Inter Pipeline Fund
TSX : IPL.DB
TSX : IPL.UN

Inter Pipeline Fund

May 11, 2006 13:25 ET

Inter Pipeline Fund Reports Strong First Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - May 11, 2006) - Inter Pipeline Fund (TSX:IPL.UN) (Inter Pipeline) announced today its financial and operating results for the three month period ended March 31, 2006.

Highlights

- Funds from operations(1) of $47.9 million, up $5.8 million or 13.7% over the same quarter last year

- Quarterly payout ratio(1) of 81.5%

- Net income of $29.1 million, up $2.2 million or 8.3% from the same quarter a year ago

- Completed acquisition of Tanklager-Gesellschaft Hoyer mbH for approximately $38 million

- Raised $150 million through successful Class A unit equity offering

- Transported a quarterly record of 312,100 barrels per day (b/d) on the Cold Lake pipeline system, up 9,200 b/d from the comparable period in 2005

- Southbound crude oil deliveries on the Bow River pipeline system sourced from Hardisty, Alberta to refining markets in the U.S. averaged 22,100 b/d, up 234% from Q1 2005

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

Funds From Operations

Inter Pipeline's funds from operations during the quarter totaled $47.9 million, up $5.8 million or 13.7% over the same period in 2005. This increase is primarily due to the addition of Inter Pipeline's recently acquired European bulk liquid storage businesses and strong commodity prices in the natural gas liquids (NGL) extraction business.

During the quarter, Inter Pipeline's NGL extraction, conventional oil pipeline, oil sands transportation and bulk liquid storage business segments contributed $23.9 million, $20.8 million, $9.6 million, and $9.0 million respectively to funds from operations. This was offset by corporate charges totaling $15.4 million.

Cash Distributions

Cash distributions to unitholders during the quarter totaled $39.0 million, or $0.1950 per unit, representing a payout ratio of 81.5% of funds from operations. This is consistent with the 80.8% payout ratio that was achieved during the first quarter of 2005 and below Inter Pipeline's targeted annual payout ratio of 90% to 95%. Financial results in the quarter were enhanced by strong market prices realized on propane plus ("C3+") volumes produced at the Cochrane NGL extraction facility.

Inter Pipeline's monthly cash distributions are currently $0.0650 per unit, or $0.78 per unit on an annualized basis. The regular monthly cash distribution rate is expected to be maintained subject to review from time to time by the Board of Directors of Inter Pipeline's general partner, Pipeline Management Inc.

NGL Extraction

Inter Pipeline's NGL extraction business benefited from favourable commodity prices in February and March and generated strong results during the first quarter. Combined, Inter Pipeline's three NGL extraction facilities processed 4.5 billion cubic feet per day (bcf/d) of natural gas, producing an average of 156,800 b/d of NGLs, comprised of 100,500 b/d of ethane and 56,300 b/d of propane plus.

In 2006, Inter Pipeline expects to spend approximately $15 million to $17 million on organic growth projects in the NGL extraction business segment. These opportunities include several efficiency and optimization projects at the Cochrane and Empress facilities that will improve liquids recovery or reduce fuel and power consumption. In the first quarter, $0.9 million was incurred developing these organic growth projects.

Conventional Oil Pipelines

Throughput volumes on Inter Pipeline's four conventional oil pipeline systems averaged 210,100 b/d during the first quarter, compared to 206,600 b/d for the same period last year. The increase in conventional volumes is primarily the result of improved weather conditions, and higher Bow River southbound volumes sourced at Hardisty, which averaged 22,100 b/d compared to 6,600 b/d in the first quarter of 2005. Conventional operating margins in the first quarter increased to $1.10 per barrel, up from $1.09 per barrel during the same period in 2005.

Inter Pipeline has a conventional oil pipeline 2006 growth capital program totalling $16 million to $18 million. These projects include the continued expansion of the Bow River Hardisty south pipeline, construction of interconnection facilities at the Kerrobert terminal and additional blending facilities. During the first three months of 2006, Inter Pipeline spent $6.0 million of growth capital on the conventional oil pipeline business.

Oil Sands Transportation

Throughput volumes on the Cold Lake pipeline system reached a new record averaging 312,100 b/d during the quarter. This represents an increase of 9,200 b/d over volumes delivered during the first quarter in 2005. Continued oil sands development by the three Cold Lake founding shippers, Imperial Oil, EnCana and Canadian Natural Resources, has increased the volumes transported on the Cold Lake pipeline system.

In the first quarter, Inter Pipeline incurred approximately $2.8 million of growth capital, primarily to expand capacity on the Cold Lake pipeline system. For 2006, Inter Pipeline is expecting to spend a total of approximately $27 million to $31 million of growth capital on the Cold Lake system to prepare for expected founding shipper production growth. Capital projects include the addition of capacity on the diluent pipeline from Edmonton to the Cold Lake area, and capacity expansions at the La Corey terminal, and Foster Creek and Wolf Lake pump stations.

Bulk Liquid Storage

Inter Pipeline's bulk liquid storage business continued to produce strong and stable results. During the quarter, this segment contributed $31.6 million in revenue and $9.0 million to funds from operations. These results include the positive contribution from Tanklager-Gesellschaft Hoyer mbH, an independent bulk liquid storage business based in Germany that was acquired by Inter Pipeline on January 1, 2006.

During the first quarter, Inter Pipeline also advanced several organic growth opportunities in the United Kingdom. Approximately $0.9 million was spent on growth capital projects in the first three months of 2006, and a total of $12 million to $14 million is planned for 2006. Organic projects include the reconfiguration of existing tankage at the Immingham terminal to store biodiesel, and conversion of additional tanks to store heated black oil products to and from an adjacent ConocoPhillips refinery.

Financing Activity

On January 31, 2006, Inter Pipeline successfully raised gross proceeds of $150 million by issuing 15 million Class A units. Net proceeds of $142.2 million were used to reduce bank indebtedness.

At March 31, 2006, Inter Pipeline's outstanding debt balance, including convertible debentures was $663 million, resulting in a total debt to total capitalization ratio of approximately 36%.

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 first quarter 2006 financial and operating results.

To participate in the conference call, please dial 888-280-8771 or 416-695-7848. A recording of the call will be available for replay until May 18, 2006, by dialing 888-509-0081 or 416-695-5275. The pass code for the replay is 620083.

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
(millions of dollars, March 31,
except where noted) 2006 2005
------------------------------------------------------------------------
Extraction Production(1) (000 b/d)
Ethane 100.5 100.1
Propane Plus 56.3 57.1
--------- ---------
Total Extraction 156.8 157.2

Pipeline Volumes (000 b/d)
Conventional Oil 210.1 206.6
Cold Lake Pipeline(1) 312.1 302.9
--------- ---------
Total Pipeline 522.2 509.5

Revenue
NGL Extraction $ 195.5 $ 170.5
Conventional Oil Pipelines $ 28.7 $ 27.1
Oil Sands Transportation $ 13.9 $ 15.0
Bulk Liquid Storage(2) $ 31.6 n/a

Net Income $ 29.1 $ 26.8

Funds From Operations(3) $ 47.9 $ 42.1

Cash Distributions(3) $ 39.0 $ 34.0
Per Unit $0.1950 $0.1875

Payout Ratio(3) 81.5% 80.8%

Capital Expenditures(3)
Growth $ 10.6 $ 1.5
Sustaining $ 1.6 $ 1.6

(1) Volumes reported on a 100% basis.
(2) Simon Storage was acquired on October 4, 2005 and TLG was acquired
on January 1, 2006. Therefore, there are no comparable figures.
(3) Please refer to the "Non-GAAP Financial Measures" section of the
MD&A.


Inter Pipeline Fund

Inter Pipeline is a major petroleum transportation, storage and natural gas liquids extraction business based in Calgary, Alberta, Canada. Structured as a publicly traded limited partnership, Inter Pipeline is an investment grade owner and operator of 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 and convertible debentures trade on the Toronto Stock Exchange under the symbols IPL.UN and IPL.DB, respectively.

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 set forth above may contain forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by 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 contained herein that are not statements of historical fact may be deemed to be forward-looking statements.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE FIRST QUARTER ENDED MARCH 31, 2006

The following Management's Discussion and Analysis ("MD&A") provides a detailed explanation of Inter Pipeline Fund's ("Inter Pipeline") operating results for the first quarter ended March 31, 2006 as compared to the first quarter ended March 31, 2005. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements of Inter Pipeline for the three month periods ended March 31, 2006 and 2005, the audited consolidated financial statements and MD&A for the years ended December 31, 2005 and 2004 and the Annual Information Form ("AIF") and other information filed by Inter Pipeline at www.sedar.com.

FIRST QUARTER 2006 HIGHLIGHTS

- Funds from operations of $47.9 million, up $5.8 million or 13.7% over the same quarter last year

- Quarterly payout ratio of 81.5%

- Net income of $29.1 million, up $2.2 million or 8.3% from the same quarter a year ago

- Completed acquisition of Tanklager-Gesellschaft Hoyer mbH ("TLG") for approximately $38 million

- Raised $150 million through successful Class A unit equity offering

- Transported a quarterly record of 312,100 barrels per day (b/d) on the Cold Lake pipeline system, up 9,200 b/d from the comparable period in 2005

- Southbound crude oil deliveries on the Bow River pipeline system sourced from Hardisty, Alberta to refining markets in the U.S. averaged 22,100 b/d, up 234% from Q1 2005

PERFORMANCE OVERVIEW

For the first quarter ended March 31, 2006, Inter Pipeline's funds from operations increased $5.8 million to $47.9 million, up from $42.1 million in the quarter ended March 31, 2005. For comparative purposes, Inter Pipeline did not acquire the Simon Storage bulk liquid storage business until the fourth quarter of 2005 and the TLG bulk liquid storage business until January 1, 2006. As such, Inter Pipeline has not recognized any of the bulk liquid storage business operations in the comparative figures for the first quarter of 2005.

The natural gas liquids ("NGL") extraction, conventional oil pipeline, oil sands transportation, and bulk liquid storage businesses contributed $23.9 million, $20.8 million, $9.6 million and $9.0 million of funds from operations, respectively (Q1 2005 - $22.2 million, $20.2 million, $11.6 million and nil, respectively). These cash contributions were offset by corporate cash costs of $15.4 million (Q1 2005 - $11.9 million).

