Inter Pipeline Fund
TSX : IPL.UN

Inter Pipeline Fund

November 08, 2007 11:27 ET

Inter Pipeline Fund Announces Record Third Quarter Results and Provides Positive Guidance on Future Cash Distributions

CALGARY, ALBERTA--(Marketwire - Nov. 8, 2007) - Inter Pipeline Fund ("Inter Pipeline" or the "Partnership") (TSX:IPL.UN) announced today its financial and operating results for the three and nine month period ended September 30, 2007. In addition, Inter Pipeline announced that the Partnership expects to maintain its current level of cash distributions through 2010 and beyond.

Highlights

- Funds from operations(1) increased $6.1 million or 9.9% to $67.6 million compared to the same quarter last year

- Payout ratios before sustaining capital(1) for the three and nine month periods ended September 30, 2007 were 63.1% and 76.2%, respectively

- Cash distributions to unitholders totalled $42.7 million, or $0.21 per unit during the quarter

- Oil sands transportation and conventional crude oil pipeline systems transported a quarterly record 795,300 barrels per day (b/d)

- Corridor pipeline expansion project remains on schedule and on budget, with approximately 240 kilometres, or 52%, of total line pipe installed

- Successfully closed a $2.2 billion syndicated credit facility to finance the development and expansion of the Corridor pipeline system

- Subsequent to the quarter end, Shell Canada Energy's Orion oil sands project began transporting volumes on the Cold Lake pipeline system

(1) Please refer to the "Non-GAAP Financial Measures" section of the MD&A.

Sustainability of Cash Distributions

On June 22, 2007, the Federal Government's Tax Fairness Plan (part of Bill C-52) became law. As a result, publicly-traded flow-through entities such as income funds, royalty trusts and limited partnerships will be subject to taxation commencing January 1, 2011. In recent months there has been considerable debate within the investment community and the media regarding the sustainability of current cash distributions paid by such entities once they become taxable.

Inter Pipeline believes it is well positioned to maintain its current level of cash distributions to unitholders, despite becoming taxable in 2011. The Partnership's positive outlook is supported by attractive fundamentals within each of its four business units, continuing strong financial performance, and a large inventory of capital investment opportunities to expand and enhance its energy infrastructure assets.

"Upon completion of the $1.8 billion capacity expansion project currently underway on the Corridor pipeline system in 2010, we expect to see a material increase in the cash flow available for distribution to our unitholders," commented David Fesyk, President and Chief Executive Officer. "The timing of incremental cash flow is well-matched to the period when Inter Pipeline will be transitioning into a taxable entity. To my knowledge, very few flow-through entities in Canada have positioned themselves as well as Inter Pipeline to mitigate the impact that future taxation could have on the sustainability of cash distributions."

Funds From Operations

During the third quarter of 2007, Inter Pipeline generated record funds from operations of $67.6 million, representing an increase of $6.1 million over the third quarter in 2006. For the nine month period ended September 30, 2007, funds from operations increased to $167.4 million, or $9.2 million higher than results for the comparable period in 2006. Inter Pipeline's strong financial performance during the quarter was primarily the result of favourable product pricing on propane plus sales within the NGL extraction business unit. In addition, Inter Pipeline's quarterly results incorporate, for the first time, a full quarter of funds from operations on the Corridor pipeline system. Inter Pipeline's acquisition of the Corridor system from an affiliate of Kinder Morgan Inc. closed on June 15, 2007.

In the third quarter, Inter Pipeline's NGL extraction, conventional oil pipeline, oil sands transportation and bulk liquid storage businesses contributed $38.4 million, $20.7 million, $18.2 million and $11.5 million, respectively to funds from operations. Corporate charges totalled $21.2 million.

Oil Sands Transportation

Throughput volumes on the Cold Lake pipeline system reached a new quarterly record of 356,200 b/d during the third quarter. This represents an increase of approximately 20,700 b/d, or 6.2%, over volumes delivered during the same period in 2006. Volumes now exceed the minimum aggregate throughput commitment of shippers on the Cold Lake system. Inter Pipeline is allowed to collect additional revenue on shipments above a minimum "take-or-pay" threshold of 355,000 b/d.

Subsequent to quarter end, Inter Pipeline began transporting volumes from Shell Canada Energy's Orion oil sands project on the Cold Lake pipeline system. Cash flow from the Orion project is supported by a 10-year ship-or-pay contract which includes provisions for the flow through of all material operating costs.

During the third quarter, transportation volumes on the Corridor oil sands pipeline averaged 242,300 b/d. Revenue from the Corridor system is underpinned by a 25-year ship-or-pay contract which includes the recovery of all operating costs, depreciation, taxes and interest as well as a structured return on the equity component of Corridor's rate base.

Corridor Expansion Project

Inter Pipeline continues to make strong progress on the $1.8 billion capacity expansion project currently underway on the Corridor pipeline system. The project remains on schedule and on budget.

Following a very successful summer construction season, 240 kilometres of 42-inch diameter line pipe have been installed. This represents approximately 52% of the total length of expansion pipeline that will be installed. As at September 30, 2007, Inter Pipeline has incurred approximately $479 million in capital costs related to the Corridor expansion, representing over 26% of the estimated project costs. Pump station and additional line pipe construction will continue over the next two years, with an expected in-service date in 2010. A substantial portion of remaining line pipe and facility construction costs has been committed under fixed price contracts.

The Corridor expansion project has been designed to accommodate additional bitumen blend volumes from the Athabasca Oil Sands Project near Fort McMurray, Alberta. Bitumen blend capacity on the Corridor system will increase from 300,000 b/d to 465,000 b/d upon completion of the current expansion project. The Athabasca Oil Sands Project is jointly owned by Shell Canada Energy, Chevron Canada Resources and Marathon Oil Company.

NGL Extraction

Inter Pipeline's NGL extraction business continued to generate strong results during the third quarter due to strong NGL product prices and favourable natural gas volumes. Combined, Inter Pipeline's three NGL extraction facilities processed 4.1 billion cubic feet per day of natural gas, producing an average of 138,900 b/d of NGL, comprised of 83,600 b/d of ethane and 55,300 b/d of propane plus. Strong NGL production volumes were achieved despite a routine maintenance shut down in September at the Cochrane extraction plant, Inter Pipeline's largest NGL production facility.

Propane plus sales at the Cochrane extraction facility are exposed to frac spread, or the difference between the weighted average price of propane-plus products and AECO natural gas. During the quarter, Inter Pipeline's realized frac spread averaged $0.676 US/US gallon, compared to $0.598 US/US gallon in the same quarter last year. Energy commodity markets during the quarter were characterized by rising crude oil prices and weak natural gas prices. This environment is highly favourable for the extraction of NGL products from natural gas.

Conventional Oil Pipelines

Throughput volumes on Inter Pipeline's conventional oil pipeline systems averaged 196,800 b/d during the third quarter, compared to 213,800 b/d during the same period in 2006. The reduction in year-over-year throughput is primarily the result of lower southbound shipments on the Bow River pipeline from Hardisty, Alberta.

During the third quarter, demand for Bow River crude oil was reduced due to refinery turnaround activity in the Billings, Montana market. In addition, Inter Pipeline has implemented new oil blending practices on the Bow River system which result in the transportation of heavier, more viscous oil blends from Hardisty. Consequently, the capacity available for southbound oil shipments has been reduced. Inter Pipeline has concurrently implemented a toll increase on southbound volumes to generate incremental revenue to materially offset the impact of lower shipping capacity.

The average revenue per barrel realized on Inter Pipeline's conventional oil pipelines during the third quarter of 2007 was $1.67 compared to $1.54 for the same quarter in 2006.

Bulk Liquid Storage

During the third quarter, Inter Pipeline's European bulk liquid storage business contributed $11.5 million to funds from operations, representing a 12.7% increase over the same period in 2006. Tank utilization rates averaged 95.8%, compared to 94.5% in 2006 reflecting continued high demand for petroleum and petrochemical storage facilities in western Europe.

In response to growing demand for biofuel storage and handling facilities, Inter Pipeline intends to construct an additional 318,000 barrels of tankage at its deep water storage terminal at Immingham on the eastern coast of the United Kingdom. Inter Pipeline's capital investment is estimated to be $26 million. The new storage facilities are expected to be operational in 2009.

Financing Activity

In August, Inter Pipeline (Corridor) Inc. closed a new $2.2 billion credit facility with a syndicate of 15 major lending institutions in Canada and abroad. This facility ensures access to funding for the development and expansion of the Corridor pipeline system.

Inter Pipeline has an investment grade, long term corporate credit rating of BBB from both Standard & Poor's and DBRS. Inter Pipeline (Corridor) Inc.'s senior unsecured debentures are rated A (low), A3 and BBB+ by DBRS, Moody's and Standard & Poor's, respectively.

As at September 30, 2007, Inter Pipeline's outstanding debt balance was $1,891 million, resulting in a total debt to total capitalization ratio of 68.0%. Adjusting for the impact of $888 million of Corridor non-recourse debt, Inter Pipeline's debt to capitalization ratio was 53.0%.

New Alberta Royalty Regime

On Thursday, October 25, 2007, the Alberta Government announced a new royalty framework for conventional crude oil, oil sands and natural gas production within the Province of Alberta effective January 1, 2009. At this time, Inter Pipeline does not expect any material impact to its overall business as a result of the new royalty regime.

Conference Call & Webcast

Inter Pipeline will hold a conference call and webcast today at 2:30 p.m. (Mountain Time) / 4:30 p.m. (Eastern Time) to discuss third quarter 2007 financial and operating results.

To participate in the conference call, please dial 866-542-4236 or 416-641-6125. A recording of the call will be available for replay until November 15, 2007, by dialling 800-408-3053 or 416-695-5800. The pass code for the replay is 3240141.

A webcast of the conference call can be accessed on Inter Pipeline's website at www.interpipelinefund.com under Investor Relations / Webcasts. A rebroadcast of the conference call will be available on the website for approximately 90 days.



Selected Financial and Operating Highlights

----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(millions of dollars, except where September 30, September 30,
noted) 2007 2006 2007 2006
----------------------------------------------------------------------------
Extraction Production (000 b/d)
Ethane 83.6 88.6 91.1 89.3
Propane Plus 55.3 56.1 58.0 52.6
--------------------------------------
Total Extraction 138.9 144.7 149.1 141.9

Pipeline Volumes (000 b/d)
Conventional Oil Pipelines 196.8 213.8 209.8 208.1
Oil Sands Transportation(1) 598.5 335.5 433.6 327.3
--------------------------------------
Total Pipeline 795.3 549.3 643.4 535.4

Revenue
NGL Extraction $176.2 $177.1 $ 551.5 $ 505.7
Conventional Oil Pipelines $ 30.2 $ 30.2 $ 90.9 $ 86.0
Oil Sands Transportation $ 39.2 $ 14.9 $ 71.0 $ 44.1
Bulk Liquid Storage $ 38.9 $ 34.1 $ 120.8 $ 100.1

Net (Loss) Income $ 35.1 $ 42.4 $(148.3) $ 102.4
Per Unit (basic & diluted) $ 0.18 $ 0.21 $ (0.73) $ 0.51

Funds From Operations(2) $ 67.6 $ 61.5 $ 167.4 $ 158.2
Per Unit $ 0.34 $ 0.31 $ 0.83 $ 0.80

Cash Distributions(2) $ 42.7 $ 40.3 $ 127.7 $ 118.4
Per Unit $ 0.21 $ 0.20 $ 0.63 $ 0.59

Payout Ratio before sustaining
capital(2) 63.1% 65.4% 76.2% 74.9%
Payout Ratio after sustaining
capital(2) 65.5% 69.7% 79.6% 78.8%

Capital Expenditures(2)
Growth $164.6 $ 11.4 $ 196.3 $ 37.2
Sustaining $ 2.4 $ 3.8 $ 7.0 $ 8.0

(1) Cold Lake volumes reported on a 100% basis. Corridor was acquired on
June 15(th), 2007. Corridor volumes represent 107 days of operations
and have been prorated over the nine month period.
(2) Please refer to the "Non-GAAP Financial Measures" section of the MD&A.


Inter Pipeline Fund

Inter Pipeline is a major petroleum transportation, bulk liquid storage and natural gas liquids extraction business based in Calgary, Alberta, Canada. Structured as a publicly traded limited partnership, Inter Pipeline owns and operates energy infrastructure assets in western Canada, the United Kingdom, Germany and Ireland. Additional information about Inter Pipeline can be found at www.interpipelinefund.com.

Inter Pipeline is a member of the S&P/TSX Composite Index. Class A Units trade on the Toronto Stock Exchange under the symbol IPL.UN.

Eligible Investors

Only persons who are residents of Canada, or if partnerships, are Canadian partnerships, in each case for purposes of the Income Tax Act (Canada) are entitled to purchase and own Class A Units and debentures of Inter Pipeline.

Disclaimer

Certain information contained herein may constitute forward-looking statements that involve risks and uncertainties. Readers are cautioned not to place undue reliance on forward-looking statements. Such information, although considered reasonable by the General Partner of Inter Pipeline at the time of preparation, may later prove to be incorrect and actual results may differ materially from those anticipated in the statements made. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements often contain terms such as "may", "will", "should", "anticipate", "expects" and similar expressions. Such risks and uncertainties include, but are not limited to, risks associated with operations, such as loss of markets, regulatory matters, environmental risks, industry competition and the ability to access sufficient capital from internal and external sources. You can find a discussion of those risks and uncertainties in Inter Pipeline's securities filings at www.sedar.com. Except to the extent required by applicable securities laws and regulations, Inter Pipeline assumes no obligation to update or revise forward-looking statements made herein or otherwise, whether as a result of new information, future events, or otherwise. The forward-looking statements contained in this document are expressly qualified by this cautionary note.

All dollar values are expressed in Canadian dollars unless otherwise noted.


Management's Discussion and Analysis

For the third quarter ended September 30, 2007

The following Management's Discussion and Analysis (MD&A) provides a detailed explanation of Inter Pipeline Fund's (Inter Pipeline) operating results for the three and nine month periods ended September 30, 2007 as compared to the three and nine month periods ended September 30, 2006. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements and MD&A of Inter Pipeline for the quarterly periods ended March 31, June 30, September 30, 2006 and March 31 and June 30, 2007, the audited consolidated financial statements and MD&A for the years ended December 31, 2006 and 2005, the Annual Information Form (AIF) and other information filed by Inter Pipeline at www.sedar.com.

THIRD QUARTER 2007 HIGHLIGHTS

- Announced that Inter Pipeline expects to maintain its current level of cash distributions through 2010 and beyond

- Funds from operations(1) increased $6.1 million or 9.9% to $67.6 million compared to the same quarter last year

- Payout ratios before sustaining capital(1) for the three and nine month periods ended September 30, 2007 were 63.1% and 76.2%, respectively

- Cash distributions to unitholders totaled $42.7 million, or $0.21 per unit during the quarter

- Oil sands transportation and conventional crude oil pipeline systems transported a quarterly record 795,300 barrels per day (b/d)

- Corridor pipeline expansion project remains on schedule and on budget with approximately 240 kilometres, or 52% of total line pipe installed

- Successfully closed a $2.2 billion syndicated credit facility to finance the development and expansion of the Corridor pipeline system

SUBSEQUENT EVENT

- Shell Canada Energy's Orion oil sands project began transporting volumes on the Cold Lake pipeline system

(1) Please refer to the "Non-GAAP Financial Measures" section



PERFORMANCE OVERVIEW
Three Months Ended September 30, 2007

Three Months Ended
September 30
----------------------------------------------------------------------------
($ millions) 2007 2006
----------------------------------------------------------------------------
Funds from operations
NGL extraction $ 38.4 $ 36.4
Conventional oil pipelines 20.7 21.1
Oil sands transportation 18.2 9.2
Bulk liquid storage 11.5 10.2
Corporate costs (21.2) (15.4)
----------------------------------------------------------------------------
$ 67.6 $ 61.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------


For the three months ended September 30, 2007, Inter Pipeline's funds from operations increased $6.1 million or 9.9% from $61.5 million in 2006 to $67.6 million in 2007. The acquisition of Terasen Pipelines (Corridor) Inc. (subsequently renamed Inter Pipeline (Corridor) Inc.) (Corridor) in June 2007 and favourable commodity prices in the natural gas liquids (NGL) extraction business contributed to the majority of the increase in funds from operations. Corporate costs also increased primarily due to financing and general and administrative costs associated with the Corridor acquisition.

Inter Pipeline paid monthly cash distributions of $0.070 per unit to unitholders in each of July, August and September 2007 for a total of $0.210 per unit. This compares with monthly cash distributions of $0.065 per unit for the months July and August 2006 and $0.070 per unit in September 2006 for a total of $0.200 per unit. Total cash distributed to unitholders in the third quarter of 2007 increased $2.4 million or 6.0% to $42.7 million compared to $40.3 million distributed in the third quarter ended September 30, 2006. The increase in total cash distributed is attributable to a cash distribution per unit increase effective September 2006 and an increase in the number of units outstanding.

A 63.1% payout ratio before sustaining capital of funds from operations was realized in the third quarter of 2007, as compared to 65.4% realized in the third quarter of 2006.

Inter Pipeline's outstanding long-term debt, excluding the 10% Convertible Extendible Unsecured Subordinated Debentures (Convertible Debentures), increased by $1,206.0 million to $1,880.8 million from $674.8 million outstanding as at December 31, 2006. The increase in long-term debt is a result of the Corridor acquisition and continued construction on the Corridor Expansion project (Corridor Expansion). At September 30, 2007, Inter Pipeline's consolidated debt to total capitalization ratio was 68.0%. Removing the impact of Corridor's non-recourse debt of $888.0 million, Inter Pipeline's debt to capitalization ratio was 53.0%.

Net income for the third quarter of 2007 decreased approximately $7.3 million to $35.1 million from net income of $42.4 million in 2006. The decline in net income is primarily due to increases in financing charges and general administrative expenditures as a result of the acquisition of Corridor, and the recognition of an $8.9 million unrealized loss on Inter Pipeline's derivative financial instruments as a result of prospective accounting policy changes.



Nine Months Ended September 30, 2007

Nine Months Ended
September 30
----------------------------------------------------------------------------
($ millions) 2007 2006
----------------------------------------------------------------------------
Funds from operations
NGL extraction $ 95.0 $ 85.7
Conventional oil pipelines 64.1 60.3
Oil sands transportation 38.5 29.4
Bulk liquid storage 35.1 28.5
Corporate costs (65.3) (45.7)
----------------------------------------------------------------------------
$ 167.4 $ 158.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The increase in funds from operations for the nine months ended September 30, 2007 was primarily due to the acquisition of Corridor in June 2007, favourable commodity prices and volume increases in the NGL extraction business and higher margins in the bulk liquid storage business. These increases were offset by the $10.9 million acquisition fee paid to Pipeline Management Inc., Inter Pipeline's General Partner (General Partner) related to the Corridor acquisition in the second quarter of 2007 and an increase in financing charges and general and administrative expenses as a result of acquiring Corridor. See RESULTS OF OPERATIONS section for further discussion on each business segment's operating results.

Total cash distributions to unitholders in the first nine months of 2007 increased by $9.3 million or 7.9% to $127.7 million compared to $118.4 million of cash distributions in the nine months ended September 30, 2006. This results in a favourable 76.2% payout ratio before sustaining capital for the nine month period ended September 30, 2007, compared to a payout ratio before sustaining capital of 74.9% realized in the same period of 2006.

Net income for the nine months ended September 30, 2007 decreased approximately $250.7 million to a net loss of $148.3 million from net income of $102.4 million in 2006. This is primarily due to the recognition of a $234.6 million non-cash expense for future income taxes as a result of the substantive enactment of Bill C-52 Budget Implementation Act, 2007, associated with the Federal Government's Tax Fairness Plan (Plan) effective June 2007. Excluding non-cash future tax expense of $234.6 million, net income year to date would have been $86.3 million or $0.43 per unit. See RESULTS OF OPERATIONS - Corporate for further discussion on the increase in future income taxes.

OUTLOOK

Inter Pipeline's four business segments continue to perform very well, with exceptional results from the NGL extraction business segment. The continuation of higher than historical frac-spread levels has contributed to the stronger than anticipated results from this business segment. With the recent price of crude oil approximating USD $90 per barrel and the price of natural gas approximating $5 per gigajoule (GJ), Inter Pipeline continues to enjoy a period of record breaking frac-spreads. Should this trend of high oil prices and low gas prices continue, Inter Pipeline is very well positioned to benefit economically from this frac-spread environment into the future.

