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

Inter Pipeline Fund

November 09, 2006 13:44 ET

Inter Pipeline Fund Announces Record Third Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2006) - Inter Pipeline Fund (Inter Pipeline) (TSX:IPL.UN) announced today its financial and operating results for the three and nine month period ended September 30, 2006.

Highlights

- Record funds from operations(1) for the quarter of $61.5 million, up 54% compared to the same quarter last year

- Quarterly payout ratio(1) of 65.4%; year-to-date payout ratio of 74.9%

- Net income of $42.4 million, up $17.9 million or 73% from the same quarter a year ago

- Increased annualized cash distributions to unitholders by 7.7% to $0.84 per unit from $0.78 per unit, commencing in September

- Distributed over $40 million, or $0.20 per unit, to unitholders during the quarter

- Record volumes transported on the Cold Lake pipeline system; increase of 25.3% or 67,800 barrels per day (b/d) to 335,500 b/d, over the comparable period in 2005

- Conventional volumes increased by 8.1% to 213,800 b/d primarily due to increased southbound crude oil deliveries sourced at Hardisty, Alberta

- Subsequent to quarter end, announced investment in a $36 million capital project to increase ethane production at the Empress V natural gas liquids extraction facility

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

Funds From Operations

During the third quarter of 2006, Inter Pipeline generated funds from operations of $61.5 million, representing an increase of 54% or $21.6 million over the comparable 2005 period. For the nine month period ended September 30, 2006, funds from operations increased 38% or $43.4 million to $158.2 million over the same nine months of 2005. These year over year increases are primarily due to the addition of Inter Pipeline's European bulk liquid storage businesses and strong frac-spread prices on propane plus volumes produced at the Cochrane natural gas liquids (NGL) extraction facility.

In the third quarter, Inter Pipeline's NGL extraction, conventional oil pipeline, oil sands transportation and bulk liquid storage businesses contributed $36.4 million, $21.1 million, $9.2 million, and $10.2 million, respectively to funds from operations. Corporate costs, including general & administrative and interest expenses, totaled $15.4 million.

Cash Distributions

Cash distributions to unitholders during the quarter totaled $40.3 million, or $0.20 per unit, resulting in a very positive payout ratio of 65.4% of funds from operations. These results compare favourably to an 86.2% payout ratio achieved during the third quarter of 2005. For the nine month period ending September 30, 2006, Inter Pipeline distributed $118.4 million to unitholders, or $0.59 per unit, reflecting an attractive payout ratio of 74.9%, compared to 89.4% for the same period in 2005.

In September, Inter Pipeline increased monthly cash distributions to unitholders by 7.7% to $0.07 per unit, or $0.84 per unit on an annualized basis. The distribution increase was the result of strong performance across all of Inter Pipeline's business segments as well as the completion of several organic growth projects.

NGL Extraction

Inter Pipeline's NGL extraction business generated record cash flow during the quarter as a result of strong commodity prices and favourable natural gas volumes. Combined, Inter Pipeline's three NGL extraction facilities processed 4.4 billion cubic feet per day of natural gas, producing an average of 144,700 b/d of NGLs, comprised of 88,600 b/d of ethane and 56,100 b/d of propane plus.

In August, Inter Pipeline filed a regulatory application with the Alberta Energy and Utilities Board for the Cochrane Ethane Recovery Project, which involves the construction of a new gas processing unit to increase the ethane recovery efficiency at the Cochrane NGL extraction facility. Inter Pipeline is awaiting regulatory approval for this project.

Subsequent to quarter end, Inter Pipeline announced that it will invest in a $36 million capital project on its Empress V natural gas liquids extraction plant. The upgrade to this facility, of which Inter Pipeline owns 50%, is expected to increase ethane production by approximately 45% or 7,000 b/d. Construction is expected to begin in early 2007 with initial production of incremental ethane volumes during the second quarter in 2008. This project supports the Province of Alberta's recently announced Incremental Ethane Extraction Policy, which is designed to increase ethane feedstock to Alberta's petrochemical industry.

Conventional Oil Pipeline

Throughput volumes on Inter Pipeline's four conventional oil pipeline systems averaged 213,800 b/d during the third quarter, compared to 197,800 b/d during the same period in 2005. This 8.1% volume increase is primarily the result of higher Bow River southbound volumes sourced at Hardisty, Alberta, which improved by more than 21,000 b/d or 209% over the comparable period in 2005. The average revenue per barrel from the conventional oil pipelines during the third quarter of 2006 and 2005 was $1.54.

Oil Sands Transportation

Throughput volumes on the Cold Lake pipeline system reached a new quarterly record averaging 335,500 b/d during the quarter. This represents an increase of approximately 67,800 b/d, or 25.3%, over volumes delivered during the third quarter of 2005. This volume increase is the result of expanded oil sands production by the three founding Cold Lake shippers, Imperial Oil, EnCana and Canadian Natural Resources.

Bulk Liquid Storage

Inter Pipeline's European bulk liquid storage business generated strong and stable results. During the three month period ended September 30, 2006, this business contributed $34.1 million to revenue and $10.2 million to funds from operations.

During the third quarter, approximately $6.1 million was invested in organic growth projects, with $2.8 million related to the reconfiguration of existing storage facilities to accommodate the growing biofuels market in the United Kingdom.

Financing Activity

In September, Inter Pipeline amended its $500 million revolving bank facility by reducing pricing margins and extending the revolving period from three years to five years. As a result, Inter Pipeline has secured access to longer-term bank financing and reduced the cost of borrowing.

At September 30, 2006, Inter Pipeline's outstanding debt balance, including convertible debentures, was $683.9 million, resulting in a conservative total debt to total capitalization ratio of 36.7%.

Federal Government Tax Announcement

On Tuesday October 31, 2006, Canada's Finance Minister unexpectedly announced a proposal to change the way limited partnerships and income trusts are taxed. If the proposed changes are approved, Inter Pipeline will have a four-year transition period and will not be subject to the proposed measures until the 2011 taxation year.

At this time, Inter Pipeline does not anticipate any immediate changes to its business structure or monthly cash distributions, but will continue to review the potential long-term implications of the government's announcement.

Unitholders are encouraged to read the full Government of Canada's tax announcement at http://www.fin.gc.ca/news06/06-061e.html.

Conference Call & Webcast

Inter Pipeline will hold a conference call and webcast today at 2:30 p.m. (Mountain Time) / 4:30 p.m. (Eastern Time) to discuss third quarter 2006 financial and operating results.