Inter Pipeline paid monthly cash distributions of $0.065 per unit to unitholders in each of January, February and March 2006, for a total of $0.195 per unit during the quarter. This compares with cash distributions paid of $0.0625 per unit per month for January to March 2005 for a total of $0.1875 per unit.

Total cash distributed in the first quarter of 2006 of $39.0 million was $5.0 million higher than the $34.0 million distributed in the quarter ended March 31, 2005. This increase in total cash distributed is primarily attributable to the 4% increase in the amount of cash distributed per unit and the January 31, 2006 equity issuance of 15.0 million Class A units. These new Class A units qualified for the distributions declared in January, February and March 2006. An 81.5% payout ratio of funds from operations was realized in the first quarter of 2006, as compared to a payout ratio of 80.8% for the first quarter of 2005.

Inter Pipeline increased its outstanding long-term debt level, excluding Debentures, compared to March 31, 2005 by $163.5 million. This increase was primarily required to fund the acquisitions of the European bulk liquid storage businesses. The total debt to capitalization ratio was 36.1% at March 31, 2006. Of the total $662.9 million of debt outstanding as at March 31, 2006, $208.0 million, or 31.4% is exposed to interest rate fluctuations.

OUTLOOK

Inter Pipeline will continue to pursue its strategy to provide stable and predictable distributions to unitholders, while optimizing and growing its business. Inter Pipeline intends to spend approximately $70 million to $80 million on organic growth projects in 2006. These organic projects generally provide the highest economic returns on investment available to Inter Pipeline, and will allow Inter Pipeline to meet increased customer demand and optimize the operating capabilities of its assets. Inter Pipeline incurred growth related expenditures of $10.6 million in the first quarter of 2006.

On January 31, 2006 Inter Pipeline issued 15 million Class A units at $10.00 per unit for gross proceeds of $150 million. The net proceeds of $142.2 million were applied to reduce Inter Pipeline's revolving credit facility. With this reduction in short term debt, Inter Pipeline's debt level as at March 31, 2006 is only 36.1% of total capitalization. This represents a strong balance sheet position, which, when combined with $231.0 million available under the revolving credit facility, positions Inter Pipeline well for further growth. Standard & Poor's continues to rate Inter Pipeline as a BBB corporate credit rating with a stable outlook.

Together, the NGL extraction, conventional oil pipeline, oil sands transportation and bulk liquid storage business segments continue to provide stable and predictable cash flow. In addition, first quarter propane-plus frac-spreads in the NGL extraction business have been well above historical averages, and continue to be strong into the second quarter of 2006. The announced regular monthly distribution rate of $0.065 per unit, or $0.78 per unit on an annualized basis, is expected to be maintained subject to review from time to time by the Board of Directors of Inter Pipeline's general partner, Pipeline Management Inc. Any excess cash generated will be applied against short term debt to further strengthen the balance sheet.

Cochrane Ethane Recovery Project

Inter Pipeline is in the final stages of preparing its regulatory application for a new project to enhance ethane recovery at the Cochrane extraction plant. It is Inter Pipeline's position that this project will provide the Alberta ethane market with a better alternative than Taylor NGL Limited Partnership's recently announced Harmattan-Cochrane pipeline proposal, and should have a significantly lower landowner impact. This project, known as the "Cochrane Ethane Recovery Project", will significantly increase the ethane recovery efficiency of the plant and contribute incremental ethane to Alberta's overall supply. The project involves the installation of a single, new state-of-the-art cryogenic extraction unit capable of processing 750 mmcf/d to 800 mmcf/d of inlet gas supply, and the use of an existing electric motor and compressor. The new cryogenic unit will increase the ethane extraction capacity of the Cochrane facility by approximately 15,000 b/d, to 80,000 b/d making it among the largest and most efficient NGL extraction facilities in North America. Upon completion of the project, Inter Pipeline will suspend the operation of Cochrane's two existing, less efficient lean oil absorption trains.

Inter Pipeline has commenced stakeholder consultations and is preparing regulatory applications, which should be filed with the Alberta Energy and Utilities Board by the end of June, 2006. Pending regulatory approval, the project could commence construction in mid 2007, and be operational by late 2008 at an estimated cost of approximately $80 million.




SELECTED CONSOLIDATED FINANCIAL INFORMATION

Three Months Ended
March 31
------------------------------------------------------------------------
(millions, except per unit and % amounts) 2006 2005
------------------------------------------------------------------------
Revenues
NGL extraction $ 195.5 $ 170.5
Conventional oil pipeline $ 28.7 $ 27.1
Oil sands transportation $ 13.9 $ 15.0
Bulk liquid storage(1) $ 31.6 n/a

Net income(1)(4) $ 29.1 $ 26.8
Per unit - basic(4) $ 0.15 $ 0.15
Per unit - diluted(4) $ 0.15 $ 0.15

Funds from operations(1)(3)(4) $ 47.9 $ 42.1
Per unit(3) $ 0.25 $ 0.23

Cash distributions(2)(3) $ 39.0 $ 34.0
Per unit(2)(3) $ 0.195 $ 0.1875

Payout ratio(3)(4) 81.5% 80.8%

Total assets(1) $2,079.3 $1,699.6
Long-term debt(1)(5) $ 648.8 $ 485.3
Debentures $ 14.1 $ 24.7
Total partners' equity(5) $1,173.5 $1,067.4
Partnership units outstanding, end of period(5) 200.4 181.9
Total enterprise value(1)(3)(4)(5) $2,668.8 $2,123.7

(1) The Simon Storage bulk liquid storage business was acquired on
October 4, 2005 and TLG on January 1, 2006. Therefore, there are no
comparable figures. The acquisitions were financed by debt and thus
the increase in assets and debt outstanding.
(2) Cash distributions are calculated based on the number of units
outstanding at each record date.
(3) Please refer to the "Non-GAAP Financial Measures" section of this
MD&A.
(4) Restated comparative periods due to change in accounting policy
regarding UIOP.
(5) Inter Pipeline issued 15.0 million class A units on January 31, 2006
for gross proceeds of $150.0 million. The net proceeds of $142.2
million were used to reduce debt.


RESULTS OF OPERATIONS

NGL EXTRACTION BUSINESS SEGMENT

Volumes and Extraction Revenues
Three Months Ended
March 31
----------------------------- -----------------------------
2006 2005
----------------------------- -----------------------------
Bcf/d (000's b/d) Bcf/d (000's b/d)
----------------------------- -----------------------------
Through Propane Through Propane
put Ethane -plus Total put Ethane -plus Total
------------------------------------------ -----------------------------
Cochrane 1.6 51.5 24.7 76.2 1.9 51.0 27.7 78.7
Empress V
(100% basis) 1.1 16.0 12.0 28.0 1.1 19.3 12.2 31.5
Empress II 1.8 33.0 19.6 52.6 1.5 29.8 17.2 47.0
------------------------------------------ -----------------------------
Total 4.5 100.5 56.3 156.8 4.5 100.1 57.1 157.2
------------------------------------------ -----------------------------
------------------------------------------ -----------------------------


The three NGL extraction plants processed a combined 4.5 Bcf/d of natural gas for the quarter ended March 31, 2006, which is consistent with the 4.5 Bcf/d for the three month period ended March 31, 2005. As a result, the NGL extraction facilities produced an average of 156,800 b/d in the first quarter of 2006, consistent with the average of 157,200 b/d produced during the first three months of 2005. Gas throughput was down slightly at the Cochrane plant due primarily to the warmer than average temperatures in the U.S. Pacific Northwest.

The NGL extraction business generated $195.5 million in revenues in the first quarter of 2006 as compared to $170.5 million for the three month period ended March 31, 2005. The increased revenue is due to higher ethane sale prices and the cost of the replacement shrinkage gas that is recovered from ethane customers.

In the first quarter of 2006, Inter Pipeline hedged a portion of the cash flow related to propane-plus volumes at the Cochrane extraction plant, which is subject to commodity prices fluctuations (the "frac-spread"). Market frac-spread, or gross margin, is defined as the difference between the weighted average propane-plus price at Mont Belvieu, Texas and the cost of AECO natural gas purchased for shrinkage make-up. During the three months ended March 31, 2006, the actual market frac-spread was $0.353 CAD/US gallon (Q1 2005 - $0.420 CAD/US gallon). Based on the average monthly Bank of Canada USD/CAD rate, the actual market frac-spread was $0.306 US/US gallon (Q1 2005 - $0.343 US/US gallon).

The frac-spread realized by Inter Pipeline during the quarter, including hedged and unhedged production, was $0.353 CAD/US gallon (Q1 2005 - $0.328 CAD/US gallon) or $0.305 US/US gallon (Q1 2005 - $0.268 US/US gallon), based on the average monthly Bank of Canada CAD/USD rate. This realized price is higher than the 15-year historical simple average frac-spread to December 31, 2005 of $0.232 US/US gallon.

As at May 9, 2006, Inter Pipeline has hedged approximately 52% of forecast propane-plus volumes for the period April 1, 2006 to December 31, 2006 at an average price of $0.45 Cdn/US gallon. This average price would approximate $0.41 US/US gallon based on the average US$/Cdn$ forward curve as at May 9, 2006.

See the "FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET FINANCING" section below for further descriptions of the hedged frac-spreads as at March 31, 2006.

Shrinkage and Operating Expenses

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 shrinkage gas cost was $133.4 million for the first quarter of 2006 (Q1 2005 - $115.7 million). The increase in cost is directly associated with the increased price of Alberta natural gas, which is based on a combination of daily and monthly index AECO prices for natural gas. The price for shrinkage gas averaged $8.82 per gigajoule in the first quarter of 2006 as compared with an average price of $6.34 per gigajoule in the three month period ended March 31, 2005.

Operating and maintenance costs were $38.3 million in the first three months of 2006 as compared to $32.6 million for the comparable period of 2005. Fuel and power costs, included in operating costs, were $31.5 million in the first quarter of 2006 compared to $24.4 million for the three month period ended March 31, 2005. Increased Alberta natural gas prices, as noted above, were accompanied by increased electrical power prices. The average Alberta market electrical power price for the first three months of 2006 was $56.85 per mega-watt hour ("MW.h") compared to $46.00 per MW.h in the comparable period of 2005. The increase in fuel and power costs associated with these market price increases was partially offset by an unrealized gain on a heat rate swap contract of $1.0 million (see "FINANCIAL INSTRUMENTS & OFF-BALANCE-SHEET FINANCING" section below).

