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Pembina Pipeline Corp
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Good evening, my name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pembina Pipeline Corporation 2018 Second Quarter Results Conference Call. [Operator Instructions] Thank you.Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer, you may begin your conference.
Thank you, Chris. Good afternoon, everyone, and welcome to Pembina's conference call and webcast to review highlights on the second quarter and first 6 months of 2018. I'm Scott Burrows, Pembina's Senior Vice President and Chief Financial Officer. On the call with me today are: Mick Dilger, Pembina's President and Chief Executive Officer; Jason Wiun, Senior Vice President and Chief Operating Officer, Pipelines; and Jaret Sprott, Senior Vice President and Chief Operating Officer, Facilities.Before passing the call over to Mick, I'd like to remind you that some of the comments made today may be forward-looking in nature and are based on Pembina's current expectations, estimates, judgments and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties, which could cause actual results to differ materially from expectations. Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see the company's various financial reports, which are available at www.pembina.com and on both SEDAR and EDGAR.Over to you, Mick.
Well, good afternoon or good evening, depending on where you are, everybody. Thanks for joining our call to review our second quarter results.Now we're at the midpoint of what continues to be a record-setting year. Second quarter has once again seen strong financial and operating results, as we continue to realize the benefits of last year's acquisition, the approximately $5 billion suite of new assets placed into service last year and the constructive commodity price environment.On a quarterly basis, we set new financial records for operating margin, adjusted EBITDA, adjusted cash flow from operations and adjusted cash flow from operations per share. We've also set new revenue volume records, all while continuing to operate both safely and reliably.We continue to see strong customer demand for our services, which has led to increased utilization across both our Pipeline and Facilities divisions, as well as strong frac spreads continue to drive the outperformance from our Marketing & New Ventures Division. Based on our strong year-to-date performance and positive outlook we see for the remainder of the year, we reiterate our 2018 adjusted EBITDA guidance range of $2.65 billion to $2.75 billion. Scott will now discuss a few financial highlights from our second quarter 2018 results.
Thanks, Mick. As Mick mentioned, Pembina achieved operational and financial records in the second quarter and first half of 2018. Adjusted EBITDA was $700 million for the second quarter, a 136% increase compared to the same period last year and an all-time quarterly high. The period-over-period increase was driven by 2 factors: first, a larger asset base drove increase sales and revenue volumes in the Pipelines and Facilities Division; and second, improvement in crude and NGL market pricing in the Marketing & New Ventures Division.Earnings were $246 million during the second quarter of 2018, having more than doubled from the same period in 2017. On a year-to-date basis, earnings of $576 million were 76% higher than the comparable period in 2017.In addition to the factors previously discussed, which contributed to higher revenue, earnings were partially offset by increased tax expense, net finance costs and higher G&A expenses incurred as a result of increased staffing to support the growth in the company's asset base. We achieved a new quarterly revenue volume record in our Pipelines Division, averaging approximately 2.5 million BOE per day, a 52% increase compared to the same period last year. On a year-to-date basis, in 2018, revenue volumes increased 49% to an average of approximately 2.5 million BOE per day compared to approximately 1.7 million BOE per day in the first half of 2017.Higher revenue volumes are realized due to system expansions on Pembina's Peace Pipeline System, as well as the acquisition of AEGS, Alliance and Ruby. Revenue volumes were also positively impacted by the recognition of volumes related to take-or-pay revenue that had previously been deferred under IFRS 15.Operating margin in our Pipelines Division was $451 million for the second quarter of 2018, an increase of 158% compared to the second quarter of 2017. Year-to-date operating margin of $867 million was a 155% higher than the comparable period in 2017. These increases were a result of higher revenue due to increased revenue volumes from new assets being placed into service, as well as the inclusion of revenue generated by acquired assets, partially offset by higher operating and power costs and increased labor expenses resulting from increased staffing levels.In our Facilities Division, revenue volumes were 849,000 BOE per day in the second quarter of 2018, 37% higher than the second quarter of 2017. Year-to-date revenue volumes were 854,000 BOE per day, 29% higher than the comparable period in 2017. The increased revenue volumes were a result of new volumes from the start-up of our Duvernay I gas plant during Q4 2017, the acquisition of Veresen Midstream in the fourth quarter of 2017 and higher realized revenue volumes at Saturn, Enbridge, Kakwa River and Resthaven.Second quarter revenue volumes were partially offset -- offset decreased volumes at the Resthaven plant and the Cutbank Complex. Our Marketing & New