To participate in the conference call, please dial 888-789-0156 or 416-695-9757. A recording of the call will be available for replay until November 16, 2006, by dialing 888-509-0081 or 416-695-5275. The pass code for the replay is 634189.

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
---------------------------------------------------------------------------
(millions of dollars, Three Months Ended Nine Months Ended
except where noted) September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
Extraction Production1 (000 b/d)
Ethane 88.6 97.9 89.3 93.7
Propane Plus 56.1 55.7 52.6 52.8
------- ------- ------- -------
Total Extraction 144.7 153.6 141.9 146.5

Pipeline Volumes (000 b/d)
Conventional Oil 213.8 197.8 208.1 200.9
Cold Lake Pipeline(1) 335.5 267.7 327.3 283.1
------- ------- ------- -------
Total Pipeline 549.3 465.5 535.4 484.0

Revenue
NGL Extraction $ 177.1 $ 174.8 $ 505.7 $ 490.2
Conventional Oil Pipelines $ 30.2 $ 28.1 $ 86.0 $ 81.7
Oil Sands Transportation $ 14.9 $ 15.4 $ 44.1 $ 45.5
Bulk Liquid Storage(2) $ 34.1 n/a $ 100.1 n/a

Net Income $ 42.4 $ 24.5 $ 102.4 $ 68.4
Per Unit (basic & diluted) $ 0.21 $ 0.13 $0.51 $ 0.37

Funds From Operations(3) $ 61.5 $ 39.9 $ 158.2 $ 114.8
Per Unit $ 0.31 $ 0.22 $0.80 $ 0.63

Cash Distributions(3) $ 40.3 $ 34.4 $ 118.4 $ 102.7
Per Unit $0.2000 $0.1875 $0.5900 $0.5625

Payout Ratio(3) 65.4% 86.2% 74.9% 89.4%

Capital Expenditures(3)
Growth $ 11.4 $ 3.6 $ 37.2 $ 5.7
Sustaining $ 3.8 $ 0.7 $ 8.0 $ 3.2


(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.

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Inter Pipeline Fund

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

Inter Pipeline is a member of the S&P/TSX Composite Index. Class A Units 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 THIRD QUARTER ENDED SEPTEMBER 30, 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 three and nine month periods ended September 30, 2006 as compared to the three and nine month periods ended September 30, 2005. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements of Inter Pipeline for the three and nine month periods ended September 30, 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.

THIRD QUARTER 2006 HIGHLIGHTS

- Record funds from operations(1) for the quarter of $61.5 million, up 54% compared to the same quarter last year

- Quarterly payout ratio(1) of 65.4%; year-to-date payout ratio of 74.9%

- Net income of $42.4 million, up $17.9 million or 73% from the same quarter a year ago

- Increased annualized cash distributions to unitholders by 7.7% to $0.84 per unit from $0.78 per unit, commencing in September

- Distributed over $40 million or $0.20 per unit, to unitholders during the quarter

- Record volumes transported on the Cold Lake pipeline system; increase of 25.3% or 67,800 barrels per day (b/d) to 335,500 b/d, over the comparable period in 2005

- Conventional volumes increased by 8.1% to 213,800 b/d primarily due to increased southbound crude oil deliveries sourced at Hardisty, Alberta

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

SUBSEQUENT EVENTS

On October 17, 2006, Inter Pipeline announced that it will invest in a $36 million capital project to increase ethane production at the Empress V natural gas liquids extraction plant.

On Tuesday, October 31, 2006, Canada's Finance Minister introduced the Federal Government's "Tax Fairness Plan". This proposed legislation includes significant changes to existing tax law applied to publicly traded limited partnerships and income trusts. If the proposed changes are approved, Inter Pipeline will be required to implement these measures in the 2011 taxation year. Inter Pipeline is currently evaluating the impact of the proposed legislation, but does not anticipate any immediate changes to its business structure or monthly cash distributions. However, if the Tax Fairness Plan is implemented as proposed, it may impact Inter Pipeline's future cash distribution rate and payout ratio.


PERFORMANCE OVERVIEW

Three Months Ended September 30, 2006

For the third quarter ended September 30, 2006, Inter Pipeline's funds from operations increased $21.6 million or 54.1% to $61.5 million, over the quarter ended September 30, 2005. The natural gas liquids ("NGL") extraction, conventional oil pipeline, oil sands transportation, and bulk liquid storage businesses contributed $36.4 million, $21.1 million, $9.2 million and $10.2 million of funds from operations, respectively (Q3 2005 - $21.6 million, $19.8 million, $11.3 million and nil, respectively). These contributions to funds from operations were offset by corporate costs of $15.4 million (Q3 2005 - $12.8 million).

This increase in funds from operations was primarily due to favourable commodity prices in the NGL extraction business and the acquisition of the entities comprising the bulk liquid storage business in late 2005 and early 2006. For comparative purposes, Inter Pipeline did not acquire the Simon Storage bulk liquid storage business until the fourth quarter of 2005 and the Tanklager-Gesellschaft Hoyer mbH ("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 third quarter of 2005.

During the quarter Inter Pipeline announced a 7.7% increase to monthly distributions to unitholders. Given this increase, Inter Pipeline paid monthly cash distributions of $0.065 per unit to unitholders in each of July and August 2006 and $0.070 per unit in September 2006, for a total of $0.200 per unit during the quarter. This compares with cash distributions paid of $0.0625 per unit per month for July to September 2005 for a total of $0.1875 per unit.

Total cash distributed in the third quarter of 2006 increased $5.9 million or 17.2% to $40.3 million compared to the quarter ended September 30, 2005. This increase in total cash distributed is primarily attributable to the cash distribution increase noted above and a January 31, 2006 equity issuance of 15.0 million Class A units. A very strong 65.4% payout ratio of funds from operations was realized in the third quarter of 2006, as compared to 86.2% realized in the third quarter of 2005.

Inter Pipeline's outstanding long-term debt level, excluding the 10% Convertible Extendible Unsecured Subordinated Debentures (the "Debentures"), increased by $156.5 million compared to September 30, 2005. This increase primarily consisted of the debt incurred to fund the acquisitions of the two entities that comprise the bulk liquid storage business of $296.5 million, reduced by the equity offering in January 2006 that provided net proceeds of $142.2 million.

Nine Months Ended September 30, 2006

For the nine months ended September 30, 2006, Inter Pipeline's funds from operations increased $43.4 million or 37.8% to $158.2 million, compared to the nine months ended September 30, 2005. The NGL extraction, conventional oil pipeline, oil sands transportation, and bulk liquid storage businesses contributed $85.7 million, $60.3 million, $29.4 million and $28.5 million of funds from operations, respectively (YTD 2005 - $59.0 million, $58.9 million, $33.8 million and nil, respectively). These contributions to funds from operations were offset by corporate costs of $45.7 million (YTD 2005 - $36.9 million).