Inter Pipeline continued to use its fuel switching capability to optimize fuel and power costs at the Cochrane extraction plant. Natural gas prices were high relative to Alberta power prices in the first quarter, resulting in the preferential use of the electric motor. Inter Pipeline has received final regulatory approval, effective May 1, 2006, from the Alberta Electric System Operator to operate a recently refurbished second electric motor. The availability of a second electric motor increases Inter Pipeline's fuel switching capability and allows for further optimization of fuel and power costs.



CONVENTIONAL OIL PIPELINE BUSINESS SEGMENT

Volumes and Revenues

Three Months Ended
March 31
--------------------
(000's b/d) 2006 2005
------------------------------------------------------------------------
Bow River 141.8 139.1
Central/Valley/Mid Saskatchewan 68.3 67.5
------------------------------------------------------------------------
210.1 206.6
------------------------------------------------------------------------
------------------------------------------------------------------------


Overall volumes in the first quarter of 2006 were 3,500 b/d higher than in the comparable period of 2005. Natural volumes declines were offset primarily by increased Hardisty South volumes resulting from the recently expanded Bow River system (up 15,500 b/d, or 234%, to 22,100 b/d). Also contributing to the additional volumes were the improved weather conditions in the first quarter of 2006.

Total conventional revenues of $28.7 million in the first three months of 2006 were $1.6 million higher than the $27.1 million earned in the quarter ended March 31, 2005. The increased revenue was the result of the volume increase described above, combined with mainline toll increases on average of 5% to 6% effective on each of July 1, 2005 and January 1, 2006, respectively, and revenues earned from the Oil Storage and Marketing Agreement with Nexen Marketing Inc. The average revenue per barrel from the conventional systems in the first three months of 2006 was $1.52 vs. $1.45 per barrel in the first quarter of 2005.

Operating Expenses

The operating expenses for the conventional system were $7.9 million, which is $1.0 million higher than the $6.9 million incurred in the first quarter of 2005. This increase is primarily due to increased routine operating costs ($0.7 million) and additional costs associated with the operating portion of the new Long Term Incentive Plan ("LTIP") ($0.2 million). Please see NEW ACCOUNTING POLICIES - Long Term Incentive Plan below for further information.

In addition, conventional system power costs increased by $0.2 million compared to the first quarter of 2005. As previously noted, the average Alberta market power price for the first three months of 2006 was $56.85 per MW.h compared to $46.00 per MW.h in the comparable period of 2005. The impact of higher Alberta market power prices, increased transportation charges and increased consumption was partially offset by Inter Pipeline's power hedging program, which fixed 5.0 mega-watts of power at an average price of $49.50 per MW.h for the first quarter of 2006 (Q1 2005 - 5.0 mega-watts of power at an average price of $46.95 per MW.h).

The Cactus Lake Pipeline System Commercial Agreements

Inter Pipeline entered into several commercial agreements with Nexen Marketing and other parties in which Inter Pipeline will invest approximately $3.5 million to construct new metering and interconnection facilities at its Kerrobert terminal in southwest Saskatchewan. Inter Pipeline expects these new facilities to be in service by mid-2006.

On February 28, 2006 Inter Pipeline announced that the agreement to purchase an 85% interest in the Cactus Lake pipeline system from Nexen Marketing, a division of Nexen Inc. would likely not proceed as the other owner of the business exercised its right of first refusal to acquire the 85% interest.



OIL SANDS TRANSPORTATION BUSINESS SEGMENT

Volumes and Revenues

Three Months Ended
March 31
--------------------
(000's b/d) 2006 2005
------------------------------------------------------------------------
Cold Lake Pipeline (100% basis) 312.1 302.9
------------------------------------------------------------------------
------------------------------------------------------------------------


Volumes on the Cold Lake pipeline system increased by approximately 9,200 b/d from 302,900 b/d in the first quarter of 2005 to 312,100 b/d in the first three months of 2006. This increase is the result of the continued development of the oil sands by the founding shippers on the Cold Lake pipeline system of their respective Cold Lake oil sands projects.

Revenues from Inter Pipeline's 85% interest in the Cold Lake Pipeline Limited Partnership ("Cold Lake L.P.") were $13.9 million during the first three months of 2006, down $1.1 million from $15.0 million earned in the first quarter of 2005. Despite the increase of 9,200 b/d in the Cold Lake pipeline system volumes, on a 100% basis, the $1.1 million decrease in revenues is primarily a result of the contractual reduction in capital fees (per barrel) that became effective January 1, 2006. This capital fee reduction resulted in an approximately $2.2 million decrease in revenue when compared to the first quarter of 2005. This decrease in capital fee revenue was somewhat offset by increased volumes, which contributed $0.6 million in revenue, and operating revenue, which increased by $0.5 million as a result of increased recoverable operating expenses.

The Cold Lake Transportation Services Agreement is supported with an annual minimum ship or pay commitment of $30.1 million ($35.4 million - 100% basis) in 2006 and, thereafter, increases to approximately $30.9 million ($36.3 million - 100% basis) annually through to the end of December, 2011.

Operating Expenses

Cold Lake operating expenses for the first three months of 2006 were $4.3 million compared to $3.4 million for the comparable period of 2005. The increase was primarily due to a $0.5 million increase in fuel and power costs, attributable to power price and transportation charge increases along with a $0.2 million increase in property taxes. Unlike the conventional system, the Cold Lake pipeline system fuel and power costs are not hedged as these costs and the majority of operating expenses are recovered from the shippers. The fuel, power and operating cost recoveries are recorded as revenue.

BULK LIQUID STORAGE BUSINESS SEGMENT

Operating Results

The bulk liquid storage business earned revenues of $31.6 million for the three months ended March 31, 2006. Rental and handling income benefited from continued high demand across the European terminal network, with an average tank utilization rate of approximately 96%. The Immingham storage terminals continued to benefit from close proximity to, and pipeline links with the ConocoPhillips and Total refineries. TLG experienced strong demand in the first quarter and results were in line with management expectations. TLG has been successfully integrated into Simon Storage activities.

Operating expenses for the three months ended March 31, 2006 were $20.0 million. These costs are primarily composed of variable costs, including direct operating costs ($7.5 million), staffing costs ($6.0 million) and fuel and power costs ($2.7 million).

Tanklager-Gesellschaft Hoyer mbH ("TLG") Acquisition

On January 1, 2006, through its wholly-owned subsidiary, Simon Storage, Inter Pipeline acquired TLG, an independent bulk liquid storage business located in Mannheim, Germany. The transaction involved the purchase of all outstanding share capital of TLG from Hoyer GmbH International Fachspedition. The cash consideration for this transaction was approximately $37.7 million (EUR 27 million plus closing adjustments and acquisition costs of EUR 0.4 million).



(millions)
------------------------------------------------------------------------

Cash $ 0.3
Non-cash working capital deficiency (1.6)
Property, plant and equipment 50.9
Goodwill 7.8
Asset retirement obligation (0.3)
Environmental liability (3.9)
Pension liability (1.5)
Future tax liability (14.0)
------------------------------------------------------------------------
Total assets acquired $ 37.7
------------------------------------------------------------------------
------------------------------------------------------------------------


Funding for the acquisition was provided from Inter Pipeline's existing credit facilities.

Description of the Assets

TLG owns and operates two multi-purpose bulk liquid storage terminals located on the Rhine River in Mannheim, Germany, one of Europe's largest inland ports. With 134 storage tanks and a combined storage capacity of 1.9 million barrels, TLG ranks among the top ten independent storage providers and is the second largest independent petrochemical storage provider, by capacity, in Germany.

The terminals are integrated with local petrochemical complexes, including the BASF Ludwigshafen site, the world's largest petrochemical facility. TLG's location on the Rhine River, one of Western Europe's principal inland waterways, links the terminals to other major industrial centres in Germany, France and Switzerland. The terminals also provide access to the major deep water coastal ports of Rotterdam, Amsterdam and Antwerp.

Revised Simon Storage Purchase Price Allocation

On October 4, 2005, Inter Pipeline announced that it had closed the acquisition of Simon Storage, the largest independent petroleum and petrochemical storage business in the United Kingdom. The transaction involved the purchase of all outstanding share capital in Simon Storage for cash consideration of approximately $258.8 million (Pounds Sterling 120 million plus closing adjustments and acquisition costs of Pounds Sterling 4.7 million). The purchase price allocation including closing adjustments and acquisition costs is as follows:



(millions)
------------------------------------------------------------------------

Cash $ 12.8
Non-cash working capital deficiency (7.7)
Intangible assets - customer contracts 21.1
Property, plant and equipment 237.3
Goodwill 55.0
Asset retirement obligation (0.9)
Pension liability (2.3)
Future tax liability (56.5)
------------------------------------------------------------------------
Total assets acquired $ 258.8
------------------------------------------------------------------------
------------------------------------------------------------------------


Funding for the acquisition was provided from Inter Pipeline's unsecured revolving bank credit facility, which was increased from $400 million to $500 million on September 30, 2005.

CORPORATE

Depreciation and Amortization

Inter Pipeline's depreciation and amortization of its operating and intangible assets totaled $17.3 million in the first three months of 2006, which is $2.5 million higher than the $14.8 million charged in the first quarter of 2005. This increase is primarily attributable to the addition of the bulk liquid storage intangible assets and property, plant and equipment, which were acquired in late 2005 and early 2006.



Financing Charges

Three Months Ended
March 31
--------------------
(millions) 2006 2005
------------------------------------------------------------------------
Credit facility interest expense $ 3.8 $ 1.7
Interest on loan payable to General Partner 5.8 5.8
Debentures interest expense 0.4 0.7
------------------------------------------------------------------------
Cash related financing charges 10.0 8.2
Amortization of deferred financing costs 0.1 0.2
------------------------------------------------------------------------
Total financing charges $ 10.1 $ 8.4
------------------------------------------------------------------------
------------------------------------------------------------------------


Inter Pipeline incurred $3.8 million of total credit facility interest expense during the quarter, compared to $1.7 million in the comparable quarter in 2005. Short-term interest rates for the quarter ranged from a weighted average bankers acceptance rate, including stamping fees, of 4.28% to a weighted average prime rate of 5.21% (Q1 2005 - 3.44% for bankers acceptances, including stamping fees, and 4.24% for prime rate). The weighted average principal outstanding on the credit facilities was $341.8 million for the three months ended March 31, 2006 (Q1 2005 - $148.3 million).