The acquisition of the Corridor pipeline system in June 2007, when combined with Inter Pipeline's 85% interest in the Cold Lake pipeline system, makes Inter Pipeline the largest oil sands gathering business in Canada transporting more than 40% of Canada's oil sands production. Both Corridor and Cold Lake will provide stable and predictable cash flows into the future, stemming from long-term cost-of-service contracts with high credit quality shippers. The shippers on the Corridor pipeline system are Shell Canada Energy (Shell), Chevron Canada Limited (Chevron) and Marathon Oil Corporation (Marathon, formerly Western Oil Sands L.P). The shippers on the Cold Lake pipeline system are Imperial Oil Ltd., EnCana Corporation (EnCana), Canadian Natural Resources Ltd. and Shell. It is anticipated that by 2011, the majority of Inter Pipeline's cash available for distribution will be generated from its oil sands transportation business segment. This increase in expected contribution from the oil sands transportation business segment illustrates how Inter Pipeline's overall risk profile will be reduced due to this large proportion of low risk, stable and predictable cash flow.

The major expansion of the Corridor pipeline system is currently on schedule and on budget with approximately 52% of the 42-inch pipeline being successfully constructed. Upon successful completion of the Corridor expansion project, the resultant increase in cash available for distribution should firmly position Inter Pipeline to maintain its current cash distribution level beyond 2010. In 2011, Inter Pipeline will become taxable as result of the Federal Government's Tax Fairness Plan announced in October 2006 and enacted as new legislation in the 2007 Federal Budget. The strong positioning to maintain cash distributions beyond 2010, along with the generally more favourable tax treatment of Inter Pipeline's distributions, which will be treated for tax purposes substantially similar to dividends from Canadian public corporations, speaks well to the after tax return a taxable Canadian investor will receive from owning Inter Pipeline units post 2010.

The Alberta provincial government has recently announced its new Oil and Gas Royalty Plan (Royalty Plan) framework modifying the manner in which royalties will be charged on oil and gas producing properties in Alberta. The Royalty Plan does not directly impact Inter Pipeline as it has no producing properties. However, the Royalty Plan may indirectly impact Inter Pipeline's results should the producers and shippers operating in areas serviced by Inter Pipeline decide to take actions, such as reduced capital programs or curtailment of volumes shipped, as a result of the new Royalty Plan. This impact is tempered substantially by the cost-of-service contracts that are in place in the oil sands transportation business segment.

Inter Pipeline currently expects to invest approximately $455 million on organic growth capital projects including approximately $360 million on the Corridor Expansion and $12 million on sustaining capital projects in 2007. The forecast accumulated construction cost for the Corridor expansion as at December 31, 2007 will be approximately $695 million; the expansion is expected to be in service in 2010.

The Alberta Energy and Utilities Board (EUB) is conducting an inquiry into matters related to NGL extraction from the common natural gas streams transported through EUB regulated pipeline transmission systems. Of significance to Inter Pipeline, is the review of business and regulatory practices relating to the acquisition of NGL extraction rights from the common stream, public interest criteria used to determine the need and timing of NGL processing capacity additions and the potential for NGL content dilution of the common stream caused by increases in non-conventional gas production. The oral portion of the inquiry will be held in Calgary beginning February 5, 2008. Inter Pipeline has been and will continue to be an active participant in the process.

Both Standard & Poor's and DBRS credit rating agencies have assigned an investment grade, long term corporate investment grade credit rating of BBB on Inter Pipeline. Inter Pipeline's 100% owned subsidiary, Corridor has been assigned investment grade credit ratings of A (low), BBB+, and A3 from DBRS, Standard & Poor's and Moody's respectively.



SELECTED CONSOLIDATED FINANCIAL INFORMATION

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions, except per unit and
% amounts) 2007 2006 2007 2006
----------------------------------------------------------------------------
Revenues
NGL extraction $ 176.2 $ 177.1 $ 551.5 $ 505.7
Conventional oil pipelines $ 30.2 $ 30.2 $ 90.9 $ 86.0
Oil sands transportation(1) $ 39.2 $ 14.9 $ 71.0 $ 44.1
Bulk liquid storage $ 38.9 $ 34.1 $ 120.8 $ 100.1

Net income (loss)(1)(2) $ 35.1 $ 42.4 $ (148.3) $ 102.4
Per unit - basic(1)(2) $ 0.18 $ 0.21 $ (0.73) $ 0.51
Per unit - diluted(1)(2) $ 0.18 $ 0.21 $ (0.73) $ 0.51

Funds from operations(3) $ 67.6 $ 61.5 $ 167.4 $ 158.2
Per unit(3) $ 0.34 $ 0.31 $ 0.83 $ 0.80

Cash distributions(4) $ 42.7 $ 40.3 $ 127.7 $ 118.4
Per unit(4) $ 0.21 $ 0.20 $ 0.63 $ 0.59

Payout ratio before sustaining
capital(3) 63.1% 65.4% 76.2% 74.9%
Payout ratio after sustaining
capital(3) 65.5% 69.7% 79.6% 78.8%

Total assets(1) $ 3,390.2 $ 2,116.7
Long-term debt(1) $ 1,880.8 $ 671.8
Convertible Debentures $ 10.2 $ 12.1
Total partners' equity(2) $ 892.5 $ 1,181.3
Units outstanding end of
period(4) 203.3 201.4
Total enterprise value(1)(2) $ 3822.1 $ 2,745.9
----------------------------------------------------------------------------

(1) Corridor was acquired on June 15, 2007, therefore only 107 days of
revenues and operating expenses were recognized year to date in 2007.
(2) The net loss for the nine months ended September 30, 2007 is primarily a
result of the substantive enactment of Bill C-52 Budget Implementation
Act, 2007, associated with the Federal Government's Tax Fairness Plan
effective September 2007. Inter Pipeline estimates that $744.8 million
of net taxable temporary differences, not previously subject to tax,
will reverse after January 1, 2011, resulting in an additional $234.6
million future income tax liability. In addition, on January 1, 2007,
Inter Pipeline determined it would be appropriate to discontinue hedge
accounting and prospectively adopt the CICA's new Financial Instruments
accounting standard for its derivative financial instruments. As a
result, Inter Pipeline recorded an unrealized loss of approximately
$24.1 million for the nine months ended September 30, 2007, to record
the net change in the fair value of these derivative financial
instruments.
(3) Please refer to the "Non-GAAP Financial Measures" section of this MD&A.
(4) Cash distributions are calculated based on the number of units
outstanding at each record date.


RESULTS OF OPERATIONS
NGL Extraction Business Segment

Three Months Ended September 30
2007
----------------------------------------------------------------------------
Mmcf/d (000s b/d)
----------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
----------------------------------------------------------------------------
Cochrane 1,771 45.4 28.5 73.9
Empress V
(100% basis) 1,063 14.9 12.1 27.0
Empress II 1,287 23.3 14.7 38.0
----------------------------------------------------------------------------
Total 4,121 83.6 55.3 138.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three Months Ended September 30
2006
----------------------------------------------------------------------------
Mmcf/d (000s b/d)
----------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
----------------------------------------------------------------------------
Cochrane 1,986 48.9 28.6 77.5
Empress V
(100% basis) 1,035 14.6 11.6 26.2
Empress II 1,426 25.1 15.9 41.0
----------------------------------------------------------------------------
Total 4,447 88.6 56.1 144.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine Months Ended September 30
2007
----------------------------------------------------------------------------
Mmcf/d (000s b/d)
----------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
----------------------------------------------------------------------------
Cochrane 1,795 48.6 28.8 77.4
Empress V
(100% basis) 1,044 15.0 11.9 26.9
Empress II 1,506 27.5 17.3 44.8
----------------------------------------------------------------------------
Total 4,345 91.1 58.0 149.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine Months Ended September 30
2006
----------------------------------------------------------------------------
Mmcf/d (000s b/d)
----------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
----------------------------------------------------------------------------
Cochrane 1,662 47.5 24.6 72.1
Empress V
(100% basis) 988 14.4 11.2 25.6
Empress II 1,501 27.4 16.8 44.2
----------------------------------------------------------------------------
Total 4,151 89.3 52.6 141.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions, except % amounts) % %
2007 2006 change 2007 2006 change
----------------------------------------------------------------------------
Revenue(1) $176.2 $177.1 (0.5) $551.5 $505.7 9.1
----------------------------------------------------------------------------
Shrinkage gas(1) $ 96.1 $100.3 (4.2) $341.9 $311.9 9.6
----------------------------------------------------------------------------
Operating expenses(1) $ 41.7 $ 40.5 3.0 $114.7 $108.1 6.1
----------------------------------------------------------------------------
Capital expenditures(1)
Growth(2) $ 2.3 $ 2.3 $ 2.8 $ 4.5
Sustaining(2) 0.8 0.7 2.3 1.0
----------------------------------------------------------------------------
Total capital expenditures $ 3.1 $ 3.0 $ 5.1 $ 5.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Revenue, shrinkage, operating expenses and capital expenditures of the
Empress V NGL extraction facility are recorded on a 50% ownership basis.

(2) Please refer to the "Non-GAAP Financial Measures" section.


Volumes

Inter Pipeline's three NGL extraction plants processed a combined 4,121 million cubic feet per day (Mmcf/d) of natural gas for the three months ended September 30, 2007, which is 326 Mmcf/d lower than in the comparative period of 2006, due to decreased gas throughput at the Cochrane and Empress II plants. As a result, the NGL extraction facilities produced an average of 138,900 b/d of NGLs in the third quarter of 2007, a decrease of 5,800 b/d relative to the third quarter of 2006. The Cochrane facility's annual maintenance shutdown, normally scheduled in June, was deferred until the third quarter of 2007 which contributed to a decrease in throughput volumes when compared to 2006. Throughput volumes at the Empress II gas plant decreased due to a decline in overall volumes of Alberta gas exported to eastern Canada.

Total year to date 2007 gas throughput volumes increased 194 Mmcf/d and NGL production increased by 7,200 b/d over the same period in 2006. The increased volumes are primarily due to weather and electrical generation driven natural gas demand increases in California and the U.S. Pacific Northwest, resulting in higher gas throughputs at the Cochrane plant.



Frac-spread

Three Months Ended
September 30
----------------------------------------------------------------------------
($ actual) 2007 2006
----------------------------------------------------------------------------
USD/USG CDN/USG USD/USG CDN/USG
----------------------------------------------------------------------------
Market frac-spread $ 0.782 $ 0.819 $ 0.686 $ 0.769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Realized frac-spread $ 0.676 $ 0.709 $ 0.598 $ 0.671
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine Months Ended
September 30
----------------------------------------------------------------------------
($ actual) 2007 2006
----------------------------------------------------------------------------
USD/USG CDN/USG USD/USG CDN/USG
----------------------------------------------------------------------------
Market frac-spread $ 0.594 $ 0.650 $ 0.539 $ 0.608
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Realized frac-spread $ 0.524 $ 0.573 $ 0.482 $ 0.544
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The NGL extraction business segment earns revenue from a combination of cost-of-service, fee based and commodity based contracts. Under cost-of-service and fee based contracts, there is no exposure to commodity price risk. Inter Pipeline's only frac-spread risk applies to its commodity based contract for propane plus volumes at the Cochrane plant.

Market frac-spread is defined as the difference between the weighted average propane plus price at Mont Belvieu, Texas and the price of AECO natural gas purchased for shrinkage calculated in US dollars per US gallon (USD/USG). This price is translated to Canadian dollars per USG (CDN/USG) based on the average monthly Bank of Canada CDN/USD rate. Inter Pipeline hedges a portion of its anticipated cash flow to mitigate exposure to frac-spread volatility. The realized frac-spread is defined in a similar manner and is calculated on a weighted average basis using the market frac-spread for unhedged production and the fixed-priced frac-spread for hedged production. See the FINANCIAL INSTRUMENTS section for further discussion of the hedged frac-spreads as at September 30, 2007.

For the three months ended September 30, 2007, Inter Pipeline's realized frac-spread of $0.676 USD/USG, including hedged and unhedged production, was 13.0% higher than the $0.598 USD/USG frac-spread realized in 2006. Similarly, Inter Pipeline's realized frac-spread of $0.524 USD/USG for the nine months ended September 30, 2007, was approximately 8.7% higher than the $0.482 USD/USG frac-spread realized in 2006. This is primarily due to lower year to date natural gas prices as discussed in the Shrinkage section below. Comparatively, these realized prices are significantly higher than the 15-year, and even the 3-year annual historical simple average market frac-spreads to December 31, 2006 of $0.246 USD/USG and $0.370 USD/USG, respectively.

Revenue

Overall, in the third quarter of 2007, the NGL extraction business generated $0.9 million less revenue as compared to the quarter ended September 30, 2006. This decrease in revenue is due to the decreases in the cost of shrinkage, fuel gas and power and lower throughput volumes at the plants.

Inter Pipeline recovers a significant portion of its shrinkage and fuel gas costs through its cost-of-service or fee based product sale contracts, which is recognized as revenue. In the third quarter of 2007, as the cost of shrinkage, fuel gas and power decreased over the same period in 2006, the associated revenue also decreased.

Year to date 2007, the NGL extraction business generated $45.8 million of additional revenue as compared to the same period in 2006. The majority of this increase occurred in the second quarter of 2007 and is due primarily to increases in volumes and propane-plus prices as described above.

Shrinkage

Shrinkage gas expense decreased $4.2 million in the third quarter of 2007 compared to the same period in 2006. Shrinkage gas represents natural gas bought by Inter Pipeline to replace the heat content of the liquids extracted from the natural gas processed at the NGL extraction plants. The decrease in cost is directly associated with the decreased volumes of shrinkage gas purchased due to the decreased production of NGLs. A decrease in the price of Alberta natural gas purchased for shrinkage gas at the NGL extraction plants also contributed to the decrease in shrinkage gas expense during the third quarter. The price for shrinkage gas is based on a combination of daily and monthly index AECO prices for natural gas. The weighted average monthly AECO price was $5.32 per GJ in the third quarter of 2007, which is approximately 7.0% lower than the weighted average price of $5.72 per GJ in the third quarter ended September 30, 2006.

Year to date 2007, shrinkage gas expense increased $30.0 million when compared to the same period in 2006. The majority of this increase is attributable to the second quarter of 2007 and is the result of higher NGL production. This increase was partially offset by an overall decline in AECO prices year to date. The weighted average monthly AECO price of $6.46 per GJ in the first nine months of 2007 was approximately 5.3% lower than the weighted average price of $6.82 per GJ in 2006.

Operating Expenses

Fuel and power costs, which accounted for 77.5% of operating costs, were $32.3 million in the third quarter of 2007 compared to $32.7 million for the same period in 2006. The decrease in costs is primarily due to the decreased volume of gas processed and NGL produced at the NGL extraction facilities and the decrease in natural gas prices as described in the Shrinkage section above. Natural gas cost decreases were complemented by a decrease in the average Alberta power pool price. The power pool price for the third quarter of 2007 was $92.47 per megawatt hour (MWh) as compared to $94.87/MWh in the third quarter of 2006.

Year to date 2007, fuel and power costs, which accounted for 76.6% of operating costs, were $87.9 million for the first nine months of 2007 compared to $83.8 million for the same period in 2006. This increase in costs is primarily due to the increased volume of gas processed and NGL produced at the NGL extraction facilities and a slight increase in Alberta power pool prices. These increases were partially offset by a year to date decrease in natural gas prices. The average Alberta power pool price for the first nine months of 2007 was $68.68 per MWh as compared to $68.59 per MWh in 2006.

Capital Expenditures

Growth capital expenditures of $2.3 million are related to the Empress V ethane recovery improvement project. Sustaining capital expenditures of $0.8 million for the third quarter of 2007 are related to the installation of updated process controls at the Cochrane plant.



Conventional Oil Pipelines Business Segment

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
Volumes (000s b/d) % %
2007 2006 change 2007 2006 change
----------------------------------------------------------------------------
Bow River 123.6 144.5 (14.5) 136.8 142.1 (3.7)
Central/Valley/Mid
Saskatchewan 73.2 69.3 5.6 73.0 66.0 10.6
----------------------------------------------------------------------------
196.8 213.8 (8.0) 209.8 208.1 0.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per barrel
and % amounts)
Revenue $ 30.2 $ 30.2 - $ 90.9 $ 86.0 5.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating expenses $ 10.2 $ 10.0 2.0 $ 28.9 $ 26.8 7.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue per barrel $ 1.67 $ 1.54 8.4 $ 1.59 $ 1.51 5.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures
Growth(1) $ 1.2 $ 1.8 $ 5.3 $ 12.3
Sustaining(1) 0.3 0.6 2.1 1.4
----------------------------------------------------------------------------
Total capital expenditures $ 1.5 $ 2.4 $ 7.4 $ 13.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Please refer to the "Non-GAAP Financial Measures" section.


Volumes

Overall volumes in the third quarter of 2007 were approximately 17,000 b/d lower than in the comparable period of 2006. The Bow River Hardisty South system volumes were approximately 13,000 b/d lower in the third quarter of 2007, compared to the same period in 2006. The majority of this decrease to Hardisty South volumes is a result of a scheduled refinery turnaround in Billings, Montana. These volumes were also down as a result of Inter Pipeline modifying the viscosity blending taking place on the Hardisty South system to ship a more viscous crude oil which reduced the overall throughput capacity of the Hardisty South system. The associated decrease in throughput capacity has been offset by a tariff increase such that revenue to Inter Pipeline should not be impacted significantly. This new viscosity blending methodology is expected to continue until November 1, 2008 with an effect of decreased throughput volumes on the Hardisty South system. Volume declines on the conventional systems were approximately 3.8% when compared to the same period in 2006. These volume declines were partially offset by the additional volumes from the Cactus Lake interconnection facilities on the Mid Saskatchewan pipeline system.

Year to date volumes in 2007 were approximately 1,700 b/d higher than in the comparable period of 2006. Hardisty South volumes increased approximately 1,400 b/d resulting from the expanded Bow River system and volumes from the new Cactus Lake interconnection facilities. These volume increases more than offset year to date natural volume declines of approximately 4.4%.

Revenue

Revenues in the third quarter of 2007 were consistent with the prior year. Volume declines discussed above were primarily offset by mainline toll increases averaging 6% and 3% effective January 1 and July 1, 2007, respectively. Year to date revenues for 2007 increased approximately $4.9 million when compared to 2006 primarily due to toll rate and volume increases.

Operating Expenses

Operating expenses in the third quarter of 2007 increased approximately $0.2 million compared to the prior year. Increased expenditures on routine integrity maintenance programs and salary and benefit costs were primarily offset by decreases in fuel and power costs and non cash environmental remediation accruals.

Fuel and power expenses decreased approximately $0.5 million to $1.3 million in the third quarter of 2007. The average Alberta power pool price for the third quarter of 2007 was $92.47 per MWh compared to $94.87 per MWh for the same period in 2006. The Alberta market power prices were partially offset by Inter Pipeline's conventional pipeline system power hedging program. The 2007 hedging program fixes 5.0 megawatts (MW) of power at an average price of $52.75 per MWh throughout 2007 (2006 - 5.0 MW of power at an average price of $49.50/MWh).

Year to date operating expenses increased approximately $2.1 million compared to the same period in 2006. This is primarily due to increases in routine operating, salary and benefit expenditures.

Capital Expenditures

Growth capital expenditures of $1.2 million in the third quarter of 2007 for the conventional oil pipelines segment primarily relate to the completion of construction of blending facilities on the Bow River pipeline system. Sustaining capital expenditures of $0.3 million in the third quarter consisted of a number of small projects on three of the conventional pipeline systems. Year to date capital expenditures are approximately $0.7 million higher when compared to 2006, primarily due to the replenishment of capital spares such as pumps during the year and other smaller maintenance projects.



Oil Sands Transportation Business Segment

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
Volumes (000s b/d) % %
2007 2006 change 2007 2006 change
----------------------------------------------------------------------------
Cold Lake (100% basis) 356.2 335.5 6.2 339.5 327.3 3.7
Corridor(1) 242.3 - - 94.1 - -
----------------------------------------------------------------------------
598.5 335.5 78.4 433.6 327.3 32.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except % amounts)
Revenue(1)(2) $ 39.2 $ 14.9 163.1 $ 71.0 $ 44.1 61.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating expenses(1)(2) $ 14.1 $ 5.7 147.4 $ 24.6 $ 14.7 67.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures(1)(2)
Growth(3) $153.2 $ 1.2 $169.5 $ 10.9
Sustaining(3) 0.5 - 0.5 -
----------------------------------------------------------------------------
Total capital expenditures $153.7 $ 1.2 $170.0 $ 10.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) The Corridor pipeline system was acquired on June 15, 2007, therefore
only 107 days of revenues and operating expenses were recognized year to
date in 2007 and there are no comparable figures. Average volumes
represent 107 days of operations and have been prorated over the nine
month period. Since the acquisition of Corridor, average volumes on the
Corridor pipeline systems have been approximately 243,430 b/d.

