OGE Energy Corp. Q2 2009 Earnings Call Transcript

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 |  About: OGE Energy Corp. (OGE)
by: SA Transcripts

OGE Energy Corp. (NYSE:OGE)

Q2 2009 Earnings Call Transcript

August 5, 2009 9:00 am ET

Executives

Todd Tidwell – Director, IR

Pete Delaney – Chairman, President and CEO

Sean Trauschke – VP and CFO

Analysts

Brian Russo – Ladenburg Thalmann

David Frank [ph]

Jay Dobson [ph]

Buela Marti [ph]

Operator

Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions). Thank you.

Mr. Tidwell, you may begin your conference.

Todd Tidwell

Thank you, Rachel. Good morning, everyone, and welcome to OGE Energy Corp second quarter 2009 earnings call. I am Todd Tidwell, Director of Investor Relations. And with me today I have Pete Delaney, Chairman, President, and CEO of OGE Energy Corp; Sean Trauschke, Vice President and CFO of OGE Energy Corp and several other members of the management team to address any questions that you may have.

In terms of the call today, we will first hear from Pete Delaney, followed by an explanation of second quarter results from Sean, and finally, as always, we will answer your questions. I would like to remind you that this conference is being webcast, and you may follow along on our website at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same website.

Before we begin the presentation, I would like to direct your attention to the safe harbor statement regarding forward looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward looking financial results, but this is our best estimate to date.

I will now turn the call over to Pete Delaney for his opening comments, Pete?

Pete Delaney

Thank you, Todd, and good morning, everyone. Welcome to our second quarter earnings call. As is our custom, I will discuss our recent accomplishments and forward initiatives and our outlook for our businesses, and Sean will review our financial results in more detail. My comments are very much from the themes of the last few calls and while that may be somewhat repetitive, it is one confirmation that we are on track achieving our milestones and executing our business plans.

Our second quarter results were good, coming in at $0.72 per share in, up $0.10 compared to $0.62 last year. We have also reaffirmed our 2009 earnings guidance to $2.30 to $2.60 per share. This quarter, the utilities margin benefited from the Redbud Rider, which started last fall and our consolidated rate increase effected this June and slightly warmer weather. Enogex while down year over year due to a decline from the $7 record processing spreads realized last year remains on track with growth and gathering volumes for the year in line with earlier expectations. Overall, our outlook for continued earnings growth remains positive for both businesses, even as we navigate through this difficult economy.

At OG&E, residential and commercial customer growth continues at a rate more or less in line with historical levels with overall customer growth coming in at 9/10 of 1% year-to-date. Industrial sales continued to be down significantly from last year following the pattern we have seen since the beginning of this year. However, the margin from industrial sales were $29 million year-to-date, up 5% from last year, the result of higher rates and tariff structure. 49 megawatts of load from new industrial projects is still expected to be in service by year-end 2009. These projects are heavily weighted towards the back of the year offsetting only a part of the decline in industrial sales expected this year.

Relative to the rest of the country, our economic situation remains positive. Unemployment in Oklahoma continues to hover around 6%, still well below the national average. And housing prices have remained relatively stable, not a large change from our economic outlook from the last call. We continue to actively develop renewable energy assets through our wind generation and transmission build out. This will continue to drive a large part of our growth at the utility. And we have two important wind generation projects underway in 2009, first, the 100 megawatt OU Spirit wind farm is on track to be in production by the end of this year. This project is supported by long-term sale of renewable energy credits to the University of Oklahoma that will cover 100% of their energy requirements in the future.

We filed last Thursday for regulatory approval to the project and hope to have an order by year-end. The other important renewable initiative is our wind RFP that was completed this quarter and that resulted in 430 megawatts being short listed. We're in the process of negotiating with three different developers. Two are purchase power agreements and one is build and transfer by the developer. If successful, the additional wind generation should be available in our system by the beginning of 2011. These two initiatives will put our total wind generation at 700 megawatts, which represents more than 10% of our total generating capacity by the end of 2010.