Interest expense of $5.8 million was incurred in the quarter on the $379.8 million loan payable to the General Partner and is consistent with the first quarter of 2005.

General and Administrative

Inter Pipeline's general and administrative expenses totaled $6.3 million during the first quarter of 2006, which is $3.6 million higher than the $2.7 million in the first three months of 2005. This increase in costs is primarily attributable to the addition of $2.4 million in general and administrative costs associated with the acquisition of the Bulk Liquid Storage business: Simon Storage on October 4, 2005 and TLG on January 1, 2006, respectively.

The remaining $1.2 million increase in general and administrative expenses relates to Canadian operations. Additional costs of $0.4 million were included for the first time for the new LTIP. Please see NEW ACCOUNTING POLICIES - Long Term Incentive Plan below for further information. Also, regulatory and compliance costs increased by $0.3 million and employee costs increased by $0.2 million.

Unit Incentive Options

The unit incentive option expense for the first quarter of 2006 is $0.1 million (Q1 2005 - $0.2 million). Inter Pipeline's policy for amortizing the fair value of the options from the date of grant results in larger amounts being amortized in the early years of the vesting period such that they are fully amortized in the year the Unit Incentive Options ("Options") are fully vested. There were no new Options issued in the first quarter of 2006.

The 2005 unit incentive option expense was restated as explained below in the NEW ACCOUNTING POLICIES - Unit Incentive Option Plan and in the MD&A for the year ended December 31, 2005.

Management and Acquisition Fees

The General Partner was paid a management fee equivalent to 2% of "Operating Cash," as defined in the Partnership Agreement. The fees of $1.2 million for the first three months of 2006 are $0.2 million higher than the $1.0 million expensed for 2005.

An acquisition fee of approximately $0.4 million, representing 1% of the purchase price, before closing adjustments, on the acquisition of TLG, was paid in January 2006. There was no acquisition fee paid in the first quarter of 2005.

Income Taxes

Inter Pipeline is a Canadian limited partnership and therefore, is not a taxable entity. Certain of Inter Pipeline's subsidiaries are taxable entities in Canada and in Europe. Therefore, the current and future tax expenses reported in the consolidated financial statements are the expenses of those subsidiaries.

The future tax expense of $1.1 million primarily represents the change in the difference between the tax value and the accounting book value of the acquired bulk liquid storage assets and liabilities in the period, multiplied by the statutory future income tax rate.



Capital Expenditures

Inter Pipeline incurred a total of $12.2 million on capital expenditures
during the first quarter of 2006 (Q1 2005 - $3.1 million) as follows:

Three Months Ended
March 31
--------------------
2006 2005
(millions) Growth Sustaining Total Total
------------------------------------------------------------------------
NGL extraction $ 0.9 $ 0.2 $ 1.1 $ 0.5
Conventional oil pipeline 6.0 0.5 6.5 2.1
Oil sands transportation 2.8 - 2.8 0.5
Bulk liquid storage 0.9 0.9 1.8 -
------------------------------------------------------------------------
Total $ 10.6 $ 1.6 $ 12.2 $ 3.1
------------------------------------------------------------------------
------------------------------------------------------------------------


The majority of Q1 2006 expenditures in the conventional oil pipeline segment relate to the previously announced Bow River South expansion. During Q1 2006, $4.2 million was spent on the project, primarily for detailed engineering and procurement of major equipment and materials. This brings project costs to March 31, 2006 to $8.2 million. Current estimates place the total expansion costs at $12.8 million, and IPF anticipates the complete expansion to be in-service in June 2006.

In the oil sands transportation business segment, capital expenditures for the three months ended March 31, 2006 were primarily related to the commencement of detailed engineering and procurement on a number of Cold Lake Pipeline expansion projects at the Foster Creek and Wolf Lake pump stations, as well as the La Corey terminal, for a total of $2.6 million during Q1.



SUMMARY OF QUARTERLY RESULTS

---------------------------
2004
---------------------------------------------------------------
(millions, except per Second Third Fourth
unit and % amounts) Quarter Quarter Quarter
(1)
---------------------------------------------------------------
Revenue
NGL extraction(1) n/a $ 114.7 $ 185.5
Conventional oil pipeline(5) $ 26.1 $ 28.3 $ 27.9
Oil sands transportation(5) $ 17.8 $ 19.8 $ 18.6
Bulk liquid storage(2) n/a n/a n/a
Net income(6) $ 13.8 $ 20.2 $ 33.5
Per unit - basic(6) $ 0.10 $ 0.12 $ 0.19
Per unit -diluted(6) $ 0.10 $ 0.12 $ 0.18
Funds from operations(1)(4)(6) $ 27.7 $ 38.7 $ 55.8
Per unit(4) $ 0.20 $ 0.23 $ 0.31
Cash distributions(3)(4) $ 25.1 $ 32.5 $ 33.7
Per unit(3)(4) $0.1800 $0.1825 $0.1875
Payout ratio(4)(6) 90.3% 83.9% 60.4%
Partnership units
outstanding
Weighted average 138.9 166.1 179.4
End of period 139.4 178.0 180.1

------------------------------------
2005 2006
------------------------------------------------------------------------
(millions, except per First Second Third Fourth First
unit and % amounts) Quarter Quarter Quarter Quarter Quarter
(2)
------------------------------------------------------------------------
Revenue
NGL extraction(1) $ 170.5 $ 144.8 $ 174.8 $ 233.8 $ 195.5
Conventional oil
pipeline(5) $ 27.1 $ 26.5 $ 28.1 $ 28.2 $ 28.7
Oil sands
transportation(5) $ 15.0 $ 15.1 $ 15.4 $ 17.2 $ 13.9
Bulk liquid storage(2) n/a n/a n/a $ 30.4 $ 31.6
Net income(6) $ 26.8 $ 17.1 $ 24.5 $ 20.9 $ 29.1
Per unit - basic(6) $ 0.15 $ 0.09 $ 0.13 $ 0.11 $ 0.15
Per unit -diluted(6) $ 0.15 $ 0.09 $ 0.13 $ 0.11 $ 0.15
Funds from
operations(1)(4)(6) $ 42.1 $ 32.8 $ 40.0 $ 38.1 $ 47.9
Per unit(4) $ 0.23 $ 0.18 $ 0.22 $ 0.21 $ 0.25
Cash distributions(3)(4) $ 34.0 $ 34.2 $ 34.4 $ 35.0 $ 39.0
Per unit(3)(4) $0.1875 $0.1875 $0.1875 $0.1900 $0.1950
Payout ratio(4)(6) 80.8% 104.4% 86.2% 91.8% 81.5%
Partnership units
outstanding
Weighted average 181.0 182.3 183.4 184.2 194.7
End of period 181.9 183.0 183.9 184.6 200.4

(1) The incremental change in the third quarter of 2004 is due to the
acquisition of the NGL extraction business on July 28, 2004.
(2) The incremental change in the fourth quarter of 2005 is due to the
acquisition of the Simon Storage bulk liquid storage business on
October 4, 2005.
(3) Cash distributions are calculated based on the number of units
outstanding at each record date.
(4) Please refer to the "Non-GAAP Financial Measures" section of this
MD&A.
(5) Restated for change in segment reporting policy.
(6) Restated comparative periods due to change in accounting policy
regarding Unit Incentive Option Plan.


LIQUIDITY AND CAPITAL RESOURCES

As at
March 31
--------------------
(millions, except for % amounts) 2006 2005
------------------------------------------------------------------------

Cash, cash equivalents $ 22.9 $ 1.7
------------------------------------------------------------------------
------------------------------------------------------------------------

Working capital (deficiency) excluding cash(1) $ (27.1) $ (12.7)
------------------------------------------------------------------------
------------------------------------------------------------------------

Variable rate debt
Revolving credit facility $ 500.0 $ 400.0
Revolving credit facility - unutilized (231.0) (294.5)
------------------------------------------------------------------------
Revolving credit facility outstanding 269.0 105.5
Less variable rate debt swapped to fixed (61.0) (62.0)
------------------------------------------------------------------------
Total variable rate debt outstanding 208.0 43.5
------------------------------------------------------------------------

Fixed rate long-term debt
Loan payable to General Partner 379.8 379.8
Debentures 14.1 24.7
Add variable rate debt swapped to fixed 61.0 62.0
------------------------------------------------------------------------
Total fixed rate long-term debt outstanding 454.9 466.5
------------------------------------------------------------------------

Total debt and Debentures outstanding $ 662.9 $ 510.0
------------------------------------------------------------------------
------------------------------------------------------------------------

Senior debt to total capitalization(1) 35.3% 30.8%
Total debt to total capitalization(1) 36.1% 32.4%
------------------------------------------------------------------------
------------------------------------------------------------------------

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


Inter Pipeline applies any excess cash against its outstanding debt to reduce interest costs. Of the $648.8 million of total debt outstanding at March 31, 2006 (excluding Debentures at 10%), $208.0 million was exposed to a period ending variable interest rate of 4.64% with the remaining $440.8 million of fixed term debt having rates ranging from 5.41% to 6.31%.

Subsequent to March 31, 2006 Inter Pipeline established a $20 million revolving demand loan facility with a Canadian Chartered bank for cash management purposes. Amounts borrowed under this facility bear interest at the same applicable rates as the $500 million Unsecured Revolving Credit Facility, while no fees are payable on undrawn amounts.

Standard & Poor's has maintained Inter Pipeline's BBB long-term corporate credit rating with a stable outlook.



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 facility $ 269.0 $ - $ 269.0 $ - $ -
Loan payable to General
Partner 379.8 - - - 379.8
Debentures 14.1 - 14.1 - -
Operating leases 52.9 6.2 14.3 6.4 26.0
------------------------------------------------------------------------
Total obligations $ 715.8 $ 6.2 $ 297.4 $ 6.4 $ 405.8
------------------------------------------------------------------------
------------------------------------------------------------------------


The NGL extraction business has estimated commitments in place related to material capital and operating expense projects of $5.9 million and $0.2 million, respectively, as at March 31, 2006.

The conventional oil pipeline business has estimated commitments in place related to material capital and operating expense projects of $6.3 million and $1.1 million, respectively, as at March 31, 2006.

The Cold Lake pipeline business has estimated commitments in place related to material capital and operating expense projects of $3.1 million (85% share) and $0.1 million, respectively, as at March 31, 2006.

The bulk liquid storage business has estimated commitments in place related to material capital and operating expense projects of $2.9 million and $0.9 million, respectively, as at March 31, 2006.