(2) The proportion of the Cold Lake pipeline system's revenue, operating
expenses and capital expenditures are recorded on the basis of Inter
Pipeline's 85% ownership interest.

(3) Please refer to the "Non-GAAP Financial Measures" section.


Volumes

Total volumes (100% basis) in the oil sands transportation business increased significantly with the acquisition of the Corridor pipeline system.

Total throughput volumes on the Corridor pipeline system of 242,300 b/d is comprised of 216,800 b/d and 25,500 b/d on the bitumen blend and supplemental feedstock pipelines, respectively. Volumes on the Corridor pipeline system have been consistent since its acquisition with the exception of September when they were reduced by approximately 49,000 b/d due to maintenance at the Muskeg River Mine.

Volumes on the Cold Lake pipeline system increased by 20,700 b/d in the third quarter of 2007 over the comparable period in 2006. The increase was primarily a result of increased production from EnCana's Foster Creek project. During the third quarter of 2007, aggregate volumes on the Cold Lake pipeline system were above the minimum ship-or-pay levels for the first time.

Revenue

In the third quarter of 2007, approximately $23.0 million of the $24.3 million growth in revenues in the oil sands transportation business segment is primarily due to the Corridor acquisition in June 2007. Corridor is the sole transporter of diluted bitumen produced by the Alberta Oil Sands Project owned by Shell, Chevron and Marathon. Cash flow from the pipeline system is supported by a long-term ship-or-pay contract with the shippers. The shippers are bound under the terms of the Firm Service Agreement (FSA), which includes an initial contract term of 25 years, extending through 2028 with options for further extensions. The FSA is based on traditional cost-of-service principles and includes the recovery of operating costs, depreciation, taxes, debt financing costs and provides a structured return on the equity component of the rate base.

Revenues attributable to the Cold Lake pipeline system increased approximately $1.3 million in the third quarter of 2007 due to increased volume and a resulting increase in each of the capital fee revenue and operating cost recovery revenues.

Similarly, year to date oil sands transportation revenues increased approximately $26.9 million over the comparable period primarily due to the Corridor acquisition. Cold Lake pipeline system revenues increased approximately $0.4 million year to date in 2007 primarily as a result of an increase in volumes and the annual minimum ship-or-pay commitment, and recoverable operating expense terms of the Cold Lake Transportation Services Agreement (Cold Lake TSA). The annual minimum ship-or-pay commitment for the founding shippers is $27.8 million ($32.7 million - 100% basis) annually to the end of December 2011. Capital fees under this commitment are collected in excess of actual volumes shipped until certain volume thresholds are achieved by each shipper.

The Cold Lake TSA and additional facility agreements also provide for the recovery of substantially all of the Cold Lake pipeline system's operating costs. As such, $6.3 million (Q3 2006 - $5.5 million) of operating costs recovered were included in revenue during the quarter. Year to date 2007, approximately $15.5 million (YTD 2006 - $14.7 million) of additional revenue was earned.

Pursuant to the Cold Lake TSA, additional facilities have been constructed and added to the Cold Lake system by the Cold Lake Pipeline Limited Partnership providing for a return on the capital invested and recovery of operating costs. During the third quarter, approximately $2.4 million (Q3 2006 - $2.6 million) of additional capital fee revenue was earned from these projects. Year to date 2007, these additional facilities contributed capital fees of approximately $7.0 million (YTD 2006 - $7.2 million).

Operating Expenses

Similar to above, approximately $7.5 million of the $8.4 million increase in operating expenses for the oil sands transportation business was due to the Corridor acquisition. Cold Lake operating expenses for the third quarter ended September 30, 2007 increased approximately $0.9 million compared to the same period last year primarily due to increases in power and timing of right-of-way remediation projects. As noted above, substantially all of the operating costs are flowed through to the shippers; therefore, most of these costs have no substantial impact on Inter Pipeline's earnings.

Year to date, approximately $8.4 million of the $9.9 million increase in operating expenses, related to the acquisition of Corridor.

Capital Expenditures

During the third quarter of 2007, capital expenditures incurred in the oil sands transportation business segment totalled $153.7 million of which $144.4 million was expended on the Corridor Expansion.

The Corridor Expansion is currently on schedule and on target with original cost estimates, with approximately 52% of the 42-inch pipeline being successfully constructed. The remaining expenditures relate to engineering, progress payments on long lead delivery items and construction activities associated with the pump stations and other facilities portion of the Corridor Expansion. Approximately 75% of Corridor's pipeline construction and facility costs have been committed.

Construction of the Shell Orion connection to the Cold Lake pipeline system accounted for approximately $5.0 million of the total expenditures in the quarter. Expansions of pumping facilities on the diluent pipeline and at the La Corey Terminal accounted for an additional $3.0 million of the total expenditures. Approximately $0.8 million of the remaining expenditures relate to engineering for the expansion of the south leg of the Cold Lake pipeline system and various metering expansions.



Bulk Liquid Storage Business Segment

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
% %
2007 2006 change 2007 2006 change
----------------------------------------------------------------------------
Utilization 95.8% 94.5% 1.4 96.4% 94.8% 1.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except % amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 38.9 $ 34.1 14.1 $120.8 $100.1 20.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating expenses $ 24.5 $ 21.3 15.0 $ 76.6 $ 63.3 21.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures
Growth(1) $ 7.9 $ 6.1 $ 18.7 $ 9.5
Sustaining(1) 0.8 2.5 2.1 5.6
----------------------------------------------------------------------------
Total capital expenditures $ 8.7 $ 8.6 $ 20.8 $ 15.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Please refer to the "Non-GAAP Financial Measures" section.


Utilization

Utilization rates continued to be strong, in both the three and nine month periods ended September 2007, benefiting partially from continued high demand in the biofuels market and across the European terminal network. The Immingham storage terminals, which are the largest terminals in this business segment, continued to benefit from close proximity to and pipeline links with ConocoPhillips and Total refineries.

Revenue

Revenue in the third quarter of 2007 increased $4.8 million when compared to the same period in 2006. Revenue of approximately $3.0 million was generated from increased utilization and higher storage margins associated with additional biofuels storage services. Revenues from engineering project and facilities management services, through which certain project costs are recoverable from customers, increased approximately $2.3 million compared to the same period in 2006. Average foreign exchange rates were relatively consistent between the third quarters of 2006 and 2007; therefore foreign exchange rates had a negligible effect on the translation of the bulk liquid storage operations into Canadian currency for financial reporting purposes.

Year to date 2007, revenue increased approximately $20.7 million when compared to 2006. Inter Pipeline completed the reconfiguration of existing storage facilities to accommodate biodiesel products for Greenergy International Ltd. (Greenergy) commissioned in April 2007. An additional $6.4 million of revenue is attributed to increased utilization and higher margins related to biofuels storage. Year to date, approximately $7.9 million of the increase in revenue is related to engineering project and facilities management revenue as discussed above. Translation of the bulk liquid storage operations into Canadian currency increased revenue by approximately $6.6 million compared to 2006. The average foreign exchange rate from British pounds sterling to the Canadian dollar for the year to date rose from approximately pounds sterling 1 to $2.06 in 2006 to pounds sterling 1 to $2.19 in 2007.

Operating Expenses

Operating expenses in the quarter increased approximately $3.2 million compared to the same quarter of 2006 primarily due to a $2.4 million increase in recoverable costs relating to engineering projects and facilities management operations. Other variances include approximately $0.8 million in costs associated with increased utilization from Greenergy and other customers.

Year to date 2007, operating expenses increased approximately $13.3 million compared to 2006. As above, approximately $7.7 million of the increase related to recoverable engineering project and facilities management costs. Other variances include approximately $1.1 million in fuel and other costs associated with the increased utilization. Approximately $4.2 million of the increase in operating expenses is due to foreign currency translation to Canadian currency.

Capital Expenditures

Approximately $3.4 million of the $7.9 million of growth capital expenditures relate primarily to a second Greenergy biofuels project at the Immingham West terminal. Approximately $1.3 million relates to three modification projects and new tank construction at the Seal Sands terminal with the remaining growth capital expenditures mainly related to other smaller modification projects at Immingham terminals. The first Greenergy project is effectively complete and Greenergy has brought this biodiesel plant up to full production capacity of 100,000 tonnes per annum. The second phase of this project's design and modification works are presently on schedule for completion in May 2008.



Corporate

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
% %
($ millions, except % amounts) 2007 2006 change 2007 2006 change
----------------------------------------------------------------------------
Depreciation and
amortization $ 22.8 $ 17.1 33.3 $ 60.2 $ 52.1 15.5
Financing charges 20.7 10.1 105.0 41.9 30.0 39.7
General and administrative 9.0 6.6 36.4 25.1 19.3 30.0
Unrealized change in fair value
of derivative financial
instruments 8.9 - - 24.1 - -
Management and acquisition
fees to General Partner 1.8 1.4 28.6 15.4 4.3 258.1
Unit incentive options - - - - 0.2 (100.0)
Income taxes (recovery) (0.3) 0.9 (133.3) 229.1 2.8 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Depreciation and Amortization

Increases in depreciation and amortization of its operating and intangible assets are primarily attributable to Inter Pipeline's 2006 capital expenditures of $65.6 million and the Corridor acquisition in June 2007.



Financing Charges
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006
----------------------------------------------------------------------------
Credit facility interest expense $ 10.9 $ 3.9 $ 19.3 $ 11.4
Interest on loan payable to
General Partner 5.8 5.8 17.3 17.3
Debentures interest expense 3.7 0.3 4.9 1.1
----------------------------------------------------------------------------
Cash related financing charges 20.4 10.0 41.5 29.8
Amortization of deferred financing
charges 0.3 0.1 0.4 0.2
----------------------------------------------------------------------------
Total financing charges $ 20.7 $ 10.1 $ 41.9 $ 30.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Short-term interest rates for the quarter ranged from a weighted average commercial paper rate, including commissions, of 5.16% (Q3 2006 - bankers acceptances, including stamping fees of 5.11%) to a weighted average prime rate of 6.25% (Q3 2006 - 6.00%).

The weighted average principal outstanding on the credit facilities was $1,123.6 million for the third quarter of 2007 (Q3 2006 - $281.2 million). This weighted average debt was higher in the third quarter of 2007 compared to the same quarter in 2006 primarily due to the Corridor acquisition and capital expenditures on the Corridor Expansion. See the LIQUIDITY AND CAPITAL RESOURCES section for further details of Inter Pipeline's and Corridor's debt facilities.

In accordance with the terms of the FSA, approximately $4.4 million of interest expense (YTD 2007 - $5.0 million) incurred to finance the Corridor Expansion, was capitalized as part of the project costs.

Interest expense on the $379.8 million loan payable to the General Partner, is consistent with the same period in 2006 due to the fixed rate of interest on the loan and no change in the principal balance during the period.



General and Administrative
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006
----------------------------------------------------------------------------
Canada $ 6.3 $ 4.0 $ 16.6 $ 11.8
Europe 2.7 2.6 8.5 7.5
----------------------------------------------------------------------------
Total general and administrative
expenses $ 9.0 $ 6.6 $ 25.1 $ 19.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In Canada, general and administrative expenses increased approximately $2.3 million during the third quarter of 2007 and approximately $4.8 million year to date primarily due to an increase in employee costs and incentives when compared to the same periods in 2006. Inter Pipeline also added to its complement of employees and incurred additional administrative costs as a result of the acquisition of Corridor.

In the third quarter of 2007 in Europe, general and administrative expenses were consistent with 2006. Year to date, general and administrative expenses increased $1.0 million compared to 2006 of which $0.5 million related to a foreign currency translation adjustment.

Unrealized Change in Fair Value of Derivative Financial Instruments

Effective January 1, 2007, Inter Pipeline elected to discontinue hedge accounting for its derivative financial instruments outstanding at January 1, 2007. Concurrently, Inter Pipeline prospectively adopted the CICA's new handbook section 3855: Financial Instruments, whereby all derivative financial instruments are required to be measured at fair value each reporting period. As a result, any unrealized gains or losses resulting from this remeasurement of Inter Pipeline's derivative financial instruments were reported as an unrealized gain or loss in net income. See the "NEW ACCOUNTING POLICIES" section for further discussion of these changes in accounting policies.

Management and Acquisition Fees

During the third quarter of 2007, the General Partner was paid a management fee of $1.8 million (Q3 2006 - $1.4 million) equivalent to 2% of "Operating Cash," as defined in the Limited Partnership Agreement (LPA). Year to date 2007, management fees of $4.5 million (YTD 2006 - $3.9 million) were paid to the General Partner.

Pursuant to the terms of the LPA, an acquisition fee of $10.9 million was paid in the second quarter of 2007 (YTD 2006 - $0.4 million) related to the Corridor acquisition.

Income Taxes

In June 2007, the Government of Canada substantively enacted new legislation imposing additional income taxes upon publicly traded income trusts and limited partnerships, including Inter Pipeline effective January 1, 2011. Prior to June 2007, Inter Pipeline estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate, related to the consolidated entities that were not corporations. Under the legislation, Inter Pipeline now estimates the effective tax rate on the post 2010 reversal of these temporary differences to be 31.5%. Temporary differences reversing before 2011 still give rise to nil future income taxes. Based on its consolidated assets and liabilities as at June 30, 2007, Inter Pipeline estimated the amount of its temporary differences (previously not subject to tax) and the periods in which these differences will reverse. Inter Pipeline estimates that $744.8 million of net taxable temporary differences, not previously subject to tax, will reverse after January 1, 2011, resulting in an additional $234.6 million future income tax liability. The taxable temporary differences relate principally to the excess of net book value of property, plant and equipment and intangible assets over the remaining tax values attributable thereto.

Since the legislation gives rise to a change in Inter Pipeline's estimated future income tax liability in the nine months ended September 30, 2007, the recognition of the additional liability was initially accounted for prospectively and an additional $234.6 million of future income tax expense was recorded.

While Inter Pipeline believes it will be subject to additional tax under the new legislation, the estimated effective tax rate on temporary difference reversals after 2011 may change in future periods. As an example, the Federal Government recently proposed tax rate reductions in its fall Economic Statement, which would impact the overall future income tax estimate once enacted. As the legislation is new, future technical interpretations of the legislation could occur and could materially affect management's estimate of the future income tax liability. The amount and timing of reversals of temporary differences will also depend on Inter Pipeline's future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. A significant change in any of the preceding assumptions could materially affect Inter Pipeline's estimate of the future tax liability.

In the bulk liquid storage business segment, recent tax legislative changes in Europe also impacted future income taxes. In Germany, tax legislation passed which aligns German income tax rates more closely with the other European Union members, reducing the effective income tax rate from 39.00% to 30.35%, effective January 1, 2008. The effect of recognizing this change in German income tax rates was a $4.6 million reduction in future income tax liabilities. Similarly, in the United Kingdom, recent legislative changes will result in income tax rates declining from 30.0% to 28.0% effective April 1, 2008. The effect of recognizing this income tax rate change was a $3.9 million reduction in future income tax liabilities. Therefore, the overall impact of these reduced tax rates was an $8.5 million decrease in the future income tax liabilities.



SUMMARY OF QUARTERLY RESULTS

2005 2006 2007
----------------------------------------------------------------------------
($ millions, Fourth First Second Third Fourth First Second Third
except per
unit and % Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
amounts) (1)
----------------------------------------------------------------------------
Revenue
NGL
extraction $ 233.8 $ 195.5 $ 133.0 $ 177.1 $ 186.1 $ 196.8 $ 178.5 $ 176.2
Conventional
oil
pipelines $ 28.2 $ 28.7 $ 27.1 $ 30.2 $ 30.7 $ 30.9 $ 29.8 $ 30.2
Oil sands
transportation
(2) $ 17.2 $ 13.9 $ 15.3 $ 14.9 $ 14.7 $ 14.0 $ 17.8 $ 39.2
Bulk liquid
storage $ 30.4 $ 31.6 $ 34.3 $ 34.1 $ 43.7 $ 42.4 $ 39.4 $ 38.9
Net income
(loss)(2)(3)
(4) $ 20.9 $ 29.1 $ 30.8 $ 42.4 $ 28.3 $ 24.5 $(207.9)$ 35.1
Per unit -
basic(2)(3)
(4) $ 0.11 $ 0.15 $ 0.15 $ 0.21 $ 0.14 $ 0.12 $ (1.03)$ 0.18
Per unit -
diluted(2)
(3)(4) $ 0.11 $ 0.15 $ 0.15 $ 0.21 $ 0.14 $ 0.12 $ (1.03)$ 0.18

Funds from
operations(2)
(3)(5) $ 38.1 $ 47.9 $ 48.8 $ 61.5 $ 47.2 $ 54.8 $ 45.0 $ 67.6
Per unit
(2)(3)(5) $ 0.21 $ 0.25 $ 0.24 $ 0.31 $ 0.24 $ 0.27 $ 0.22 $ 0.34

Cash
distributions
(6) $ 35.0 $ 39.0 $ 39.2 $ 40.3 $ 42.3 $ 42.4 $ 42.6 $ 42.7
Per unit(6) $0.1900 $0.1950 $0.1950 $0.2000 $0.2100 $0.2100 $0.2100 $0.2100

Payout ratio
before
sustaining
capital(3)
(5) 91.8% 81.5% 80.2% 65.4% 89.7% 77.4% 94.5% 63.1%
Payout ratio
after
sustaining
capital(3)
(5) 101.3% 84.4% 84.6% 69.7% 101.7% 79.6% 101.5% 65.5%

Units
outstanding
Weighted
average 184.2 194.7 200.7 201.2 201.6 202.0 202.6 203.1
End of
period 184.6 200.4 200.9 201.4 201.7 202.3 202.8 203.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Restated for change in segment reporting policy.

(2) Inter Pipeline acquired Corridor on June 15, 2007.

(3) Restated comparative periods due to change in accounting policy
regarding Unit Incentive Option Plan.

(4) The net loss for the second quarter of 2007 was primarily due to the
recognition of a non-cash expense for future income taxes recognized as
a result of the substantive enactment of Bill C-52 Budget Implementation
Act, 2007, associated with the Federal Government's Tax Fairness Plan
effective September 2007. See the Income Taxes section in RESULTS OF
OPERATIONS for further details.

(5) Please refer to the "Non-GAAP Financial Measures" section of this MD&A.

(6) Cash distributions are calculated based on the number of units
outstanding at each record date.


LIQUIDITY AND CAPITAL RESOURCES

As at September 30
($ millions, except for % amounts) 2007 2006
----------------------------------------------------------------------------

Cash $ 33.7 $ 33.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Working capital deficiency excluding cash, current
portion of Convertible Debentures and fair value of
derivative financial instruments(1) $ (69.5) $ (12.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Variable rate debt
Inter Pipeline revolving credit facility available $ 750.0 $ 500.0
Corridor syndicated credit facility available 2,142.0 --
Inter Pipeline and Corridor demand loan
facilities available 60.0 20.0
----------------------------------------------------------------------------
Total credit facilities available 2,952.0 520.0
Less unutilized credit facilities (1,751.0) (228.0)
----------------------------------------------------------------------------
Total outstanding credit facilities (2) 1,201.0 292.0
Corridor debentures 300.0 -
Less variable rate debt swapped to fixed (45.0) (46.0)
----------------------------------------------------------------------------
Total outstanding variable rate debt 1,456.0 246.0
----------------------------------------------------------------------------

Fixed rate long-term debt
Loan payable to General Partner 379.8 379.8
Convertible Debentures 10.2 12.6
Add variable rate debt swapped to fixed 45.0 46.0
----------------------------------------------------------------------------
Total outstanding fixed rate long-term debt 435.0 438.4
----------------------------------------------------------------------------

Total debt and debentures outstanding (before
deferred debt transaction costs) 1,891.0 684.4

Less deferred debt transaction costs and equity
portion of Convertible Debentures (3) (9.1) (0.5)
----------------------------------------------------------------------------

Total debt and debentures outstanding (net of
deferred debt transaction costs) $ 1,881.9 $ 683.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total debt to total capitalization (1) 68.0% 36.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Please refer to the "Non-GAAP Financial Measures" section of this MD&A.

(2) Outstanding letters of credit were approximately $0.2 million which are
not included in the total credit facilities outstanding as at September
30, 2007.

(3) Long term debt in the September 30, 2007 financial statements is
$1,872.1, which consists of debt of $1,880.8 net of deferred debt
transaction costs of $8.7 million. Convertible Debentures of $10.2
million outstanding consist of $9.8 million allocated to debt and $0.4
million allocated to equity.