Our transmission projects continue on pace. The Oklahoma City to Woodward 345 KV line is scheduled for service in early 2008 at a cost of around $218 million. Recovery of this line has been approved by the Oklahoma Corporation Commission and will add much-needed transmission capacity to support wind development. In addition, the Southwest Power Pool's issue to OG&E notices to construct several transmission lines for system reliability known as Portfolio 3E project. These lines require approximately 300 million of capital investment over the period 2010 to 2014. The recovery of these costs – the recovery of the costs of these lines will be spread throughout the Southwest Power Pool and is anticipated that OG&E customers will be responsible for around 14% of the revenue requirement.

Our total investment in these transmission projects is projected to be around $700 million upon their completion in 2014. And beyond these known and committed projects, additional 345 KW and/or 765 KW projects are being considered by the Southwest Power Pool again to support the expansion of wind generation on the system. Of course, our ability to continue to invest is directly tied to our ability to earn on our investments. I am pleased to say we reached a $48 million rate settlement with interveners and received a 3 to 0 vote approving the settlement with the Oklahoma Corporation Commission. We believe the settlement balances our concerns over increasing prices to our customers in a tough economic environment while keeping our financial footing strong to support our operations and capital programs.

Roughly 44 million is associated with an increase in the fixed monthly customer charge that moves our tariffs in the direction of reducing our reliance on volumes. These rates were effective August 3. Overall, it works well for us. As part of the rate settlement, the Oklahoma Corporation commission also approved an additional $20 million of capital and O&M for our smart grid program for one of our largest communities. We expect to have the program completed by the summer of 2010, which includes not just the installation of smart meters, but provides for some home networks as well. Demand response is one element of meeting our goal to further the need for new fossil fuel generated capacity until 2020. This will be an invaluable tool in helping us understand our customers' response to price signals as well as to verify other aspects of our business case.

We have also requested $140 million of stimulus funds from the federal government to expand our smart grid deployment across the system. We also continue to focus on improving our work processes and exerting tight control over our cost. Net of the incremental 13 million of O&M recovered through various regulatory riders, our O&M for the year is expected to be relatively flat to last year. On the natural gas front, Enogex continues to do well in this low price environment with gathering volumes up 14% year-to-year and a focus on cost control. We are well positioned in the prolific Granite and County Wash areas and in the Canna [ph] and Woodford shale areas. These are unconventional plays resulting in much higher initial production rates than associated with our conventional wells.

Volumes are still expected to grow 10% this year despite the much lower well connects in the second quarter reflecting the shift from conventional to unconventional wells. Recently, we have seen evidence that producers may be planning to increase their activity in these areas in the near future. We are well positioned should they do so. Enogex's transmission margin is increasing with the addition of the Mid Continent Express and Gulf Crossing pipeline coming online this summer providing for long-term fee-based margins. In the processing business, we are making progress towards our goal of shifting our processing portfolio to a more fixed fee basis. We have successfully negotiated one of our larger keep whole poll processing arrangements to a fixed fee contract. This will double the percentage of fixed fee volumes as a percentage of total inlet volumes from 10% to roughly 20%.

Enogex also successfully prefunded a part of its 400 million eight and eighth senior notes that are due to mature in January 2010 with a $200 million senior note offering in June at a coupon of 6 7/8%. We are also successfully closing a tender – successfully closed a tender for 111 million of the existing agent eight and eighth debt minimizing the negative earnings effect in 2009. These transactions eliminate our refinancing risk as our liquidity is sufficient to fund the remaining principal maturing in January. This refinancing should be accretive to earnings in 2010 as well.

We believe Enogex business has solid cash flow and is earning a good return for our shareholders. While we are pleased with our actual and projected results for 2009, we continue to prepare for future challenges. Environmental uncertainty looms with the RPF and CO2 climate legislation under consideration in Washington. We continue to prepare for such legislation with our renewable energy build out, our smart grid deployment and demand side management initiatives, all of which contribute to our goal of no new generation until 2020 or after. We recognize that these tests may not be enough to fully offset any global – the impact of any global warming legislation, and we continue to evaluate numerous alternatives to address the Waxman Bill as well as our existing Regional Haze Regulation, every mindful of the need to mitigate financial impact on our customers.