As previously mentioned, Inter Pipeline did not acquire the entities comprising the bulk liquid storage business until late 2005 and early 2006. Therefore, Inter Pipeline has not recognized any of the bulk liquid storage business operations in the comparative figures for the year-to-date (or "YTD") of 2005.

The total cash distributed in the first nine months of 2006 increased $15.7 million or 15.3% to $118.4 million compared to the nine-month period ended September 30, 2005. This represents a favourable 74.9% payout ratio of funds from operations for the period ended September 30, 2006, as compared to a payout ratio of 89.4% for the same period of 2005.

OUTLOOK

In the third quarter of 2006, Inter Pipeline expended $11.4 million on organic growth capital projects, and $37.2 million on a year-to-date basis. The full year updated capital forecast for 2006 organic growth projects is estimated to be $60 to $65 million. 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.

On August 9, 2006, Inter Pipeline filed a regulatory application with the Alberta Energy and Utilities Board for the construction of a new gas processing unit to increase the ethane recovery efficiency at the Cochrane extraction plant. This project, known as the "Cochrane Ethane Recovery Project", or CERP, will increase the ethane extraction capacity of the plant 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. CERP includes the installation of a single, new state-of-the-art cryogenic extraction unit capable of processing 750 million cubic feet per day of natural gas. Inter Pipeline is awaiting regulatory approval for this project.

Subsequent to the end of the third quarter of 2006, Inter Pipeline announced its intention to invest in a $36.0 million capital project on its Empress V NGL extraction plant. The upgrade to this facility, of which Inter Pipeline owns a 50% interest, is expected to increase ethane production by approximately 45% or 7,000 b/d.

Both the CERP and the modifications to the Empress V facility are well aligned with the Incremental Ethane Extraction Policy announced in late September as a component of Alberta's integrated energy vision. The policy is designed to increase ethane supply and promote the long-term sustainability of Alberta's petrochemical industry.

Propane plus frac-spreads in the NGL extraction business have been well above historical averages during the first nine months of 2006, and continue to be above historical averages to date. Frac-spread opportunities are created in periods of high NGL prices (which are generally correlated to the price of crude oil) and low natural gas prices. Inter Pipeline has taken advantage of the current market conditions and entered into certain hedge arrangements for 2006 and 2007 at prices that are well above the historical average.

Inter Pipeline's four business segments continue to provide stable and predictable cash flow while providing opportunities in the near term to grow the business organically. Over the long-term, both the oil sands transportation and NGL extraction businesses have the potential to benefit from two major North American energy developments. Specifically, these major energy developments are northern natural gas developments, and the continued expansion of Alberta's vast oil sands deposits. This latter opportunity is evidenced by the recent announcement of a partnership between EnCana Corporation and ConocoPhilips to further develop the Foster Creek area of Alberta that is serviced by Inter Pipeline's Cold Lake pipeline.

During the quarter, Standard & Poor's confirmed Inter Pipeline's BBB long-term corporate credit rating with a stable outlook.



SELECTED CONSOLIDATED FINANCIAL INFORMATION

Three Months Ended Nine Months Ended
September 30 September 30
($ millions, except per ------------------------------------------
unit and % amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------
Revenues
NGL extraction $ 177.1 $ 174.8 $ 505.7 $ 490.2
Conventional oil pipeline $ 30.2 $ 28.1 $ 86.0 $ 81.7
Oil sands transportation $ 14.9 $ 15.4 $ 44.1 $ 45.5
Bulk liquid storage(1) $ 34.1 n/a $ 100.1 n/a

Net income(1)(4) $ 42.4 $ 24.5 $ 102.4 $ 68.4
Per unit - basic(4) $ 0.21 $ 0.13 $ 0.51 $ 0.37
Per unit - diluted(4) $ 0.21 $ 0.13 $ 0.51 $ 0.37

Funds from operations(1)(3)(4) $ 61.5 $ 39.9 $ 158.2 $ 114.8
Per unit(3) $ 0.31 $ 0.22 $ 0.80 $ 0.63

Cash distributions(2)(3) $ 40.3 $ 34.4 $ 118.4 $ 102.7
Per unit(2)(3) $ 0.2000 $ 0.1875 $ 0.5900 $ 0.5625

Payout ratio(3)(4) 65.4% 86.2% 74.9% 89.4%

Total assets(1) $ 2,116.7 $ 1,704.5

Long-term debt(1)(5) $ 671.8 $ 515.3

Debentures $ 12.1 $ 18.5

Total partners' equity(5) $ 1,181.3 $ 1,051.4

Partnership units outstanding,
end of period(5) 201.4 183.9

Total enterprise
value(1)(3) (5) $ 2,745.9 $ 2,373.1

(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 resulting in an
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 the Unit Incentive Option Plan.
(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

Three Months Ended
September 30
---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
Mmcf/d (000's b/d)
---------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
---------------------------------------------------------------------------
Cochrane 1,986 48.9 28.6 77.5
Empress V
(100% basis) 1,035 14.6 11.6 26.2
Empress II 1,426 25.1 15.9 41.0
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Total 4,447 88.6 56.1 144.7
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Three Months Ended
September 30
---------------------------------------------------------------------------
2005
---------------------------------------------------------------------------
Mmcf/d (000's b/d)
---------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
---------------------------------------------------------------------------
Cochrane 1,415 45.6 23.2 68.8
Empress V
(100% basis) 1,050 17.3 11.7 29.0
Empress II 1,864 35.0 20.8 55.8
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Total 4,329 97.9 55.7 153.6
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Nine Months Ended
September 30
---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
Mmcf/d (000's b/d)
---------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
---------------------------------------------------------------------------
Cochrane 1,662 47.5 24.6 72.1
Empress V
(100% basis) 988 14.4 11.2 25.6
Empress II 1,501 27.4 16.8 44.2
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Total 4,151 89.3 52.6 141.9
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Nine Months Ended
September 30
---------------------------------------------------------------------------
2005
---------------------------------------------------------------------------
Mmcf/d (000's b/d)
---------------------------------------------------------------------------
Propane
Throughput Ethane plus Total
---------------------------------------------------------------------------
Cochrane 1,504 46.2 23.9 70.1
Empress V
(100% basis) 1,046 17.9 11.8 29.7
Empress II 1,527 29.6 17.1 46.7
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Total 4,077 93.7 52.8 146.5
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Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------
($ millions, except % %
% amounts) 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Revenue $ 177.1 $ 174.8 1.3 $ 505.7 $ 490.2 3.2
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Shrinkage gas $ 100.3 $ 117.9 (14.9) $ 311.9 $ 332.8 (6.3)
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Operating expenses $ 40.5 $ 35.3 14.7 $ 108.1 $ 98.4 9.9
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Capital expenditures
Growth(1) $ 2.3 $ 0.5 $ 4.5 $ 0.5
Sustaining(1) 0.7 0.3 1.0 1.2
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Total capital
expenditures $ 3.0 $ 0.8 $ 5.5 $ 1.7
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(1) Please refer to the "Non-GAAP Financial Measures" section.


