TXNM Energy, Inc. (TXNM) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the PNM Resources Second Quarter Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host, Jimmie Blotter, Investor Relations manager.

Thank you, Kate, and thank you, everyone, for joining us this morning for the PNM Resources Second Quarter 2012 Earnings Conference Call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Collawn; and Chuck Eldred, our CFO; as well as several other members of our executive management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. And with that, I will turn the call over to Pat.

Thank you, Jimmie. Good morning, everyone, and let me add my thanks to Jimmie for all of you joining us this morning. I'm going to start the presentation on Slide 4 this morning and review our second quarter performance and provide some company updates. I hope you have all seen our news release issued earlier this morning reporting our second quarter ongoing earnings of $0.33 per diluted share compared with 2011 second quarter results of $0.20. On a GAAP basis, we finished the second quarter at $0.27 per diluted share compared with $0.04 last year. Both quarterly and year-to-date results represent continued improvement in the performance of both PNM and TNMP. For PNM, performance was strong as a result of the retail rate increase that went into effect last August, and our continuing efforts to align costs with revenues. In addition, this June was quite a bit warmer than a June a year ago. TNMP had strong retail load growth of 7%, was tempered by a cool-ish start to the summer in Texas when compared with 2011. In terms of PNM's regulatory framework, we continue to make progress on several fronts, and I will discuss those in more detail in a few minutes. Turn to Slide 5 for an overview discussion on load growth, economic conditions and unemployment. We continue to see modest retail load growth at PNM. 1/10 of a percent for the quarter and 4/10 of a percent year-to-date on a weather normalized basis. Our rolling 12-month weather normalized average sales growth rate for PNM is 0.8%. We've experienced slow residential customer growth for a while. It's been less than 0.5% for more than 2 years. Housing starts have been slow, as a result of the weak economy, they're picking up over last year, but still below prerecession levels. As we've discussed before, New Mexico's economy is closely linked to governmental activity that has historically moderated the peaks and valleys in economic fluctuations. And we're starting to see some signs that the government sector is somewhat stable in our area. For example, the state of New Mexico recently announced in that the tax revenue for the year is coming in at about 50% higher than anticipated. We are also seeing some job creation, such as the Albuquerque metro region receiving $3 million in a job training incentive program that has resulted in a $9.8 million payroll increase this past year. The city of Albuquerque also plans on adding new jobs. While there are some governmental agencies tightening their belts, we see the overall picture remaining steady. For TNMP, the quarter resulted in strong load growth in each of the Residential, Commercial and Industrial segments. However, while the nearly 25% increase in industrial load looks impressive, please remember that the non-transmission industrial load for TNMP represents a small portion of the total sales volumes and revenues. For TNMP, the rolling 12-month weather-normalized sales growth is 2.8%. The growth seen in TNMP's residential and commercial segments provide support that the Texas economy is one of the better, if not the best, currently in the nation. About 231,000 jobs were gained in Texas in June 2012 compared to the prior year. Single-family building permits were also up 21% year-to-date through May. I think this is further proof that the economy in Texas is performing better than most today. TNMP's customer growth is also very strong at 0.7%. If we look at unemployment, Texas and New Mexico continue to fare better than the nation as a whole, and I'm sure you saw that this morning, the unemployment rate for the U.S. was changed from 8.2 to 8.3, but in Texas, they're at 7% and New Mexico at 6.7%. If we turn to Slide 6, I'll talk a minute about the regulatory update. In early July, we announced the settlement in PNM's transmission case with FERC. The settlement has been filed with FERC and calls for a $2.9 million increase to transmission revenues. The FERC staff has filed comments in support of the stipulation and the administrative law judge has also certified the settlement to the commission this week. This was a black box settlement, so we have an agreed-on revenue number, but no specific ROE. We await FERC approval of the settlement, but do not have a timeline for that action. One of the most important aspects of the settlement is that, that the fact that the parties agreed not to oppose the concept of a formula-based transmission rate filing, as long as we make that filing within a year of the cases -- the pending cases approval by the FERC, and we will make that filing. The formula-based rates will be key in helping PNM fully achieve a reasonable FERC transmission return on equity. Please note, as permitted by FERC rules, in June of 2011, PNM began billing at the higher rates associated with the transmission case. Those rates are subject to refund. Revenues recorded by PNM have been aligned with the agreed to annual increase, which was included in our 2012 guidance. The FERC generation case with the Navopache Electric Co-op is also continuing towards a settlement. PNM and Navopache are making positive steps toward a resolution, and we have reached a settlement in principle. The terms are confidential however, until we file the settlement, so we hope to be able to share those results with you in the near future. Regarding the renewable energy rider, we have seen a positive response from interested parties. A hearing examiner has issued a recommendation that is designed to approve that rider and we await the commission's action. We have proposed an August 8 implementation date for that rider. Likewise, we have had a positive response to the 2013 renewable energy plan. This plan says that in 2014, when all of the plan's components are in motion, PNM expects to achieve full quantity and diversity compliance with state mandates, and still be below the reasonable cost threshold. The hearing on this has been set for September 4. Regarding the potential for a decoupling tariff in New Mexico. In May, the commission issued a notice of proposed rulemaking for an amendment to its energy efficiency rule that would include decoupling as a mechanism for removal of this incentive associated with the implementation of energy efficiency programs. The commission closed that docket on July 26, and opened a new one to consider decoupling. This NOPR establishes a workshop process to develop the new rule and, the first workshop is scheduled for August 24. And finally, regarding the future test year rulemaking for New Mexico retail cases, the commission issued an order closing the record on the rulemaking and the anticipated next step is for the commission's general counsel to draft an order that establishes clear rules for utilities to use when filing future test year cases. We are looking forward to the commission establishing ground rules for future test year filings, but we still have the ability to file a future test year even if the rulemaking is not completed in a timely manner. You will recall that principles were agreed to in our 2011 general rate case settlement, and we would follow those principles if the rulemaking is not completed at the time of our next rate case filing. Let's turn to Slide 7 for a quick update on the BART situation on our San Juan power plant. The Environmental Protection Agency issued a 90-day stay after Governor Susana Martinez requested time to try to find a middle ground on this issue. It is important to note that although the EPA has issued a stay, it does not impact the final compliance date of September 21, 2016. The EPA states that it intends to conduct a formal rulemaking process to either extend the compliance date or to accommodate the promulgation of a possible alternative. The New Mexico Environment Department kicked off a public process designed to identify possible alternatives at the San Juan plant that could meet the Clean Air Act's regional haze rules. The Environment Department is trying to break an impasse between the federal and state plan regarding Best Available Retrofit Technology at San Juan. This is a federal implementation plan versus state implementation plan issue we have been discussing with you for quite some time. This public process started in late July and is expected to go through mid-September. The first public comment was held early last week in Farmington. About 100 people attended, and 29 people provided oral comments. During the public meeting last week, New Mexico Environment Department made it clear that a viable alternative must comply with the requirements of the Clean Air Act and any alternative that does not comply with it would likely be turned down by EPA. An EPA official at the meeting reiterated that the final plan also needs to meet the Clean Air Act standards and will need EPA approval, but Clean Air Act intends for the state to develop those plans. Concurrent with the public comment meetings will be working group sessions in which key stakeholders will provide the New Mexico Environmental Department with technical assistance to evaluate and develop a viable alternative to the federal plan and the state plan. From our perspective, any viable alternative has to be one for which we get appropriate cost recovery. We are also moving forward on litigation in the 10th Circuit Court, and oral arguments are scheduled for October 23. We will keep you posted on this issue as it continues to develop. With that, I will turn the call over to Chuck for the financial details.