At September 30, 2007, Inter Pipeline's consolidated debt balance, including non-recourse debt, was $1,891.0 million. In August 2007, Corridor closed a $2,142.0 million syndicated credit facility and $40.0 million demand operating facility to finance Corridor's ongoing operations and the construction of the Corridor Expansion. Concurrently, Corridor's $520.0 million syndicated credit facility and $20 million demand operating facilities were cancelled.

As at September 30, 2007, Inter Pipeline's total debt to capitalization ratio on a consolidated basis is 68.0%. Removing the impact of Corridor's non-recourse debt of $888.0 million, Inter Pipeline's debt to capitalization ratio is 53.0%.

Of the $1,891.0 million of total debt outstanding at September 30, 2007, $1,456.0 million or 77.0% was exposed to a period ending variable interest rate, including stamping fees and commissions, of 5.29% with the remaining $435.0 million or 23.0% of fixed term debt with rates ranging from 5.85% to 6.31% (excluding Convertible Debentures).

Inter Pipeline's Convertible Debenture mature December 31, 2007. These debentures are convertible at the option of the holder into Class A units at any time prior to the close of business on December 31, 2007 at a conversion price of $6.00 per Class A unit.

Inter Pipeline's contractual obligations due for the next five years and thereafter are as follows:



Payments Due by Period
----------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
($ millions) Total one year years years years
----------------------------------------------------------------------------
Credit facilities $ 1,201.0 $ - $ 588.0 $ 613.0 $ -
Loan payable to General
Partner 379.8 - - - 379.8
Convertible Debentures 10.2 10.2 - - -
Corridor debentures 300.0 - 150.0 - 150.0
Operating leases 58.5 6.9 15.3 7.4 28.9
----------------------------------------------------------------------------
Total obligations $ 1,949.5 $ 17.1 $ 753.3 $ 620.4 $ 558.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Inter Pipeline increased its capital expenditure plans for the balance of 2007 to reflect the Corridor Expansion, and now forecasts to invest approximately $260 million in organic growth and approximately $6 million in sustaining capital projects during the remainder of 2007. As a result of the Corridor acquisition, Inter Pipeline assumed the commitment to complete the $1.8 billion Corridor Expansion.

As announced in October 2006, the NGL extraction business segment committed to spending approximately $18.5 million on its ethane production optimization project at the Empress V NGL extraction plant, of which $11.6 million is included in the projected 2007 organic growth capital.

On June 15, 2007, pursuant to the FSA, Inter Pipeline entered into a guarantee in favour of the shippers for the payment and performance of all obligations of Corridor, the General Partner or the operator (if the operator was not Inter Pipeline) other then those obligations for repayment of borrowed money or similar financial obligations incurred by these entities (except for funding certain cost overruns). The guarantee may be exercised in the event that Corridor, the General Partner or the operator (if the operator was not Inter Pipeline) fails to pay or perform such obligations for any reason. Inter Pipeline was appointed under the terms of the FSA as operator of the Corridor pipeline system.



CASH DISTRIBUTIONS TO UNITHOLDERS

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions, except per unit and %
amounts) 2007 2006 2007 2006
----------------------------------------------------------------------------
Cash provided by operating
activities $ 52.2 $ 51.7 $ 166.3 $ 157.3
Net change in non-cash working
capital 15.4 9.8 1.1 0.9
Less sustaining capital
expenditures(1) (2.4) (3.8) (7.0) (8.0)
----------------------------------------------------------------------------
Cash available for distribution(1) 65.2 57.7 160.4 150.2
Change in discretionary reserves (22.5) (17.4) (32.7) (31.8)
----------------------------------------------------------------------------
Cash distributions $ 42.7 $ 40.3 $ 127.7 $ 118.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Cash distributions per unit(2) $ 0.21 $ 0.20 $ 0.63 $ 0.59
----------------------------------------------------------------------------

Payout ratio before sustaining
capital(1) 63.1% 65.4% 76.2% 74.9%
Payout ratio after sustaining
capital(1) 65.5% 69.7% 79.6% 78.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Growth capital expenditures(1) $ 164.6 $ 11.4 $ 196.3 $ 37.2
Sustaining capital expenditures(1) 2.4 3.8 7.0 8.0
----------------------------------------------------------------------------
Total capital expenditures $ 167.0 $ 15.2 $ 203.3 $ 45.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Please refer to the "Non-GAAP Financial Measures" section of this MD&A.

(2) Cash distributions are calculated based on the number of units
outstanding at each record date.


It is the policy of the General Partner to provide unitholders with stable cash distributions over time. As a result, not all cash available for distribution is distributed to unitholders. Rather, a portion of cash available for distribution is reserved and reinvested in the business to effectively manage its capital structure, and in particular, debt levels. Annually, the General Partner makes its cash distribution decisions based on the underlying assumptions in each year's annual operating and capital budget and the long term forecast, consistent with its policy to provide unitholders with stable cash distributions.

"Cash available for distribution" is a non-GAAP financial measure that the General Partner uses in managing Inter Pipeline's business and in assessing future cash requirements that impact the determination of future distributions to unitholders. Inter Pipeline defines cash available for distribution as cash provided by operating activities less net changes in non-cash working capital and sustaining capital expenditures. The impact of net change in non-cash working capital is excluded in the calculation of "Cash available for distribution" primarily to compensate for the seasonality of working capital throughout the year. Certain Inter Pipeline revenue contracts dictate an exchange of cash that differs, on a monthly basis, from the generation of revenue. Within a 12 month calendar year there is no variation between revenue generated and cash exchanged. Inter Pipeline therefore excludes the net change in non-cash working capital in its calculation of cash available for distribution to mitigate the quarterly impact this difference has on cash available for distribution. The intent is to not skew the results of Inter Pipeline in any quarter for exchanges of cash, and to focus the results on cash that is generated in any reporting period.

In addition, in determining actual cash distributions, Inter Pipeline applies a discretionary reserve to cash available for distribution, which is designed to ensure stability of distributions over economic and industry cycles and to enable Inter Pipeline to absorb the impact of material one-time events. Therefore, not all cash available for distribution is necessarily distributed to unitholders. The reconciliation is prepared using reasonable and supportable assumptions, reflecting Inter Pipeline's planned courses of action in light of management and the board of director's judgment regarding the most probable set of economic conditions. Investors should be aware that actual results may vary, possibly materially, from such forward-looking adjustments.

The discretionary reserve increased approximately $22.5 million in the third quarter of 2007 and approximately $32.7 million year to date due to the positive 2007 business performance, primarily driven by the acquisition of Corridor, favourable commodity prices and increased volumes in the NGL extraction business, increased utilization and higher margins in the bulk liquid storage business. These prices were more favourable than anticipated and as such, did not form part of management's 2007 distribution decision. Inter Pipeline will continue to manage the discretionary reserve and future cash distributions in accordance with its policy of attempting to manage the stability of distributions through industry and economic cycles.

The tables below show Inter Pipeline's cash distributions paid relative to cash provided by operating activities and net income (loss) for the periods indicated. See also the "Outlook" section of this report and "Risk Factors" section of the December 31, 2006 AIF for further information regarding the sustainability of cash distributions.



Three Months Nine Months
Ended Ended Years Ended
September 30 September 30 December 31
----------------------------------------------------------------------------
($ millions,
except per unit
and % amounts) 2007 2007 2006 2005 2004
----------------------------------------------------------------------------
Cash provided
by operating
activities $ 52.2 $ 166.3 $ 201.6 $ 171.8 $ 133.8
Cash
distributions (42.7) (127.7) (160.8) (137.7) (115.6)
----------------------------------------------------------------------------
Excess $ 9.5 $ 38.6 $ 40.8 $ 34.1 $ 18.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three Months Nine Months
Ended Ended Years Ended
September 30 September 30 December 31
----------------------------------------------------------------------------
($ millions,
except per unit
and % amounts) 2007 2007 2006 2005 2004
----------------------------------------------------------------------------
Net income
(loss) $ 35.1 $ (148.3) $ 130.6 $ 89.3 $ 81.1
Cash
distributions (42.7) (127.7) (160.8) (137.7) (115.6)
----------------------------------------------------------------------------
Shortfall $ (7.6) $ (276.0) $ (30.2) $ (48.4) $ (34.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Cash distributions are less than cash provided by operating activities, but are in excess of net income. Cash distributions are generally more than net income because Inter Pipeline, as a flow-through-entity, distributes a cash return of capital in addition to a cash return on capital. Thus the cash distributions will generally always be higher than net income as it will include certain non-cash expenses such as depreciation, future income taxes, unrealized changes in the fair value of derivative financial instruments, etc. The overall cash distributions of Inter Pipeline are governed by the LPA, specifically section 5.2 of the LPA requires that Inter Pipeline make distributions of cash as defined in the LPA (LPA Distributable Cash) on a monthly basis, provided that Inter Pipeline has cash available for such payment (thereby excluding any cash withheld as a reserve). LPA Distributable Cash is defined to generally mean cash from operating, investing and financing activities, less certain items, including any cash withheld as a reserve that the General Partner determines to be necessary or appropriate for the proper management of Inter Pipeline and its assets. As a result of the General Partner's discretion to establish reserves under the LPA, cash distributed to unitholders is always equal to LPA Distributable Cash.



OUTSTANDING UNIT DATA

Inter Pipeline's outstanding units as at September 30, 2007 are as follows:

(millions) Class A Class B Total
----------------------------------------------------------------------------
Units outstanding 203.1 0.2 203.3
Units reserved for issuance upon exercise of
vested Unit Incentive Options 1.7 - 1.7
Units reserved for issuance upon conversion of
Convertible Debentures 1.7 - 1.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at November 6, 2007, Inter Pipeline had 203.6 million Class A units outstanding and 0.2 million Class B units outstanding, for a total of 203.8 million units outstanding.

FINANCIAL INSTRUMENTS

Inter Pipeline utilizes derivative financial instruments to manage its exposure to changes in power costs, interest rates, foreign currencies and commodity prices. Risk management policies are intended to minimize the volatility of Inter Pipeline's exposure to commodity price and foreign exchange risk and to assist with stabilizing funds from operations. Inter Pipeline attempts to accomplish this primarily through the use of financial instruments. Inter Pipeline is prohibited from using financial instruments for speculative purposes. All hedging policies are authorized and approved by the Board of Directors through Inter Pipeline's risk management policy.

Inter Pipeline has four types of financial instruments: power price swap agreements, commodity price swap agreements, foreign currency exchange contracts and interest rate swap agreements. All contracts outstanding at September 30, 2006 were being accounted for as hedges; however effective January 1, 2007, Inter Pipeline discontinued accounting for these financial instruments as hedges. As at January 1, 2007, the mark-to-market or fair value of these financial instruments were recorded as current assets or liabilities and any change in the fair value is now recognized as an unrealized change in fair value of these derivative financial instruments in the calculation of net income. When the financial instrument matures, the realized gain or loss is recorded in net income.

NGL Extraction Business

The following commodity and foreign currency swaps are used collectively to mitigate the frac-spread risk on propane plus volumes at the Cochrane extraction facility. As at September 30, 2007, Inter Pipeline had hedged approximately 38% of forecast propane plus volumes for the period October 1 to December 31, 2007 and 31% for the period January 1 to December 31, 2008 at the Cochrane NGL extraction plant at average prices of $0.40 CDN/USG and $0.45 CDN/USG, respectively. These average prices would approximate $0.40 USD/USG and $0.46 USD/USG, respectively based on the average USD/CDN forward curve as at September 30, 2007.

As at November 6, 2007, Inter Pipeline hedged approximately 43% and 34% of forecast propane plus volumes for the period October 1, 2007 to December 31, 2007 and January 1, 2008 to December 31, 2008, respectively at average prices of $0.452 CDN/USG and $0.473 CDN/USG. This average price would approximate $0.481 USD/USG and $0.512 USD/USG, respectively based on the average USD/CDN forward curve as at November 6, 2007.

Commodity Prices

NGLs

Inter Pipeline established a hedging program to sell certain quantities of NGL products at fixed prices to third party counter parties and buy related quantities of natural gas at fixed prices from third party counter parties in order to manage frac-spread risk in its NGL extraction business. Contracts outstanding at September 30, 2007 to hedge NGL revenues fixed NGL prices at average prices for the following periods:



2007
----------------------------------------------------------------------------
October to January to
Hedge Period December 2007 December 2008
----------------------------------------------------------------------------
Average Average Average Average
Price(USD/ Quantity Price(USD/ Quantity
USG) (b/d) USG) (b/d)
----------------------------------------------------------------------------
Propane $ 0.985 5,000 $ 1.067 2,997
Normal butane $ 1.147 856 $ 1.236 516
Iso butane $ 1.159 530 $ 1.270 320
Pentanes plus $ 1.645 424 $ 1.647 256
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of these contracts resulted in an unrealized loss of CDN $22.4 million (USD $22.5 million) at September 30, 2007.


Contracts outstanding at September 30, 2006 to hedge NGL revenues fixed NGL prices at average prices for the following periods:



2006
----------------------------------------------------------------------------
October to January to
Hedge Period December 2006 December 2007
----------------------------------------------------------------------------
Average Average Average Average
Price(USD/ Quantity Price(USD/ Quantity
USG) (b/d) USG) (b/d)
----------------------------------------------------------------------------
Propane $ 0.968 5,337 $ 1.043 2,241
Normal butane $ 1.160 913 $ 1.209 388
Iso butane $ 1.165 565 $ 1.217 240
Pentanes plus $ 1.639 452 $ 1.772 192
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of these contracts resulted in an unrealized loss of USD $4.1 million at September 30, 2006.

Natural Gas

Contracts outstanding at September 30, 2007 to hedge natural gas purchases fixed natural gas prices at average prices for the following periods:



2007
----------------------------------------------------------------------------
October to January to
Hedge Period December 2007 December 2008
----------------------------------------------------------------------------
Average Average Average Average
Price(CDN/ Quantity Price(CDN/ Quantity
GJ) (GJ/day) GJ) (GJ/day)
----------------------------------------------------------------------------
AECO natural gas $ 8.03 26,087 $ 7.81 17,268
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of the natural gas contracts at September 30, 2007 resulted in an unrealized loss of $13.9 million.

Contracts outstanding at September 30, 2006 to hedge natural gas purchases fixed natural gas prices at average prices for the following periods:



2006
----------------------------------------------------------------------------
October to January to
Hedge Period December 2006 December 2007
----------------------------------------------------------------------------
Average Average Average Average
Price(CDN/ Quantity Price(CDN/ Quantity
GJ) (GJ/day) GJ) (GJ/day)
----------------------------------------------------------------------------
AECO natural gas $ 8.05 27,826 $ 8.31 11,836
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of the natural gas contracts at September 30, 2006 resulted in an unrealized loss of $12.0 million.

Foreign Currency

The NGL price swap agreements are calculated based on US dollar prices. As at September 30, 2007, Inter Pipeline had the following foreign exchange contracts outstanding:



2007
----------------------------------------------------------------------------
October to January to
Hedge Period December 2007 December 2008
----------------------------------------------------------------------------
Average Average
Monthly Monthly
Notional Notional
Average Amount Average Amount
Price (USD Price (USD
(USD/CDN) thousands (USD/CDN) thousands)
----------------------------------------------------------------------------
Foreign exchange $ 0.878 $ 9,296 $ 0.918 $ 5,974
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of these contracts at September 30, 2007 resulted in an unrealized gain of $11.1 million.

As at September 30, 2006, Inter Pipeline had the following foreign exchange contracts outstanding:



2006
----------------------------------------------------------------------------
October to January to
Hedge Period December 2006 December 2007
----------------------------------------------------------------------------
Average Average
Monthly Monthly
Notional Notional
Average Amount Average Amount
Price (USD Price (USD
(USD/CDN) thousands (USD/CDN) thousands)
----------------------------------------------------------------------------
Foreign exchange $ 0.885 $ 9,819 $ 0.905 $ 4,395
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of these contracts at September 30, 2006 resulted in an unrealized gain of $0.1 million.

Power Prices

To manage its electricity price exposure at the Cochrane plant, Inter Pipeline entered into a heat rate swap contract in 2007 for 13.0 MW of electric power per hour for the period May 1, 2007 to May 31, 2007, at a price equal to 7.90 GJ/MWh multiplied by the AECO monthly index price.

In 2006, Inter Pipeline entered into a heat rate swap contract for the entire 2006 year for 14.0 MW of electric power per hour at a price equal to $6.90 GJ/MWh multiplied by the AECO monthly index price.

Conventional Oil Pipelines Business

Power Prices

Inter Pipeline entered into the following electricity price swap agreements:



2007 2006
----------------------------------------------------------------------------
Average Average Average Average
Price Quantity Price Quantity
Hedge Period (CDN/MWh) (MW) (CDN/MWh) (MW)
----------------------------------------------------------------------------
2006 - - $ 49.50 5.0
2007 $ 52.75 5.0 $ 52.75 5.0
2008 $ 54.00 2.5 $ 54.00 2.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The mark-to-market value of these contracts at September 30, 2007 is an unrealized gain of $0.9 million compared to an unrealized gain of $0.9 million at September 30, 2006.

Corporate

Interest Rates

A portion of the outstanding variable rate debt at September 30, 2007 is subject to a continuing swap agreement, in which the floating rate bank debt has been exchanged for an average fixed rate as follows:



2007 2006
----------------------------------------------------------------------------
Fixed Rate Per Fixed Rate Per
Annum Notional Annum Notional
(excluding Balance (excluding Balance
applicable (CDN applicable (CDN
Maturity date margin) millions) margin) millions)
----------------------------------------------------------------------------
September 30, 2006 - - 5.41% $ 15.0
December 30, 2011 6.30% $ 30.0 6.30% $ 31.0
December 31, 2011 6.31% $ 15.0 6.31% $ 15.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The fair market value of the remaining portion of the interest rate swap agreements aggregates to an unrealized loss of $2.7 million at September 30, 2007 compared to an unrealized loss of $4.3 million at September 30, 2006. Two interest rate swaps outstanding totaling $45.0 million are set to expire in December 2011. The notional principal balance of the $30.0 million interest rate swap is reduced by $1.0 million on December 31 of each year for the term of the arrangement.

The following Corridor debentures at September 30, 2007 are also subject to interest rate swap agreements, in which the fixed rate debentures have been exchanged for an average variable rate.



2007 2006
----------------------------------------------------------------------------
Fixed Rate Per Fixed Rate Per
Annum Notional Annum Notional
(excluding Balance (excluding Balance
applicable (CDN applicable (CDN
Maturity date margin) millions) margin) millions)
----------------------------------------------------------------------------
February 2, 2010 4.240% $ 150.0 - -
February 2, 2015 5.033% $ 150.0 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The fair market value of the remaining portion of the Corridor interest rate swap agreements aggregates to an unrealized loss of $5.5 million at September 30, 2007.

TRANSACTIONS WITH RELATED PARTIES

No revenue was earned from related parties in the quarter ended September 30, 2007 or 2006.

Upon acquisition of the General Partner in 2002, Pipeline Assets Corp. (PAC), the sole shareholder of the General Partner, assumed the obligations of the former general partner of Inter Pipeline under a support agreement. The support agreement obligates the affiliates controlled by PAC to provide certain personnel and services if requested by the General Partner, to fulfill its obligations to administer and operate Inter Pipeline's business. Such services are incurred in the normal course of operations and amounts paid for such services are at cost for the services provided. No amounts have been paid under the terms of the support agreement since PAC acquired its interests in the General Partner.

The General Partner's 0.1% interest in Inter Pipeline, represented by Class B units, is controlled by PAC. The General Partner is a wholly owned subsidiary of PAC, a corporation controlled solely by the Chairman of the Board of the General Partner. Certain officers and directors of the General Partner have non-voting shares in PAC that entitle them to dividends. The entitlement to retain these shares of PAC and to receive dividends is tied, in part, to the continuing employment or service as a director or officer of the General Partner. These officers and directors of the General Partner received a total of $0.2 million in dividends during the quarter from PAC pursuant to their ownership of non-voting shares (Q3 2006 - $0.2 million). Year to date dividends paid to these officers and directors by PAC in 2007 were $2.1 million (YTD 2006 - $0.6 million)

Inter Pipeline entered into a loan agreement with the General Partner for $379.8 million. At September 30, 2007, interest payable to the General Partner on the loan was $9.9 million (YTD 2006 - $9.9 million).

Amounts due to/from the General Partner and its affiliates related to services are non-interest bearing and have no fixed repayment terms with the exception of the loan agreement with the General Partner. At September 30, 2007, there were amounts owed to the General Partner by Inter Pipeline of $1.0 million (September 30, 2006 - $0.5 million).

See the Corporate section of RESULTS OF OPERATIONS for detail of management and acquisition fees paid to the General Partner.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

With the exception of the internal controls related to Corridor, management has made no material changes to the design of Inter Pipeline's internal controls over financial reporting in Inter Pipeline's existing business segments during the third quarter of the 2007 fiscal year.