Volumes

The three NGL extraction plants processed a combined 4,447 million cubic feet per day (Mmcf/d) of natural gas for the third quarter ended September 30, 2006, which is consistent with the 4,329 Mmcf/d for the three month period ended September 30, 2005. The increase in throughput volumes at the Cochrane facility was a result of the increased demand for natural gas in western US markets due to a warmer than normal summer in California and the Pacific Northwest. The Cochrane volume increase was offset by a decline in throughput at the Empress II facility when compared to the third quarter of 2005. In the third quarter of 2005, additional gas was redirected from within the Empress complex to the Empress II facility due to certain third party plants being temporarily shut down. As a result, production at Inter Pipeline's three NGL extraction facilities declined approximately 8,900 b/d or 5.8%, to an average of 144,700 b/d in the third quarter of 2006.

Revenues

The increase in revenue is primarily due to the increase in production volumes at the Cochrane facility.

In the third 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 price fluctuations also referred to as 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 September 30, 2006, the actual market frac-spread was $0.769 Cdn$/US gallon (Q3 2005 - $0.485 Cdn$/US gallon). Based on the average monthly Bank of Canada US$/Cdn$ rate, the actual market frac-spread was $0.686 US$/US gallon (Q3 2005 - $0.403 US$/US gallon).

The frac-spread realized by Inter Pipeline during the third quarter, including hedged and unhedged production, was $0.671 Cdn$/US gallon (Q3 2005 - $0.395 Cdn$/US gallon) or $0.598 US$/US gallon (Q3 2005 - $0.328 US$/US gallon), based on the average monthly Bank of Canada Cdn$/US$ 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.

See the "FINANCIAL INSTRUMENTS AND OFF BALANCE SHEET FINANCING" section below for further descriptions of the hedged frac-spreads as at September 30, 2006.

Overall, the increased YTD 2006 revenue is primarily due to higher ethane sale prices and the higher shrinkage and operating cost recoveries from customers during the first quarter of 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 decrease in cost is directly associated with the decreased price of Alberta natural gas used at the NGL extraction plants. The price for shrinkage gas is based on a combination of daily and monthly index AECO prices for natural gas. The weighted average monthly AECO price was $5.72 per gigajoule in the third quarter of 2006 as compared with a weighted average price of $7.73 per gigajoule in the three month period ended September 30, 2005.

Fuel and power costs, included in operating costs, were $32.7 million in the third quarter of 2006 compared to $27.7 million for the three month period ended September 30, 2005. The increase in costs is primarily due to increased power prices for electricity consumed at all three NGL extraction plants. The average Alberta Power Pool price for the third quarter of 2006 was $94.87 per megawatt hour ("MW.h") as compared to $66.71/MW.h in the three month period ended September 30, 2005.

Capital Expenditures

Approximately $1.8 million of the 2006 third quarter growth capital expenditures in the NGL business are related to ethane optimization projects.



CONVENTIONAL OIL PIPELINE BUSINESS SEGMENT

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------
% %
Volumes (000's b/d) 2006 2005 change 2006 2005 change
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Bow River 144.5 135.1 7.0 142.1 136.2 4.3
Central/Valley/Mid
Saskatchewan 69.3 62.7 10.5 66.0 64.7 2.0
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213.8 197.8 8.1 208.1 200.9 3.6
---------------------------------------------------------------------------
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($ millions, except per
barrel and % amounts)
---------------------------------------------------------------------------
Revenue $ 30.2 $ 28.1 7.5 $ 86.0 $ 81.7 5.3
---------------------------------------------------------------------------
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Operating expenses $ 10.0 $ 8.3 20.5 $ 26.8 $ 23.1 16.0
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Revenue per barrel $ 1.54 $ 1.54 0.0 $ 1.51 $ 1.49 1.3
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Capital expenditures
Growth(1) $ 1.8 $ 3.4 $ 12.3 $ 5.1
Sustaining(1) 0.6 0.3 1.4 2.0
---------------------------------------------------------------------------
Total capital expenditures $ 2.4 $ 3.7 $ 13.7 $ 7.1
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(1) Please refer to the "Non-GAAP Financial Measures" section.


Volumes

Volumes in the third quarter of 2006 were approximately 16,000 b/d (YTD 2006 - 7,200 b/d) higher than in the comparable periods of 2005. The increase in Hardisty South volumes resulting from the recently expanded Bow River system (an increase of 21,100 b/d, or 208.7%, to 31,200 b/d in Q3 2006 over Q3 2005) and new Cactus Lake interconnection facilities (an increase of approximately 7,000 b/d in Q3 2006 over Q3 2005) more than offset the natural volume declines.

Revenue

The $2.1 million (YTD 2006 - $4.3 million) increase in revenues was primarily the result of the volume increases described above, mainline toll increases and revenues earned from an Oil Storage and Marketing Agreement with Nexen Marketing Inc. Mainline toll increases averaged 6.0% and 7.5% effective on January 1 and July 1, 2006, respectively.

Operating Expenses

The $1.7 million increase in operating expenses is primarily due to increases in power ($0.7 million) costs, non-cash environmental remediation and other accruals ($1.1 million) net of small variances in other operating costs.

The average Alberta market power price for the three months ended September 30, 2006 was $94.87 per MW.h compared to $66.71 per MW.h in the comparable period of 2005. The impact of higher Alberta market power prices, increased transportation charges and increased consumption were partially offset by Inter Pipeline's conventional pipeline system power hedging program. The hedging program fixed 5.0 megawatts ("MW") of power at an average price of $49.50 per MW.h for the third quarter of 2006 (Q3 2005 - 5.0 MW of power at an average price of $46.95 per MW.h).

For the nine-month period ended September 30, 2006, the $3.7 million increase in costs are primarily due to increases in power costs of $1.1 million, non-cash accruals (as discussed above) and other routine maintenance and operating costs.