Thank you, Pat, and good morning, everyone. We'll start on Slide 9. As Pat discussed, ongoing earnings were $0.33 for the quarter, which was $0.13 increase year-over-year. The majority of the improvement came from PNM with a $0.13 improvement that was largely driven by rate relief. TNMP continues to perform well and was up $0.02 for the quarter. Corporate and Other was also $0.02 higher. First Choice and Optim were combined, $0.04 decrease. The primary driver for PNM was a rate increase that was implemented in August 2011, which was $0.12 for the quarter. There were a number of other drivers that also contributed positively to PNM. Weather accounted for $0.03 improvement due to the high temperatures in June. Billing degree days for PNM were 32% higher than normal in the second quarter 2012. The PNM Resources share repurchases from last year improved the PNM results by $0.03. The expected O&M reductions to align cost to our rate structure were also $0.01 improvement. Outage costs attributed to $0.01, the planned outage for San Juan unit 2 was shorter than expected, and PV3 had one of the shortest planned outages in the history of Palo Verde. As expected, lower Palo Verde 3 prices were a negative driver, causing a $0.01 decrease compared to 2011. Interest expense increased due to the debt issuance of PNM in October 2011 or $0.01 change. The nuclear decommissioning trust realized year gains in 2012, resulting in a $0.04 impact. TNMP was up $0.02, as Pat mentioned, TNMP is experiencing good load growth, contributing $0.02 from last year. The share repurchase improved TNMP's results by $0.01, and mild weather through June of this year had a negative impact of $0.01. Now turning to Slide 11. We are affirming our 2012 guidance today of $1.20 to $1.32 for the year. We continue to expect 2012 to end solidly in the middle of this guidance range. The settlement of the FERC transmission case this quarter falls in line with the guidance that was issued, so there is no change for that. When we originally issued 2012 guidance, you will remember that we expected a decrease of $0.03 to $0.04 year-over-year for Palo Verde unit 3 market prices. At our Q1 call, we updated this to include another penny and a half, making the total of $0.04 to $0.06 decrease year-over-year. We continue to expect this result for 2012. Based on a full year, we have fixed 90% of Palo Verde's output at an average price of $31 per megawatt hour for 2012. And we do not expect price volatility for the remainder of the year to have a material impact on our earnings. And we have a number of other small items that are mostly positive than we had anticipated. One of these is our planned outage expense. We saw better-than-expected outages in Q2, although 2 major plant outages in 2012 at San Juan, we do expect the total year planned outage expense to be up compared to 2011. Although we are seeing slightly lower-than-expected load growth at PNM this year, as usual, we continue to manage our business to mitigate any negative impact this may have. We're also doing this for various continuous improvement and cost control efforts. As we discussed last quarter, we are also seeing an increase in AFUDC, resulting from a higher capitalization rate, primarily due to lower short-term debt balances at PNM. We expect all of these items to balance out and we are confident that we will end the year in the middle of our guidance range. With that, I'll turn the call back over to Pat for our closing remarks.