Inter Pipeline acquired Corridor effective June 15, 2007. Where possible, Corridor has adopted Inter Pipeline's existing business processes and internal controls over financial reporting.

For business processes unique to Corridor, management is committed to completing the design of internal controls and integrating the accounting and reporting systems before the end of the year.

CRITICAL ACCOUNTING ESTIMATES

With the exception of new accounting estimates related to Corridor discussed below, there were no changes in Inter Pipeline's critical accounting estimates as disclosed in its annual 2006 MD&A that affected the disclosure or the accounting for its operations for the quarter ended September 30, 2007.

Property, Plant and Equipment (PP&E)

Cost of Corridor pipeline facilities and equipment includes all direct expenditures for system construction, expansion and betterments, and an allocation of overhead costs. Depreciation of regulated assets is recorded on a straight line basis on plant in service at rates set out in the terms of the FSA with shippers. Depreciation rates require the use of management estimates of the useful lives of assets. The cost of depreciable property retired, together with removal costs, less salvage, is charged to accumulated depreciation.

Asset Retirement Obligation

The accounting for asset retirement obligations represents the legal obligation associated with the retirement of a tangible long-lived asset resulting from the acquisition, construction or development and/or the normal operation of this long-lived asset. The retirement of a long-lived asset includes its other than temporary removal from service, including its sale, abandonment, recycling or disposal in some manner but not its temporary idling. The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The liability accretes to its full value over time through charges to income, or until Inter Pipeline settles the obligation. In addition, an amount equal to the discounted asset retirement cost is capitalized as part of the cost of the related long-lived asset and depreciated over the asset's useful life.

The PP&E of Corridor consist primarily of underground pipelines and above ground equipment and facilities. No amount has been recorded for asset retirement obligations relating to these assets as it is not possible to reasonably estimate the fair value of the liability due to the indeterminate timing and scope of the asset retirements. As the timing and scope of retirements become determinable for certain or all assets, the fair value of the liability and the cost of retirement will be recorded at that time. Pipeline operations will be charged with any costs associated with the future site restoration of the pipeline assets. The potential costs of future site restoration will be a function of several factors, including regulatory requirements at the time of abandonment, the size of the pipeline and the pipeline's location. Abandonment requirements can vary considerably, ranging from emptying the pipeline, to removal of the pipeline and reclamation of the right-of-way.

Goodwill

Goodwill was created upon the acquisition of Corridor which represents the excess of the purchase price over the fair value of the net identifiable assets of operations acquired. Goodwill is carried at initial cost less any future write-down for impairment. If the carrying value of Corridor exceeds its fair value, an impairment loss would be recognized to the extent that the carrying amount of the goodwill exceeds its fair market value. During each fiscal year and as economic events dictate, management will review the valuation of the goodwill, taking into consideration any events or circumstances which might have impaired the fair value. Inter Pipeline intends to assess the fair value of this goodwill amount for impairment at least annually by discounting the projected future cash flows generated by these assets at Inter Pipeline's cost of capital. If it is determined that the fair value of the future cash flows is less than the book value of the assets at the time of assessment, an impairment amount will be determined by deducting the fair value of the cash flows from the book values and applying it against the book balance of goodwill.

NEW ACCOUNTING POLICIES

Future

International Financial Reporting Standards (IFRS)

In January 2007, the Accounting Standards Board (AcSB) adopted a new strategic plan for financial reporting in Canada, "Accounting Standards in Canada: New Directions." For publicly reported enterprises, the AcSB will converge Canadian GAAP with IFRS over a period from 2007 to 2011. After this time period, Canadian GAAP will be replaced by IFRS and cease to exist as a separate, distinct basis of financial reporting for publicly accountable enterprises. Canada will continue to maintain its own standard-setting capability to carry out the strategic direction outlined above, although roles, structures, processes and resources may evolve.

Capital Disclosures

Financial Instruments - Disclosures and Presentation

On December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535 "Capital Disclosures", Handbook Section 3862 "Financial Instruments - Disclosures" and Handbook Section 3863 "Financial Instruments - Presentation". Inter Pipeline will adopt these standards on January 1, 2008. The new standards require the disclosure of quantitative and qualitative information that is intended to provide users of the financial statements with additional disclosures on Inter Pipeline's management of capital and on the risks associated with financial instruments. Inter Pipeline will be reviewing the impact of these standards on its financial statements in the coming months.

2007

Corridor Accounting Policies

Regulation

Corridor pipeline operations are governed by contractual arrangements with shippers, and are regulated by the EUB, an independent regulatory authority. Inter Pipeline's rates are cost-of-service based and are determined using formulas embedded in the FSA with shippers.

In accordance with GAAP, certain assets and liabilities, revenues and expenses of Corridor pipeline operations qualify for selected accounting treatments that differ from those used by entities not subject to rate regulation. Regulatory assets represent future revenues associated with certain costs, incurred in the current period or in prior periods that are expected to be recovered from customers in future periods in accordance with the FSA. Regulatory liabilities represent future reductions or limitations of increases in revenues associated with amounts that are expected to be refunded to customers in accordance with the FSA.

The timing of the recognition of the following items, as a result of regulation, may differ from that otherwise expected using Canadian GAAP for entities not subject to rate regulation: a regulatory asset may not be recorded as an asset, but would be charged to the income statement as an unrealized change in the fair value of derivative instruments; $7.5 million of debt transaction costs may have been recorded within long-term debt instead of to property, plant and equipment; a regulatory liability may be recorded as accounts payable and accrued liabilities instead of deferred revenue. Inter Pipeline has not recognized future income taxes of approximately $19 million as a result of using the taxes payable method for its regulated operations, while this would be recognized under GAAP in the absence of rate regulation.

Regulatory Asset

Corridor utilizes interest rate derivatives to manage its interest rate risk. Gains or losses arising on the interest rate swap contracts are recoverable from the shippers, therefore the unrealized portion has been recorded as a regulatory asset.

Property, Plant and Equipment and Capitalized Interest

Pipeline linefill and tank working inventory for the Corridor pipeline system represents the petroleum based product purchased for the purpose of charging the pipeline system and partially filling the petroleum product storage tanks with appropriate volume of petroleum products to enable commercial operation of the facilities and pipeline. These volumes of petroleum product will be recovered upon the ultimate retirement and decommissioning of the pipeline system at which time the proceeds from the sale of the linefill will be used to fund the cost of any asset retirement obligations. To the extent the asset retirement obligations exceed the value of the linefill, Inter Pipeline and its affiliates will be obligated to fund the excess. To the extent the value of the linefill exceeds the asset retirement obligation; the funds shall be refunded to the shippers.

Linefill is carried at cost less accumulated depreciation. Cost includes all direct expenditures for acquiring the petroleum based products. Depreciation is calculated on the same basis as property, plant and equipment.

Interest costs relating to the Corridor expansion project are capitalized as part of property, plant and equipment. Capitalization of interest ceases when the capital asset is substantially complete and ready for its intended productive use.


Revenue Recognition

Revenues are recorded when products are delivered and adjusted according to terms prescribed by the FSA with the shippers. Under the terms of the FSA, Corridor's revenues are determined by an agreed upon annual revenue requirement formula which allows for the recovery of prescribed expenditures and costs associated with the operation of the Corridor pipeline system, as well as a rate of return on the Rate Base (as defined in the FSA) determined with reference to the long-term bond yield reported by the Bank of Canada. For the purposes of periodic interim reporting, Corridor and the shippers have agreed to estimate the annual revenue requirements to be invoiced by Corridor and paid by the shippers. To the extent these estimates are different from the annual revenue requirement Inter Pipeline records a surplus or deficiency charge to adjust its net income to match the returns allowed for in the annual revenue requirement formula.

Income Taxes

In accordance with the terms of the FSA and consistent with generally accepted accounting principles for rate-regulated entities, Inter Pipeline accounts for income taxes using the taxes payable method and therefore future income taxes related to temporary differences are not recorded. The taxes payable method is followed as there is reasonable expectation that all future income taxes will be recovered in rates when they become payable.

Changes in Accounting Policies

Concurrent with the adoption of section 3865, Inter Pipeline elected to discontinue hedge accounting for derivative financial instruments outstanding at January 1, 2007 that had qualified as effective cash flow hedges in prior periods. Accordingly, for the three months ended September 30, 2007, Inter Pipeline has recognized the change in fair value of the related derivative financial instruments in net income and has transferred unrealized gains and losses from accumulated other comprehensive income (AOCI) to net income related to contracts settled in the period.

Comprehensive Income

Section 1530 introduces comprehensive income, which consists of net income and other comprehensive income (OCI). OCI comprises revenues, expenses, gains and losses that, in accordance with GAAP, are recognized in comprehensive income, but excluded from net income. Inter Pipeline's consolidated financial statements now include a Statement of Comprehensive Income, which includes the components of comprehensive income.

The cumulative changes in OCI are included in AOCI, which is presented as a new category within partners' equity in the Consolidated Balance Sheet. The cumulative foreign currency translation balance, formerly presented as a separate category within partners' equity, is now included in AOCI. Inter Pipeline's consolidated financial statements now include a Statement of Accumulated Other Comprehensive Income, which provides the continuity of the AOCI balance.

Effective January 1, 2007, AOCI was comprised of the changes in the cumulative foreign currency translation balance and the unrealized gains and losses on derivatives previously designated as cash flow hedges.

The adoption of comprehensive income resulted in an opening adjustment to AOCI of $8.0 million at January 1, 2007 to record the effective portion of the fair value of derivative financial instruments previously designated as cash flow hedges.

The December 31, 2006 year end accumulated foreign currency translation adjustment balance of $30.8 million was reclassified to AOCI.

Financial Instruments - Recognition and Measurement

CICA handbook section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities, financial derivatives and certain non-financial derivatives. It requires that financial assets and financial liabilities, including derivatives and certain non-financial derivatives, be recognized on the consolidated balance sheet when a contract or certain contractual provisions meet the definition of a financial instrument. Under this standard, all financial instruments, including derivatives, are required to be measured at fair value upon initial recognition except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities", as defined by the standard.

Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net income. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in OCI. Financial assets "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost using the effective interest method of amortization. Investments in equity instruments classified as "available-for-sale" that do not have a quoted market price in an active market are measured at cost. Section 3855 also provides an entity the option to designate a financial instrument as held-for-trading (the fair value option) on its initial recognition or upon adoption of the standard, provided certain criteria are met.

Financial and non-financial derivative instruments are classified as "held-for-trading" and recorded on the consolidated balance sheet at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in the fair values of derivative instruments are recognized in net income with the exception of the effective portion of derivatives designated as cash flow hedges or hedges of foreign currency exposure of a net investment in a self-sustaining foreign operation, which are recognized in OCI.

Section 3855 requires the use of the effective interest method of amortization for any transaction costs or fees, premiums or discounts earned or incurred for financial instruments measured at amortized cost. In addition, an entity must select an accounting policy of either expensing transaction issue costs as incurred or applying them against the carrying value of the related asset or liability.

Inter Pipeline classified its financial instruments as follows. Cash is designated as "held-for-trading" and is measured at carrying value, which approximates fair value due to the short-term nature of these instruments. The majority of accounts receivable are designated as "loans and receivables". Cash distributions payable, the majority of accounts payable and accrued liabilities, certain components of deferred revenue and long-term debt are designated as "other liabilities". Derivative financial instruments are classified as "held-for-trading" unless designated for hedge accounting.

Accordingly, at January 1, 2007, Inter Pipeline recognized a net liability of $8.0 million representing the fair market value of derivative financial instruments that qualified and were designated as effective cash flow hedges in prior periods, with the offset to AOCI. There were no other opening transition adjustments to financial assets and financial liabilities as a result of these classifications with the exception of those made to long-term debt and debt transaction costs, as outlined in the paragraph below. The estimated fair values of financial instruments have been determined based on Inter Pipeline's assessment of available market information, appropriate valuation methodologies and third party indications. Fair values are generally based on observable market prices with the exception of the NGL swaps. Obtaining market prices for NGL swaps is difficult as these are relatively inactive markets. Therefore, these estimates may not necessarily be indicative of the amounts that could be realized or settled in a current market transaction and the differences may be material.

Inter Pipeline adopted a policy of capitalizing long-term debt transaction costs, premiums and discounts within long-term debt. Accordingly, at January 1, 2007, $1.5 million of deferred financing charges were reclassified to long-term debt. These costs capitalized within long-term debt will be amortized using the effective interest method. Previously, Inter Pipeline deferred these costs and amortized straight-line over the life of the related long-term debt. The adoption of the effective interest method of amortization resulted in a $0.1 million credit to opening retained earnings.

Impact Upon Adoption of Sections 1530, 3855 and 3865

The net effect to Inter Pipeline's financial statements at January 1, 2007 resulting from the above-mentioned changes is as follows:



January 1
2007
----------------------------------------------------------------------------
Deferred financing charges $ (1,541)
Fair value of derivative financial instruments (net) (7,971)
Long-term debt 1,628
Accumulated other comprehensive income 7,971
Partners' equity (87)
----------------------------------------------------------------------------
$ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


BUSINESS RISKS

Risks Associated with Corridor

Corridor is subject to a number of risks, including, without limitation, risks associated with: Inter Pipeline failing to achieve the full benefits of the acquisition, including the Corridor Expansion; competition from other pipelines; an inability to market excess capacity on the Corridor pipeline system; the operations of Corridor being substantially dependent upon three principal shippers; Inter Pipeline's operations being subject to common hazards of the oil transportation business, including disruption by natural disasters or other events; regulatory intervention and changes in legislation; environmental costs and liabilities; the effect of the legislation or proposed legislation developed to limit or reduce greenhouse gas emissions; the costs of abandonment of Corridor; risks associated with illiquidity or failure of the market for commercial paper; risks associated with fluctuations in interest rates as a result of the use of floating rate debt and certain interest rate swap contracts entered into by Corridor; and various other risks which are common to Inter Pipeline's other pipeline systems, as disclosed in Inter Pipeline's December 31, 2006 AIF and MD&A. See the BUSINESS RISKS section of Inter Pipeline's December 31, 2006 annual MD&A or AIF for further discussion on risks common to Inter Pipeline's pipeline systems, including Corridor.

The Corridor Expansion is subject to a number of risks, including, without limitation, risks associated with the costs to complete the Corridor Expansion varying considerably from the current and forecast costs; the success of the Corridor Expansion being dependent upon the retention of key project execution and construction personnel; risks associated with potential labour disturbances and strikes of the construction labour force; risks associated with natural disasters, inclement weather, design issues or other events affecting construction schedules; risks associated with contractor and key supplier financial stability; the occurrence of any major environmental or safety incidents during construction of the Corridor Expansion; the lack of availability of sufficient capital, whether through borrowings or equity issuances, to fund the Corridor Expansion or other required expenditures.

Inter Pipeline's pipeline systems, including Corridor, have risks common to all of Inter Pipeline's business segments as disclosed in Inter Pipeline's December 31, 2006 AIF and MD&A. See the BUSINESS RISKS section of Inter Pipeline's December 31, 2006 annual MD&A or Inter Pipeline's AIF for further discussion on risks common to all of Inter Pipeline's business segments.

NON-GAAP FINANCIAL MEASURES

Certain financial measures referred to in this MD&A, namely "cash available for distribution", "enterprise value", "funds from operations", "funds from operations per unit", "payout ratio after sustaining capital", "payout ratio before sustaining capital", "growth capital expenditures", "sustaining capital expenditures", "total debt to total capitalization" and "working capital" are not measures recognized by GAAP. These non-GAAP financial measures do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities. Investors are cautioned that these non-GAAP financial measures should not be construed as alternatives to other measures of financial performance calculated in accordance with GAAP.

The following non-GAAP financial measures are provided to assist investors with their evaluation of Inter Pipeline, including their assessment of its ability to generate cash and fund the monthly distributions. Management considers these non-GAAP financial measures to be important indicators in assessing its performance.

Cash available for distribution includes cash provided by operating activities less net changes in non-cash working capital and sustaining capital expenditures. This measure is used by the investment community to calculate the annualized yield of the units.

Enterprise value is calculated by multiplying the period-end closing unit price by the total number of units outstanding and adding debt before deferred transaction costs related to debt plus the debt portion of the Convertible Debentures. This measure, in combination with other measures, is used by the investment community to assess the overall market value of the business. Enterprise value is calculated as follows:



As at September 30
----------------------------------------------------------------------------
($ millions, except per unit amounts) 2007 2006
----------------------------------------------------------------------------
Closing unit price $ 9.50 $ 10.24
Total number of units outstanding 203.3 201.4
----------------------------------------------------------------------------
1,931.5 2,062.0
Long-term debt 1,880.8 671.8
Convertible Debentures (debt portion) 9.8 12.1
----------------------------------------------------------------------------
Enterprise value $ 3,822.1 $ 2,745.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Funds from operations are reconciled from the components of net income as noted below and are expressed before changes in non-cash working capital. This measure, together with other measures, is used by the investment community to assess the source and sustainability of cash distributions.



Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2007 2006 2007 2006
----------------------------------------------------------------------------
Operating revenue $ 284.4 $ 256.3 $ 834.2 $ 735.9
Shrinkage gas expense (96.1) (100.3) (341.9) (311.9)
Cash operating expense (89.6) (76.6) (242.4) (211.8)
Cash general and administrative
expense (8.6) (6.4) (24.5) (18.7)
Management and acquisition fees
expense (1.8) (1.4) (15.4) (4.3)
Credit facility interest expense (10.9) (3.9) (19.3) (11.4)
Loan payable to General Partner
interest expense (5.8) (5.8) (17.3) (17.3)
Interest on debentures (3.7) (0.3) (4.9) (1.1)
Current income taxes (0.3) (0.1) (1.1) (1.2)
----------------------------------------------------------------------------
Funds from operations $ 67.6 $ 61.5 $ 167.4 $ 158.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Funds from operations per unit are calculated on a weighted average basis using basic units outstanding during the period.

Growth capital expenditures are generally defined as expenditures that are related to system capacity expansions, business growth, volume or revenue increases and/or sustainable operating efficiencies. This measure is used by the investment community to assess the extent of discretionary capital spending.

Sustaining capital expenditures are generally defined as new assets that provide support to operations and/or expenditures that involve an enhancement to existing assets without the associated benefits characteristic of growth capital expenditures. This measure is used by the investment community to assess the extent of non-discretionary capital spending.



Three Months Ended September 30
2007 2006
----------------------------------------------------------------------------
($ millions) Growth Sustaining Total Total
----------------------------------------------------------------------------
NGL extraction $ 2.3 $ 0.8 $ 3.1 $ 3.0
Conventional oil pipelines 1.2 0.3 1.5 2.4
Oil sands transportation 153.2 0.5 153.7 1.2
Bulk liquid storage 7.9 0.8 8.7 8.6
----------------------------------------------------------------------------
Total $ 164.6 $ 2.4 $ 167.0 $ 15.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Nine Months Ended September 30
2007 2006
----------------------------------------------------------------------------
($ millions) Growth Sustaining Total Total
----------------------------------------------------------------------------
NGL extraction $ 2.8 $ 2.3 $ 5.1 $ 5.5
Conventional oil pipelines 5.3 2.1 7.4 13.7
Oil sands transportation 169.5 0.5 170.0 10.9
Bulk liquid storage 18.7 2.1 20.8 15.1
----------------------------------------------------------------------------
Total $ 196.3 $ 7.0 $ 203.3 $ 45.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Payout ratio after sustaining capital is calculated by expressing cash distributions declared for the period as a percentage of cash available for distribution after deducting sustaining capital expenditures for the period. This measure, in combination with other measures, is used by the investment community to assess the sustainability of the current cash distributions.

Payout ratio before sustaining capital is calculated by expressing cash distributions paid for the period as a percentage of cash available for distribution before deducting sustaining capital. These measures, in combination with other measures, are used by the investment community to assess the sustainability of the current cash distributions.

Total debt to total capitalization is calculated by dividing the sum of long-term debt, Convertible Debentures and the conversion feature on Convertible Debentures by the sum of long-term debt, Convertible Debentures and total partners' equity. This measure, in combination with other measures, is used by the investment community to assess the financial strength of the entity.

Working capital is calculated by subtracting current liabilities from current assets excluding cash, fair value of derivative financial instruments and current portion of Convertible Debentures.

ADDITIONAL INFORMATION

Additional information relating to Inter Pipeline, including Inter Pipeline's AIF, is available on SEDAR at www.sedar.com.

Dated at Calgary, Alberta this 8th day of November, 2007.