Capital Expenditures

The majority of the 2006 third quarter capital expenditures in the conventional oil pipeline segment relate to the previously announced Bow River South expansion. This project increased the southbound capacity of the Bow River system from Hardisty, Alberta to refining markets in the northwest United States to approximately 36,000 b/d from 7,000 b/d.



OIL SANDS TRANSPORTATION BUSINESS SEGMENT

Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
% %
Volumes (000's b/d) 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Cold Lake (100% basis) 335.5 267.7 25.3 327.3 283.1 15.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------

($ millions,
except % amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue $ 14.9 $ 15.4 (3.2) $ 44.1 $ 45.5 (3.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating expenses $ 5.7 $ 4.1 39.0 $ 14.7 $ 11.7 25.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital expenditures
Growth(1) $ 1.2 $ (0.2) $ 10.9 $ 0.0
Sustaining(1) - 0.0 - 0.1
---------------------------------------------------------------------------
Total capital expenditures $ 1.2 $ (0.2) $ 10.9 $ 0.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Please refer to the "Non-GAAP Financial Measures" section.


Volumes

Total volumes (100% basis) on the Cold Lake pipeline system increased by 67,800 b/d (YTD 2006 - 44,200 b/d) in the third quarter of 2006 over the comparable period in September 30, 2005. The increase is the result of the continued development by the founding shippers of their respective Cold Lake oil sands projects that are transported on the Cold Lake pipeline system.

Revenue

The $0.5 million decrease in revenue in the third quarter of 2006 arising from Inter Pipeline's 85% interest in the Cold Lake Pipeline Limited Partnership is primarily a result of increases in volumes and operating revenue net of a contractual reduction in capital fees payable per barrel that became effective January 1, 2006. The 67,800 b/d (on a 100% basis) increase in volumes contributed $0.4 million in revenue, and operating revenue increased by $1.3 million as a result of increased recoverable operating expenses. These increases were offset by a contracted capital fee reduction of approximately $2.2 million as compared to the third quarter of 2005.

Effective in 2006, the terms of the Cold Lake Transportation Services Agreement provides annual minimum ship or pay commitment of $27.1 million ($31.9 million - 100% basis) in 2006 and thereafter, increases to approximately $27.8 million ($32.7 million - 100% basis) annually through to the end of December, 2011.

Although the year to date volumes have increased, the revenues remain comparable to revenues in 2005, as the increased volumes offset the decrease in the capital fees payable per barrel.

Operating Expenses

The $1.6 million increase in Cold Lake operating expenses for the three months ended September 30, 2006 was primarily due to a $1.2 million increase in fuel and power costs, attributable to power price and transportation charge increases and a $0.4 million increase in other routine operating expenses. Unlike the conventional system, the Cold Lake pipeline system's 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.

The Cold Lake pipeline system year-to-date operating cost was $3.0 million higher than the comparable 2005 operating cost primarily due to increases in fuel and power costs.

Capital Expenditures

The majority of capital expenditures incurred in the oil sands transportation business were related to the engineering, procurement and construction on expansion projects at the Foster Creek and Wolf Lake pump stations during the third quarter.



BULK LIQUID STORAGE BUSINESS SEGMENT

Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
($ millions, % %
except % amounts) 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Revenue $ 34.1 n/a(1) n/a(1) $ 100.1 n/a(1) n/a(1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating expenses $ 21.3 n/a(1) n/a(1) $ 63.3 n/a(1) n/a(1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital expenditures
Growth(2) $ 6.1 n/a(1) $ 9.5 n/a(1)
Sustaining(2) 2.5 n/a(1) 5.6 n/a(1)
---------------------------------------------------------------------------
Total capital expenditures $ 8.6 n/a(1) $ 15.1 n/a(1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Not applicable ("n/a"). Inter Pipeline acquired the Simon Storage bulk
liquid storage business on October 4, 2005 and TLG on January 1, 2006;
therefore no comparative operating results are available for 2005.

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


Revenue

Rental and handling income benefited from continued high demand across the European terminal network, with an average tank utilization rate of approximately 96%. The occupancy rate increased in September 2006 due to additional biofuels related storage at Immingham, Seal Sands and Tyne terminals. The Immingham storage terminals continued to benefit from close proximity to, and pipeline links with ConocoPhillips and Total refineries.

Operating Expenses

Operating expenses in the third quarter of 2006 decreased approximately 3% compared to the second quarter of 2006 primarily due to planned lower costs incurred during the final stages of the Greenergy project announced in November 2005. Operating expenses are primarily composed of labour costs ($7.4 million), tank repair and maintenance costs ($2.5 million), fuel and power costs ($2.1 million) and other routine operating costs.

Capital Expenditures

The bulk liquid storage business capital expenditures relate primarily to a Greenergy Biofuels project at Immingham for which $2.8 million has been expended in the third quarter of 2006 and other smaller projects. Sustaining capital expenditures during the third quarter primarily consist of tank modifications ($0.7 million) and jetty pipeline refurbishments ($0.2 million) at Immingham and Tyne terminals, respectively.



CORPORATE

Expenses

Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
($ millions, % %
except % amounts) 2006 2005 change 2006 2005 change
---------------------------------------------------------------------------
Depreciation and
amortization $ 17.1 $ 14.9 14.8 $ 52.1 $ 44.6 16.8
Financing charges 10.1 8.4 20.2 30.0 25.1 19.5
General and administrative 6.6 3.7 78.4 19.3 9.8 96.9
Management and acquisition
fees to General Partner 1.4 1.0 40.0 4.3 2.9 48.3
Unit incentive options - 0.2 (100.0) 0.2 0.6 (66.7)
Income taxes $ 0.9 $ - - $ 2.8 $ 0.1 2,700.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Depreciation and Amortization

Increases in Inter Pipeline's depreciation and amortization of its operating and intangible assets are 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 Nine Months Ended
September 30 September 30
($ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Credit facility interest expense $ 3.9 $ 1.8 $ 11.4 $ 5.2
Interest on loan payable to
General Partner 5.8 5.8 17.3 17.3
Debentures interest expense 0.3 0.5 1.1 1.8
---------------------------------------------------------------------------
Cash related financing charges 10.0 8.1 29.8 24.3
Amortization of deferred financing
costs 0.1 0.3 0.2 0.8
---------------------------------------------------------------------------
Total financing charges $ 10.1 $ 8.4 $ 30.0 $ 25.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Short-term interest rates for the quarter ranged from a weighted average bankers' acceptance rate, including stamping fees, of 5.11% to a weighted average prime rate of 6.00% (Q3 2005 - 3.49% for bankers' acceptances, including stamping fees, and 4.33% for prime rate). The weighted average principal outstanding on the credit facilities was $281.2 million for the three months ended September 30, 2006 (Q3 2005 - $123.2 million) and $300.4 million (YTD 2005 - $130.8 million) for the nine months ended September 30, 2006. The increase in the weighted average principal balance outstanding was related to the use of debt to acquire the entities comprising the bulk liquid storage businesses in October 2005 and January 2006, offset by the $142.2 million net funds raised in the January 2006 Class A unit equity offering.