Thanks, Chuck. We'll wrap up for today's call with the check list for 2012. The settlement in the FERC transmission case provides the latest example of how we are making progress towards our goal of earning our allowed returns. Our efforts to seek proper cost recovery, coupled with controlling expenses, continues to pay off. And we will continue on this path of matching cost with cost recovery. As we discussed earlier, we are in the earlier stages on the other regulatory matters and are making progress. We are also seeing strong reliability in power plant performance. And as Chuck has detailed, we are effectively controlling our costs. Operator, we can start the question-and-answer portion now.

[Operator Instructions] Our first question comes from the line of Paul Fremont with Jefferies. Paul B. Fremont - Jefferies & Company, Inc., Research Division: A couple of questions. One, if the state and the EPA move towards a possible shutdown of one or more units of San Juan, would you consider offering Palo Verde 3 as -- or the rate basing of Palo Verde 3 as a possible force of replacement power?

Paul, it's Pat. It's too soon to think about those kind of alternatives, Paul. One of the things that we said we would do is we would look, not only at the environmental performance of the plants, we'd also take a look at the economic piece of it. So that includes both the cost to rate pairs and the impact on jobs in New Mexico. So there may be pushes for that, if you wanted to build some new gas generation in New Mexico. So it's really kind of, I think, too soon and tell until we start getting these technical workgroups together offering alternatives. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And then, what is the timeline by which you need to inform lessors for Palo Verde Units 1 and 2 about what your intention is, come the end of the lease term?

Yes, Paul, this is Chuck. We do have to give notices for both unit 1 and unit 2, which is the total 178 megawatts that are under lease payments. The first notice will be January 2013 for unit 1. That's actually our second notice. The first notice was where we indicated that we have an interest to continue to have ownership in the asset. The second notice will really be an indication that our interest in either extending the lease or making a decision to purchase the less -- the leases that are outstanding. The second period for unit 2 will be January 2014, and which again will be the second notice. The indicated decision to either extend the lease or purchase the option. So in either case, we haven't made a firm decision as to what our plans are. We still have a few more months to work through this. Ultimately, our goal and desire is to have ownership of those leases of the Palo Verde within rate base. And to our view, it's really more of a timing of how we can work through a decision to ultimately get regulatory treatment and recovery of them, the investment and ownership of Palo Verde, both 1 and 2. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And can you tell us, what is the current revenue requirement that's built into rates to recover the lease expense?