We're fortunate that here in Oklahoma by law we can recover environmental costs of utility associated with complying with federal and state environmental regulations. However, we clearly recognize our obligation of ensuring that whatever we do is in the best interest of our customers.

Now Sean will review our financial results in more detail. Sean?

Sean Trauschke

Thank you, Pete. For the second quarter, we reported net income of 70.5 million or $0.72 per average diluted share as compared to net income of 57.1 million or $0.62 per average diluted share in 2008. The contribution by business units on a comparative basis is listed on the slide. At OG&E, net income for the second quarter was 56.4 million or $0.58 per share as compared to net income of 30.9 million or $0.33 per share in 2008. Some of the primary drivers are as follows. Gross margin on revenues increased 29 million or 14%. I will provide more details of gross margin in just a minute. Operation and maintenance expense decreased 7.9 million primarily due to lower labor and contract labor costs and an Arkansas regulatory settlement for pension costs, partially offset by higher employee costs and higher costs for materials and supplies.

Depreciation and amortization expense increased 9.1 million, primarily due to the Redbud facility being placed into service and the amortization of the Oklahoma Storm regulatory asset. Other income and expense created a positive variance of 17.7 million in part due to 9.2 million of write-downs in 2008 and higher allowance for equity funds used during construction in 2009. Interest expense increased 6.2 million, primarily due to higher levels of long-term debt that were issued in 2008 partially offset by lower short-term interest borrowings and higher levels of AFUDC.

Now turning to the drivers for the increase in gross margin, new revenues from the Redbud facility increased gross margins by 19.1 million. Warmer weather primarily in June in our service territory compared to 2008 added 4.2 million to gross margin. Compared to normal, weather has added 5.5 million to gross margin year to date and 2.2 million for the second quarter. Growth and price variance due to sales and customer mix increased the gross margin by approximately 3.2 million. We have seen a 16.6% decline in industrial volumes year-to-date versus last year. The rate increases have increased industrial margins by nearly 5%. As Pete mentioned earlier, we still plan on adding 49 megawatts of new industrial load towards the end of 2009 to help offset the industrial sales decline.

Other revenue items, including the Arkansas rate increase and the Oklahoma Storm costs recovery rider, added 2.5 million to gross margin compared to 2008. We continue to see customer growth on the system in line with our expectations and slightly below our historical customer growth rate of 1%. Year-to-date, we have added just over 3300 customers primarily in the residential sector.

Now turning to Enogex, net income decreased $0.17 per share in 2009 compared to 2008. You can see the impact record commodity spreads had on Enogex earnings in 2008. Some of the primary drivers are as follows. The largest variance was gross margin, which decreased by 27.8 million. I will discuss those details on the next slide. Operation and maintenance expenses were 4.7 million lower in 2009 primarily due to lower labor costs compared to the same period in 2008. Depreciation and amortization expense increased 2.3 million primarily due to higher levels of depreciable plan associated with system growth. Interest expense created a positive variance of 2.1 million from 2008 primarily due to an increase in capitalized interest associated with construction projects.

Now looking at the drivers for gross margin, transportation and storage margins increased 5.7 million primarily due to higher cross sell revenues and increased demand fees partially offset by operational storage hedge losses and an increased natural gas and balance liability. Of note, MEP and Gulf Crossing began operations in June and added 1.4 million to gross margin. The main driver for the drop in margin was in the gathering processing business, which decreased by 33.5 million. The decrease was all in the processing area where realized commodity spreads fell from $7.18 per MMBtu to $3.50 per MMBtu. And average liquids prices decreased from $1.55 per gallon to $0.66 per gallon quarter over quarter. Gathering margins were flat year-over-year. Our volumes did increase by 12% quarter over quarter, margin gains were primarily offset by lower natural gas prices. For more detailed variance explanations, please review our second quarter 10-Q filed with the SEC this morning.