Disclaimer

This MD&A highlights significant business results and statistics for Inter Pipeline's three and nine month periods ended September 30, 2007. This MD&A contains certain forward-looking statements or information (collectively referred to in this note as "forward-looking statements") within the meaning of applicable securities legislation. Forward-looking statements often contain terms such as "may", "will", "should", "anticipate", "expect", "continue", "estimate", "believe", "project", and similar words suggesting future outcomes or statements regarding an outlook. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the expectations, plans or intentions upon which they are based will occur. Inter Pipeline in no manner represents that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements herein. Such information, although considered reasonable by the General Partner at the time of preparation, may later prove to be incorrect and actual results may differ materially from those anticipated in the forward-looking statements made.

By their nature, forward-looking statements are subject to various risks, uncertainties and other factors, which are beyond Inter Pipeline's control, including, but not limited to: risks associated with operations, such as Inter Pipeline's ability to successfully implement its strategic initiatives and achieve expected benefits; the status, credit risk and continued existence of customers having contracts with Inter Pipeline and its subsidiaries; availability of energy commodities; volatility of and assumptions regarding prices of energy commodities; competitive factors, pricing pressures and supply and demand in the natural gas and oil transportation, ethane transportation and NGL extraction and storage industries; assumptions based upon Inter Pipeline's current guidance; fluctuations in currency and interest rates; the ability to access sufficient capital from internal and external sources; product supply and demand; risks inherent in Inter Pipeline's Canadian and foreign operations; risks of war, hostilities, civil insurrection and instability affecting countries in which Inter Pipeline and its subsidiaries operate; severe weather conditions; terrorist threats; risks associated with technology; Inter Pipeline's ability to generate sufficient cash flow from operations to meet its current and future obligations; Inter Pipeline's ability to access external sources of debt and equity capital; general economic and business conditions; the timing and costs of construction projects; Inter Pipeline's ability to make capital investments and the amounts of capital investments; changes in laws and regulations, including environmental, regulatory and taxation laws, and the interpretation of such changes to laws and regulations; the risks associated with existing and potential future lawsuits and regulatory actions against Inter Pipeline and its subsidiaries; increases in maintenance, operating or financing costs; availability of adequate levels of insurance; political and economic conditions in the countries in which Inter Pipeline and its subsidiaries operate; difficulty in obtaining necessary regulatory approvals; and such other risks and uncertainties described from time to time in Inter Pipeline's reports and filings with the Canadian securities authorities. Readers are cautioned that the foregoing list of important factors is not exhaustive. See also the section entitled BUSINESS RISKS in this MD&A and the section entitled "Risk Factors" included in Inter Pipeline's AIF, which can be reviewed at www.sedar.com.

Except to the extent required by applicable securities laws and regulations, Inter Pipeline assumes no obligation to update or revise forward-looking statements made herein or otherwise, whether as a result of new information, future events, or otherwise. The forward-looking statements contained in this document are expressly qualified by this cautionary note.

Only persons who are residents of Canada, or if partnerships, are Canadian partnerships, in each case for purpose of the Income Tax Act (Canada) are entitled to purchase and own Class A units and 10% Convertible Extendible Unsecured Subordinated Debentures of Inter Pipeline.

Inter Pipeline's Statement of Corporate Governance is included in Inter Pipeline's AIF.

The MD&A has been reviewed and approved by the Audit Committee and the Board of Directors of the General Partner. All amounts are stated in Canadian dollars unless otherwise specified.



Consolidated Balance Sheets

As at As at
September 30 December 31
(unaudited) (thousands of dollars) 2007 2006
----------------------------------------------------------------------------
(restated -
see note 2)
ASSETS
Current Assets
Cash (note 16) $ 33,720 $ 16,294
Accounts receivable 125,710 131,520
Fair value of derivative financial
instruments (note 15) 10,114 -
Prepaid expenses and other deposits 5,218 13,032
----------------------------------------------------------------------------
Total Current Assets 174,762 160,846

Fair value of derivative financial
instruments (note 15) 1,915 -
Regulatory asset (notes 2 and 3) 5,447 -
Intangible assets (note 5) 361,540 374,583
Property, plant and equipment (note 6) 2,643,035 1,545,341
Deferred financing charges (note 2) - 1,541
Goodwill (note 3) 203,503 74,803
----------------------------------------------------------------------------
Total Assets $ 3,390,202 $ 2,157,114
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Cash distributions payable (note 7) $ 14,232 $ 14,121
Accounts payable and accrued
liabilities (note 10) 173,281 123,593
Fair value of derivative financial
instruments (note 15) 32,875 -
Deferred revenue 12,908 10,108
Current portion of Convertible Debentures 9,785 11,697
----------------------------------------------------------------------------
Total Current Liabilities 243,081 159,519

Long-term debt (note 8) 1,872,155 674,800
Fair value of derivative financial
instruments (note 15) 11,591 -
Asset retirement obligation (note 9) 22,302 20,530
Environmental liabilities 10,859 10,259
Pension liabilities 3,114 3,442
Long-term incentive plan (note 12) 2,342 1,337
Future income taxes (note 10) 332,222 88,839
----------------------------------------------------------------------------
Total Liabilities 2,497,666 958,726
----------------------------------------------------------------------------

Commitments (notes 3, 15 and 17)

Partners' Equity
Conversion feature on Convertible Debentures 429 516
Partners' equity (note 11) 901,230 1,167,093
Accumulated other comprehensive income (9,123) 30,779
----------------------------------------------------------------------------
Total Partners' Equity 892,536 1,198,388
----------------------------------------------------------------------------
Total Liabilities and Partners' Equity $ 3,390,202 $ 2,157,114
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


Consolidated Statements of Partners' Equity

Nine Months Ended September 30
(unaudited) (thousands of dollars) 2007 2006
----------------------------------------------------------------------------
Class A Class B
Limited Unlimited
Liability Liability
Partnership Partnership
Units Units Total Total
----------------------------------------------------------------------------

Balance, beginning of
period $ 1,165,928 $ 1,165 $ 1,167,093 $ 1,042,074
Opening adjustment on
adoption of new
accounting standards
(note 2) 87 - 87 -
Net (loss) income for
the period (148,153) (148) (148,301) 102,356
Cash distributions
declared (note 7) (127,535) (128) (127,663) (118,424)
Issuance of
Partnership units
(notes 11 and 12)
Conversion of
Debentures 1,999 2 2,001 4,013
Issued under
Distribution
Reinvestment and
Optional Unit
Purchase Plan 6,567 7 6,574 4,192
Issued under Unit
Incentive Option Plan 1,430 2 1,432 2,104
Equity issuances, net
of issue costs - - - 142,231
Unit incentive options
(note 12) 7 - 7 154
----------------------------------------------------------------------------
Balance, end of period $ 900,330 $ 900 $ 901,230 $ 1,178,700
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Accumulated Other Comprehensive Income (Loss)

Nine Months Ended September 30
(unaudited) (thousands of dollars) 2007 2006
----------------------------------------------------------------------------
(restated -
see note 2)
Balance, beginning of period $ 30,779 $ (9,706)
Opening adjustment on adoption of new
accounting standards (note 2) (7,971) -
Other comprehensive (loss) income for
the period (31,931) 11,742
----------------------------------------------------------------------------
Balance, end of period $ (9,123) $ 2,036
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


Consolidated Statements of Net Income (Loss)

Three Months Ended Nine Months Ended
(unaudited) September 30 September 30
(thousands of dollars) 2007 2006 2007 2006
----------------------------------------------------------------------------

REVENUES
Operating revenue $ 284,456 $ 256,344 $ 834,212 $ 735,864
----------------------------------------------------------------------------

EXPENSES
Shrinkage gas 96,120 100,251 341,901 311,937
Operating 90,466 77,495 244,783 212,908
Depreciation and
amortization (note 13) 22,803 17,070 60,183 52,144
Financing charges (note 14) 20,687 10,146 41,924 29,955
General and administrative 8,963 6,641 25,109 19,300
Unrealized change in fair
value of derivative
financial instruments
(note 15) 8,862 - 24,128 -
Management fee to
General Partner 1,801 1,401 4,503 3,885
Acquisition fee to
General Partner (note 3) - - 10,883 376
Unit incentive options
(note 12) - 23 7 154
----------------------------------------------------------------------------
249,702 213,027 753,421 630,659
----------------------------------------------------------------------------

----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 34,754 43,317 80,791 105,205
----------------------------------------------------------------------------

Provision for income taxes
(note 10)
Current income tax expense 338 95 1,130 1,171
Future income tax
(recovery) expense (681) 768 227,962 1,678
----------------------------------------------------------------------------
(343) 863 229,092 2,849
----------------------------------------------------------------------------

----------------------------------------------------------------------------
NET INCOME (LOSS) $ 35,097 $ 42,454 $(148,301) $ 102,356
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net income (loss) per unit
(note 11)
Basic and Diluted $ 0.18 $ 0.21 $ (0.73) $ 0.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended Nine Months Ended
(unaudited) September 30 September 30
(thousands of dollars) 2007 2006 2007 2006
----------------------------------------------------------------------------
(restated - (restated -
see note 2) see note 2)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 35,097 $ 42,454 $(148,301) $ 102,356
----------------------------------------------------------------------------

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized (loss) gain on
translating financial
statements of self-
sustaining foreign
operations (14,435) 3,392 (37,041) 11,742
Transfer of gains and
losses on derivatives
previously designated
as cash flow hedges to
net income 736 - 5,110 -
----------------------------------------------------------------------------
(13,699) 3,392 (31,931) 11,742
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 21,398 $ 45,846 $(180,232) $ 114,098
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


Consolidated Statements of Cash Flows


Three Months Ended Nine Months Ended
(unaudited) September 30 September 30
(thousands of dollars) 2007 2006 2007 2006
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income (loss) $ 35,097 $ 42,454 $(148,301) $ 102,356
Depreciation and
amortization 22,803 17,070 60,183 52,144
Amortization of deferred
financing charges - 53 - 159
Amortization of transaction
costs on long-term debt 279 - 449 -
Unit incentive options - 23 7 154
Non-cash operating expense 874 933 2,357 1,133
Non-cash general and
administrative expense 368 225 648 591
Unrealized change in fair
value of derivative
financial instruments 8,862 - 24,128 -
Future income tax (recovery)
expense (681) 768 227,962 1,678
----------------------------------------------------------------------------
Funds from operations 67,602 61,526 167,433 158,215
Net change in non-cash
working capital (note 16) (15,413) (9,804) (1,135) (902)
----------------------------------------------------------------------------
Cash provided by operating
activities 52,189 51,722 166,298 157,313
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Expenditures on property,
plant and equipment (167,048) (15,187) (203,307) (45,182)
Proceeds on sale of assets - 59 41 87
Acquisition of Corridor
pipeline system (note 3) (25) - (302,227) -
Assumption of cash on the
acquisition of Corridor
pipeline system (note 3) - - 3,012 -
Decrease in funds held in
trust - - - 37,851
Acquisition of TLG - (6) - (37,732)
Assumption of cash on the
acquisition of TLG - - - 303
Acquisition of Simon Storage - - - (187)
Net change in non-cash
investing working capital
(note 16) 43,387 (1,317) 47,907 5,037
----------------------------------------------------------------------------
Cash used in investing
activities (123,686) (16,451) (454,574) (39,823)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Cash distributions declared
(note 7) (42,664) (40,253) (127,663) (118,424)
Increase (repayment) of
long-term debt 117,165 15,000 428,023 (134,000)
Transaction costs on
long-term debt (125) - (1,383) -
Issuance of Partnership
units, net of issue costs - - - 142,231
Cash received under
Distribution Reinvestment
and Optional Unit
Purchase Plan 2,509 1,534 6,574 4,192
Issuance of units under Unit
Incentive Option Plan 395 363 1,432 2,104
Issuance of Class B units
upon Debenture conversions 1 1 2 4
Net change in non-cash
financing working capital
(note 16) 34 1,034 111 2,098
----------------------------------------------------------------------------
Cash provided by (used in)
financing activities 77,315 (22,321) 307,096 (101,795)
----------------------------------------------------------------------------

Effect of foreign currency
translation on foreign
denominated cash (539) 98 (1,394) 577

Increase in cash 5,279 13,048 17,426 16,272
Cash, beginning of period 28,441 20,749 16,294 17,525
----------------------------------------------------------------------------
Cash, end of period $ 33,720 $ 33,797 $ 33,720 $ 33,797
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.


Inter Pipeline Fund
Notes To Interim Consolidated Financial Statements (unaudited)
September 30, 2007
(tabular amounts in thousands of dollars, except per unit amounts)


1. Summary of Significant Accounting Policies

These unaudited interim consolidated financial statements are presented in accordance with Canadian generally accepted accounting principles ("GAAP") and have been prepared by management following the same accounting policies and methods of computation as the consolidated financial statements for the year ended December 31, 2006, except as discussed in note 2 below. The disclosures provided in these interim consolidated financial statements are incremental to those included with the annual consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Inter Pipeline Fund's ("Inter Pipeline") annual report for the year ended December 31, 2006.

2. Changes in Accounting Policy

On January 1, 2007, Inter Pipeline adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial Instruments - Recognition and Measurement", Section 3861 "Financial Instruments - Disclosure and Presentation" and Section 3865 "Hedges". Inter Pipeline adopted these standards by adjusting opening partners' equity and accumulated other comprehensive income ("AOCI"). As required by the new standards, prior periods have not been restated, except to reclassify cumulative foreign currency translation balances of prior periods to AOCI.

Comprehensive Income

Section 1530 introduces comprehensive income, which consists of net income and other comprehensive income ("OCI"). OCI comprises revenues, expenses, gains and losses that, in accordance with GAAP, are recognized in comprehensive income, but excluded from net income. Inter Pipeline's consolidated financial statements now include a Statement of Comprehensive Income, which includes the components of comprehensive income.

The cumulative changes in OCI are included in AOCI, which is presented as a new category within partners' equity in the Consolidated Balance Sheet. The cumulative foreign currency translation balance, formerly presented as a separate category within partners' equity, is now included in AOCI. Inter Pipeline's consolidated financial statements now include a Statement of Accumulated Other Comprehensive Income, which provides the continuity of the AOCI balance.

Financial Instruments - Recognition and Measurement

Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities, financial derivatives and certain non-financial derivatives. It requires that financial assets and financial liabilities, including derivatives and certain non-financial derivatives, be recognized on the consolidated balance sheet when a contract or certain contractual provisions meet the definition of a financial instrument. Under this standard, all financial instruments, including derivatives, are required to be measured at fair value upon initial recognition except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as "held-for-trading", "available-for-sale", "held-to-maturity", "loans and receivables", or "other financial liabilities", as defined by the standard.

Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net income. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in OCI. Financial assets "held-to-maturity", "loans and receivables" and "other financial liabilities" are measured at amortized cost using the effective interest method of amortization. Investments in equity instruments classified as "available-for-sale" that do not have a quoted market price in an active market are measured at cost. Section 3855 also provides an entity the option to designate a financial instrument as held-for-trading (the fair value option) on its initial recognition or upon adoption of the standard, provided certain criteria are met.

Financial and non-financial derivative instruments are classified as "held-for-trading" and recorded on the consolidated balance sheet at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in the fair values of derivative instruments are recognized in net income with the exception of the effective portion of derivatives designated as cash flow hedges or hedges of foreign currency exposure of a net investment in a self-sustaining foreign operation, which are recognized in OCI.

Section 3855 requires the use of the effective interest method of amortization for any transaction costs or fees, premiums or discounts earned or incurred for financial instruments measured at amortized cost. In addition, an entity must select an accounting policy of either expensing transaction issue costs as incurred or applying them against the carrying value of the related asset or liability.

Hedges

Section 3865 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges, cash flow hedges, and hedges of foreign currency exposures of net investments in self-sustaining foreign operations. Hedge accounting is discontinued prospectively when the hedging relationship ceases to satisfy the conditions for hedge accounting.

Impact Upon Adoption of Sections 1530, 3855 and 3865

The net effect to Inter Pipeline's financial statements at January 1, 2007 resulting from the above-mentioned changes is as follows:



January 1
2007
---------------------------------------------------------------------------
Deferred financing charges $ (1,541)
Fair value of derivative financial instruments (net) (7,971)
Long-term debt 1,628
Accumulated other comprehensive income 7,971
Partners' equity (87)
---------------------------------------------------------------------------
$ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Other comprehensive income

For Inter Pipeline, OCI is currently comprised of the changes in the cumulative foreign currency translation balance and the transfer of unrealized gains and losses on derivatives previously designated as cash flow hedges to net income.

The adoption of comprehensive income resulted in an opening adjustment to AOCI of $8.0 million at January 1, 2007 to record the effective portion of the fair value of derivative financial instruments designated as cash flow hedges in prior periods.

The accumulated foreign currency translation adjustment balance at September 30, 2007 of $6.2 million has been recorded to AOCI (December 31, 2006 - $30.8 million; September 30, 2006 - gain of $2.0 million; December 31, 2005 - loss of $9.7 million). The decrease of $14.4 million and $37.0 million respectively in the accumulated foreign currency translation adjustment balance for the three and nine months ended September 30, 2007 is now included in OCI in the Statement of Comprehensive Income (three and nine months ended September 30, 2006 - increase of $3.4 million and $11.7 million respectively). In addition, in the three and nine months ended September 30, 2007, $0.7 million and $5.1 million respectively of unrealized gains and losses on derivatives designated as cash flow hedges in prior periods have been transferred to net income.

Financial instruments

Inter Pipeline has classified its financial instruments as follows. Cash is designated as "held-for-trading" and is measured at carrying value, which approximates fair value due to the short-term nature of these instruments. The majority of accounts receivable are designated as "loans and receivables". Cash distributions payable, the majority of accounts payable and accrued liabilities, certain components of deferred revenue and long-term debt are designated as "other liabilities". Derivative financial instruments are classified as "held-for-trading" unless designated for hedge accounting.

Accordingly, at January 1, 2007, Inter Pipeline recognized a net liability of $8.0 million representing the fair market value of derivative financial instruments that qualified as effective cash flow hedges in prior periods, with the offset to AOCI. There were no other opening transition adjustments to financial assets and financial liabilities as a result of these classifications with the exception of those made to long-term debt and debt transaction costs, as outlined in the paragraph below. The estimated fair values of financial instruments have been determined based on Inter Pipeline's assessment of available market information, appropriate valuation methodologies and third party indications. However, these estimates may not necessarily be indicative of the amounts that could be realized or settled in a current market transaction and the differences may be material. Fair values are generally based on observable market prices with the exception of NGL swaps. Obtaining market prices for NGL swaps is difficult as these markets are not very liquid.

Inter Pipeline has adopted a policy of capitalizing long-term debt transaction costs, premiums and discounts within long-term debt. Accordingly, at January 1, 2007, $1.5 million of deferred financing charges were reclassified to long-term debt. These costs capitalized within long-term debt will be amortized using the effective interest method. Previously, Inter Pipeline deferred these costs and amortized straight-line over the life of the related long-term debt. The adoption of the effective interest method of amortization resulted in a $0.1 million credit to opening partners' equity.

In accordance with transitional provisions, Inter Pipeline chose to review all agreements acquired, substantially modified, or entered into on or after January 1, 2003 for embedded derivatives.

Hedges

Concurrent with the adoption of section 3865, Inter Pipeline elected to discontinue hedge accounting for derivative financial instruments outstanding at January 1, 2007 that had qualified as effective cash flow hedges in prior periods. Accordingly, for the three and six months ended June 30, 2007, Inter Pipeline has recognized the change in fair value of the related derivative financial instruments in net income and has transferred unrealized gains and losses from AOCI to net income related to contracts settled in the period.

New Accounting Policies due to Acquisition of Corridor Pipeline System

Regulation

Inter Pipeline's Corridor pipeline operations are governed by contractual arrangements with shippers, and are regulated by the Alberta Energy and Utilities Board (the "EUB"), an independent regulatory authority. Inter Pipeline's rates are cost-of-service based and are determined using formulas embedded in the Firm Service Agreement (the "FSA") with shippers.

In accordance with GAAP, certain assets and liabilities, revenues and expenses of Inter Pipeline's Corridor pipeline operations qualify for selected accounting treatments that differ from those used by entities not subject to rate regulation. Regulatory assets represent future revenues associated with certain costs, incurred in the current period or in prior periods, that are expected to be recovered from customers in future periods in accordance with the FSA. Regulatory liabilities represent future reductions or limitations of increases in revenues associated with amounts that are expected to be refunded to customers in accordance with the FSA.