Currently, the payments for a year around $57 million. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Okay. So that's roughly the equivalent of what you're collecting from customers right now?

Dollar for dollar, yes. It's treated as an O&M expense. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And I guess, my last question would be, when we think about your equity ratio and targets, can you give us a sense of what you're targeting, both at the utility and at the holding company?

Yes, we -- target for PNM is 50-50 cap structure. At the holding company, we maintain a range of between 50, 55, roughly around 52 would be -- probably 52, 53 is really a pretty good medium range for that. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And that's 52, 53 debt?

That's right.

Our next question comes from the line of Justin McCann with S&P Capital IQ. Justin C. McCann - S&P Equity Research: Despite the strength of this quarter, you were staying within the midrange of your guidance. Despite the impact of Palo Verde, could you still approach the high-end of your guidance?

Yes, at this point, we're really comfortable being at the solid point of the mid-point of the range. We mentioned a slight decrease in loads. So there's some impact there. We're using cost efforts to really offset that. And the impact of Palo Verde, we're really comfortable where we are right now. But I think it's probably -- we're very comfortable, and we're confident in the mid-point of the range. To that degree, anything beyond this point would be certainly an upside to that mid-point.

Our next question comes from the line of Ali Agha with SunTrust.

A couple of quick questions. First on Palo Verde 3, Chuck, can you remind us how much of that output is hedged in 2013? And perhaps in '14 right now?

We haven't really talked about that, Ali. We've talked about that we continue to use a rolling 12 months to keep a hedged position. We are 90% hedged through this year. Certainly, we are hedging positions out in 2013, but we haven't disclosed what our final position is at this point. And we're trying to keep the flexibility, as we talked about before of any upside potential in the market to capture that, given the fact that it continues to be a negative impact to earnings, trying to capture some, hopefully, at some point, some increases in power prices that would turn that around.

Okay. But just that -- actually less than half is a fair way to think about it?

We really haven't talked about it, Ali. So I think at this point, it's fair just to say that we're 90% hedged for this year. We -- certainly are beginning to hedge some in 2013, and that's about as far as I think I can go at this point.

Okay. Secondly, Pat, going back to the BART issue, et cetera, just remind us, with all these petal parts going, the 90 day stay at the court, et cetera. Working backwards, if that deadline does not change, what's kind of a drop-dead date for you guys to start that investment and still meet the deadline?

Well, the 90-day stay technically would be up in mid-October of this year. And what we're doing now is working with the different vendors that have put in bids on the SCR project to determine if there are ways that we can move spending back, so we don't have to start to any spending, significant spending, until we get through this process and know if there's an alternative. So we don't have a definite plan yet. But as we disclosed in the Q, we're looking to not have to spend the amount of money we thought we would, and working with vendors to coming up with alternative plans. But we'll know, when this public process is over by mid-October. I think, whether or not there could be a viable alternative or if we're going to have to go ahead with the SCRs.

I see. And also, is the plan at PNM to file the rate case? What was it, at fourth quarter? What's the latest on the timeline there?

Yes, our current plan was that we would file a rate case in December of this year.

Okay. And last question. Remind us again, when we look at your base CapEx numbers that you have in your forecast, that -- what does that translate into from an annualized rate-base growth? And what's sort of baked into the rate-base growth to go back to that 10% to 12% total return you talked to us about?

Yes, the annualized rate base growth that was built into the capital budget was about 2%.

Okay. But to get to...

Yes, yes.

Okay, but to get to the 10% to 12% total return, the -- if I recall, the rate base growth needs to be higher. Correct?

Yes, and Ali, where we -- the other piece that we talked about, anywhere from 4% to 6% that would be considered with the other potential capital we have relative to whether we put SCRs or some alternative to how we pursue solving or providing some solution to San Juan.

Because that 2% was base capital, Ali, yes.

And so we take the other capital potential. We have the renewables. We continue to feel comfortable that the 10% to 13%, over the next 5 years, with 2012 being a base year. We're confident we can provide the results to meet those expectations. And of course, as you know, that also includes dividend yield, which we address every February with the Board.