Ventures Division realized strong second quarter performance, increasing marketed NGL volumes by 38% to 151,000 barrels per day over the comparable period in 2017 and generating quarterly operating margin of $118 million, a 146% increase over the comparable period in 2017. Strong results in the marketing business were driven by higher product prices and margins as, well as Aux Sable, which was acquired in the fourth quarter of 2017.With respect to financing activities, during the second quarter, Veresen Midstream successfully amended, extended and increased the capacity of its senior secured credit facilities. As a reflection of the derisking of that business, the amendment enabled a reduction in cost, modifications of the covenant package and increased permitted distributions to the owners.Pembina remains well positioned with one of the strongest financial positions amongst our peers. Based on our 2018 guidance range, Pembina's proportionally consolidated debt-to-adjusted EBITDA ratio by the end of the year is expected to range from 3.7x to 3.9x. Additionally, in the first 6 months of 2018, Pembina's payout ratio of adjusted cash flow was approximately 50%. With our strong balance sheet and liquidity position, we continue to remain well positioned to fund the growing dividend and $1 billion to $2 billion of capital projects per year without accessing equity markets.I will now pass the call over to Jason, who will provide an update on growth projects within our Pipelines Division.
Thanks, Scott. Good afternoon, everyone. We continue to see strong customer demand for our transportation services, which is driving an ongoing build-out of our pipeline systems in the key basins in Western Canada. Our Phase IV and V pipeline expansions continue to track on-time and on-budget and are expected to be placed into service in late 2018.Our Phase VI expansion continues to progress on time with an in-service date of early 2020, subject to environmental and regulatory approvals. During the quarter, Alliance Pipeline announced binding commitments for the open session that ended May 30, 2018, did not reach the target of 400 cubic million feet -- 400 million cubic feet per day. Based on the open season results and the feedback from producers, we are currently assessing potential alternatives and next steps for associated -- or next steps associated with the potential expansion.On June 25, Pembina, together with the other 50% owner Enbridge, converted the operation and administration of the Alliance Pipeline into an owner-operated model. We expect that the new operating model will have a number of benefits, including creating strategic alignment that will result in improved efficiencies by Alliance being managed as part of the owner's larger organization.Finally, effective October 1, 2018, Pembina will assume control of the operation and administration of the Alberta Ethane Gathering System.I will now pass the call on to Jaret to provide an update on ongoing growth projects within the Facilities Division.
Thanks, Jason. Good afternoon, everyone. We're continuing to progress the construction of our Duvernay II facilities. These facilities are underpinned by a 20-year take-or-pay contract with a combination of fee-for-service and fixed return arrangements. Duvernay II is tracking on-budget and on-schedule, with the majority of long lead items having already been purchased. The project has received regulatory approval and construction will begin in the third quarter of 2018, with expected in-service date of mid- to late 2019.Our 25,000-barrel a day LPG export terminal at Prince Rupert continues to progress. Site preparation required for facility construction has been undertaken by the City of Prince Rupert and is nearing completion. Given this progress, we have triggered a key milestone that allows us to proceed with the above-ground facility construction. We continue to anticipate the terminal will be placed into service mid-2020.As previously announced, Pembina will construct a new fractionation and terminaling facility at the company's Empress, Alberta facility for approximately $120 million. Detailed engineering continued to progress and major equipment contracts were awarded during the second quarter. These facilities have been anticipated in-service date of late 2020, subject to environmental and regulatory approvals.Construction is advancing on our Burstall ethane storage facility, which will have 1 million barrels of storage capacity. The facility is underpinned by a 20-year agreement and is expected to be in place in-service in late 2018.Late in the second quarter, the North Central Liquids Hub was placed into service, ahead of schedule and below budget. This project provides separation and stabilization of condensate volumes supporting the Cutbank Ridge partnership within the Montney formation.On April 1, Pembina exercised its option to assume an additional interest in the Younger extraction and fractionation facility. On the same day, Pembina took over operatorship of Younger, which was previously operated by its joint interest partner. Given the extensive integration between Younger and our NGL infrastructure, we believe efficiencies are available from common operations.Lastly, in conjunction with our partners Enbridge and Williams, we're currently developing a new operating model for the future operation and administration of Aux Sable. The new model will have a number of benefits, including creating strategic alignment and will result in increased efficiencies, and is expected to be completed in the third quarter of 2018.I'll now pass the call back to Mick.