I want to spend a few minutes updating you on new developments in our transmission arena . You have heard us refer to transmission expansion as one of the key growth opportunities for the company. Previously we discussed and noticed to construct issued to OG&E by the SPP for Portfolio 3E projects for additional system liability. We are pleased to announce that OG&E has issued a letter of notification to the SPP of our intent to build these lines. The projected capital cost of these projects is approximately 300 million and you can see them circled on the map along with the projected capital spending. The good news is our Oklahoma customers will pay only 39% of these costs. Construction will begin next year with the projects coming online between 2012 and 2014.

I wanted to take a minute to discuss our capital spending plans. Our capital spending plans have increased by approximately 400 million between 2009 and 2014. I want to talk specifically about two projects, which represent the majority of the capital changes. First, on the Portfolio 3E projects mentioned on the previous slide, which are projected to cost approximately 300 million. Over the next six years, we have plans to spend over 700 million on these transmission growth projects. Second at Enogex, where we have a $60 million aid and construct pipeline project to serve a new power plant from an electric cooperative. The key point to remember here is that the customers funding that project in advance of any dollars we have spent. We are committed to our rates and any additional capital projects that might require equity issuance would be accretive to earnings and support our long-term growth plans.

We had two solid quarters despite the challenging economic environment with a continued focus on controlling costs, normal weather for the remainder of the year, and hitting our other key assumptions set forth in our Q, we would expect to end the year around the midpoint of our original guidance.

Now I will turn the call over to Pete for Q&A.

Pete Delaney

Thank you Sean. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Brian Russo, your line is open.

Brian Russo – Ladenburg Thalmann.

You know my first question in terms of guidance I think previously you were assuming you would be at the lower end of the range and now you're assuming the middle end of the range, and I'm just wondering what the driver is for that?

Pete Delaney

Sean?

Sean Trauschke

Sure. Hi Brian. Really when we look at this we are looking at utility as slightly ahead for the year and going forward as we look through this from a utility standpoint, now that we have the Oklahoma and Arkansas rate cases behind us, we feel very confident that we will be right there in the middle of our range. And again I think a key variable here is we are expecting normal weather principally in the third quarter.

Brian Russo – Ladenburg Thalmann.

Okay. And in your queue you outlined some of the guidance assumption, it looks like your margin expectations on the transmission storage as well as gathering and processing has come down a little bit, what is the driver for that?

Sean Trauschke

On the transmission and storage?

Brian Russo – Ladenburg Thalmann.

Yes. On the gathering and processing. I think it is 182 to 190 million versus 192 to 220?

Sean Trauschke

On the gathering and processing?

Brian Russo – Ladenburg Thalmann.

Yes.

Sean Trauschke

And that is really – you know I think what Pete mentioned earlier, we were very pleased with the idea that we have converted a number of our – a large percentage of our keep whole volumes to fixed fee contract and so we have – that is actually a ten year fixed fee agreement and so we think that is a good value for our customers, so we have removed that commodity exposure for the balance of the year.

Brian Russo – Ladenburg Thalmann.

Okay. When will you guys convey 2010 guidance?

Sean Trauschke

Well, Pete and I have not discussed this but I would expect it would be towards the end of this year, early part of next year. I think we certainly would like to have a little more information around the economy and where spread are at, but in particular what I would like to see is we mentioned we would be filing for the OU Spirit filing, I would like to get that behind us, so we could lay out exactly what our capital spending plans and our the financing plans for you. So I would anticipate later this year or early next year.

Brian Russo – Ladenburg Thalmann.

Okay. And when I look at your CapEx spend for 2009 and 2014, how should we view the means to finance that, both with internal cash, but also any external capital needs?

Sean Trauschke

Yes. I think as you think about the remainder of this year and the beginning of next year, we feel very comfortable with our financing position. Now we have close to 600 million of available liquidity forecasted by the end of the year. I mean, our credit facilities, we will refinance the maturity of Enogex. We may look at terming out some of the short-term debt but we don't foresee any equity issuances for 2009, 2010 beyond what we are issuing through our DRIP program.