DISTRIBUTIONS TO UNITHOLDERS

The Limited Partnership Agreement defines a concept of Distributable Cash which is required to be paid by the General Partner to unitholders. The General Partner has the discretion to manage and control the business of Inter Pipeline and specifically, may establish cash reserves that are determined to be necessary or appropriate for the proper management of Inter Pipeline. Changes to any such reserves may be made by the General Partner at any time. Distributable Cash as defined will fluctuate from time to time as a result of many factors, including any such changes in reserves made by the General Partner in the exercise of its discretion.

The definition of Distributable Cash includes different components. The following table generally describes the sources and uses of cash leading to cash distributions.



Three Months Ended
March 31
--------------------
(millions, except per unit and % amounts) 2006 2005
------------------------------------------------------------------------
Operating revenue $ 269.7 $ 212.6
Shrinkage gas expense (133.4) (115.7)
Cash operating expense (70.4) (42.9)
Cash general and administrative expense (6.0) (2.7)
Management fees expense(3) (1.2) (1.0)
Acquisition fee expense (0.4) -
Credit facility interest expense (3.8) (1.7)
Loan payable to General Partner interest expense (5.8) (5.8)
Interest on Debentures (0.4) (0.7)
Current income taxes (0.4) -
------------------------------------------------------------------------
Funds from operations(1)(3) 47.9 42.1
Net change in non-cash working capital(3) 19.4 38.0
------------------------------------------------------------------------
Cash provided by operating activities(3) $ 67.3 $ 80.1
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash distributions(1)(2) $ 39.0 $ 34.0
------------------------------------------------------------------------
------------------------------------------------------------------------

Per unit(1)(2) $ 0.1950 $ 0.1875
------------------------------------------------------------------------
------------------------------------------------------------------------

Payout ratio(1)(3) 81.5% 80.8%
------------------------------------------------------------------------
------------------------------------------------------------------------

Growth capital expenditures(1) $ 10.6 $ 1.5
Sustaining capital expenditures(1) 1.6 1.6
------------------------------------------------------------------------
Total capital expenditures $ 12.2 $ 3.1
------------------------------------------------------------------------
------------------------------------------------------------------------

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


It is the intention of the General Partner of Inter Pipeline to provide unitholders with a stable flow of cash distributions. In this regard, the General Partner has excluded from cash distributions cash received from issuances of equity and proceeds on the sale of assets. These amounts have been reinvested in the business to effectively manage the balance sheet, particularly debt levels, and remain available within Inter Pipeline's credit facilities should they ever be needed to maintain the monthly distributions.



OUTSTANDING UNIT DATA

Inter Pipeline's outstanding units as at March 31, 2006 are as follows:

(millions) Class A Class B Total
------------------------------------------------------------------------
Units outstanding 200.2 0.2 200.4
Units reserved for issuance upon exercise
of vested Unit Incentive Options 2.1 - 2.1
Units reserved for issuance upon conversion
of Debentures 2.4 - 2.4
------------------------------------------------------------------------


As at May 9, 2006, Inter Pipeline had 200.5 million Class A units outstanding and 0.2 million Class B units outstanding, for a total of 200.7 million units outstanding.

FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

Inter Pipeline utilizes derivative financial instruments to manage its exposure to changes in power costs, interest rates, foreign currencies and commodity prices. A derivative must be designated and effective to be accounted for as a hedge. The gain or loss incurred on these instruments is recognized in income in the same period as the hedged transactions are settled.

Inter Pipeline's risk management policies are intended to minimize the volatility of Inter Pipeline's exposure to commodity price risk 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 the risk management policy.

Inter Pipeline has four types of "off-balance sheet" financial instruments: power price swap agreements, commodity price swap agreements, foreign currency exchange contracts and interest rate swap agreements. All contracts outstanding at March 31, 2006 and 2005 are being accounted for as hedges, except for the heat rate swap contract in the NGL extraction business.

CONVENTIONAL OIL PIPELINE BUSINESS

Power Prices

Inter Pipeline has entered into electricity price swap agreements in respect of 5.0 MW for 2006 at average prices of $49.50 per MW.h, 5.0 MW for 2007 at average prices of $52.75 per MW.h and 2.5 MW for 2008 at an average price of $54.00 per MW.h. The mark-to-market value of these contracts at March 31, 2006 is an unrecognized gain of $1.1 million.

Contracts outstanding at March 31, 2005 were for 5.0 MW for 2005 at average prices of $46.95 per MW.h and 5.0 MW for 2006 at average prices of $49.50 per MW.h. The mark-to-market value of these contracts resulted in an unrecognized gain of $0.6 million at March 31, 2005.

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 March 31, 2006, Inter Pipeline had hedged approximately 40% of forecast propane plus volumes for the period April 1, 2006 to December 31, 2006 at the Cochrane NGL extraction plant at an average price of $0.43 Cdn/US gallon. This average price would approximate $0.37 US/US gallon based on the average US$/Cdn$ forward curve as at March 31, 2006.

Subsequent to March 31, 2006, Inter Pipeline entered into additional frac spread swap contracts, increasing the percentage of forecast propane plus volumes hedged for the remainder of 2006 to 52% at an average price of $0.45 Cdn/US gallon. This average price would approximate $0.41 US/US gallon based on the average US$/Cdn$ forward curve as at May 9, 2006.

Commodity Prices

NGLs

Inter Pipeline established a hedge 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 commodity price ("frac-spread") risk in its NGL extraction business. Contracts outstanding at March 31, 2006 to hedge NGL revenues fix NGL prices at the following average prices for the period from April 1, 2006 to December 31, 2006:



Average Price Average Quantity
(US$/ US gallon) (b/d)
------------------------------------------------------------------------
Propane 0.922 3,222
Normal Butane 1.093 554
Iso Butane 1.126 343
Pentanes Plus 1.561 274
------------------------------------------------------------------------

The mark to market value of these contracts resulted in an unrecognized
loss of US$5.8 million at March 31, 2006.

Contracts outstanding at March 31, 2005 fixed NGL prices at the
following average prices for the period from April 2005 to December
2005:

Average Price Average Quantity
(US$/ US gallon) (b/d)
------------------------------------------------------------------------
Propane 0.773 3,775
Normal Butane 0.905 649
Iso Butane 0.910 402
Pentanes Plus 1.166 321
------------------------------------------------------------------------

The mark to market value of these contracts resulted in an unrecognized
loss of US$6.6 million at March 31, 2005.


Natural Gas

Contracts outstanding at March 31, 2006 to hedge natural gas purchases fix natural gas prices at an average price of $7.049 per gigajoule for the period from April 1, 2006 to December 31, 2006 for average quantities of 20,364 gigajoules per day. The mark-to-market value of the natural gas contracts at March 31, 2006 resulted in an unrecognized gain of $0.5 million.

Contracts outstanding at March 31, 2005 fixed natural gas prices at an average price of $6.971 per gigajoule for the period from April 1, 2005 to December 31, 2005 for average quantities of 24,145 gigajoules per day. The mark-to-market value of these contracts at March 31, 2005 resulted in an unrecognized gain of $6.1 million.

Foreign Currency

The NGL price swap agreements are calculated based on US dollar prices. As at March 31, 2006 Inter Pipeline had outstanding foreign exchange contracts to sell an average of US$5.6 million per month at an average fixed rate of US$0.878 per Canadian dollar for the period from April 1, 2006 to December 31, 2006. The mark-to-market value of these contracts at March 31, 2006 resulted in an unrecognized loss of $1.2 million.

As at March 31, 2005, Inter Pipeline had outstanding foreign exchange contracts to sell an average of US$3.1 million per month at an average fixed rate of US$0.805 per Canadian dollar for the period from April 1, 2005 to December 31, 2005. The mark-to-market value of these contracts resulted in an unrecognized gain of $0.6 million at March 31, 2005.

Power Prices

To manage electricity price exposure at the Cochrane plant, Inter Pipeline entered into a heat rate swap contract in 2006 for 14.0 MW of electric power per hour for the period January 1, 2006 to December 31, 2006, at a price equal to 6.90 GJs/MW.h multiplied by the AECO monthly index price. These contracts have not been accounted for as hedges. They have been and will be marked to market each reporting period. As a result, an unrealized gain of $1.0 million has been included in operating expenses for the three months ended March 31, 2006 representing the mark-to-market value of the contract as at March 31, 2006.

CORPORATE

Interest Rates

$61.0 million of the outstanding debt at March 31, 2006 (2005 - $62.0 million) is subject to a continuing swap agreement, in which the floating rate bank debt has been exchanged for an average fixed rate of 6.1%. The fair market value of the remaining interest rate swap agreements aggregates to an unrecognized loss of $3.8 million at March 31, 2006 compared to an unrecognized loss of $5.9 million at March 31, 2005. Of the $61.0 million of interest rate swaps outstanding at March 31, 2006, $15.0 million is set to expire on September 30, 2006.

TRANSACTIONS WITH RELATED PARTIES

No revenue was earned from related parties for the three months ended March 31, 2006 and 2005.

Inter Pipeline has entered into a support agreement that enables Inter Pipeline to request Pipeline Assets Corp. ("PAC"), the shareholder of the General Partner, and its affiliates to provide certain personnel and services to 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 fair value for the services provided. No amounts were paid during the three months ended March 31, 2006 or 2005 under the support agreement.

Amounts due to/from the General Partner and its affiliates related to these services are non-interest bearing and have no fixed repayment terms with the exception of the loan agreement with the General Partner. At March 31, 2006, there were amounts owed to the General Partner by Inter Pipeline of $0.5 million (March 31, 2005 - $0.4 million).

Management fees of $1.2 million were earned by the General Partner in the quarter ended March 31, 2006 (Q1 2005 - $1.0 million). Acquisition fees of $0.4 million were paid in the quarter (Q1 2005 - $nil).

The General Partner's 0.1% partnership interest, 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 of the officers and a director 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 to the continuing employment or service as a director of the General Partner. These certain officers and director of the General Partner received a total of $0.2 million in dividends during the quarter from PAC pursuant to their non-voting shares (Q1 2005 - $0.1 million).

CRITICAL ACCOUNTING ESTIMATES

There were no changes in Inter Pipeline's critical accounting estimates that affected the disclosure or the accounting for its operations for the quarter ended March 31, 2006.