Thanks, Jaret. At our 2018 Investor Day, we formally unveiled the next evolution of Pembina's strategy, being the move towards accessing global markets. Pembina has committed to connecting long-life hydrocarbon reserves to new demand location. By levering its infrastructure and extending our service offering along the hydrocarbon value chain, Pembina will contribute to ensuring that hydrocarbons produced in the Western Canadian sedimentary basin, and the other basins where Pembina operates, can reach the highest volume markets in the world. This evolution in our strategy underpins the projects under development in our Marketing & New Ventures Division.In terms of specific projects, let me first touch based on our PDH/PP project. Canada Kuwait Petrochemical Company, of which Pembina owns a 50% interest, continues to progress front-end engineering design. We continue to expect this work stream will be completed by late 2018 and will be followed by a final investment decision.With respect to Jordan Cove, we continue to advance both commercial and regulatory activity. In September 2017, applications with FERC were filed for the construction and operation of Jordan Cove.Based on the most recent information available to us, the project is positioned to receive a FERC decision during the second half of 2019, and we continue to anticipate first gas in 2024. We look forward to providing further updates on these important projects later this year.In closing, we're extremely pleased with our strong financial performance through the first 6 months of 2018. Our strong first-half results once again demonstrate the strength of our underlying business. And looking ahead, we're focused on completing our secured growth projects on-time and on-budget, and converting our unsecured opportunities into secured projects, all while continuing to create value for all of our stakeholders.I would like to thank all stakeholders for their continued support. We're proud of what we have accomplished and are excited to continue realizing the benefits of our hard work.With that, we'll wrap things up. Operator, please go ahead and open up the line for questions.
[Operator Instructions] Your first question comes from the line of Jeremy Tonet with JPMorgan.
I was just curious turning to the guidance here, reaffirming the guidance and I was looking at the top end of the guide. And relative to the first half of 2018, the top end of the guide would imply a decrease in EBITDA. And I was just wondering what factors would need to materialize to make the second half of '18 EBITDA lower than the first half?
I think there's 2 things going on, Jeremy. One is, obviously, conservatism around the commodity curve. We benefited through the first half of the year with both very strong NGL prices, as well as some opportunities within the crude oil marketing business, with some volatility and some storage opportunities that we've seen. In addition to that, as you may recall, we tend to have our OpEx, especially within our conventional business unit, a little more back-end weighted with some of the winter access only OpEx. So we would expect OpEx in the back half of the year to be higher than the front half of the year.
That's helpful. And building on the marketing margins there, it looks like the second quarter was pretty close to the first quarter as far as the result there. And we were kind of thinking it might be a dip down in seasonality. And so I was wondering if you could just expand a bit as far as the drivers there. Is it more on the crude oil side, or on the NGL side, that allowed kind of another -- a strong quarter in a seasonally softer time period?