Interest expense on the $379.8 million loan payable to Pipeline Management Inc., Inter Pipeline's General Partner, is consistent with the same periods in 2005 due to the fixed rate of interest on the loan and no change in the principal balance during the period.

General and Administrative

The increase in general and administrative expenses in the three and nine month periods ended September 30, 2006 are primarily attributable to the addition of $2.6 million (YTD 2006 - $7.5 million) in general and administrative costs associated with the acquisition of the bulk liquid storage businesses. The remaining $0.3 million increase in general and administrative expenses relates to Canadian operations, with $0.5 million included for a new Long Term Incentive Plan ("LTIP"). Please see NEW ACCOUNTING POLICIES - Long Term Incentive Plan below for further information.

Management and Acquisition Fees

The General Partner was paid a management fee equivalent to 2% of "Operating Cash," as defined in the Partnership Agreement.

There were no acquisition fees paid in the third quarter of either 2006 or 2005. The acquisition fees of $0.4 million incurred in the nine months ended September 30, 2006 relate to the acquisition of TLG.

Unit Incentive Options

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 have been no new Options issued in 2006.

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

Income Taxes

Inter Pipeline is a Canadian limited partnership and therefore, under current legislation, 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.

Future income tax expense of $0.8 million (YTD 2006 - $1.7 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.




SUMMARY OF QUARTERLY RESULTS

-------------------------------------------------------
2004 2005
---------------------------------------------------------------------------
($ millions, except Fourth First Second Third Fourth
per unit and % amounts) Quarter Quarter Quarter Quarter Quarter(1)
---------------------------------------------------------------------------
Revenue
NGL extraction $ 185.5 $ 170.5 $ 144.8 $ 174.8 $ 233.8
Conventional oil
pipeline(4) $ 27.9 $ 27.1 $ 26.5 $ 28.1 $ 28.2
Oil sands
transportation(4) $ 18.6 $ 15.0 $ 15.1 $ 15.4 $ 17.2
Bulk liquid storage(1) n/a n/a n/a n/a $ 30.4

Net income(5) $ 33.5 $ 26.8 $ 17.1 $ 24.5 $ 20.9
Per unit - basic(5) $ 0.19 $ 0.15 $ 0.09 $ 0.13 $ 0.11
Per unit - diluted(5) $ 0.18 $ 0.15 $ 0.09 $ 0.13 $ 0.11
Funds from
operations(3)(5) $ 55.8 $ 42.1 $ 32.8 $ 40.0 $ 38.1
Per unit(3)(5) $ 0.31 $ 0.23 $ 0.18 $ 0.22 $ 0.21
Cash
distributions(2)(3) $ 33.7 $ 34.0 $ 34.2 $ 34.4 $ 35.0
Per unit(2)(3) $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1875 $ 0.1900
Payout ratio(3)(5) 60.4% 80.8% 104.4% 86.2% 91.8%
Partnership units
outstanding
Weighted average 179.4 181.0 182.3 183.4 184.2
End of period 180.1 181.9 183.0 183.9 184.6
---------------------------------------------------------------------------


SUMMARY OF QUARTERLY RESULTS

---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
($ millions, except First Second Third
per unit and % amounts) Quarter Quarter Quarter
---------------------------------------------------------------------------
Revenue
NGL extraction $ 195.5 $ 133.0 $ 177.1
Conventional oil pipeline(4) $ 28.7 $ 27.1 $ 30.2
Oil sands transportation(4) $ 13.9 $ 15.3 $ 14.9
Bulk liquid storage(1) $ 31.6 $ 34.3 $ 34.1

Net income(5) $ 29.1 $ 30.8 $ 42.4
Per unit - basic(5) $ 0.15 $ 0.15 $ 0.21
Per unit - diluted(5) $ 0.15 $ 0.15 $ 0.21
Funds from operations(3)(5) $ 47.9 $ 48.8 $ 61.5
Per unit(3)(5) $ 0.25 $ 0.24 $ 0.31
Cash distributions(2)(3) $ 39.0 $ 39.2 $ 40.3
Per unit(2)(3) $ 0.1950 $ 0.1950 $ 0.2000
Payout ratio(3)(5) 81.5% 80.2% 65.4%
Partnership units outstanding
Weighted average 194.7 200.7 201.2
End of period 200.4 200.9 201.4
---------------------------------------------------------------------------

(1) 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.
(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 for change in segment reporting policy.
(5) Restated comparative periods due to change in accounting policy
regarding Unit Incentive Option Plan.


LIQUIDITY AND CAPITAL RESOURCES
As at As at As at
September 30 December 31 September 30
($ millions, except for % amounts) 2006 2005 2005
---------------------------------------------------------------------------

Cash, cash equivalents and funds held
in trust $ 33.8 $ 55.5 $ 22.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Working capital (deficiency) excluding
cash and funds held in trust(1) $ (12.0) $ (4.8) $ (0.3)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Variable rate debt
Revolving credit facility available $ 500.0 $ 500.0 $ 500.0
Revolving demand loan facility
available 20.0 - -
---------------------------------------------------------------------------
Total credit facilities available 520.0 500.0 500.0
Less unutilized revolving credit
facility (228.0) (74.0) (364.5)
---------------------------------------------------------------------------
Total outstanding revolving credit
facility 292.0 426.0 135.5
Less variable rate debt swapped to
fixed (46.0) (61.0) (62.0)
---------------------------------------------------------------------------
Total outstanding variable rate debt 246.0 365.0 73.5
---------------------------------------------------------------------------

Fixed rate long-term debt
Loan payable to General Partner 379.8 379.8 379.8
Debentures 12.1 15.9 18.5
Add variable rate debt swapped to
fixed 46.0 61.0 62.0
---------------------------------------------------------------------------
Total outstanding fixed rate long-term
debt 437.9 456.7 460.3
---------------------------------------------------------------------------

Total debt and Debentures outstanding $ 683.9 $ 821.7 $ 533.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Senior debt to total capitalization (1) 36.0% 43.4% 32.5%
Total debt to total capitalization (1) 36.7% 44.3% 33.7%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


Excess cash generated for the nine months ended September 30, 2006, along with the net proceeds of $142.2 million raised in the January 2006 equity issuance, have been applied to reduce Inter Pipeline's revolving credit facility and partially finance organic growth projects. With this reduction in debt, Inter Pipeline's debt level as at September 30, 2006 is only 36.7% of total debt to capitalization. This represents a strong balance sheet position which, when combined with $228.0 million available under the revolving credit facility, positions Inter Pipeline well for further growth. Of the $671.8 million of total debt outstanding at September 30, 2006 (excluding the Debentures at 10%), $246.0 million or 36.6% was exposed to a period ending variable interest rate of 4.94% with the remaining $425.8 million of fixed term debt having rates ranging from 5.41% to 6.31%.