The timing of the recognition of the following items, as a result of regulation, may differ from that otherwise expected using Canadian GAAP for entities not subject to rate regulation: The regulatory asset of $5.4 million may not be recorded as an asset, but would be charged to the income statement as an unrealized change in fair value of derivative instruments; $7.5 million of debt transaction costs may have been recorded within long-term debt instead of to property, plant and equipment; the regulatory liability of $0.9 million may be recorded as accounts payable and accrued liabilities instead of deferred revenue; and Inter Pipeline has not recognized future income taxes of approximately $19 million as a result of using the taxes payable method for its regulated operations, while this would be recognized under GAAP in the absence of rate regulation

Regulatory Asset

Corridor utilizes interest rate derivatives to manage its interest rate risk. Gains or losses arising on the interest rate swap contracts are recoverable from the shippers, therefore the unrealized portion has been recorded as a regulatory asset.

Property, Plant and Equipment and Capitalized Interest

Cost of Corridor pipeline facilities and equipment includes all direct expenditures for system construction, expansion, and betterments, and an allocation of overhead costs. Depreciation of regulated assets is recorded on a straight line basis on plant in service at rates set out in the terms of the FSA with shippers. Depreciation rates require the use of management estimates of the useful lives of assets. The cost of depreciable property retired, together with removal costs, less salvage, is charged to accumulated depreciation.

Pipeline linefill and tank working inventory for the Corridor pipeline system represents the petroleum based product purchased for the purpose of charging the pipeline system and partially filling the petroleum product storage tanks with appropriate volume of petroleum products to enable commercial operation of the facilities and pipeline. These volumes of petroleum product will be recovered upon the ultimate retirement and decommissioning of the pipeline system at which time the proceeds from the sale of the linefill will be used to fund the cost of any asset retirement obligations. To the extent the asset retirement obligations exceed the value of the linefill, Inter Pipeline and its affiliates will be obligated to fund the excess. To the extent the value of the linefill exceeds the asset retirement obligation, the funds shall be refunded to the shippers.

Linefill is carried at cost less accumulated depreciation. Cost includes all direct expenditures for acquiring the petroleum based products. Depreciation is calculated on the same basis as property, plant and equipment.

Interest costs relating to the Corridor expansion project are capitalized as part of property, plant and equipment. Capitalization of interest ceases when the capital asset is substantially complete and ready for its intended productive use.

Revenue Recognition

Revenues are recorded when products are delivered and adjusted according to terms prescribed by the FSA with the shippers. Under the terms of the FSA, Inter Pipeline's revenues are determined by an agreed upon annual revenue requirement formula which allows for the recovery of prescribed expenditures and costs associated with the operation of the Corridor pipeline system, as well as a rate of return on the Rate Base (as defined in the FSA) determined with reference to the long-term bond yield reported by the Bank of Canada. For the purposes of periodic interim reporting, Inter Pipeline and the shippers have agreed to estimate the annual revenue requirements to be invoiced by Inter Pipeline and paid by the shippers. To the extent these estimates are different from the annual revenue requirement Inter Pipeline records a surplus or deficiency charge to adjust its net income to match the returns allowed for in the annual revenue requirement formula. At September 30, 2007, $0.9 million is included in deferred revenue as a revenue surplus.

Income Taxes

In accordance with the terms of the FSA, Inter Pipeline accounts for income taxes using the taxes payable method and therefore future income taxes related to temporary differences are not recorded. The taxes payable method is followed as there is reasonable expectation that all future income taxes will be recovered in rates when they become payable.

Future Accounting Changes

On December 1, 2006, the CICA issued three new accounting standards: Handbook Section 1535 "Capital Disclosures", Handbook Section 3862 "Financial Instruments - Disclosures" and Handbook Section 3863 "Financial Instruments - Presentation". Inter Pipeline will adopt these standards on January 1, 2008. The new standards require the disclosure of quantitative and qualitative information that is intended to provide users of the financial statements with additional disclosures on Inter Pipeline's management of capital and on the risks associated with financial instruments. Inter Pipeline will be reviewing the impact of these standards on its financial statements in the coming months.

3. Acquisition of Corridor Pipeline System

On June 15, 2007, Inter Pipeline completed the acquisition of the Corridor pipeline system through the purchase of 100% of the share capital of Terasen Pipelines (Corridor) Inc. ("Corridor") for cash consideration of $302.2 million, and long-term debt assumed of $777.0 million. The acquisition was funded through an existing revolving credit facility (see note 8). As a result of this transaction, an acquisition fee of $10.9 million was paid to the General Partner, pursuant to the terms of the Limited Partnership Agreement ("LPA"). Inter Pipeline began consolidating Corridor in the Oil Sands Transportation Business segment subsequent to the acquisition date. As a result of the Corridor acquisition, Inter Pipeline assumed the commitment to complete the $1.8 billion expansion to the Corridor pipeline system ("Corridor Expansion").

The acquisition was accounted for by the purchase method as at the closing date of June 15, 2007. The preliminary allocation of the purchase price was as follows:



Cash $ 3,012
Non-cash working capital deficiency (9,621)
Regulatory asset (note 2) 10,234
Property, plant and equipment (note 6) 970,093
Goodwill 136,492
Long-term debt, net of debt transaction costs and
discount of $3.6 million (note 8) (773,438)
Fair value of derivative financial
instruments (notes 2 and 15) (10,234)
Future income taxes liability (notes 2 and 10) (24,311)
---------------------------------------------------------------------------
$ 302,227
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4. Segment Reporting

Inter Pipeline operates its business under the following principal business segments:



Three Months Ended September 30, 2007
---------------------------------------------------------------------------
Canada
-------------------------------------------------------------
NGL Conventional Oil Sands Total
Extraction Oil Pipeline Transportation Canadian
Business Business Business Corporate Operations
---------------------------------------------------------------------------
Revenues $176,189 $ 30,156 $ 39,194 $ - $ 245,539
---------------------------------------------------------------------------
Expenses
Shrinkage gas 96,120 - - - 96,120
Operating 41,708 10,196 14,071 - 65,975
Depreciation
and
amortization 6,382 4,700 8,634 - 19,716
Financing
charges - - 6,378 14,503 20,881
General and
administrative - - 753 5,477 6,230
Unrealized
change in
fair value
of derivative
financial
instruments 7,812 434 - 616 8,862
Management fee
to General
Partner - - - 1,801 1,801
Acquisition fee
to General
Partner - - - - -
Unit incentive
options - - - - -
---------------------------------------------------------------------------
Total expenses 152,022 15,330 29,836 22,397 219,585
---------------------------------------------------------------------------
Income before
income taxes 24,167 14,826 9,358 (22,397) 25,954
---------------------------------------------------------------------------
Provision for
income taxes - - 48 (1,563) (1,515)
---------------------------------------------------------------------------
Net income
(loss) $ 24,167 $ 14,826 $ 9,310 $ (20,834) $ 27,469
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures
on property,
plant and
equipment $ (3,129) $ (1,482) $ (153,683)$ - $ (158,294)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

As at September 30, 2007
---------------------------------------------------------------------------
Total assets $750,436 $461,168 $1,741,385 $ - $2,952,989
---------------------------------------------------------------------------
Property,
plant and
equipment $408,086 $440,096 $1,483,597 $ - $2,331,779
---------------------------------------------------------------------------
Goodwill $ - $ - $ 136,492 $ - $ 136,492
---------------------------------------------------------------------------


Three Months Ended September 30, 2007
---------------------------------------------------------------------------
Europe
------------
Total
Bulk Liquid Canadian and
Storage European
Business Operations
---------------------------------------------------------------------------
Revenues $ 38,917 $ 284,456
---------------------------------------------------------------------------
Expenses
Shrinkage gas - 96,120
Operating 24,491 90,466
Depreciation and amortization 3,087 22,803
Financing charges (194) 20,687
General and administrative 2,733 8,963
Unrealized change in fair value
of derivative financial instruments - 8,862
Management fee to General Partner - 1,801
Acquisition fee to General Partner - -
Unit incentive options - -
---------------------------------------------------------------------------
Total expenses 30,117 249,702
---------------------------------------------------------------------------
Income before income taxes 8,800 34,754
---------------------------------------------------------------------------
Provision for income taxes 1,172 (343)
---------------------------------------------------------------------------
Net income (loss) $ 7,628 $ 35,097
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property, plant
and equipment $ (8,754) $ (167,048)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

As at September 30, 2007
---------------------------------------------------------------------------
Total assets $ 437,213 $3,390,202
---------------------------------------------------------------------------
Property, plant and equipment $ 311,256 $2,643,035
---------------------------------------------------------------------------
Goodwill $ 67,011 $ 203,503
---------------------------------------------------------------------------



Three Months Ended September 30, 2006
---------------------------------------------------------------------------
Canada
-------------------------------------------------------------
NGL Conventional Oil Sands Total
Extraction Oil Pipeline Transportation Canadian
Business Business Business Corporate Operations
---------------------------------------------------------------------------
Revenues $177,090 $ 30,243 $ 14,873 $ - $ 222,206
---------------------------------------------------------------------------
Expenses
Shrinkage gas 100,251 - - - 100,251
Operating 40,467 9,958 5,722 - 56,147
Depreciation
and
amortization 6,288 4,543 3,997 14,828
Financing
charges - - - 10,274 10,274
General and
administrative - - - 4,018 4,018
Management fee
to General
Partner - - - 1,401 1,401
Acquisition fee
to General
Partner - - - - -
Unit incentive
options - - - 23 23
---------------------------------------------------------------------------
Total expenses 147,006 14,501 9,719 15,716 186,942
---------------------------------------------------------------------------
Income before
income taxes 30,084 15,742 5,154 (15,716) 35,264
---------------------------------------------------------------------------
Provision for
income taxes - - 46 - 46
---------------------------------------------------------------------------
Net income
(loss) $ 30,084 $ 15,742 $ 5,108 $ (15,716) $ 35,218
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures
on property,
plant and
equipment $ (3,030) $ (2,417) $ (1,207)$ - $ (6,654)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

As at December 31, 2006
---------------------------------------------------------------------------
Total assets $766,923 $469,192 $ 453,867 $ - $1,689,982
---------------------------------------------------------------------------
Property,
plant and
equipment $413,627 $446,748 $ 349,871 $ - $1,210,246
---------------------------------------------------------------------------
Goodwill $ - $ - $ - $ - $ -
---------------------------------------------------------------------------


Three Months Ended September 30, 2006
---------------------------------------------------------------------------
Europe
------------
Total
Bulk Liquid Canadian and
Storage European
Business Operations
---------------------------------------------------------------------------
Revenues $ 34,138 $ 256,344
---------------------------------------------------------------------------
Expenses
Shrinkage gas - 100,251
Operating 21,348 77,495
Depreciation and amortization 2,242 17,070
Financing charges (128) 10,146
General and administrative 2,623 6,641
Management fee to General Partner - 1,401
Acquisition fee to General Partner - -
Unit incentive options - 23
---------------------------------------------------------------------------
Total expenses 26,085 213,027
---------------------------------------------------------------------------
Income before income taxes 8,053 43,317
---------------------------------------------------------------------------
Provision for income taxes 817 863
---------------------------------------------------------------------------
Net income (loss) $ 7,236 $ 42,454
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property, plant
and equipment $ (8,533) $ (15,187)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

As at December 31, 2006
---------------------------------------------------------------------------
Total assets $ 467,132 $2,157,114
---------------------------------------------------------------------------
Property, plant and equipment $ 335,095 $1,545,341
---------------------------------------------------------------------------
Goodwill $ 74,803 $ 74,803
---------------------------------------------------------------------------



Nine Months Ended September 30, 2007
---------------------------------------------------------------------------
Canada
-------------------------------------------------------------
NGL Conventional Oil Sands Total
Extraction Oil Pipeline Transportation Canadian
Business Business Business Corporate Operations
---------------------------------------------------------------------------
Revenues $551,503 $ 90,924 $ 71,000 $ - $ 713,427
---------------------------------------------------------------------------
Expenses
Shrinkage gas 341,901 - - - 341,901
Operating 114,698 28,914 24,571 - 168,183
Depreciation
and
amortization 19,139 14,017 17,581 - 50,737
Financing
charges - - 7,358 35,112 42,470
General and
administrative - - 753 15,836 16,589
Unrealized
change in
fair value
of derivative
financial
instruments 25,048 (230) - (690) 24,128
Management fee
to General
Partner - - - 4,503 4,503
Acquisition fee
to General
Partner - - - 10,883 10,883
Unit incentive
options - - - 7 7
---------------------------------------------------------------------------
Total expenses 500,786 42,701 50,263 65,651 659,401
---------------------------------------------------------------------------
Income before
income taxes 50,717 48,223 20,737 (65,651) 54,026
---------------------------------------------------------------------------
Provision for
income taxes - - 139 234,606 234,745
---------------------------------------------------------------------------
Net income
(loss) $ 50,717 $ 48,223 $ 20,598 $(300,257) $ (180,719)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures
on property,
plant and
equipment $ (5,114) $ (7,416) $ (170,004)$ - $ (182,534)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Nine Months Ended September 30, 2007
---------------------------------------------------------------------------
Europe
------------
Total
Bulk Liquid Canadian and
Storage European
Business Operations
---------------------------------------------------------------------------
Revenues $ 120,785 $ 834,212
---------------------------------------------------------------------------
Expenses
Shrinkage gas - 341,901
Operating 76,600 244,783
Depreciation and amortization 9,446 60,183
Financing charges (546) 41,924
General and administrative 8,520 25,109
Unrealized change in fair value
of derivative financial instruments - 24,128
Management fee to General Partner - 4,503
Acquisition fee to General Partner - 10,883
Unit incentive options - 7
---------------------------------------------------------------------------
Total expenses 94,020 753,421
---------------------------------------------------------------------------
Income before income taxes 26,765 80,791
---------------------------------------------------------------------------
Provision for income taxes (5,653) 229,092
---------------------------------------------------------------------------
Net income (loss) $ 32,418 $ (148,301)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property, plant
and equipment $ (20,773) $ (203,307)
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Nine Months Ended September 30, 2006
---------------------------------------------------------------------------
Canada
-------------------------------------------------------------
NGL Conventional Oil Sands Total
Extraction Oil Pipeline Transportation Canadian
Business Business Business Corporate Operations
---------------------------------------------------------------------------
Revenues $505,665 $ 86,042 $ 44,098 $ - $ 635,805
---------------------------------------------------------------------------
Expenses
Shrinkage gas 311,937 - - - 311,937
Operating 108,075 26,827 14,735 - 149,637
Depreciation
and
amortization 18,869 13,745 12,028 - 44,642
Financing
charges - - - 30,356 30,356
General and
administrative - - - 11,797 11,797
Management fee
to General
Partner - - - 3,885 3,885
Acquisition fee
to General
Partner - - - 376 376
Unit incentive
options - - - 154 154
---------------------------------------------------------------------------
Total expenses 438,881 40,572 26,763 46,568 552,784
---------------------------------------------------------------------------
Income before
income taxes 66,784 45,470 17,335 (46,568) 83,021
---------------------------------------------------------------------------
Provision for
income taxes - - 150 - 150
---------------------------------------------------------------------------
Net income
(loss) $ 66,784 $ 45,470 $ 17,185 $ (46,568) $ 82,871
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures
on property,
plant and
equipment $ (5,550) $(13,641) $ (10,912)$ - $ (30,103)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Nine Months Ended September 30, 2006
---------------------------------------------------------------------------
Europe
------------
Total
Bulk Liquid Canadian and
Storage European
Business Operations
---------------------------------------------------------------------------
Revenues $ 100,059 $ 735,864
---------------------------------------------------------------------------
Expenses
Shrinkage gas - 311,937
Operating 63,271 212,908
Depreciation and amortization 7,502 52,144
Financing charges (401) 29,955
General and administrative 7,503 19,300
Management fee to General Partner - 3,885
Acquisition fee to General Partner - 376
Unit incentive options - 154
---------------------------------------------------------------------------
Total expenses 77,875 630,659
---------------------------------------------------------------------------
Income before income taxes 22,184 105,205
---------------------------------------------------------------------------
Provision for income taxes 2,699 2,849
---------------------------------------------------------------------------
Net income (loss) $ 19,485 $ 102,356
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property, plant
and equipment $ (15,079) $ (45,182)
---------------------------------------------------------------------------
---------------------------------------------------------------------------



5. Intangible Assets

September 30 December 31
2007 2006
---------------------------------------------------------------------------
Accumulated Net Net
Cost Amortization Book Value Book Value
---------------------------------------------------------------------------
NGL extraction business
Customer contracts $ 287,612 $ (30,364) $ 257,248 $ 264,438
Patent 8,727 (1,974) 6,753 7,220
Oil sands transportation
business
Transportation
Services Agreement 93,548 (15,312) 78,236 80,656
Bulk liquid
storage business
Customer contracts
and relationships 15,438 (1,026) 14,412 16,624
Tradename 5,240 (349) 4,891 5,645
---------------------------------------------------------------------------
$ 410,565 $ (49,025) $ 361,540 $ 374,583
---------------------------------------------------------------------------
---------------------------------------------------------------------------



6. Property, Plant and Equipment

September 30 December 31
2007 2006
---------------------------------------------------------------------------
Accumulated
Depreciation & Net Net
Cost Amortization Book Value Book Value
---------------------------------------------------------------------------
NGL extraction business
Facilities and
equipment $ 448,674 $ (44,255) $ 404,419 $ 410,010
Spare parts 3,667 - 3,667 3,617
Conventional oil
pipeline business
Facilities and
equipment 782,487 (342,604) 439,883 446,322
Deferred receipt
facilities
expenditures 6,138 (5,925) 213 426
Oil sands
transportation business
Facilities and
equipment 967,458 (64,587) 902,871 339,468
Construction work
in progress 507,209 - 507,209 19
Pipeline linefill 74,033 (516) 73,517 10,384
Bulk liquid
storage business
Facilities and
equipment 325,857 (14,601) 311,256 335,095
---------------------------------------------------------------------------
$3,115,523 $ (472,488) $2,643,035 $1,545,341
---------------------------------------------------------------------------
---------------------------------------------------------------------------


7. Cash Distributions Payable

Section 5.2 of the LPA requires that Inter Pipeline make distributions of LPA Distributable Cash on a monthly basis, provided that Inter Pipeline has cash available for such payment (thereby excluding any cash withheld as a reserve). LPA Distributable Cash is defined to generally mean cash from operating, investing and financing activities, less certain items, including any cash withheld as a reserve that the General Partner determines to be necessary or appropriate for the proper management of Inter Pipeline and its assets. As a result of the General Partner's discretion to establish reserves under the LPA, cash distributed to unitholders is always equal to LPA Distributable Cash.

For the three and nine months ended September 30, 2007, Inter Pipeline declared cash distributions totaling $42.7 million and $127.7 million, respectively (three and nine months ended September 30, 2006 - $40.3 million and $118.4 million, respectively). As at September 30, 2007, distributions of $14.2 million are payable to 203.1 million outstanding Class A units and 0.2 million outstanding Class B units at $0.07 per unit (December 31, 2006 - $14.1 million payable to 201.5 million outstanding Class A units and 0.2 million outstanding Class B units at $0.07 per unit).

8. Long-Term Debt

The following amounts are outstanding under Inter Pipeline's debt facilities:



September 30 December 31
2007 2006
---------------------------------------------------------------------------
Loan Payable to General Partner $ 379,800 $ 379,800
$2,142 million Unsecured Revolving
Credit Facility (a, e) 588,000 -
$750 million Unsecured Revolving
Credit Facility (b, e) 613,000 295,000
Corridor Debentures (c, e) 300,000 -

Transaction Costs (note 2) (5,467) -
Accumulated amortization of transaction costs 1,507 -

Discount (20,237) -
Accumulated amortization of discount 15,552 -
---------------------------------------------------------------------------
$1,872,155 $ 674,800
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(a) On August 16, 2007, Corridor entered into a new unsecured $2,142 million syndicated revolving credit facility and a $40 million demand operating facility. The credit facility is comprised of the following tranches:

i. $190 million non-recourse tranche expiring on August 14, 2012

ii. $1,464 million non-recourse tranche expiring on August 14, 2012

iii. $292 million recourse to Inter Pipeline, this tranche expires on the earlier of August 14, 2012 and the Corridor first expansion commencement date or the suspension true-up date.

iv. $196 million recourse to Inter Pipeline, this tranche expires on the earlier of August 14, 2012, the Corridor first expansion commencement date or the suspension true-up date.

The credit and operating facilities incur fees on amounts borrowed at floating rates based on bankers' acceptances plus 45 to 65 basis points. Unborrowed amounts are charged standby fees of 10 to 15 basis points. If Corridor's credit rating changes, the fees on floating rate amounts could increase by up to 55 basis points or reduce by up to 10 basis points, while fees on undrawn amounts could increase by up to 12 basis points and decrease by up to 2.5 basis points.

(b) On June 15, 2007, Inter Pipeline amended certain terms and increased the size of its revolving credit facility by $250 million to $750 million. The increased facility was used to partially finance the Corridor acquisition (see note 3). Subsequent to September 30, 2007, the maturity date for $660 million of the revolving facility was extended to September 29, 2012.