Jeremy, that's a very fair comment when you think about our traditional NGL business. That is historically how that business has worked. I think there is a couple of things that are unique to this quarter. One, we continued to see NGL prices rise throughout the quarter as well as lower echo prices. So frac spreads were -- if you do the math, I think it's actually a little higher in Q2 than they were in Q1, which offset typically with the lower volume sales profile. Secondly, we did have very strong crude oil storage results as well as some other opportunities we saw on the crude oil marketing side in Q2. That business is a little more ratable across the quarters, but Q2 was quite strong. And then, lastly, one of the main differences is obviously Aux Sable and the way the contracts underlie that business. We started to recognize pretty significant EBITDA in the second quarter. If you recall, in the first quarter, there wasn't a ton of EBITDA recognized in Aux Sable, and we're through some thresholds within that contract that allow us to recognize the EBITDA. So you saw that big pick-up in Q2.
That's helpful. And then, I guess, with the favorable marketing conditions or the environment that you're seeing in Q2 that's favorable here, one month into the third quarter, have you seen those conditions abate or is there any reason to indicate kind of deterioration of big magnitude versus 2Q?
Well, we haven't seen the July results, so I can't comment on that, obviously. But I would say, overall, the pricing environment is trending in the right direction.
Great. And then just, I guess, for the other segments, real quick, is there any reason to think that they would decline from these levels? Or could they -- would -- should we expect them to just kind of ramp as these projects experience greater utilization over the back half of the year?
Yes, so this is Jason. With respect the Pipelines Division, Jeremy, I think we already talked about the fact that we'll have the ramp-up in OpEx in the second half of the year. But we're also building towards the in-service state of our Phase IV and V expansion. So we would expect to see volumes begin to materialize towards that expansion as we get ready to bring it online in the start of 2019.
And, Jeremy, with respect to the Facilities Division, we're continuing to see, as Jason mentioned, seeing volumes come down the pipe and, obviously, there is processing and NGL that require fractionation with respect to that. The only asset we'll be bringing into service will be Burstall in Q4. And then also, one of the larger growth areas is as the Veresen Midstream asset comes into service and that ramp-up from CRP. That continues to go as planned. So...
Your next question comes from the line of Linda Ezergailis from TD Securities.
I just wanted to follow up with the back half of the year further to some of Jeremy's questions. Looking at beyond just your conventional, your NGL services business in Q2, I think it was your proportionate operating margin was down versus Q1. And I think there was mention of decreased volumes in Younger and Cutbank. How might we think of Q3 and Q4 volumes and contributions from NGL services? And maybe you can comment on any other factors at play in Q3 versus Q2?
Linda, Jaret here. Yes, actually, in the second quarter, we -- our Empress facility had its routine 4-year maintenance, where we actually had that facility down for about 30 days to execute preventative maintenance that's required on a 4-year basis. So that went extremely well. It was ahead of schedule, and that facility is back up and running. So that was one of the major outages, I guess, we had planned in that quarter. With respect to the comment around Cutbank and Resthaven, that's just some IP volumes that we've seen as echo has been depressed, as Scott mentioned, that are getting shut in but they're not very material, to be honest.
And what about Younger? What caused the lower volumes there?
I don't think we had referenced any lower volumes at Younger. Minor throughput, I guess, with respect to it being a little bit under, but we did take over operatorship of that facility on April 1. And we are now incorporating that into our processing and fractionation operational world, and you know, and now we've also taken over the rail logistics portion of that facility. And we're seeing the benefits of allowing that to be within our larger Facilities Division organization.
There is nothing systematic in Younger at all. That's been a -- if it was down a bit, I'm not aware that it was. But if it is, it's nothing systemic.
I would say, I'll leave you with an overall comment. Without obviously commenting on specific quarters, the back half of the year, given the fee-for-service nature of that business and the contracts that are in place, the back half of that year looks generally in line with the first half of the year.
That's helpful. And there is no other major outages that we should be mindful of, either in Q3 or Q4?
No.
None that we can think of.
No, nothing material.