Brian Russo – Ladenburg Thalmann.

Okay. And then in terms of Enogex, I think volume growth you said 10% for the year but it is 14% the second quarter, so should we assume somewhat of a declining growth profile through the end of the year?

Sean Trauschke

Now, that is a good question. So no just keep in mind we are forecasting 10%, but that is not a deterioration in volumes by any means. Recall in the fourth quarter of 2008, we saw a significant increase in our gathering volumes and so that is why we're kind of sticking to the 10% but we did see a significant expansion of our gathering volumes in the fourth quarter. So when we think about in terms of a full year of 10%, that is incorporating a big increase that we saw in volumes in the fourth quarter of 2008.

Brian Russo – Ladenburg Thalmann.

Okay. And then lastly when we look at 2010, what projects can we assume will be – will get AFUDC or a rider, some of these pending projects that you have?

Sean Trauschke

Well, I think the way to think about that, I think OU Spirit would be certainly one that we would be requesting a rider for. The other projects such as Windspeed, we already have a rider in place. And so the other item there on our wind RFP to the extent that we are able to secure something favorable to our customers, some of those may be incorporated into some sort of rider structure.

Brian Russo – Ladenburg Thalmann.

Okay great. Thanks a lot.

Sean Trauschke

And one more thing, and Todd just pointed out, we would expect to get AFUDC on this Portfolio 3E projects as well.

Brian Russo – Ladenburg Thalmann.

Okay, thank you.

Sean Trauschke

Thanks Brian.

Operator

Your next question comes from the line of David Frank [ph], your line is open.

David Frank

Hi, good morning guys.

Pete Delaney

Good morning.

David Frank

Question for you is you guys rattled of a lot of wind and transmission numbers today and my memory is a little slow this morning, could you just tell me is any of these numbers incremental to the investment numbers you highlighted on your last quarter or official update for the company?

Pete Delaney

David, on the last call, we went through pretty much a lot of same numbers and talked about the same projects. In the last call, we didn't – the RFP was in the – obviously it is far as long and we hadn't selected been shortlist at that point in time and we – and the big change that Sean pointed out is that the 3E projects last call, we knew about it, and they had been – we knew that they were being approved by the Southwest Power Pool.

I don't think we have gotten notices to construct and we have not officially notified them that we would construct, so we were not officially obligated for the construction of those lines. So we have now done that. And that 300 million of capital for the 3E projects has now moved into our known and committed projects, so that now that moves into our financing plan, our earnings forecasting from that standpoint. So we identified it before and now we are just moving again down the milestone and moving that more into operational planning.

David Frank

So, the 300 million for the transmission and then as far as the wind RFP you have out there now and working on the shortlist, do you have an update as to when we would hear, get a final outcome on that, and if you would be somehow participating or contracting or…

Pete Delaney

Right. Two of those – you know there is 430 megawatts short listed. Two are PPAs, purchase power agreements that covers around 280 megawatts of that 430. So of course they would be just expensed and recovered. We of course will not enter into those PPAs without regulatory approval. The third is the 150 megawatts is a build and transfer. Obviously then we would be owning that unit, that farm, and we would again not do so without regulatory recovery, clear regulatory recovery before we do that. So that is the way it is shaping up. We still have – we are still not done negotiations, so they're not done transactions, but they're moving well. We do believe that these at the prices that is good value for our customers again from a natural gas hedge and again lowering our CO2 footprint and again anticipating that we may get some sort of legislation out of Washington.

David Frank

Okay. And what would the – if all goes well and according to plan, what would be the investment be for that 150 megawatts and I assume that is currently not in any projected CapEx spend?

Pete Delaney

I don't know if we have disclosed that. But you know roughly it is 25 – 2250, 2500 per KW, my rough number. When I look back at what Centennial was and it is probably a good assumption to use, but you know we haven't really disclosed that. We're still in negotiations and so probably not better – it is going in that direction right now.

David Frank

Okay. And I guess my last question is, you guys are talking about customer growth at the utility this year, you know I guess you probably one of the only utilities in the country experiencing growth, do you have anything you could attribute that to?

