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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 from the second quarter and first six 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 of 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 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 benefit of last year's acquisition, the approximately CAD 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 Pipelines and Facilities divisions, as well as strong frac spreads continue to drive the outperformance from our Marketing and 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 CAD 2.65 billion-CAD 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 CAD 700 million for the second quarter, 136% increase compared to the same period last year, an all-time quarterly high. The period-over-period increase was driven by two factors. First, a larger asset base drove increased sales and revenue volumes within the Pipelines and Facilities division. Second, improvements in crude and NGL market pricing in the Marketing and New Ventures division. Earnings were CAD 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 CAD 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, 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 were realized due to system expansions on Pembina's Peace Pipeline system, 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 CAD 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 CAD 867 million was 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, the inclusion of revenue generated by acquired assets, partially offset by higher operating and power costs, 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 startup 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, Ambris, Kakwa River, and West Haven. Second quarter revenue volumes were partially offset decreased volumes at our West Haven plant and the Cutbank complex. Our marketing and new ventures division realized strong second quarter performance, increasing marketed NGL volumes by 38% to 155,000 barrels per day over the comparable period in 2017 and generating quarterly operating margin of CAD 118 million, 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 de-risking of that business, the amendment enabled a reduction in cost, modification 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 3.7 to 3.9 times. Additionally, in the first six 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 a growing dividend and CAD 1 billion to CAD 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 pipeline 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 4 and 5 pipeline expansions continue to track on time and on budget and are expected to be placed into service in late 2018. Our phase 6 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 season that ended May 30th, 2018, did not reach the target of 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 associated with the potential expansion.
On June 25th, 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 1st, 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 contracts 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 dates 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've 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 terminalling facility at the company's Empress, Alberta facility for approximately CAD 120 million. Detailed engineering continued to progress and major equipment contracts were awarded during the second quarter. These facilities have an 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 1st, Pembina exercised its option to assume an additional interest in the Younger Extraction 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 are 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 greater 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 is committed to connecting long-life hydrocarbon reserves to new demand locations. By leveraging 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 value markets in the world. This evolution in our strategy underpins the projects under development in our marketing and new ventures division.
In terms of specific projects, let me first touch base on our PDHP 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 activities. 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 are extremely pleased with our strong financial performance through the first six months of 2018.
Our strong first-half results once again demonstrate the strength of our underlying business, and looking ahead, we are 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 are 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.
Thank you. At this time, if you'd like to ask a question, please press star, then the number 1 on your telephone keypad. Your first question comes from the line of Jeremy Tonet with J.P. Morgan. Your line is open.
Good afternoon. Congratulations on the strong quarter.
Thanks, Jeremy.
I was just curious, turning to the guidance here, reaffirming the guidance. I was looking at the top end of the guide in 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 2018 EBITDA lower than the first half?
I think there's two things going on, Jeremy. One is obviously conservatism around the commodity curve. We've 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. We would expect OpEx in the back half of the year to be higher than the front half of the year.
Thanks for that color. That's helpful. Building on the marketing margins there, it looks like the second quarter was pretty close to the first quarter as far as the results there, and we were kind of thinking there might be a dip down in seasonality, 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 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's a couple things that are unique to this quarter. One, we continue to see NGL prices rise throughout the quarter, as well as lower AECO prices. frac spreads were, if you do the math, I think is actually a little higher in Q2 than they were in Q1, which offset typically what's a 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. 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 on Aux Sable, and we're through some thresholds within that contract that allow us to recognize the EBITDA. You saw that big pickup in Q2.
That's helpful. Thanks. I guess with the favorable marketing conditions or the environment that you're seeing in 2Q 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 a big magnitude versus 2Q?
We haven't seen the July results, so I can't comment on that obviously. I would say overall, the pricing environment is trending in the right direction.
Great. Thanks. Just I guess for the other segments real quick, is there any reason to think that they would decline from these levels, or should we expect them to just kind of ramp as these projects experience greater utilization over the back half of the year?
This is Jason. With respect to the pipeline divisions, Jeremy, I think we already talked about the fact that we'll have a ramp-up in OpEx in the second half of the year, but we're also building towards the in-service date of our phase 4 and 5 expansions. 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.