During the second quarter of 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 (the "Unsecured Revolving Credit Facility"), while no fees are payable on undrawn amounts.

During the third quarter of 2006, the revolving period term of the Unsecured Revolving Credit Facility was extended from three to five years and certain pricing margins were reduced.

During the quarter, Standard & Poor's issued their annual entity credit rating for Inter Pipeline and 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 facilities $ 292.0 $ - $ - $ 292.0 $ -
Loan payable to General
Partner 379.8 - - - 379.8
Debentures 12.1 - 12.1 - -
Operating leases 52.9 6.2 14.3 6.4 26.0
---------------------------------------------------------------------------
Total obligations $ 736.8 $ 6.2 $ 26.4 $ 298.4 $ 405.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In the first nine months of 2006, Inter Pipeline has expended $37.2 million of the revised capital forecast of approximately $60 million to $65 million it had planned to spend on organic growth projects during the year.



DISTRIBUTIONS TO UNITHOLDERS

Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------
($ millions, except per unit
and % amounts) 2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by operating
activities(1) $ 51.7 $ 31.2 $ 157.3 $ 138.8
Net change in non-cash working
capital(1) 9.8 8.7 0.9 (24.0)
---------------------------------------------------------------------------
Funds from operations(1)((2) $ 61.5 $ 39.9 $ 158.2 $ 114.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Cash distributions(2)(3) $ 40.3 $ 34.4 $ 118.4 $ 102.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Per unit(2)(3) $ 0.2000 $ 0.1875 $ 0.5900 $ 0.5625
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Payout ratio(1)(2) 65.4% 86.2% 74.9% 89.4%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Growth capital expenditures(2) $ 11.4 $ 3.6 $ 37.2 $ 5.7
Sustaining capital
expenditures(2) 3.8 0.7 8.0 3.2
---------------------------------------------------------------------------
Total capital expenditures $ 15.2 $ 4.3 $ 45.2 $ 8.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Restated comparative periods due to change in accounting policy
regarding Unit Incentive Option Plan.
(2) Please refer to the "Non-GAAP Financial Measures" section of this MD&A.
(3) Cash distributions are calculated based on the number of units
outstanding at each record date.


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. Therefore, funds generated by operating activities that are not distributed to the unitholders, along with funds received from financing and investing activities, have been reinvested in the business to effectively manage the balance sheet, particularly debt levels.



OUTSTANDING UNIT DATA

Inter Pipeline's outstanding units as at September 30, 2006 are as follows:

(millions) Class A Class B Total
---------------------------------------------------------------------------
Units outstanding 201.2 0.2 201.4
Units reserved for issuance upon exercise of
vested Unit Incentive Options 2.0 - 2.0
Units reserved for issuance upon conversion of
Debentures 2.1 - 2.1
---------------------------------------------------------------------------


As at November 7, 2006, Inter Pipeline had 201.3 million Class A units outstanding and 0.2 million Class B units outstanding, for a total of 201.5 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 and foreign exchange risk and to assist with stabilizing funds from operations. Inter Pipeline attempts to accomplish this primarily through the use of financial instruments. Inter Pipeline is prohibited from using financial instruments for speculative purposes. All hedging policies are authorized and approved by the Board of Directors through Inter Pipeline's risk management policy.

Inter Pipeline has four types of "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 September 30, 2006 and 2005 are being accounted for as hedges, except for the heat rate swap contract.

NGL EXTRACTION BUSINESS

The following commodity and foreign currency swaps are used collectively to mitigate the frac-spread risk on propane plus volumes at the Cochrane extraction facility. As at September 30, 2006, Inter Pipeline had hedged approximately 45% and 24% of forecast propane plus volumes for the periods October 1 to December 31, 2006 and January 1 to December 31, 2007 at the Cochrane NGL extraction plant at an average price of $0.37 Cdn$/US gallon and $0.41 Cdn$/US gallon, respectively. These average prices would approximate $0.34 US$/US gallon and $0.37 US$/US gallon, respectively, based on the average US$/Cdn$ forward curve as at September 30, 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 frac-spread risk in its NGL extraction business. Contracts outstanding at September 30, 2006 to hedge NGL revenues fixed NGL prices at average prices for the following periods:


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


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

Contracts outstanding at September 30, 2005 fixed NGL prices at the following average prices for the period:


2005
---------------------------------------------------------------------------
Hedge Period: October to December
---------------------------------------------------------------------------
Average Price Average
(US$/ Quantity
US gallon) (b/d)
---------------------------------------------------------------------------
Propane 0.852 4,000
Normal Butane 1.003 685
Iso Butane 1.012 424
Pentanes Plus 1.267 339
---------------------------------------------------------------------------


The mark-to-market value of these contracts resulted in an unrecognized loss of US$4.5 million at September 30, 2005.

Natural Gas

Contracts outstanding at September 30, 2006 to hedge natural gas purchases fix natural gas prices at average prices of $8.05 and $8.31 per gigajoule for the periods from October 1, 2006 to December 31, 2006 and January 1, 2007 to December 31, 2007 for average quantities of 27,826 and 11,836 gigajoules per day, respectively. The mark-to-market value of the natural gas contracts at September 30, 2006 resulted in an unrecognized loss of $12.0 million.

Contracts outstanding at September 30, 2005 fixed natural gas prices at an average price of $7.78 per gigajoule for the period from October 1, 2005 to December 31, 2005 for average quantities of 20,870 gigajoules per day. The mark-to-market value of these contracts at September 30, 2005 resulted in an unrecognized gain of $8.6 million.

Foreign Currency

The NGL price swap agreements are calculated based on US dollar prices. As at September 30, 2006, Inter Pipeline had foreign exchange contracts outstanding to sell an average of US$9.8 million and US$4.4 million per month, at average fixed rates of US$0.885 and US$0.905 per Canadian dollar for the periods from October 1, 2006 to December 31, 2006 and January 1 to December 31, 2007, respectively. The mark-to-market value of these contracts at September 30, 2006 resulted in an unrecognized gain of $0.1 million.