Pete Delaney

I mean you know when we look at that, our residential commercial is pretty much in line. We actually probably planned on it down a little bit. Our industrial is down 2% in terms of customers but commercial and residentials you know are our biggest driver, you know it is up 6000 customers year to year and about five of that is from residential and commercial. You know it is our economy we still have some businesses growing. I think it is the fact that we have got a large military presence here, you know we have got a large seat of governments here, you know aviation, and we just haven't seen the collapse in housing prices. We haven't seen financial institutions laying off here. We avoided the whole run off, asset run off – excuse me, an asset I think inflation that they had in other areas, so and unemployment while up, there is probably not you know if you look back through 40 years ago, it was 5% or almost 5 and so we're at six. So we just haven't seen that big an impact that we have in another areas.

David Frank

Okay. All right. Well, thanks a lot.

Pete Delaney

Thank you David.

Operator

Your next question comes from the line of Jay Dobson [ph]. Your line is open.

Jay Dobson

Hi. Thank you. Good morning. Sean or Pete, I was wondering if you can give us a little more granularity on O&M. When I look at it, were down in the quarter, were down year-to-date. I think in your comments you suggested flat, I sort of see in the Q when you go into some granularity around your estimates for the full year that you are sort of trending up at OG&A and down at Enogex, should we expect that that is sort of the third and fourth quarter is sort of equally balanced that O&M makeup to flat or just give us a little bit of granularity and particularly in the second quarter you know if were deferring any of that O&M into the third quarter, if that was just you know sort of flat or sorry down on just a cost cutting basis?

Sean Trauschke

Sure. Sure. Jay, this is Sean. I do think, just to echo Pete's comments, we have done a very good job of monitoring our costs and controlling those for the first six months of the year and we would anticipate that to continue. I think in the quarter specifically, I mentioned in my comments as a result of the Arkansas settlement, we reversed a previous pension expense of $3.2 million, that was a big driver in addition to controlling our costs for the quarter. The second thing I would say with regard to O&M, we have a number of regulatory riders, so you will see the revenue impact in the revenue line, and you will see the O&M impact in the O&M line, and so what was saying there is that if you adjust for those O&M expenses that have the revenue offset, we are going to be pretty close to flat to the previous year. Does that help?

Jay Dobson

Yes, yes. No, that is fantastic. I appreciate that. And I don't know if I missed this but on the wind RFP, the build and transfer, I mean the PPA and the build and transfer, what is the timing on an announcement there? Is it still sort of the buy you rent obviously the build and transfer coming sort of new this morning?

Sean Trauschke

Yes, what that is, we would expect as we negotiate each one of these and we get to the point we think it is a good economic value for our customers, we would file this with the commission. We would hope to file those sometime later this year in the third quarter. And then on the build and transfer, just to be perfectly clear as Pete said, we are not going to proceed with expenditures until we receive that regulatory approval. But I think…

Jay Dobson

Got you. No, that is perfect. I mean lastly on Enogex, just to sort of maybe update us on hedging, I know sort of NGL prices were a little better and fracs continued to improve (inaudible) over the second quarter relative to first and just didn't know if you had come out of here you know anymore hedged already significantly hedged, so and then maybe just update us on 2010?

Sean Trauschke

We are about the same for both 2009 and 2010. Just keep in mind those, we mentioned earlier, we were successful in converting some of the keep whole volumes to fixed fee has been our strategy, and so as a result of that, we had pure keep whole volumes that needed to be changed. So we did unwind some of that. But our hedge percentage is roughly the same for both of those years.

Jay Dobson

Got you. Got you. Perfect. Thank you so much.

Sean Trauschke

Have a good day.

Operator

(Operator instructions). Your next question comes from the line of Buela Marti [ph] your line is open.

Buela Marti

Good morning.

Pete Delaney

Good morning.

Buela Marti

A couple of things. One, can you remind us part of the rate settlement if you are – when you will be permitted or if you are required to file your next rate case?