Moving on to your major projects. Just a quick question on your LNG development activities. You mentioned you're continuing the commercial and engineering work streams. I'm wondering, are you kind of bottlenecked on the commercial side until you get your FERC decision in the second half of 2019? And how might we think of your run rate of development costs until you get to an FID, which I assume could potentially come shortly after your FERC decision, and maybe comment on...
Yes. We talked about that at the Board meeting today. We don't feel bottlenecked at all. If you think about all of our -- at a normal Pembina project, we FID it subject to regulatory approvals. In fact, I can't think of a single project that we waited until we had regulatory approvals to FID it. Obviously, Jordan Cove is pretty involved. But there's no -- we don't have that feedback from customers that they're going to wait to see what happens with FERC. Obviously, if we do strike commercial arrangements, there will be an out if we don't have -- get those approvals. So we're full steam ahead with the commercial, a lot of interest at World Gas Conference. It is a unique project because of its location. And so -- that is progressing well. We've got, as you know, Class II engineering for the facilities, lump-sum turnkey engineering. We're into great detail there and we're comfortable with those contracts. But what we don't have is that -- is the similar quality of work done on the pipe. We expect to have our Class III engineering done on the pipeline by the end of the year. And so there is really nothing holding us back there from taking FID were we to confirm. Our threshold volume there is 6 million tons. So that's kind of give or take what we're hoping to sign up. But the FERC and the commerce are not really linked right now.
That's helpful context. And how might we think of your expense spend rate on that front...
Oh yes, sorry, that was your second question. We talked about spending $10 million a month. We're well under that year-to-date. So I don't think we've given guidance specifically, but we are -- there is not a chance we're going to be higher than that.
Your next question comes from the line of Rob Hope with Scotiabank.
First I wanted to touch on Alliance. Can you add some additional color on what the potential next steps there could be regarding the expansion, whether it could scaled back? And then secondly, we've seen your refi, AEGS and the MLP now. Any thoughts on further refi or -- refinancing at Alliance?
This is Jason. I'll take the first part, Rob. With respect to Alliance, really is reevaluating the project and looking if there is any opportunities for cost savings or alternative options for expansion of that pipeline system. We're sort of circling back with all our customers and talking to them about their perception of the terms and trying to get an understanding of what would be successful. So it's a little early to say exactly what that might look like, but we're looking at several options.
There is great utility in that asset. The opening quarry came rather quickly, maybe too quickly. We didn't necessarily have all the work done that we wanted to. But we're still really confident in the utility of that asset and that it can be exploited in a material way. And on your question around financing, AEGS and the MLP, we were able to refinance without any associated make wholes. So we were able to get a lot of the upside and the advantages with no real cost to Pembina. The difference obviously with Alliance is the make whole is associated with refinancing those instruments is still punitive. But it's certainly something that we continue to investigate and we monitor on a monthly basis. As we continue to progress towards expiry of those notes, of course, they're amortizing every 6 months and interest rates are changing. It's moved a little bit more into favor. But at this time, it's still little punitive. But it's certainly on our radar and something that we actively monitor.
All right. That's helpful. Just moving over to some more Veresen assets, we're seeing AEGS, Alliance and Aux Sable transition to a new operating model. Can you provide some estimate on the potential savings here? And I guess, more broadly, are you seeing greater synergies with the Veresen assets than you previously thought?
I would say, to your second question, I don't know if we're seeing greater synergies than we thought. There's some of the buckets are moving around in terms of the specific buckets how we modeled them, but the overall trend is definitely in the same direction. When it comes to the second question, we're not going to be specific in regards to the synergies associated with those. But I think you've seen it with the tightening of our guidance range, and the overall outlook for the business. So we'll just leave it at that.
Yes. I'll also offer just the following that we've described how we had a base acquisition case and a development case. And we're pretty comfortable -- and we announced the base synergies and we're pretty comfortable those will be achieved. When we talk about Alliance and possibly Aux Sable owner-operated model, any savings we draw from that is in the development case bucket. So assuming we can achieve our base case synergies, we're starting to exceed those. I'm not quite ready to quantify those, but we're into the second bucket of development case synergies.
