where we sit in kind of, let's say, May of 2022 when we actually close the transaction as an illustrative example and see what our opportunities are. And I think that recur -- that could include return to capital to shareholders, if that makes the most sense as well. To your other question around California natural gas and monetization. I think for us, as I've indicated, we really look at the portfolio on a holistic level, kind of looking at all the pieces together. This obviously provides us with a pretty good runway. We're going to also continue to try to contract those assets. Just because we got contracts through '26 it doesn't mean, as you've seen with some of the CCAs, that they're willing to go out further. So there's nothing that says we could try to contract in 2027 on a forward basis with some of these entities. So I think, Julien, our approach on the California gas is, a, we're always open to sale of assets at appropriate value, but b, this definitely buys us time in terms of thinking about those assets and any monetization thereof.

Got you. And then if I can follow up here real quickly. How are you thinking about stand-alone storage within the portfolio? It looks like the pipeline seems to be including some of this as well as just opportunities to complement your existing gas assets with those kinds of resources in California, given just how constrained and limited those opportunities might be for greenfield.

Sure. To your point, we do look at storage as part of the drop-downs that we have in the future. I think in terms of our existing platform in natural gas, keep in mind, we've already installed black start and the process of installing black start capability at our Marsh Landing asset. So it doesn't have an infinite amount of space at that site. But we constantly evaluate if storage makes sense at those natural gas assets. But just for clarity, we do have black start at Marsh Landing, so some of that space, so to speak, has already been allocated.

Chris, I could add that from a tenure and contractual structure perspective, Julien, where we're developing stand-alone storage assets, we're doing so generally where the market design will allow for those projects to be contracted to produce contracted revenue profiles that are compatible with the investment mandate that Clearway Energy, Inc. has or where they provide some complementary risk reduction for other assets. And we also see opportunity for hybridizing existing operating renewable plants in places like California. So as we're developing both paired and stand-alone storage assets, we're trying to think about the fleet as a whole. We're selectively developing those storage assets so that once built, they fit together with the whole of a portfolio, which is intended to be low risk in its cash flow generation and balanced in terms of resource and customer diversification.

Sorry, one quick clarification, if I can, on credit. Obviously, your peer, NEP, had some updates with rating agency delay. Is that a further angle with you all? Sorry, just to throw that out there, and why.

Chad, why don't you take that?

Yes, Julien, I think I know what you're referring. I mean I think, look, I think as we look at our forward metrics, we kind of look at the 2 core metrics between corporate debt to corporate EBITDA, which we define an FFO to debt. I think you kind of look at those collectively in the sense of the strength of the credit of the platform. And I think given where we stand and the trajectory we have, we remain in those targets. But I don't -- I think I recall what you're referring to, I don't have the specifics exactly on what they were doing, but I believe our FFO to debt number is well within that range.

Okay. Just curious if there was some comparability. Congrats again.

Our next question comes from Michael Lapides with Goldman Sachs.

I want to come back to the California gas plants because I think the contracting announcements that you're disclosing today is actually really, really important for investors to understand. Pricing-wise, we've seen RA pricing in the $5 to $7 a kilowatt month range kind of annually. It's obviously seasonal -- seasonally different a little bit. Just curious if that type of tenor extends out to the '25-'26 time frame, meaning if you can get that kind of pricing that far out. That's question one. Question 2 is, now that you've got 5 years of certainty really on 2 out of the 3 assets, do you think about recapitalizing them, right? When the debt fully amortizes by 2023, about reissuing debt, upstreaming some of that cash to the parent using that cash for incremental renewable growth.

Thanks, Michael. So a couple of questions. I think, one, we -- obviously, the contracts are confidential in terms of pricing and the like. But I think importantly for us, we think about where CAFD would be neutral from where we sit today. And so I think the pricing you're indicating I'd say is generally in line with how we think about. In terms of the question around recapitalizing, we'll look at that kind of as the whole portfolio comes together as we approach '23 and kind of see are there opportunities to your point. If there's a lot of excellent growth investments, maybe it makes sense to raise capital on that book. If it doesn't, we'll kind of leave them. Obviously, we've tried to engage in new contracts so that any concerns about CAFD diminution in an unlevered case versus levered today would be mitigated. Obviously, if we then re-levered them, we would probably have lower CAFD, everything else all constant. But I think from our view, we really want to kind of take the optionality on those assets and look to see when we approach 2023. If there's refinancing opportunities that makes sense, we'll do it.