NEW ACCOUNTING POLICIES

Unit Incentive Option Plan ("UIOP")

In Q4 2005, Inter Pipeline determined, after consultation with its auditors and the Alberta Securities Commission that it is preferable to change its method of accounting for unit-based compensation to the fair value method. Inter Pipeline previously valued the unit incentive options ("Options") issued under its UIOP using the intrinsic value method. Under this method the resulting net change in the number of vested Class A units outstanding combined with the net change in the value of the Class A units, from reporting period to reporting period, is recorded in the income statement in each reporting period. Under the fair value method, the value of the Options is determined on the date of grant using a binomial option pricing model, and that value is amortized as an expense over the vesting period of the Options. This accounting change has been applied retroactively and prior periods restated.

Long Term Incentive Plan ("LTIP")

Effective January 1, 2006, Inter Pipeline implemented a new long term incentive plan ("LTIP") for its employees, officers and directors of the General Partner. The LTIP is governed by a Unit Appreciation Rights Plan ("UARP") document that defines how awards made under the UARP will be determined and administered.

A Unit Appreciation Right ("UAR"), as granted under the UARP, is valued based on Inter Pipeline's unit price plus credit for cash distributions paid to unitholders during the period the UAR's are held. The UAR will vest as to one third on each of the successive anniversary dates from the date of grant. Upon exercise of a UAR, the amount owing will be paid out in cash net of applicable withholding taxes.

The total number of grants issued effective January 1, 2006 were 427,000 with a fair value of $4.3 million on that date. The charge to income in the period, representing the amortized value of the initial grant, the value of the distributions associated with the vested grants since the grant date, the increase/decrease in unit price per vested grant and cancelled grants, in the three month period ended March 31, 2006 was $0.7 million.

NON-GAAP FINANCIAL MEASURES

Certain financial measures referred to in this MD&A, namely "cash distributions", "cash distributions per unit", "Distributable Cash", "enterprise value", "funds from operations", "funds from operations per unit", "growth capital expenditures", "payout ratio", "senior debt to total capitalization", "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 in determining the ability of Inter Pipeline to generate cash and fund the monthly distributions. Management considers these non-GAAP financial measures to be important indicators in assessing its performance.

Cash distributions are calculated by multiplying the cash distributions per unit by the number of units outstanding at each record date.

Cash distributions per unit are declared by the Board of Directors and are currently paid on a monthly basis to unitholders.

Distributable Cash is an amount calculated in accordance with the terms of the Partnership Agreement.

Enterprise value is calculated by multiplying the period-end closing unit price by the total number of units outstanding and adding debt plus the debt portion of the Debentures. Enterprise value is calculated as follows:



Three Months Ended
March 31
--------------------
(millions, except per unit amounts) 2006 2005
------------------------------------------------------------------------
Closing unit price $ 10.01 $ 8.87
Total number of partnership units outstanding 200.4 181.9
------------------------------------------------------------------------
2,005.9 1,613.7
Long-term debt 648.8 485.3
Convertible Debentures 14.1 24.7
------------------------------------------------------------------------
Enterprise value $2,668.8 $2,123.7
------------------------------------------------------------------------
------------------------------------------------------------------------


Funds from operations is reconciled from net income as seen on the Consolidated Cash Flow Statement and is expressed before changes in non-cash working capital.

Funds from operations per unit is 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.

Payout ratio is calculated by expressing cash distributions for the period as a percentage of funds from operations for the period.

Senior debt to total capitalization is calculated by dividing long-term debt by the sum of long-term debt, Debentures and total partners' equity.

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.

Total debt to total capitalization is calculated by dividing the sum of long-term debt, Debentures and the conversion feature on Debentures by the sum of long-term debt, Debentures and total partners' equity.

Working capital is calculated by subtracting current liabilities from current assets.

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 11th day of May, 2006.

Disclaimer

This MD&A highlights significant business results and statistics for Inter Pipeline's three month period ended March 31, 2006. This information may contain forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by the General Partner of Inter Pipeline at the time of preparation, may prove to be incorrect and actual results may differ materially from those anticipated. 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. Inter Pipeline assumes no obligation to update forward-looking statements should circumstances or management's estimates or opinions change.

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.



Inter Pipeline Fund
CONSOLIDATED BALANCE SHEETS

As at As at
March 31, December 31,
(unaudited) (thousands of dollars) 2006 2005
------------------------------------------------------------------------

ASSETS
Current Assets
Cash $ 22,932 $ 17,525
Funds held in trust (note 4) - 37,964
Accounts receivable 103,945 130,175
Prepaid expenses and other deposits 10,534 12,771
------------------------------------------------------------------------
Total Current Assets 137,411 198,435

Intangible assets (note 6) 382,710 385,977
Property, plant and equipment (note 7) 1,495,750 1,442,367
Deferred financing charges 1,700 1,753
Goodwill 61,701 53,893
------------------------------------------------------------------------
Total Assets $ 2,079,272 $ 2,082,425
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Distributable cash payable $ 13,025 $ 11,998
Accounts payable and accrued
liabilities 113,014 133,866
Deferred revenue 15,539 1,909
------------------------------------------------------------------------
Total Current Liabilities 141,578 147,773

Long-term debt (note 8) 648,800 805,800
Convertible debentures 14,106 15,948
Asset retirement obligation (note 9) 17,283 16,715
Environmental liabilities 9,016 5,025
Pension liabilities 3,597 2,060
Long-term compensation accrual 296 4
Future income taxes (notes 3 and 4) 71,132 56,025
------------------------------------------------------------------------
Total Liabilities 905,808 1,049,350
------------------------------------------------------------------------

Partners' Equity
Conversion feature on convertible
debentures 625 707
Cumulative foreign currency
translation (5,865) (9,706)
Partners' equity (note 10) 1,178,704 1,042,074
------------------------------------------------------------------------
Total Partners' Equity 1,173,464 1,033,075
------------------------------------------------------------------------
Total Liabilities and Partners'
Equity $ 2,079,272 $ 2,082,425
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

Three months
ended March 31
2006 2005
------------------------------------------------------------------------
Class A Class B (restated -
Limited Unlimited see Note 2)
Liability Liability
(unaudited) Partnership Partnership
(thousands of dollars) Units Units Total Total
------------------------------------------------------------------------

Balance, beginning of
period, as previously
reported $ 1,041,032 $ 1,042 $ 1,042,074 $ 1,063,536
Retroactive adjustment
for change in
accounting policy - - - (211)
------------------------------------------------------------------------
Balance, beginning of
period, as restated 1,041,032 1,042 1,042,074 1,063,325
Net income for the
period 29,032 29 29,061 26,836
Cash distributions
declared (38,973) (39) (39,012) (34,016)
Issuance of
Partnership units
Conversion of
debentures 1,924 2 1,926 8,135
Issued under
Distribution
Reinvestment and
Optional Unit
Purchase Plan 1,270 2 1,272 623
Issued under Unit
Incentive Option
Plan (note 10) 1,101 1 1,102 1,496
Equity issuances,
net of issue costs
(note 10) 142,056 142 142,198 -
Amortization of
debenture issue costs - - - (199)
Unit incentive
options (note 11) 83 - 83 180
------------------------------------------------------------------------
Balance,
end of period $ 1,177,525 $ 1,179 $ 1,178,704 $ 1,066,380
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
CONSOLIDATED STATEMENTS OF NET INCOME

Three months ended March 31
(unaudited) (thousands of dollars) 2006 2005
------------------------------------------------------------------------
(restated -
see Note 2)

REVENUES $ 269,748 $ 212,634
------------------------------------------------------------------------

EXPENSES
Shrinkage gas 133,355 115,708
Operating 70,461 42,876
Depreciation and amortization 17,310 14,825
Financing charges (note 12) 10,072 8,447
General and administrative 6,324 2,729
Management fee to General Partner 1,188 1,013
Acquisition fee to General Partner
(notes 3 and 4) 376 -
Unit incentive options (note 11) 83 180
------------------------------------------------------------------------
239,169 185,778
------------------------------------------------------------------------

------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 30,579 26,856
------------------------------------------------------------------------

Provision for income taxes:
Current income tax expense 392 -
Future income tax expense 1,126 20
------------------------------------------------------------------------
1,518 20
------------------------------------------------------------------------
NET INCOME $ 29,061 $ 26,836
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per Partnership unit (note 10)
Basic and Diluted $ 0.15 $ 0.15
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31
(unaudited) (thousands of dollars) 2006 2005
------------------------------------------------------------------------
(restated -
see Note 2)
OPERATING ACTIVITIES
Net income $ 29,061 $ 26,836
Depreciation and amortization 17,310 14,825
Amortization of deferred financing charges
(note 12) 53 268
Unit incentive options 83 180
Non-cash operating expense (52) -
Non-cash general and administrative expense 292 -
Future income taxes 1,126 20
Accretion of discount on Annual Service
Contract Recovery Amounts - (23)
------------------------------------------------------------------------
Funds from operations 47,873 42,106
Net change in non-cash working capital
(note 14) 19,379 37,999
------------------------------------------------------------------------
Cash provided by operating activities 67,252 80,105
------------------------------------------------------------------------

INVESTING ACTIVITIES
Funds held in trust 37,851 -
Acquisition of TLG (note 4) (37,736) -
Assumption of cash on the acquisition of
TLG (note 4) 303 -
Acquisition of Simon Storage Holdings
Limited (note 3) (187) -
Annual Service Contract Recovery Payment - 1,472
Expenditures on property, plant and
equipment (12,245) (3,080)
Proceeds on sale of assets 15 23
Acquisition of the NGL extraction business - 342
Net change in non-cash working capital
(note 14) 230 (4,197)
------------------------------------------------------------------------
Cash used in investing activities (11,769) (5,440)
------------------------------------------------------------------------

FINANCING ACTIVITIES
Cash distributions declared (39,012) (34,016)
Decrease in other long-term debt (157,000) (45,500)
Issuance of Partnership units, net of
issue costs 142,198 -
Cash received under Distribution
Reinvestment and Optional
Unit Purchase Plan 1,272 623
Issuance of units under Unit Incentive
Option Plan 1,102 1,496
Issuance of Class B units upon debenture
conversions 2 8
Deferred financing charges - (121)
Net change in non-cash working capital
(note 14) 1,026 114
------------------------------------------------------------------------
Cash used in financing activities (50,412) (77,396)
------------------------------------------------------------------------

Effect of foreign currency translation
on cash 336 -

Increase in cash 5,407 (2,731)
Cash, beginning of period 17,525 4,412
------------------------------------------------------------------------
Cash, end of period $ 22,932 $ 1,681
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash interest paid $ 3,718 $ 1,801
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(tabular amounts in thousands of dollars, except unit and per unit
information)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These unaudited interim consolidated financial statements are presented in accordance with Canadian generally accepted accounting principles 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, 2005, 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, 2005.