Your next question comes from the line of Robert Catellier with CIBC Capital Markets.
I just wanted to follow up on the Aux Sable restructuring. Are there any commercial benefits in addition to just ease of operating and the administrative benefits that go along with that?
You mean, from a -- yes, absolutely. I mean, as we think about the integrated value chain and both Enbridge's other businesses and our other businesses and particularly the NGL space, we think that other synergies are going to become evident. I mean, it's a lot of product, 130,000 barrels a day of product. And added to kind of similar volumes that we have on in the NGL space, you're going to get some economies of scale. Have we figured that out exactly? I would say, no. But we spend a lot of time talking about possibilities. We think there's a lot of possibilities, not just with the volume but what happens downstream at Aux Sable. So I would reiterate the same comment for Alliance. We think that asset has utility and we're early innings in capturing that utility.
And Robert, with respect to the actual operation, the folks at Aux Sable has been running the Channahon facility extremely well. But we're going to bring it under our umbrella and very similar to Younger, there's opportunities to have -- roll it into our preventative maintenance and our rail logistics, et cetera, that we feel that's just going to benefit the overall performance of the facility.
Okay. And then -- I'm curious about Alliance and how much Pembina or its affiliates might be shipping on Alliance and if what contribution might have to the strong marketing volumes and margins, if any.
I don't think we disclosed that, specifically, who's got what capacity and what the fees are from that capacity. So...
Maybe you can address it this way. Has there been any change since the change in ownership?
No, no, no, there hasn't. And -- we have to get consent to even disclose that from our partners, but we probably would choose not to.
And then, finally, just on Jordan Cove. There's obviously been a change, with Stu now taking the leadership role. I'm wondering, what's changed in the circumstances around Betsy's departure? Is it just a mutual departure? Can you just provide more color there? What would it imply for the project going forward?
Yes. You know what, we're -- in a nutshell, we're very intrusive owners and that just wasn't a fit for Betsy and we fully integrate everything we buy into our systems and our processes. And we think this project could be better managed with that approach. And so -- we -- Betsy decided to pursue other endeavors.
Your next question comes from the line of Patrick Kenny with National Bank Financial.
Guys, just sticking with Jordan Cove here or I guess, the Pacific Connector pipeline, specifically. Would you have an update on what percentage of private land along the pipeline route has been locked up with easement agreements at this point? And maybe you can remind us what level you believe is needed in order to achieve a positive decision by the FERC.
That's a -- there is a continuum there. Clearly, you can -- the more you have and the less eminent domain, everybody is pleased. We'd be pleased, landowners obviously would be pleased. Regulators and politicians would be pleased. I'm not aware exactly where we are, but we're attempting to get 75% to 80% figured out this year.
All right. That's great. And then with respect to Veresen Midstream LP, I believe, you have the opportunity to true up your ownership level back to 50% this spring, but just wondering what your appetite might be at this point to consolidate your ownership, maybe sooner than later? And I'm thinking especially if the North Montney pipeline shippers are able to connect into NGTL. Maybe you can comment on what sort of gas processing opportunities you might see up there for Pembina and if that region is a good fit for the LP or better to go it alone, 100%.
We decide that on a case-by-case basis. Clearly, if we're looking at some projects that use spare sour capacity in certain of those facilities or surplus. Some of those plants have been running well over nameplate, and so that's something to certainly think about. We don't feel it's urgent for us to true-up or to buy out our partner. We like our partner there. Things are working out well. There is an opportunity for true-up under, I think, it's under an arbitration. Is that right?
Well, it could be negotiated.
Negotiated or arbitration. So we'll take a look at that. But we don't feel any urgency to do that. Everything is working out rather well right now.
Your next question comes from the line of Andrew Kuske with Crédit Suisse.