Right. But just to be clear, Chuck, so 4% to 6% is kind of implied rate-base growth that kind of supports that target?

That's probably a reasonable expectation with -- knowing that we're going to have to spend that potential capital, we're just not sure exactly what we'll be spending it on, other than SCRs first, at this point.

Yes.

Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Most of my questions have been asked and answered. Just curious, could you just remind us of your dividend policy and the timing of when the Board refused the dividend?

Yes, our long-term target on our dividend is 50% to 60% of consolidated ongoing earnings. And the Board continues to evaluate it every year in February. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay, every February. Okay. And then, also remind us that the $143 million of 9.25% parent debt I believe expires in '15, is there an opportunity to take that out or refinance that earlier? Or you'll just let that roll off at -- when it expires in '15?

Yes, the plan -- yes, the plan, Brian, right now is to let it expire, we'll pay off at the -- when that date in May of 2015. Now there because it's not callable, there's no way to take it out, unless interest rates were to change dramatically, which I don't think any of us expect to happen.

Yes, when we recapitalized last fall, we bought some of it back, but we paid a hefty premium for it. So we don't really want to do that again. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And lastly, these alternatives that you reference in terms of San Juan, BART, EPA situation. I'm just trying to get a feel, I think from your -- or at least from the state and the governor's perspective, the best alternative would be the lowest cost. And I'm just wondering in this $700 million of potential CapEx, given any sort of settlement with the EPA, it looks like that $700 million could be considerably less. Just trying to figure out if -- how you backfill that to maintain the $700 million, which supports 10% to 13% total return target.

A couple of things on that. On that $700 million, that's the total plants, and our share of that is about 46.3%. So it's, I'll do easy math, it's about $350 million for us. If we ended up doing the SNCRs, that's about $77 million. Half of that is ours. So there's, there's just a little over $300 million delta. First, I don't think that we're going to be able to get to get to 4 SNCRs on that unit. I think that was the state plan and the EPA has rejected that. But if we come up with a lower cost plan, we can still fill in with other renewables. We would like to own more renewables as opposed to doing a PPA. We can build a gas peaker. We can build some generation. So we have lots of opportunities to fill in that gap for a cheaper alternative.

Yes, I mean, Brian to add to Pat's comment, we update the capital budget in December of each year. So what we project and look at the infrastructure of the business. And given whatever solution we determine, there may be some capital that we can allocate, both PNM and TNMP that would help support that as well.

[Operator Instructions] Our next question comes from the line of Maury May with Wellington Shields. Maurice E. May - Wellington Shields & Co., LLC, Research Division: The story is really intact. I got a couple of questions this morning. First of all, going back to one of the first questions. If you are sticking to the mid-point of guidance for 2012, it indicates down quarters in the third and fourth quarter. And how is that possible?

I'm not sure. When you say down quarters for third and fourth quarter? Maurice E. May - Wellington Shields & Co., LLC, Research Division: Well, just mathematics. If you take the 17 and the 33 and look at the 61 and 22 last year, we're looking at a -- third and fourth quarters that are down from last year.

I might want to take that off-line to kind of to reconcile the numbers with you. But we wouldn't necessarily see it that way, Maury, but I think it's probably better to just discuss numbers off-line to see if we -- and just call Jimmie and we'll make sure. But we're very confident with the third and fourth quarter. And frankly, with what happens, typically, you'll have a stronger third quarter.

And remember, Maury, there's a lot of weather last year in the third and fourth quarters, in both New Mexico and Texas. Maurice E. May - Wellington Shields & Co., LLC, Research Division: Okay, okay. Yes, next question has to do with the regulators in Santa Fe. There are couple of open seats this year in districts 1 and 3. And I just wondered if you could give us some color on the elections as they're unfolding.

Yes, sure. In the district, that's a -- Commissioner Howe's current seat, Valerie Espinoza won the Democratic primary up there, she is unopposed. So she will be the next commissioner there. Maurice E. May - Wellington Shields & Co., LLC, Research Division: I'm sorry, what was that name again?