2. CHANGES IN ACCOUNTING POLICY

Unit-Based Compensation

Unit Incentive Options

Effective December 2005, Inter Pipeline retroactively adopted the fair value method of accounting for unit-based compensation. This change is as a result of additional guidance published in Canada and the United States surrounding the accounting for stock based compensation, particularly with respect to the valuation methods used under the fair value method of valuing options.

The restatement did not impact the current period but did increase net income in the period ended March 31, 2005. The impact of the change in accounting policy is:






Change in Consolidated Statement of Net Income

Three months ended
Increase (decrease) March 31, 2005
------------------------------------------------------------------------
Non-cash compensation expense $ (4,333)
Management fee to General Partner 87
------------------------------------------------------------------------
Total expenses (4,246)
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
Net income $ 4,246
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per Partnership unit - Basic and diluted $ 0.03
------------------------------------------------------------------------
------------------------------------------------------------------------


Unit Appreciation Rights

Effective January 1, 2006, Inter Pipeline implemented a new long term incentive plan ("LTIP") for its employees, officers, and directors of the General Partner. The LTIP is governed by a Unit Appreciation Rights Plan ("UARP") document that defines how awards made under the UARP will be determined and administered.

A Unit Appreciation Right ("UAR"), as granted under the UARP, is valued based on Inter Pipeline's unit price plus credit for cash distributions paid to unitholders during the period the UAR's are held. The UAR will vest as to one third on each of the successive anniversary dates from the date of grant. Upon exercise of a UAR, the amount owing will be paid out in cash net of applicable withholding taxes. As the awards are paid in cash, the UAR's are accounted for on a mark-to-market basis whereby a liability and expense are recorded each period based on the number of UAR's outstanding and the current market price of Inter Pipeline's units plus the accrued distributions to date.

3. ACQUISITION OF SIMON STORAGE HOLDINGS LTD ("Simon Storage")

On October 4, 2005, Inter Pipeline acquired all of the outstanding shares of Simon Storage for cash consideration of $258.8 million (Pounds Sterling 120 million plus closing adjustments and acquisition costs of Pounds Sterling 4.7 million). The acquisition was funded through an existing revolving credit facility (see note 7). Concurrent with this transaction, an acquisition fee of $2.5 million was paid to the General Partner, pursuant to the terms of the Partnership Agreement.

The acquisition was accounted for by the purchase method as at the closing date of October 4, 2005. The acquisition costs have been amended during the three months ended March 31, 2006, and Inter Pipeline allocated the purchase price as follows:



Cash $ 12,803
Non-cash working capital deficiency (7,694)
Intangible assets - customer contracts (note 6) 21,123
Property, plant and equipment (note 7) 237,296
Goodwill 55,029
Asset retirement obligation (948)
Pension liability (2,289)
Future tax liability (56,508)
------------------------------------------------------------------------
$ 258,812
------------------------------------------------------------------------
------------------------------------------------------------------------


4. ACQUISITION OF TANKLAGER-GESELLSCHAFT HOYER MBH ("TLG")

On January 1, 2006, Inter Pipeline acquired all of the outstanding shares of TLG, an independent bulk liquid storage business located in Mannheim, Germany. The cash consideration for this transaction was approximately $37.7 million ($38 million (Euro 27 million), less closing adjustments and acquisition costs of $0.3 million), which was funded from Inter Pipeline's existing credit facilities. At December 31, 2005, approximately $38.0 million of cash was held in trust pending the closing of this acquisition on January 1, 2006. Concurrent with this transaction, an acquisition fee of $0.4 million was paid to the General Partner, pursuant to the terms of the Partnership Agreement.

The acquisition was accounted for by the purchase method as at the closing date of January 1, 2006. Inter Pipeline has allocated the purchase price as follows:



Cash $ 303
Non-cash working capital deficiency (1,609)
Property, plant and equipment (note 7) 50,926
Goodwill 7,778
Asset retirement obligation (301)
Environmental liability (3,849)
Pension liability (1,491)
Future tax liability (14,021)
------------------------------------------------------------------------
$ 37,736
------------------------------------------------------------------------
------------------------------------------------------------------------


5. SEGMENT REPORTING

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

------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
------------------------------------------------------------------------

Revenues $ 195,547 $ 28,722 $ 13,895 $ -
------------------------------------------------------------------------
Expenses
Shrinkage gas 133,355 - - -
Operating 38,268 7,924 4,305 -
Depreciation and
amortization 6,290 4,574 4,016 -
Financing charges - - - 10,211
General and
administrative - - - 3,940
Management fee to
General Partner - - - 1,188
Acquisition fee to
General Partner - - - 376
Unit incentive
options - - - 83
------------------------------------------------------------------------
Total Expenses 177,913 12,498 8,321 15,798
------------------------------------------------------------------------
Income before income
taxes 17,634 16,224 5,574 (15,798)
------------------------------------------------------------------------
Income taxes (recovery) - - 48 -
------------------------------------------------------------------------
Net income $ 17,634 $ 16,224 $ 5,526 $(15,798)
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on
property, plant and
equipment $ (1,075) $ (6,532) $ (2,868) $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
Total Assets $ 756,890 $ 473,044 $ 447,020 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months ended March 31, 2006
------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(1) Operations
------------------------------------------------------------------------

Revenues $ 238,164 $ 31,584 $ 269,748
------------------------------------------------------------------------
Expenses
Shrinkage gas 133,355 - 133,355
Operating 50,497 19,964 70,461
Depreciation and amortization 14,880 2,430 17,310
Financing charges 10,211 (139) 10,072
General and administrative 3,940 2,384 6,324
Management fee to General
Partner 1,188 - 1,188
Acquisition fee to General
Partner 376 - 376
Unit incentive options 83 - 83
------------------------------------------------------------------------
Total Expenses 214,530 24,639 239,169
------------------------------------------------------------------------
Income before income taxes 23,634 6,945 30,579
------------------------------------------------------------------------
Income taxes (recovery) 48 1,470 1,518
------------------------------------------------------------------------
Net income $ 23,586 $ 5,475 $ 29,061
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on property,
plant and equipment $ (10,475) $ (1,770) $ (12,245)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total Assets $ 1,676,954 $ 402,318 $ 2,079,272
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The European bulk liquid storage business includes operations in
the United Kingdom, the Republic of Ireland and Germany.


------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
------------------------------------------------------------------------
Revenues $ 170,537 $ 27,048 $ 15,026 $ 23
------------------------------------------------------------------------
Expenses
Shrinkage gas 115,708 - - -
Operating 32,624 6,850 3,402 -
Depreciation and
amortization 6,133 4,685 4,007 -
Financing charges - - - 8,447
General and
administrative - - - 2,729
Management fee to
General Partner - - - 1,013
Unit incentive
options - - - 180
------------------------------------------------------------------------
Total Expenses 154,465 11,535 7,409 12,369
------------------------------------------------------------------------
Income before
income taxes 16,072 15,513 7,617 (12,346)
------------------------------------------------------------------------
Income taxes
(recovery) - - 20 -
------------------------------------------------------------------------
Net income $ 16,072 $ 15,513 $ 7,597 $ (12,346)
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ (466) $ (2,152) $ (462)$ -
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
As at December 31, 2005

Total Assets $ 780,434 $ 471,158 $ 456,430 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months ended March 31, 2005
------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(2) Operations
------------------------------------------------------------------------
Revenues $ 212,634 $ - $ 212,634
------------------------------------------------------------------------
Expenses
Shrinkage gas 115,708 - 115,708
Operating 42,876 - 42,876
Depreciation and
amortization 14,825 - 14,825
Financing charges 8,447 - 8,447
General and
Administrative 2,729 - 2,729
Management fee to
General Partner 1,013 - 1,013
Unit incentive
options 180 - 180
------------------------------------------------------------------------
Total Expenses 185,778 - 185,778
------------------------------------------------------------------------
Income before
income taxes 26,856 - 26,856
------------------------------------------------------------------------
Income taxes
(recovery) 20 - 20
------------------------------------------------------------------------
Net income $ 26,836 $ - $ 26,836
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ (3,080) $ - $ (3,080)
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
------------------------------------------------------------------------
As at December 31, 2005
Total Assets $ 1,708,022 $ 374,403 $ 2,082,425
------------------------------------------------------------------------
------------------------------------------------------------------------

(2) There were no bulk liquid storage operations in the period ending
March 31, 2005.


6. INTANGIBLE AND OTHER ASSETS

March 31, December 31,
2006 2005
------------------------------------------------------------------------
Accumulated
Depreciation & Net Book Net Book
Cost Amortization Value Value
------------------------------------------------------------------------
Oil sands
transportation
business
Transportation
Services
Agreement $ 93,548 $ (10,473) $ 83,075 $ 83,881
NGL extraction
business
Customer
contracts 287,612 (15,984) 271,628 274,025
Patent 8,727 (1,039) 7,688 7,844
Bulk liquid
storage business
Customer
contracts 20,664 (345) 20,319 20,227
------------------------------------------------------------------------
$ 410,551 $ (27,841) $ 382,710 $ 385,977
------------------------------------------------------------------------
------------------------------------------------------------------------


7. PROPERTY, PLANT AND EQUIPMENT

March 31, December 31,
2006 2005
------------------------------------------------------------------------
Accumulated
Depreciation & Net Book Net Book
Cost Amortization Value Value
------------------------------------------------------------------------
NGL extraction
business
Facilities and
equipment $ 432,814 $ (23,086) $ 409,728 $ 412,140
Spare parts 3,398 - 3,398 3,418
Conventional
oil pipeline
business
Facilities
and equipment 766,301 (315,655) 450,646 448,180
Deferred receipt
facilities
expenditures 6,126 (5,321) 805 1,161
Oil sands
transportation
business
Facilities
and equipment 375,244 (40,314) 334,930 335,440
Pipeline linefill 10,384 - 10,384 10,384
Bulk liquid
storage business
Facilities
and equipment 288,703 (2,844) 285,859 231,644
------------------------------------------------------------------------
$ 1,882,970 $ (387,220) $ 1,495,750 $ 1,442,367
------------------------------------------------------------------------
------------------------------------------------------------------------


8. LONG-TERM DEBT

At March 31, 2006, the following amounts have been drawn under Inter
Pipeline's credit facilities:

March 31, December 31,
2006 2005
------------------------------------------------------------------------
Loan Payable to General Partner $ 379,800 $ 379,800
$500 million Unsecured Revolving
Credit Facility (a) 269,000 426,000
------------------------------------------------------------------------
$ 648,800 $ 805,800
------------------------------------------------------------------------
------------------------------------------------------------------------

(a) During the three months ended March 31, 2006, Inter Pipeline repaid
a portion of the outstanding $500 million Unsecured Revolving Credit
Facility with proceeds from the equity issuance completed on January 31,
2006.