Jeremy, with respect to the facilities division, we're continuing to see, as Jason mentioned, seeing volumes come down the pipe, and obviously there's processing and NGLs that require fractionation with respect to that. The only asset we'll be bringing into service will be Burstall in Q4. Also one of the larger growth areas is as the Veresen Midstream assets come into service and that ramp up from CRP, that continues to go as planned.
That's all very helpful color. I'll stop there. Thank you.
Thank you.
Your next question comes from the line of Linda Ezergailis from TD Securities. Your line is open.
Thank you. Excuse me. 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, I think there was some mention of decreased volumes in Younger and Cutbank. How might we think of Q3 and Q4 volumes and contributions from NGL services? Maybe you can comment on any other factors at play in Q3 versus Q2.
Hi, Linda. Jaret here. Actually in the second quarter, our Empress facility had its routine four-year maintenance where we actually had that facility down for about 30 days to execute preventative maintenance that's required on a four-year basis. That went extremely well. It was ahead of schedule, and that facility is back up and running. That was one of the major outages, I guess, we had planned in that quarter. With respect to the comment around Cutbank and West Haven, that's just some NGL volumes that we've seen as AECO's been depressed, as Scott mentioned, that are getting shut in. They're not very material, to be honest.
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. We did take over operatorship of that facility on April 1st, and we are now incorporating that into our processing and fractionation operational world. 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's nothing systemic in Younger at all.
No.
If it was down a bit, I'm not aware that it was. If it is, it's nothing systemic.
Okay.
I would say I'd 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, there's no other major outages that we should be mindful of either in Q3 or Q4?
Nope, none that we can think of.
No. Nothing material.
Thank you. 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? 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? Maybe you can comment on that.
We talked about that at the board meeting today. We don't feel bottlenecked at all. If you think about a normal Pembina project, we FID it subject to regulatory approvals, and 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 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'll be an out if we don't get those approvals. 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 2 engineering for the facility, lump sum turnkey engineering.
We're into great detail there, and we're very comfortable with those contracts. What we don't have is a similar quality of work done on the pipe. We expect to have our class 3 engineering done on the pipeline by the end of the year. There's really nothing holding us back there from taking FID were we to confirm our threshold volume there is 6 million tons. That's kind of give or take what we're hoping to sign up. The FERC and the commerce are not really linked right now.
That's helpful context. How might we think of your expense spend rate on that front?
Oh, yeah. Sorry, that was your second question. We talked about spending CAD 10 million a month. We're well under that year-to-date. I don't think we've given guidance specifically, but there's not a chance we're going to be higher than that.
Thank you. Welcome.
Your next question comes from the line of Robert Hope with Scotiabank. Your line is open.
Yes. Good afternoon, everyone. First, 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 be scaled back? Secondly, we've seen you refi AEGS and VMLP now. Any thoughts on further refinancing at Alliance?
This is Jason. I'll take the first part, Rob. With respect to Alliance, really is re-evaluating the project and looking if there's 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. It's a little early to say exactly what that might look like, but we're looking at several options.
Yeah. There's great utility in that asset. The opening foray came rather quickly, maybe too quickly. We didn't necessarily have all the work done that we wanted to. We're still really confident in the utility of that asset and that it can be exploited in a material way.
On your question around financing, AEGS and VMLP, we were able to refinance without any associated make-wholes. 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-wholes associated with refinancing those instruments is still punitive. It's certainly something that we continue to investigate, and we monitor on a monthly basis. As we continue to progress towards the expiry of those notes, of course, they're amortizing every six months, and interest rates are changing. It's moved a little bit more into favor, but at this time, it's still a little punitive. It's certainly on our radar and something that we actively monitor.
All right. That's helpful. Thank you. 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? 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. Some of the buckets are moving around in terms of the specific buckets, how we model them, 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. I think you've seen it with the tightening of our guidance range and the overall outlook for the business. We'll just leave it at that.