(c) As a result of the acquisition of Corridor, Inter Pipeline assumed $150 million of 4.240% Series A Debentures due February 2, 2010 and $150 million 5.033% Series B Debentures due February 2, 2015 ("Corridor Debentures"). The Corridor Debentures are unsecured obligations subject to the terms and conditions of a trust indenture dated February 1, 2005. Interest is payable semi-annually in equal installments in arrears on February 2 and August 2 of each year. Corridor uses derivative instruments to exchange its fixed rate of interest to floating rates of interest (see note 15).

The Corridor Debentures are redeemable in whole, or in part, at the option of Corridor at a price equal to the principal amount to be redeemed, plus accrued and unpaid interest including a premium above the implied yield to maturity.

(d) The credit agreement with a banking syndicate that was assumed as a result of the acquisition of Corridor, consisting of a $520 million revolving loan facility and a $20 million demand operating loan facility, was cancelled in August, 2007.

(e) During the nine months ended September 30, 2007, Inter Pipeline had a net increase of $1,206 million in its long-term debt. $0.3 million of the increase was drawn on the $750 million Unsecured Revolving Credit Facility, $0.6 million was drawn on the $2,142 million Corridor Revolving Credit Facility, and $0.3 million relates to the Corridor Debentures assumed.

(f) At September 30, 2007, outstanding letters of credit of $0.2 million have been issued. In October, 2007, letters of credit for $3.5 million were also issued.

9. Asset Retirement Obligation

The following table shows the movement in the liability for asset retirement obligations:



Nine Months
Ended Year ended
September 30 December 31
2007 2006
---------------------------------------------------------------------------
Obligation at beginning of year $ 20,530 $ 16,715
Additions to liabilities 1,137 2,577
Accretion expense 924 1,063
Foreign currency adjustments (289) 175
---------------------------------------------------------------------------
Obligation at end of period $ 22,302 $ 20,530
---------------------------------------------------------------------------
---------------------------------------------------------------------------
There were no liabilities settled during the nine months ended September
30, 2007 and 2006.


At September 30, 2007, $0.9 million is included in accounts payable and accrued liabilities for asset retirement obligations related to the retirement of property, plant and equipment in the conventional oil pipeline business (December 31, 2006 - $0.8 million).

10. Income Taxes

In June 2007, the Government of Canada substantively enacted new legislation imposing additional income taxes upon publicly traded income trusts and limited partnerships, including Inter Pipeline effective January 1, 2011. Prior to June 2007, Inter Pipeline estimated the future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate, related to the consolidated entities that were not corporations. Under the legislation, Inter Pipeline now estimates the effective tax rate on the post 2010 reversal of these temporary differences to be 31.5%. Temporary differences reversing before 2011 still give rise to nil future income taxes. Based on its consolidated assets and liabilities as at June 30, 2007, Inter Pipeline has estimated the amount of its temporary differences, which were previously not subject to tax and has estimated the periods in which these differences will reverse.

Inter Pipeline estimates that $744.8 million net taxable temporary differences, not previously subject to tax, will reverse after January 1, 2011, resulting in an additional $234.6 million future income tax liability. The taxable temporary differences relate principally to the excess of net book value of property, plant and equipment and intangible assets over the remaining tax values attributable thereto.

Since the legislation gives rise to a change in Inter Pipeline's estimated future income tax liability in the nine months ended September 30, 2007, the recognition of the additional liability is accounted for prospectively and an additional $234.6 million of future income tax expense has been recorded.

While Inter Pipeline believes it will be subject to additional tax under the new legislation, the estimated effective tax rate on temporary difference reversals after 2011 may change in future periods. As the legislation is new, future technical interpretations of the legislation could occur and could materially affect management's estimate of the future income tax liability. The amount and timing of reversals of temporary differences will also depend on Inter Pipeline's future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. A significant change in any of the preceding assumptions could materially affect Inter Pipeline's estimate of the future tax liability.

In the bulk liquid storage business, the results recognize recent tax legislative changes which have impacted future income taxes. In Germany, tax legislation has been passed which aligns German income tax rates more closely with the other European Union members, reducing the effective income tax rate from 39% to 30.35%, effective January 1, 2008. The effect of recognizing this change in German income tax rates is a $4.6 million reduction in future income tax liabilities at September 30, 2007. Similarly, in the United Kingdom, recent legislative changes will result in income tax rates declining from 30% to 28% effective April 1, 2008. The effect at September 30, 2007, of recognizing this income tax rate change is a $3.9 million reduction in future income tax liabilities. Therefore, the overall impact of these reduced tax rates is an $8.5 million decrease in the future income tax liabilities at September 30, 2007.

At September 30, 2007, current income taxes payable of $2.1 million (December 31, 2006 - $1.9 million) are included in accounts payable and accrued liabilities.



11. Partners' Equity

Number of Units Issued and Outstanding
Issued and outstanding

Class B
Class A Units Units Total
---------------------------------------------------------------------------
Balance as at December 31, 2006 201,526,608 201,754 201,728,362
Issued on conversion of Debentures 333,152 356 333,508
Issued under Distribution Reinvestment
and Optional Unit Purchase Plan 744,847 755 745,602
Issued under Unit Incentive
Option Plan (note 12) 506,571 539 507,110
---------------------------------------------------------------------------
Balance as at September 30, 2007 203,111,178 203,404 203,314,582
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Calculation of Net (Loss) Income per unit

Units share equally on a pro rata basis in the allocation of net income. The number of diluted units outstanding is calculated using the Treasury Stock method based on the weighted-average number of units outstanding for the period as follows:



Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Net income (loss)
attributable to
unitholders - Basic $ 35,097 $ 42,454 $(148,301) $ 102,356
Interest on Debentures 255 324 - 1,053
---------------------------------------------------------------------------
Net income (loss)
attributable to
unitholders - Diluted(i) $ 35,352 $ 42,778 $(148,301) $ 103,409
---------------------------------------------------------------------------

Weighted-average units
outstanding - Basic 203,062,749 201,166,924 202,543,817 198,889,098
Effect of debenture
conversions 1,685,744 2,146,857 - 2,351,688
Effect of unit options 780,846 1,204,086 - 1,346,036
---------------------------------------------------------------------------
Weighted-average
units outstanding
- Diluted(i) 205,529,339 204,517,867 202,543,817 202,586,822
---------------------------------------------------------------------------
Net (loss) income
per unit - Basic
and diluted $ 0.18 $ 0.21 $ (0.73) $ 0.51
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(i) The debenture conversions and unit option exercises have an anti-
dilutive impact for the nine months ended September 30, 2007;
therefore, they are not included in the calculation of diluted net
income per unit.


12. Long-Term Incentive Plan and Unit Incentive Options

The following table summarizes changes in the outstanding unit options and DURs:



---------------------------------------------------------------------------
Unit Options DURs
---------------------------------------------------------------------------
Weighted-
Weighted- Average
Average Adjusted
Exercise Exercise
Numbers Price(i) Price(ii) Numbers
---------------------------------------------------------------------------
Balance outstanding,
December 31, 2006 2,253,258 $ 7.56 $ 5.06 1,047,228
Granted - $ - $ - 86,317
Exercised (506,571) $ 6.57 $ 2.54 (30,625)
Cancelled (13,000) $ 10.22 $ 9.72 (68,376)
-------------------------------------- -----------
Balance outstanding,
September 30, 2007 1,733,687 $ 7.83 $ 5.29 1,034,544
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(i) The weighted-average exercise price based on the exercise price on
the date of grant.
(ii) The weighted-average exercise price adjusted for the incentive
reduction.



13. Depreciation and Amortization

Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
---------------------------------------------------------------------------
Amortization of intangible assets $ 3,539 $ 3,538 $ 10,637 $ 10,602
Depreciation of facilities
and equipment 18,441 13,230 47,900 40,233
Depreciation of pipeline linefill 442 - 515 -
Amortization of deferred receipt
facilities expenditures 71 70 213 571
Gain on sale of property, plant
and equipment - (23) (6) (24)
Accretion of asset retirement
obligation 310 255 924 762
---------------------------------------------------------------------------
Total depreciation
and amortization $ 22,803 $ 17,070 $ 60,183 $ 52,144
---------------------------------------------------------------------------
---------------------------------------------------------------------------



14. Financing Charges

Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
---------------------------------------------------------------------------
Interest on Loan Payable to
General Partner (note 8) $ 5,771 $ 5,771 $ 17,313 $ 17,313
Interest expense on credit
facilities 15,290 3,998 24,264 11,430
Interest on Debentures 255 324 802 1,053
Interest on Corridor Debentures 3,463 - 4,078 -
---------------------------------------------------------------------------
24,779 10,093 46,457 29,796
Capitalized interest (note 2) (4,371) - (4,982) -
Amortization of transaction costs
on long-term debt (notes 2 and 8) 279 - 449 -
Amortization of deferred
financing charges (note 2) - 53 - 159
---------------------------------------------------------------------------
Total financing charges $ 20,687 $ 10,146 $ 41,924 $ 29,955
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At September 30, 2007, $9.9 million in interest payable was included in accounts payable and accrued liabilities related to the Loan Payable to the General Partner (December 31, 2006 - $4.1 million).

15. Financial Instruments and Risk Management

Financial Instruments

At September 30, 2007, the carrying values of cash, accounts receivable, cash distributions payable, accounts payable and accrued liabilities, and long-term debt with variable interest rates approximate their fair value. The estimated fair values of derivative financial instruments are disclosed in the "Risk Management" section below.

Risk Management

As discussed in note 2, concurrent with the adoption of CICA Handbook section 3865, Inter Pipeline elected to discontinue hedge accounting for derivative financial instruments outstanding at January 1, 2007 that had qualified as effective cash flow hedges in prior periods. Inter Pipeline has recognized assets or liabilities for derivative contracts outstanding at September 30, 2007 and has recorded the change in fair value for the three and nine months ended September 30, 2007 in net income.

Fair values of outstanding derivative financial instruments

The following table presents a reconciliation of the change in the fair market value of derivative financial instruments used for risk management activities from January 1, 2007 to September 30, 2007:



Nine Months Ended September 30
2007 2006
---------------------------------------------------------------------------
Fair value of derivative financial
instruments, beginning of period $ - $ -
Fair value recognized on adoption of
new accounting standards (note 2) (7,971) -
Fair value of contracts acquired (note 3) (10,234) -
Change in fair value of contracts in
place at beginning of year and contracts
entered into during the period (19,342) -
Change in fair value of contracts in place
at beginning of year that settled
during the period 5,110 -
---------------------------------------------------------------------------
Fair value of derivative financial
instruments, end of period $ (32,437) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At September 30, 2007, the fair values of derivative financial instruments used for risk management activities are recorded in the consolidated balance sheet as follows:



September 30 December 31
2007 2006
---------------------------------------------------------------------------
Current asset $ 10,114 $ -
Long-term asset 1,915 -
Current liability (32,875) -
Long-term liability (11,591) -
---------------------------------------------------------------------------
$ (32,437) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

A summary of the estimated fair values of derivative financial instruments
used for risk management activities is as follows:

September 30 December 31
2007 2006(i)
---------------------------------------------------------------------------
Frac-spread risk management
NGL swaps $ (22,415) $ 8,596
Natural gas swaps (13,859) (10,016)
Foreign exchange swaps 11,124 (3,829)
---------------------------------------------------------------------------
(25,150) (5,249)
---------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps (8,192) (4,041)
---------------------------------------------------------------------------
(8,192) (4,041)
---------------------------------------------------------------------------
Power price risk management
Electricity price swaps 905 1,319
---------------------------------------------------------------------------
905 1,319
---------------------------------------------------------------------------
$ (32,437) $ (7,971)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(i) Comparative amounts were not recognized on the balance sheet at
December 31, 2006, as this was prior to the adoption of CICA Handbook
sections 1530, 3855 and 3865 (see note 2).

Realized and unrealized gain (loss) on risk management activities

The realized gains (losses) on derivative financial instruments used for
risk management activities recognized in income were:

Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
---------------------------------------------------------------------------
Revenues
NGL swaps $ (3,928) $ (3,656) $ (5,123) $ (5,372)
Foreign exchange swaps 1,241 462 (17) 1,043
---------------------------------------------------------------------------
(2,687) (3,194) (5,140) (4,329)
---------------------------------------------------------------------------
Shrinkage gas expense
Natural gas swaps (4,191) (3,050) (9,010) (8,055)
---------------------------------------------------------------------------
(4,191) (3,050) (9,010) (8,055)
---------------------------------------------------------------------------
Operating expenses
Electricity price swaps 438 501 521 625
Heat rate swaps - 1,713 (74) 1,977
---------------------------------------------------------------------------
438 2,214 447 2,602
---------------------------------------------------------------------------
Financing charges
Interest rate swaps (589) (245) (1,079) (941)
---------------------------------------------------------------------------
(589) (245) (1,079) (941)
---------------------------------------------------------------------------
Net realized loss on derivative
financial instruments $ (7,029) $ (4,275) $(14,782) $(10,723)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The unrealized change in fair value related to derivative financial
instruments used for risk management activities recognized in income was:

Three Months Ended Nine Months Ended
September 30 September 30
2007 2006(i) 2007 2006(i)
---------------------------------------------------------------------------
Frac-spread risk management
NGL swaps $ (8,415) $ - $(31,010) $ -
Natural gas swaps (4,962) - (3,843) -
Foreign exchange swaps 6,314 - 14,953 -
---------------------------------------------------------------------------
(7,063) - (19,900) -
---------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps (414) - 1,296 -
---------------------------------------------------------------------------
(414) - 1,296 -
---------------------------------------------------------------------------
Power price risk management
Electricity price swaps (649) - (414) -
Heat rate swaps - - - -
---------------------------------------------------------------------------
(649) - (414) -
---------------------------------------------------------------------------
Transfer of gains and losses on
derivatives previously designated
as cash flow hedges from accumulated
other comprehensive income (736) - (5,110) -
---------------------------------------------------------------------------
Unrealized change in fair value of
derivative financial instruments $ (8,862) $ - $(24,128) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(i) No comparative amounts were included in net income in the three and
nine months ended September 30, 2006, as this was prior to the adoption
of CICA Handbook sections 1530, 3855 and 3865 (see note 2).


Frac-spread risk management

Contracts outstanding at September 30, 2007 represent approximately 38% of forecast propane plus volumes at the Cochrane extraction plant for the period October to December 2007 at average prices of approximately $0.40 Cdn/US gallon and 31% of forecast volumes for the period January to December 2008 at average prices of approximately $0.45 Cdn/US gallon. These average prices would approximate $0.40 US/US gallon and $0.46 US/US gallon, respectively, based on the average US$/Cdn$ forward curve as at September 30, 2007. Contracts outstanding at September 30, 2007 were as follows:



As at September 30, 2007
---------------------------------------------------------------------------
October 1 to January 1 to
Hedged Period December 31, 2007 December 31, 2008
---------------------------------------------------------------------------
Average Average Average Average
Price Quantity Price Quantity
NGLs (US$/US gallon) (b/d) (US$/US gallon) (b/d)
---------------------------------------------------------------------------
Propane 0.985 5,000 1.067 2,997
Normal butane 1.147 856 1.236 516
Iso butane 1.159 530 1.270 320
Pentanes plus 1.645 424 1.647 256
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Average Average Average Average
Price Quantity Price Quantity
(Cdn$/GJ) (GJ/day) (Cdn$/GJ) (GJ/day)
---------------------------------------------------------------------------
AECO natural gas 8.03 26,087 7.81 17,268
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Average Average Monthly Average Average Monthly
Price Notional Amount Price Notional Amount
(US$/Cdn$) (US$ thousands) (US$/Cdn$) (US$ thousands)
---------------------------------------------------------------------------
Foreign exchange 0.878 9,296 0.918 5,974
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Contracts outstanding at December 31, 2006 represented approximately 45% of forecast propane plus volumes at the Cochrane extraction plant for the period January to December 2007 at average prices of approximately $0.41 Cdn/US gallon. These average prices approximated $0.35 US/US gallon based on the average US$/Cdn$ forward curve as at December 31, 2006. Contracts outstanding at December 31, 2006 were as follows:




As at December 31, 2006
----------------------------------------------------------------------------
Hedged Period January 1 to December 31, 2007
----------------------------------------------------------------------------
Average Average
Price Quantity
NGLs (US$/US gallon) (b/d)
----------------------------------------------------------------------------

Propane 1.000 4,247
Normal butane 1.156 734
Iso butane 1.169 454
Pentanes plus 1.693 363
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Average Average
Price Quantity
(Cdn$/GJ) (GJ/day)
----------------------------------------------------------------------------

AECO natural gas 7.89 22,356
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Average Average Monthly
Price Notional Amount
(US$/Cdn$) (US$ thousands)
----------------------------------------------------------------------------

Foreign exchange 0.893 7,971
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Interest rate risk management

As a result of the acquisition of Corridor (note 3), Inter Pipeline assumed
two fixed-to-floating interest rate swap agreements:

Fixed Rate Floating Rate Notional
Maturity date Per Annum Per Annum Balance
----------------------------------------------------------------------------
CAD 3 month BA
February 2, 2010 4.240% plus margin $ 150,000
CAD 3 month BA
February 2, 2015 5.033% plus margin 150,000
----------------------------------------------------------------------------
$ 300,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Inter Pipeline believes the credit risk associated with these interest rate swaps is minimal as the counter-party is a major financial institution.

Information with respect to interest rate swaps outstanding at December 31, 2006 is disclosed in note 23 to the consolidated financial statements included in Inter Pipeline's annual report for the year ended December 31, 2006.

Power price risk management

Electricity price swap contracts

No new electricity price swap agreements were entered into during the three and nine months ended September 30, 2007. Information with respect to electricity price swaps outstanding at December 31, 2006 is disclosed in note 23 to the consolidated financial statements included in Inter Pipeline's annual report for the year ended December 31, 2006.

Heat rate swap contracts

During the nine months ended September 30, 2007, Inter Pipeline entered into a financial heat rate swap contract to manage electricity price risk exposure in the NGL extraction business. The contract was for a notional quantity of 13.0 MW of electric power per hour for the period May 1, 2007 to May 31, 2007 at a price equal to 7.9 GJs/MWh multiplied by the AECO monthly index price.

16. Supplemental Cash Flow Information

Restricted Cash

At December 31, 2006, cash included $1.7 million that was restricted as a customs bond for the Office of the Revenue Commissioners in Ireland. No similar amounts were restricted at September 30, 2007.

Changes in Non-Cash Working Capital

Non-cash working capital includes accounts receivable, prepaid expenses and other deposits, cash distributions payable, accounts payable and accrued liabilities, and deferred revenue.



Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Accounts receivable $ (11,711) $(26,778) $ 5,810 $ 10,800
Prepaid expense and other
deposits 2,884 3,146 7,814 6,075
Cash distributions payable 34 1,034 111 2,098
Accounts payable and accrued
liabilities 37,714 15,715 49,688 (18,634)
Deferred revenue (1,492) (3,141) 2,800 6,811
Working capital deficiency
assumed on acquisitions 5,622 - (9,621) (1,609)
Impact of foreign exchange rate
differences and other (5,043) (63) (9,719) 692
----------------------------------------------------------------------------
Changes in non-cash working
capital $ 28,008 $(10,087) $ 46,883 $ 6,233
----------------------------------------------------------------------------
----------------------------------------------------------------------------

These changes relate to the
following activities:
Operating $ (15,413) $ (9,804) $ (1,135) $ (902)
Investing 43,387 (1,317) 47,907 5,037
Financing 34 1,034 111 2,098
----------------------------------------------------------------------------
Decrease in non-cash working
capital $ 28,008 $(10,087) $ 46,883 $ 6,233
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Other Cash Flow Information

Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
----------------------------------------------------------------------------
Cash taxes paid $ 104 $ (2) $ 779 $ 25
----------------------------------------------------------------------------
Cash interest paid $ 22,248 $ 3,908 $ 44,859 $ 23,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------


17. Commitments

On June 15, 2007, Inter Pipeline Fund entered into an agreement with the shippers to guarantee the payment and performance of all obligations, other than repayment of borrowed amounts or similar financial obligations, of Inter Pipeline (Corridor) Inc., the General Partner, or the operator (if the operator was not Inter Pipeline) in favour of the shippers under the FSA and other related agreements. The guarantee may be exercised in the event that Inter Pipeline (Corridor) Inc., the General Partner or the operator (if the operator was not Inter Pipeline) fails to pay or perform such obligations for any reason.

With respect to the Corridor Expansion, approximately 75% of Corridor's pipeline construction and facility costs have been committed at September 30, 2007.

18. Comparative Figures

Certain prior period comparative figures have been reclassified to conform to the current period's presentation.

Contact Information