(b) Subsequent to March 31, 2006, Inter Pipeline established a $20
million revolving demand loan facility with a Canadian Chartered bank
for cash management purposes. Amounts borrowed under this facility bear
interest at the same applicable rates as the $500 million Unsecured
Revolving Credit Facility, while no fees are payable on undrawn amounts.


9. ASSET RETIREMENT OBLIGATIONS

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

Obligation at December 31, 2005 $ 16,715
Additions to liabilities 306
Accretion expense 250
Foreign currency adjustments 12
------------------------------------------------------------------------
Obligation at March 31, 2006 $ 17,283
------------------------------------------------------------------------
------------------------------------------------------------------------


At March 31, 2006, $0.8 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, 2005 - $0.7 million).



10. PARTNERS' EQUITY

Number of units issued and outstanding

Class A Units Class B Units Total
------------------------------------------------------------------------
Balance at December 31, 2005 184,407,576 184,855 184,592,431
Equity issuance(1) 15,000,000 15,016 15,015,016
Issued on conversion
of debentures 313,826 325 314,151
Issued under Distribution
Reinvestment and Optional
Unit Purchase Plan 131,670 135 131,805
Issued under Unit Incentive
Option Plan 336,502 357 336,859
------------------------------------------------------------------------
Balance at March 31, 2006 200,189,574 200,688 200,390,262
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Issuance of units

On January 31, 2006, Inter Pipeline issued 15 million Class A units at
$10.00 per Class A unit. The net proceeds of $142.2 million were applied
to reduce the outstanding debt. To maintain the required 0.1% interest
in Inter Pipeline, the General Partner acquired 15,016 Class B units at
a price of $10.00 per Class B unit.


Calculation of net income per Partnership unit

Partnership units share equally on a pro rata basis in the allocation of net income. The number of 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 March 31
2006 2005
------------------------------------------------------------------------
Net income attributable to unitholders $ 29,061 $ 26,836
------------------------------------------------------------------------

Weighted-average units outstanding
- Basic 194,728,196 181,026,167
Effect of debenture conversions 2,573,930 -
Effect of unit options 1,606,205 1,895,080
------------------------------------------------------------------------
Weighted-average units outstanding
- Diluted(1) 198,908,331 182,921,247
------------------------------------------------------------------------

Net income per Partnership unit
- Basic and Diluted $ 0.15 $ 0.15
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The conversion of debentures have an anti-dilutive impact for the
three months ended March 31, 2005, therefore they are not included
in the calculation of diluted net income per Partnership unit.


11. UNIT-BASED COMPENSATION

The following table summarizes changes in the outstanding unit options
and UAR's:

Unit Options UAR's
------------------------------------------------------------------------
Weighted-
Weighted- average
average adjusted
exercise exercise
Number price(1) price(2) Number
------------------------------------------------------------------------
Balance outstanding,
December 31, 2005 3,046,601 $ 7.37 $ 4.65 -
Granted - $ - $ - 427,000
Exercised (336,502) $ 6.72 $ 3.31 -
Cancelled (11,167) $ 8.85 $ 7.85 (2,000)
---------------------------------- --------
Balance outstanding,
March 31, 2006 2,698,932 $ 7.44 $ 4.80 425,000
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The weighted-average exercise price based on the exercise price on
the date of grant.
(2) The weighted-average exercise price adjusted for the incentive
reduction.


12. FINANCING CHARGES

Three months ended March 31
2006 2005
------------------------------------------------------------------------
Interest expense $ 9,639 $ 7,488
Interest on debentures 380 691
Amortization of deferred financing charges 53 268
------------------------------------------------------------------------
Total financing charges $ 10,072 $ 8,447
------------------------------------------------------------------------
------------------------------------------------------------------------


13. RISK MANAGEMENT

Inter Pipeline has not recognized assets or liabilities associated with the swap contracts outstanding at March 31, 2006 and December 31, 2005, because the hedging relationships meet the conditions for hedge accounting with the exception of the heat rate swap contract (see "Power Price Risk Management" below).

Contracts outstanding at March 31, 2006 represent approximately 40% of forecast propane plus volumes at the Cochrane extraction plant for the period April to December, 2006, at an average price of approximately $0.43 Cdn/US gallon. This average price would approximate $0.37 US/US gallon based on the average US$/Cdn$ forward curve as at March 31, 2006. These contracts were as follows:



Average Average
Price Quantity
NGL Swaps (US$/US gallon) (b/d) Hedged Period
------------------------------------------------------------------------
April 1, 2006 -
Propane 0.922 3,222 December 31, 2006
April 1, 2006 -
Normal Butane 1.093 554 December 31, 2006
April 1, 2006 -
Iso Butane 1.126 343 December 31, 2006
April 1, 2006 -
Pentanes Plus 1.561 274 December 31, 2006
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Average
Price Quantity
(Cdn$/GJ) (GJ/day) Hedged Period
------------------------------------------------------------------------
April 1, 2006 -
Natural gas swaps 7.049 20,364 December 31, 2006
------------------------------------------------------------------------
------------------------------------------------------------------------


Average
Monthly
Average Notional
Price Amount
(US$/Cdn$) (US$ thousands) Hedged Period
------------------------------------------------------------------------
April 1, 2006 -
Foreign exchange swaps 0.878 5,632 December 31, 2006
------------------------------------------------------------------------
------------------------------------------------------------------------

Hedge contracts outstanding at March 31, 2005 were as follows:

Average Price Average Quantity
NGL swaps (US$/gallon) (bbl/day) Hedged Period
------------------------------------------------------------------------
April 1, 2005 -
Propane 0.773 3,775 December 31, 2005
April 1, 2005 -
Normal Butane 0.905 649 December 31, 2005
April 1, 2005 -
Iso Butane 0.910 402 December 31, 2005
April 1, 2005 -
Pentanes Plus 1.166 321 December 31, 2005
------------------------------------------------------------------------

Average Price Average Quantity
(Cdn$/GJ) (GJ/day) Hedged Period
------------------------------------------------------------------------
April 1, 2005 -
Natural gas swaps 6.971 24,145 December 31, 2005
------------------------------------------------------------------------

Average
Average Price Notional Amount
(US$/Cdn$) (US$ thousands) Hedged Period
------------------------------------------------------------------------
April 1, 2005 -
Foreign exchange swaps 0.805 3,107 September 30, 2005
------------------------------------------------------------------------

The fair market value of the frac spread swap contracts resulted in
unrecognized gains/ (losses) at March 31 as follows:

2006 2005
------------------------------------------------------------------------
US$
NGL swaps $ (5,836) $ (6,600)
------------------------------------------------------------------------

Cdn$
Natural gas swaps 548 6,100
Foreign exchange swaps (1,201) 600
------------------------------------------------------------------------
Unrecognized gain (loss) $ (653) $ 6,700
------------------------------------------------------------------------
------------------------------------------------------------------------

The net settlements on the frac spread swap contracts recognized in
income were:

2006 2005
------------------------------------------------------------------------
NGL swaps $ 1,052 $ (2,007)
Natural gas swaps (3,502) (3,451)
Foreign exchange swaps 97 1,269
------------------------------------------------------------------------
Net settlement on frac spread swaps $ (2,353) $ (4,189)
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest rate risk management

The fair market value of the outstanding interest rate swap contracts as at March 31, 2006, results in an unrecognized loss of $3.8 million (as at March 31, 2005 - $5.9 million). During the three months ended March 31, 2006, the realized loss on the interest rate swap contracts recognized in income was $0.4 million (three months ended March 31, 2005 - $0.5 million).

Power price risk management

Electricity Price Swap Contracts

The fair market value of the outstanding electricity price swap contracts results in an unrecognized gain of $1.1 million as at March 31, 2006 (as at March 31, 2005 - $0.6 million). The realized gain on the electricity price swap contracts recognized in income in the three months ended March 31, 2006 were $0.1 million (three months ended March 31, 2005 - nil).

Heat Rate Swap Contracts

The fair market value of the outstanding heat rate swap contracts results in an unrealized gain of $1.0 million as at March 31, 2006. As the contract is not accounted for as a hedge, the fair market value has been included in operating expenses for the three months ended March 31, 2006. The realized loss on the heat rate swap contracts recognized in income for the three months ended March 31, 2006 was $0.1 million.



14. CHANGES IN NON-CASH WORKING CAPITAL

Three months ended March 31
2006 2005
------------------------------------------------------------------------
Accounts receivable $ 26,230 $ 24,965
Prepaid expense and other deposits 2,237 1,103
Distributable cash payable 1,027 115
Accounts payable and accrued liabilities (20,852) (6,568)
Deferred revenue 13,630 13,499
Working capital deficiency acquired on
acquisitions (1,609) 802
Impact of foreign exchange rate differences (28) -
------------------------------------------------------------------------
Changes in non-cash working capital $ 20,635 $ 33,916
------------------------------------------------------------------------
------------------------------------------------------------------------
These changes relate to the following activities:
Operating $ 19,379 $ 37,999
Investing 230 (4,197)
Financing 1,026 114
------------------------------------------------------------------------
Decrease in working capital $ 20,635 $ 33,916
------------------------------------------------------------------------
------------------------------------------------------------------------


15. COMPARATIVE FIGURES

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

Contact Information

  • Inter Pipeline Fund
    Investor Relations: Jeremy Roberge
    Vice President, Capital Markets
    (403) 290-6015 or (866) 716-7473
    Email: jroberge@interpipelinefund.com
    or
    Inter Pipeline Fund
    Media Relations: Michelle Dawson
    Director, Public and Regulatory Affairs
    (403) 290-2643
    Email: mdawson@interpipelinefund.com