Yeah. I'll offer just the following that we've described how we had a base acquisition case and a development case, we announced the base synergies, 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. Assuming we can achieve our base case synergies, we're starting to exceed those, not quite ready to quantify those, we're into the second bucket of development case synergies.
Appreciate the color. I'll hop back in the queue. Thank you.
Thank you.
Your next question comes from the line of Robert Catellier with CIBC Capital Markets. Your line is open.
Hey, good evening. I just wanted to follow up on the Aux Sable restructuring. Are there any commercial benefits in addition to just the ease of operating and the administrative benefits that go along with that?
Yeah, absolutely. 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. It's a lot of product, 130,000 barrels a day of product. Added to similar volumes that we have 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 spent a lot of time talking about possibilities. We think there's a lot of possibilities, not just with the volume, but what happens downstream of Aux Sable. I would reiterate the same comment for Alliance. We think that that asset has utility, and we're early innings in capturing that utility.
Robert, with respect to the actual operation, the folks at Aux Sable have been running the Channahon facility extremely well. We're going to bring it under our umbrella, and very similar to Younger, there's opportunities to 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. I'm curious about Alliance and how much Pembina or its affiliates might be shipping on Alliance and what contribution that might have to the strong marketing volumes and margins, if any.
I don't think we disclose that, specifically who's got what capacity and what the fees are from that capacity.
Maybe you could just address it this way. Has there been any change since the change in ownership?
No.
No.
No, there hasn't. We'd have to get consent to even disclose that from our partners, we probably would choose not to.
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 Elizabeth's departure. Is this just a mutual departure? Can you just provide more color there?
Yeah, I mean.
What it implies for the project going forward?
You know what? In a nutshell, we're very intrusive owners, and that just wasn't a fit for Betsy. We fully integrate everything we buy into our systems and our processes. We think this project could be better managed with that approach. So, Betsy decided to pursue other endeavors.
Okay. That's it for me. Thanks.
Your next question comes from the line of Patrick Kenny with National Bank Financial. Your line is open.
Oh, hey, guys. Just sticking with Jordan Cove here, or I guess the Pacific Connector pipeline specifically. Would you have an update on what % of private land along the pipeline route has been locked up with easement agreements at this point? Maybe you can remind us what level you believe is needed in order to achieve a positive decision by the FERC.
There's a continuum there. Clearly, the more you have and the less eminent domain, everybody's 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%-80% figured out this year.
That's great. With respect to Veresen Midstream LP, I believe you have the opportunity to true up your ownership level back to 50% in the spring. Just wondering what your appetite might be at this point to consolidate your ownership maybe sooner than later. 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 project that use spare sour capacity in certain of those facilities or surplus. Some of those plants have been running well over nameplate, 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 negotiation.
Negotiated or arbitration. We'll take a look at that, but we don't feel any urgency to do that. Everything's working out rather well right now.
All right. That's great. That's it for me, guys. Thanks.
Thanks.
Your next question comes from the line of Andrew Kuske with Credit Suisse. Your line is open.
Thank you. Good evening. It's probably a question either for Mick or for Scott. Just given we've seen a few asset transactions in the marketplace, how do you think about your relative valuation at this stage in time in the context of those transactions?
We're clearly way undervalued.
Well, that's where I was going with it.
I mean it. Compared to those, we're way undervalued.
You can think about that one of two ways.
The next question winds up being, what is the market missing? Or did other people just fundamentally pay too much in your view?
It's one of those two things.
Okay, well-
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. It's kind of like that, but we couldn't get to those prices. Wish them luck. 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 reproven 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. I think we have a ways to go regaining the multiple of our former days. Scott, anything to add?
Yeah. I think there's been a lot of, I'll call it headwinds or noise over the first six months, whether it's low AECO price, it's rising interest rates. You can pick one of many things, 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. In fact, some of them we actually stand to benefit from, like low AECO driving strong frac spreads. Of course, for the long-term health of the basin, we'd like to see gas price a little higher for our producers. The way the system has been set up, we're pretty insulated from a lot of the headwinds. We've been trying to tell that story.
We told it at our investor day. Sometimes people sell first and ask questions later.