Pete Delaney

Under the – are your referring to Oklahoma?

Buela Marti

Yes.

Pete Delaney

Okay, certainly. We, in the agreement there, we certainly have the opportunity to come back in 2011 and we would look at that as far as what our cost structure is and certainly look at our additional capital spending that we have incurred between these settlements and 2011. The test year for that would be 2010 and I think the stipulation requested us to come in by July 1.

Buela Marti

Is that a requirement or is it voluntary?

Pete Delaney

It is really a requirement.

Buela Marti

Okay. And I mean do you anticipate that given you know the riders that are available for several capital projects you described that you would really be (inaudible) buy any material amount at that point in time?

Pete Delaney

I think the way I would answer that is, with the riders, we feel like we are reducing our regulatory lag. I think the other thing to keep in mind though is, we are spending additional capital to invest in our ,business in the utility business, and so we would have to look at the capital spend between the close of last case and where we are in 2011, whether that was material we needed to look to recover that.

Buela Marti

And lastly, can you discuss the stimulus dollars that you have applied for and would appear, if that could very well help offset any equity requirements going forward given your CapEx program?

Pete Delaney

I mean going back to a known and committed projects, we have our – we don't have anything beyond the 20 million really in our capital numbers. You know as I said we are – our program is – we had a pilot earlier this last summer, we had home networking in, and saw some very encouraging results from that in terms of demand response from our customers, and we have talked a lot about our goal of differing and the need for any new fossil fuel generation until 2020. And we think that getting the whole networking in as well as automating the system is really going to help us at least on the demand response side.

We feel pretty good about our approach, maybe a little bit different than others. So of course as you are well aware, the federal government under the Department of Energy and the grants that we think it is compelling value for our customers based on the business cases that we have and of course the normal pilot is part of the 45,000 customer deployment, which will verify what we have seen today. But that we thought it is compelling customer – value for our customers if we can – I think the total cost, if my recollection of the implementation system wide is around $400 million I think, and so 300 million to 400 million .

So this would – I think it is a 130 actually that we might have applied for. We will cover a nice part of the overall capital requirement that we would be – that we have to spend over a couple of years to comply with the grant. And so of course that would be a significant contribution to the whole system of deployment, reduce our requirements from our customers, as you say, reduce our financing requirement, debt and equity. So we're very hopeful that we do get some dollars from the federal government to leverage our deployment.

Buela Marti

Thank you very much.

Operator

Your next question comes from the line of Brian Russo. Your line is open.

Brian Russo – Ladenburg Thalmann.

Yes, thank you. Could you just remind us how your Enogex hedges are structured and what your margin sensitivity is to changes in the frac spread?

Pete Delaney

Sean?

Sean Trauschke

Sure. So I will let Todd get to the detail of the – the hedge detail, but I think with the addition of the – or conversion of some of the keep whole volumes to this fixed fee contract, for the remainder of the year, we've really hedged 16 million of margin, that is actually exposed to commodity prices for the remainder of the year, so certainly down. And as we look at this for the sensitivity kind of plus or minus 10% move and spreads for the entire year, it is roughly $1.4 million of net income off of $2.90 spread.

Brian Russo – Ladenburg Thalmann.

Okay, thank you.

Sean Trauschke

Does that help?

Operator

There are no further questions at this time.

Pete Delaney

Thank you. In closing, I would like to say from an operating, operational, regulatory and financial standpoint, we are pleased with our performance in the first two quarters. Certainly the approval of the $48 million Oklahoma rate settlement was a noteworthy accomplishment and positions us to deliver finance performance to our shareholders and reliable service for our customers. We're excited about the approval of our smart grid rollout, our growth opportunity to both businesses and the overall direction of this company.

Based on the first six months and our outlook for the remainder of the year, we are reaffirming our earnings guidance. We do not foresee any change in our fundamentals at this point in time that would cause us to reevaluate our business plans and long-term growth objectives. And as I look back on our accomplishments over this past few months, I would like to thank our company members for their hard work that has delivered the results. Thank you for your interest in the company and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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