It's probably a question either for Mick or for Scott. And just given we're seeing a few asset transactions in the marketplace, how do you think about your relative valuation at this stage in time and the context of those transactions?
We're clearly way undervalued.
Well, that's where' I'm going with it.
And I mean it. I mean it.
Compared to those, we're way undervalued.
[ So you can cut that ] one of 2 ways.
So then the next question winds up being then what is the market missing? Or did other people just fundamentally pay too much in your view?
It's one of those 2 things. Probably -- to be honest, M&A processes are like driving your car, only you know the real speed. People who are passing you are driving too fast and people who are slowing you down, don't know how to drive. So it's kind of like that. But we couldn't get to those prices. We -- so wish them luck. It's been -- I think the sector is regaining some traction. I think we're seeing things going right. Positive commodity price environment. I think it's being re-proven why you might want to invest in Western Canada. We're certainly not back to the multiples we enjoyed a little while ago, but we're creeping back. So I think we have a ways to go in terms of regaining the multiples of our former days. Scott, anything to add?
Yes. I mean, I think there's been a lot of, I'll call it headwinds over the first 6 -- or noise over the first 6 months, whether it's low echo price, it's rising interest rates. You can pick one of many things. And I think what our results year-to-date as well as our outlook for the year will show you is that, with the integrated value chain that we have and the balance sheet positioning, we're very well positioned to weather many of those factors. And in fact some of them we actually stand to benefit from, like low echo driving strong frac spreads. Now of course, in the long-term health of the basin, we'd like to see gas price a little higher for our producers. But the way this system has been set up, we're pretty insulated from a lot of the headwinds. But -- and we've been trying to tell that story. We told it at our Investor Day, but sometimes people sell first and ask questions later.
Yes. I mean, you look at [ TOPEC 's ] announcement that Duvernay, the confidence with kind of $60 to $70 a barrel products is changing, you can feel it. The industry is waking up again. I know there's hardship on the gas side, but industry on the liquid side, and we're predominantly a liquids company. Things are waking up. And with higher propane, butane prices as well, I think, people are going to be looking at capturing more of those products out of the gas stream. So again, that could position us well for -- some of the activities that we're doing in 2012, '13, '14, which is taking a deeper cut on the gas we process. So it's a whole new opportunity set for us.
That's helpful. And maybe just an extension on some of those comments. You had a lot of time to think about the strategic interests of things like Alliance when you were doing the Veresen process and how that would match up with Enbridge's interests. Now that they've -- well, they are in the process of selling their GMP portfolio. Do you -- have you really wrapped your head around Brookfield in Western Canada, given the fact they've got nothing on the GMP. So they're buying it, but they have storage assets scattered across North America largely Western Canada and then the interest in NGPL. Does that open up any new possibilities? Or is it too early to really get into that?
No. I mean, I would say that Enbridge and Pembina, if we work, we look at something like Alliance or exploiting Alliance or other opportunities, we're much -- we're quite complementary. We're really not in each other's businesses at all right now. The overlap really was midstream and their long-haul export lines. And we share, obviously, Alliance. But we're in the hydrocarbon liquids gathering space primarily, hoping to get into petrochemicals and LNG and they are more chasing long-haul, utility-like pipeline. So I think we're quite complementary. And I think that's framed a really positive relationship. In terms of Brookfield -- Brookfield's move, we think that's neutral for us. That isn't -- those aren't really high liquids assets. So the ownership thereof is kind of neutral to us, I would say. Jaret, anything else to add?
No, no comments on that.
[Operator Instructions] Your next question comes from the line of Robert Kwan with RBC Capital Markets.
Just on -- starting on the pipe side. Revenue volumes for conventional were quite a pick-up in the second quarter versus the first quarter. Is that just the ramp that you'd directionally talked about in terms of the contracts and how they phase in? Or was there something unusual with the second quarter that might moderate?