Yeah. You look at KUFPEC's announcement in the Duvernay. The confidence with CAD 60 to CAD 70 a barrel products is changing. You can feel it. The industry's waking up again. I know there's hardship on the gas side, but industry on the liquid side, and we're predominantly a liquid company, things are waking up. 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. Again, that could position us well for some of the activities that we were doing in 2012, 2013, 2014, which is taking a deeper cut on the gas lead process. It's a whole new opportunity set for us.
That's helpful, 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, they're in the process of selling their G&P portfolio. Have you really wrapped your head around Brookfield in Western Canada, given the fact they've got nothing on the G&P side? 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 would say that Enbridge and Pembina, if we look at something like Alliance or exploiting Alliance or other opportunities, 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. We're in a hydrocarbon liquids gathering space, primarily hoping to get into petrochemicals and LNG, and they're more chasing long-haul utility-like pipelines. I think we're quite complementary, and I think that's framed a really positive relationship. In terms of Brookfield's move, we think that's neutral for us. Those aren't really high liquids assets, so ownership thereof is neutral to us, I would say. Jaret, anything else to add?
No comments on that.
Okay. That's great. Thank you.
Again, if you'd like to ask a question, please press star then the number 1 on your telephone keypad. Your next question comes from the line of Robert Kwan with RBC Capital Markets. Your line is open.
Hey, good afternoon. Just on starting on the pipe side, revenue volumes for conventional were quite a pickup in second quarter versus the first quarter. Is that just the ramp that you 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?
Yeah. Rob, remember, the definition of our volumes is revenue volumes, which is more than just physical volumes. It also includes volumes that we recognize under our take-or-pay arrangements. Under IFRS 15, if you recall, in the first quarter, we deferred a certain amount of revenue associated with volumes that were below take-or-pays. Then starting in Q2, we've started to recognize those volumes. A portion of the volumes that were recognized in Q2 were revenue volumes associated with take-or-pay shortfalls, so they weren't physical volumes. That's what amplified the ramp-up. 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. If we make the adjustment for IFRS 15 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. In terms of the OpEx pickup that you talked about for the pipe side, how material is that? Are you able to quantify what that will be second half versus first half?
It's not material, I don't think. It's just a shifting of second quarter. They're not getting the work done, they're rescheduling it for later in the year. What was it, CAD 30 million or something like that? 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. 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. Since you expensed 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 of 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. If commodity prices stay even close to where you were in the first half, is it fair that you're probably going to blow through the high end of the range?
Well, let's remember, though, that we're adding inventory at the current price. A lot of the NGL uplift is having It's not just the overall price we're selling it at, but it's our price versus our COGS, which we're at lower. If we maintain a relatively stable price, we're still going to make a margin on those NGLs. The inventory cost on the product margin side isn't going to be as wide as it was in the first half. You can't just look at absolute price. You can from the frac spread part of the business. On the product margin, where we're buying C2+ and C3+ barrels, we're buying those at market prices. That's going to weigh in on having higher COGS and therefore less EBITDA.
Yes. Everybody's alluding to it. We are being conservative in the second half with the marketing business, and we think that's prudent.
Got it. Just in terms of, like you said, building the inventory, is it fair to assume, though, that you are at least hedging it forward into the winter diff?
We have hedged a decent amount of our inventory through the end of 2018. We don't have a significant amount hedged in 2019.
Okay. You already know that that margin that you're locking in presumably is narrower than what you realized in the first half?
I think as we've publicly disclosed, we were hedged close to 75% through 2018. 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 2017, early 2018.
Fair enough. Great. Thank you.
Thanks, Robert.
There are no further questions at this time. I turn the call back over to Mick Dilger, Pembina's President and Chief Executive Officer.
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's starting to feel normal here again. 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. Some pretty transformational stuff going on. We think we're on the right track with our value-added strategy and getting hydrocarbons to world markets. We're feeling pretty good around here, and thank you all very much for your support, and have a great summer. I know you guys are all working hard with the quarterly releases, so hopefully you all get some vacation after this. Enjoy.
This concludes today's conference call. You may now disconnect.