Our next question comes from Steve Fleishman with Wolfe Research.

Taking care of a lot of things at once. Congrats. The -- just on the California. What's your sense on the -- do you think you'd be able to contract the last plant this year as well, extend contract?

I think it's probably more 2022, Steve, in terms of -- versus '21, I think that will take a little bit more time. Obviously, there is the RA procurement next summer as well. I mean we continue to work on it. But if you're asking, do we think we'll close that out this year, I don't think that's our expected outcome.

Okay. And then the -- I guess, a question maybe for Craig in terms of just the market -- development market overall, be curious your thoughts on for -- at least for your company and development there, the impact that the Biden clean energy credits could have to the growth of your business?

Yes. It's hard to overstate how transformational the family of bills that are working their way through Congress would be for a long-term robust renewables growth platform like ours. So it's very meaningful for us. When we look at what it allows us to do in accelerating development of projects that could be built at scale through the midterm, it allows us to make very substantial investments in projects that are large and that extend into geographies where renewables hasn't historically been built at scale. And so you see that in what we've disclosed around our pipeline growth, which is substantial and accelerating. Some of the features of the policy also allow us to adapt capital structures that we would employ to make certain types of projects even more compatible with the investment mandate of Clearway Energy, Inc., which is something we're excited about. For example, being able to make projects qualified for solar, to be a production tax credit eligible resource allows us to optimize capital structure so that for a typical solar project, see when we'll be able to deploy more capital. And we really like the idea of driving even more solar into this fleet as well. And of course, being able to have storage assets be qualified for investment tax credits, whether they're paired with solar or not allows us to think about deployment of storage and repowering also the existing wind assets around the fleet. So when we about what we can do with the combination of our operating portfolio and our development platform during the course of the next 5 to 10 years, this legislation, once enacted, is going to allow us to dramatically increase the size of this business and do so in a way that really drives shareholder value, and we're extraordinarily excited about what the next 5 years have for us.

Great. And I would assume that C1, particularly now that it's got this stronger balance sheet and all this money and a few years down the road, scale-wise that it can kind of keep up keep up with the growth of the development arm such that a lot of that -- or most of that gets directed down to C1.

Yes, that's our objective. And I think that the range of financing structures that we have the potential to employ allow us to also have the structure of the investments that C1 makes into these projects really be optimized to drive shareholder value around the family of metrics that Chris cited as important for capital allocation in addition to CAFD and PPA and IRR. So yes, that's certainly our goal, we think of our development work as really being focused on driving growth in an operating portfolio that underpins the fundamental value of our business.

Our next question comes from Noah Kaye with Oppenheimer.

I guess first, just a quick clarifying one. The revolver and bridge facility you're working on, will those cover the full expected proceeds from the Thermal sale or just out to the scope of the committed investments?

Go ahead, Chad.

Yes. No, it's -- we're focused on up to the committed investments on those. Yes. That's the current expectations. Yes. Yes.

That's super helpful. And then -- and this may be for Craig as well. I appreciate all the comments you just gave around the potential policy impact. Maybe a little bit shorter term, though, we obviously have seen a lot of cost inflation across the industry, steel prices, labor availability, et cetera. Just curious what you're seeing on IRRs for projects under development as well as timing. How is sort of the cadence and the IRR profile trending versus prior expectations?