Yes. So Robert, remember the definition of our volume is revenue volumes, which is more than just physical volumes. It also includes volumes that we recognize under our take-or-pay arrangement. And under our IFRS 15, if you recall in the first quarter, we deferred a certain amount of revenue associated with volumes that were below take-or-pay. And then starting in Q2, we've started to recognize those volumes. So a portion of the volumes that were recognized in Q2 were revenue volumes associated with take-or-pay shortfall, so they weren't physical volumes. So that's what amplified the ramp-up. So the increase in volumes was twofold. One is underlying physical volumes, but the second part of that is also the recognition of some take-or-pay shortfall volumes.
Got it. So if we make the adjustment for IFRS 15 on -- for Q2 pipes, that should still form a pretty good basis? There was nothing else kind of unusual going on volume-wise in the quarter?
Correct.
Okay. And then in terms of this -- the OpEx pickup that you talked about for the pipe side, how material is that? Are you able to quantify what that will be kind of second half versus first half?
It's not material, I don't think, to the full -- it's just a shifting of -- on the second quarter, they're not getting the work done, so they're rescheduling it for later in the year. What was it, $30 million or something like that?
Yes.
It's not huge.
Robert, if you looked at 2015 and 2016 as guideposts, 2017 was obviously a bit of an anomaly with the transaction. But if you looked at the first half versus the second half, it should give you a good guidepost as to what the second half might look like.
Okay. And then if -- since your expense your maintenance, with the Empress major turnaround, how much was that a hit in the quarter?
With respect to volumes?
Sorry, in terms of the actual OpEx.
Well, OpEx. I don't think we disclosed the OpEx with respect to that turnaround.
Okay. I guess, where I'm going with all this is -- to the earlier questions around guidance, the rest of the business looks like it should be pretty similar going into the second half, absent the OpEx on the pipe, which doesn't sound like it's a huge number. Q2 was hurt by Empress being out in what was a good commodity quarter. Like, if commodity prices stay even close to where you were in the first half, is it fair that you're probably going blow through the high end of the range?
Well, let's remember though, that we're adding inventory at the current price. So a lot of the NGL uplift is having low -- it's not just the overall price we're selling it at, but it's our price versus our COGS, which were at lower. If we maintain a relatively stable price, we're still going to make a margin on those NGLs. But the inventory cost on the product margin side isn't going to be as wide as it was in the first half. So you can't just look at absolute price. You can from the frac spread part of the business, but on the product margin where we're buying C2+ and C3+ barrels, we're buying those at market prices. So that's going to weigh in on our -- on having higher COGS and, therefore, less EBITDA.
Yes. But there is -- everybody is alluding to it. We are being conservative in the second half with the marketing business and we think that's prudent.
Got it. And then just in terms of, like you said building the inventory, is it fair to assume now that you are at least hedging it forward into the winter [ def? ]
We have hedged a decent amount of our inventory through the end of '18. We don't have a significant amount hedged in 2019.
Okay. But you already know that, that margin that you're locking in presumably is narrower than what you realized in the first half?
Yes. I think we've -- as we've publicly disclosed, we were hedged closed to 75% through 2018. So to the extent frac spreads continue to rally, we're not 100% participating in that because we've hedged back in, mainly December and January of late '17, early '18.
There are no further questions at this time. I'll turn the call back over to Mick Dilger, Pembina's President and Chief Executive Officer.
Well, thanks everyone on the phone for your support. Thanks to our employees for their hard work. Really rewarding for us to see our financial statement process and our reorg. Everything is starting to feel normal here again. So we're through the toughest part. We've added literally hundreds of employees through the owner-operated model. We should hit, I think, about 2,200 employees by the end of the year, which is up about 1,000 from a year earlier. It was some pretty transformational stuff going on. We think we're on the right track with our value-added strategy in getting hydrocarbons to the world market. So we're feeling pretty good around here. And thank you all very much for your support and have a great summer. And I know you guys are all working hard with the quarterly releases, so hope we all get some vacation after this. Enjoy.
This concludes today's conference call. You may now disconnect.