Valerie Espinoza. She will be the next Commissioner there. She has a good relationship with some of the other commissioners that are staying on the commission. She's been very interested in learning the business. And even though, she's not -- she's unopposed, she's still working very hard to get that seat. In -- here in the Albuquerque district, that Commissioner Marks currently holds, there is an opposed race here. The Bernalillo County Clerk, excuse me, Assessor, Karen Montoya, is the Democratic candidate. She run -- won a pretty tough race, a 3-way race. And she is up against a Republican who is a lawyer, who has been pretty low-profile. We haven't seen much going on in that race yet, the airwaves here, as you can imagine have been taken over by the presidential candidates. I think Karen may be the favorite in this district, because she's got such good name recognition from her years as an assessor, even though the district here is pretty evenly split, 50-50 in Republican and Democratic. But Karen has been a very good County Assessor. She has made tough decisions. And she's, again also very interested in the business and learning. So I think, whichever one of those 2 wins, we would be pleased with the outcome, and we're pleased with Valerie coming in. And she is the Santa Fe County Clerk, so she also has an -- and Valerie has elected official experience. Maurice E. May - Wellington Shields & Co., LLC, Research Division: Okay, and last question, the rate case that you're going to file in 2012, can you give us some color on that? What investments you need to get in? What ONM cost you need to get recovery of?

No, I've learned long ago, Maury, to never talk about rate cases before you actually let the regulators know what's going to be in them, so.

Our next question comes from the line of Terry Shu, Pioneer Investments.

Just in looking at your guidance and also your page on your allowed returns and capital structure. Just looking at the run rate earnings. Your guidance, am I right that the implied or the ROE that you're going to earn in 2012 is somewhere in the low to mid 9s? So a bit of regulatory lag, but you're -- you've closed the gap a lot. Is the calculation roughly right?

Well, definitely have closed the lag. And with PNM, we're really going to earn our allowed return. And same with TNMP. So both those businesses are earning...

Close to 10?

At least a 10% level.

Okay. Because I was just using the information that's on your -- the regulatory page. So more or -- so for 2012, you're already at that level. And I was looking at some of your older presentations and your capital spending forecast sheet. Have you given in the past, a rate base growth forecast? I don't recall seeing it, or maybe I missed it.

We did. Actually, if you go back and if you'll call Jimmie Blotter, she will share the presentation we did on guidance back in December, that showed some information on the rate base growth.

So okay. What would that be for the next, let's say, 3 to 4 years?

Well, we broke that down in 2 different components. One was just the core capital structure, which is around that 2% we talked about earlier. And also the 4% to 6% additional capital that would be supported at PNM for investing in either SCRs or other alternatives that might be considered. And then we update the capital in December of each year. So we'll, at that point, determine if there's any...

So if you put that all together, is it in the mid-single-digit area?

Yes, that's probably a reasonable expectation.

Right. So really going forward, you're at your allowed return and you have mid-single-digit revenue or mid-single-digit rate base growth. So presumably, earnings or utility earnings will track that and you have some holding company interest expenses. Is that right, more or less?

Just want to clarify. We're earning the allowed return at PNM retail. And so there's still -- you have the transmission, the past [ph] transmission, the first generation and the Palo Verde, which is unfortunately is not earning it.

Right, right. When I talked about the ROE, I was adding everything up. So the cumulative, excluding holding company interest costs. Does that sound about right?

Well, PNM retail rate base is 10% and then you have the FERC for PNM, the generation which we have [indiscernible].

Right, right, which is a drag. Right. Okay. And have you commented on dividend policy, either in recent meetings? I don't recall.

Our dividend policy is that we strive for a 50% to 60% about. And the Board looks at that strategically in a long term, they revisit that every year in February. We had a dividend increase this last February. And what the Board is looking for when they make that decision, where our capital spending is going to be, when we have some clarity around San Juan and what those options are. So we'll update again in February.

Right, right now you're at the low end or even a little below that. So...

Correct.

So the -- as each year or each meeting goes by, each time period, you'll give more color on what it -- the trajectory, is that right?

That's correct. But we did message clearly that given that we are -- where we are in the payout ratio of below 50%, we would very likely be above average dividend growth going forward. And comfortable with the projections in that message, which is above the industry average.

Thank you. And I'm not showing any further questions in the queue at this time. I would like to turn the call back over to Pat Collawn for closing remarks.

Thank you, operator, thank all for joining us on this beautiful summer morning. I hope you are all enjoying the Olympics. And we look forward to talking to all of you on our third quarter call. Thank you, operator. We're done.