Yes. Fortunately, I think the way that we approach our business likely manages risk with more care and discipline than some of our peers and also the nature of the relationship that we have with our principal suppliers is such that they prioritize favorable outcomes for us, given our scale and our industry leadership position and our history of working with them in collaborative ways. So at a point like this one where capacity is congested, the partners with whom we're implementing projects are very engaged in working with us to mitigate impacts that may be more acute for others than for us. So when we think about inflationary factors, really there are, I think, principally a problem for projects that are planned for commissioning through, say, 2023 or 2024. Beyond that, we feel very solid about the ability to pass cost inflation through to the revenue contract prices that we offer to customers while still providing a really favorable value proposition for those customers. We feel that way because in the long run, the cost inflation we anticipate is in large measure still being offset by technology improvements and also on average PPA prices in our industry have been, say, 10% to 20% below the avoided cost for load-serving energies or commercial and industrial customers participating in wholesale markets. So we have room to move up price as needed in the long run. What our industry is working through is really the risk and management of inflation on projects where revenue contracts are signed already and where projects are expected to be built during the next 3 years. And we feel very solid about how we are managing that interval, partly enabled by the advantages that I referenced and our ability to work flexibly around schedules and plant layouts and equipment delivery sequences. And we expect that we will be producing favorable returns for CWEN on the investments that it makes on projects that are commissioned through 2024. And also that we will produce returns for our parent company investors that are consistent with the objectives they set for us as a business.

That's very helpful color. And then maybe just the last one. You mentioned all the benefits -- potential benefits in the Biden plan. An additional benefit could be incentives for clean hydrogen production, which we haven't had before. And the ability to develop green hydrogen, taking even some tax credits on the power side. And then on the production side as well, could make for some very compelling dynamics. So can you talk a little bit about any collaborations, partnerships or developments you may have as a platform with hydrogen production entities?

Yes. We like that we have a lot of incumbent advantages to bring to bear in a market where consumption of green hydrogen is growing during the course of the forthcoming decade. When we think about those advantages, we think of an existing operating fleet in California and in Texas. Different markets, different end use propositions, but both places where I think we'll see consumption of green hydrogen grow around distinct delivery infrastructures and also distinct end users and incentive regimes. And so we are thinking about how our projects as they evolve during the course of the forthcoming decade can be value-effective sources of electric generation for green hydrogen. Also our development pipeline in the West has a number of assets that fit nicely with forthcoming consumers of hydrogen. And as you could imagine, we're engaging both with equipment suppliers and end users around an optimal business model for our delivery of those renewable resources as production sources for green hydrogen. And we also like what hydrogen can do to maximize the value of those renewable resources by detaching locational marginal prices at the time that renewables produce from the fundamental value of a green hydrogen commodity. So we're excited about what it could mean for our industry broadly, we're excited about what it can mean for decarbonization and we see a lot of complementarity with our existing strengths.

Congratulations to the team on the meaningful strategic progress this quarter.

Our next question is from William Grippin with UBS.

First question was just on the California gas assets. Is there anything unique about the remaining capacity there that you have left a contract that might make you more positive or more cautious on the ability to do that on favorable terms?

I'm not sure -- it's a combined cycle for El Segundo, if that's your question. So obviously, it's a little bit different than the 2 peakers. The energy component is more relevant in terms of the overall economic equation. So I'd say that's really the only difference. The machines, they are 10-minute fast start in a load pocket, et cetera. So those attributes are the same, given the other assets. The only difference is the combined cycle.

Got it. And with respect to the Thermal transaction, you mentioned possible shareholder returns. I'm just curious what your thought process is on willingness to kind of sit on cash, waiting to redeploy versus making a decision on possible shareholder returns.

I think, once again, I'm not going to get -- the transaction hasn't closed yet. So I think that part is really, as I talked about on the call, we're really emphasizing flexibility. If your question is, would we sit on $680 million with no visibility in deployment for 3 years, the answer is no. If it is well, we have a visibility to deploy that $680 million binary approach in the next 9 months from when it closes, we probably would sit on it. So I think for us, we're going to have a combination of looking at third-party M&A, looking at the drop-downs that we are working on currently and probably some of the other developments that Craig has talked about on the call, take all of that together and kind of when the transaction closes, look at it holistically and then determine if there is capital that's residual to be sent from a return to shareholders. We would prefer to put all into growth and kind of new assets commensurate with our NPV, IRR and CAFD requirements, but if opportunities aren't there, we're not going to just sit on cash to have a cash hoard.

[Operator Instructions]. All right. I don't see any further questions in the queue, sir. I would like to turn the call back to Chris Sotos for any final remarks.

Nothing in particular. Thank you, everyone, for joining. And really, once again, I think this has been a great quarter. So I appreciate everyone's investment in the company. Take care.

And with that, we end our call. Thank you for your participation, and you may now disconnect. Have a wonderful day.