As at September 30, 2005, Inter Pipeline had outstanding foreign exchange contracts to sell an average of US$6.4 million per month at an average fixed rate of US$0.798 per Canadian dollar for the period from October 1, 2005 to December 31, 2005. The mark-to-market value of these contracts resulted in an unrecognized gain of $1.8 million at September 30, 2005.

Power Prices

To manage its 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 GJ/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 loss of $0.3 million has been included in operating expenses for the three months ended September 30, 2006 representing the change in the mark-to-market value of the contract as at September 30, 2006.

CONVENTIONAL OIL PIPELINE BUSINESS

Power Prices

Inter Pipeline has entered into electricity price swap agreements for 5.0 MW in 2006 at average prices of $49.50 per MW.h, 5.0 MW in 2007 at average prices of $52.75 per MW.h and 2.5 MW in 2008 at an average price of $54.00 per MW.h. The mark-to-market value of these contracts at September 30, 2006 is an unrecognized gain of $0.9 million.

Contracts outstanding at September 30, 2005 were for 5.0 MW in 2005 at average prices of $46.95 per MW.h, 5.0 MW in 2006 at average prices of $49.50 per MW.h and 2.5 MW in 2007 at average prices of $51.50 per MW.h. The mark-to-market value of these contracts resulted in an unrecognized gain of $1.8 million at September 30, 2005.

CORPORATE

Interest Rates

$46.0 million of the outstanding debt at September 30, 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 6.3%. The fair market value of the remaining interest rate swap agreements aggregates to an unrecognized loss of $4.3 million at September 30, 2006 compared to an unrecognized loss of $6.2 million at September 30, 2005. Two interest rates swaps outstanding totaling $46.0 million are set to expire on December 31, 2011. The notional principal balance of one of these interest rate swaps is reduced by $1.0 million on December 31 of each year for the term of the arrangement.

TRANSACTIONS WITH RELATED PARTIES

No revenue was earned from related parties for the three and nine month periods ended September 30, 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 or nine month periods ended September 30, 2006 or 2005 under the support agreement.

Management fees of $1.4 million (Q3 2005 - $1.0 million) were earned by the General Partner in the quarter ended September 30, 2006. Similarly, management fees of $3.9 million (Q3 YTD - $2.9 million) were earned by the General Partner in the nine month period ended September 30, 2006. There were no acquisition fees paid in either of the three month periods ended September 30, 2006 and 2005. Acquisition fees of $0.4 million (YTD 2005 - nil) were paid year to date in 2006.

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 September 30, 2006, there were amounts owed to the General Partner by Inter Pipeline of $0.5 million (September 30, 2005 - $0.3 million).

The General Partner's 0.1% interest in Inter Pipeline, represented by Class B units, is controlled by PAC. The General Partner is a wholly owned subsidiary of PAC, a corporation controlled solely by the Chairman of the Board of the General Partner. Certain of the officers and directors of the General Partner have non-voting shares in PAC that entitle them to dividends. The entitlement to retain these shares of PAC and to receive dividends is tied, in part, to the continuing employment or service as a director or officer of the General Partner. These certain officers and directors of the General Partner received a total of $0.2 million in dividends during the quarter from PAC pursuant to their non-voting shares (Q3 2005 - nil).

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 September 30, 2006.

NEW ACCOUNTING POLICIES

Unit Incentive Option Plan ("UIOP")

In the fourth quarter of 2005, Inter Pipeline determined, after consultation with its auditors and the Alberta Securities Commission, that it was preferable to change its method of accounting for unit-based compensation to the fair value method. Inter Pipeline previously valued the 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 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. Unless otherwise provided in an individual grant agreement, 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 three month period ended September 30, 2006 was $0.8 million (YTD 2006 - $2.0 million). This represents the amortized value of the initial grant, the value of the distributions associated with the grants since the grant date, the increase/decrease in unit price per grant, new and cancelled grants.

NON-GAAP FINANCIAL MEASURES

Certain financial measures referred to in this MD&A, namely "cash distributions", "cash distributions per unit", "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 with their evaluation of Inter Pipeline, including their assessment of its ability to generate cash and fund the monthly distributions. Management considers these non-GAAP financial measures to be important indicators in assessing its performance.

Cash distributions are calculated by multiplying the cash distributions per unit by the number of units outstanding at each record date. This measure is used by the investment community to calculate the annualized yield of the Units.

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

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. This measure, in combination with other measures, is used by the investment community to assess the overall market value of the business. Enterprise value is calculated as follows:



As at September 30
--------------------
($ millions, except per unit amounts) 2006 2005
---------------------------------------------------------------------------
Closing unit price $ 10.24 $ 10.00
Total number of partnership units outstanding 201.4 183.9
---------------------------------------------------------------------------
2,062.0 1,839.3
Long-term debt 671.8 515.3
Debentures 12.1 18.5
---------------------------------------------------------------------------
Enterprise value $ 2,745.9 $ 2,373.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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



Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------
($ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Operating revenue $ 256.3 $ 218.4 $ 735.9 $ 617.4
Shrinkage gas expense (100.3) (117.9) (311.9) (332.8)
Cash operating expense (76.6) (47.8) (211.8) (132.8)
Cash general and
administrative expense (6.4) (3.7) (18.7) (9.8)
Management fees expense(1) (1.4) (1.0) (3.9) (2.9)
Acquisition fee expense - - (0.4) -
Credit facility interest expense (3.9) (1.8) (11.4) (5.2)
Loan payable to General Partner
interest expense (5.8) (5.8) (17.3) (17.3)
Interest on Debentures (0.3) (0.5) (1.1) (1.8)
Current income taxes (0.1) - (1.2) -
---------------------------------------------------------------------------
Funds from operations(1) 61.5 39.9 158.2 114.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


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. This measure is used by the investment community to assess the extent of discretionary capital spending.

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



Three Months Ended
September 30
-------------------------------------------------
2006 2005
($ millions) Growth Sustaining Total Total
---------------------------------------------------------------------------
NGL extraction $ 2.3 $ 0.7 $ 3.0 $ 0.8
Conventional oil pipeline 1.8 0.6 2.4 3.7
Oil sands transportation 1.2 - 1.2 (0.2)
Bulk liquid storage 6.1 2.5 8.6 -
---------------------------------------------------------------------------
Total $ 11.4 $ 3.8 $ 15.2 $ 4.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Nine Months Ended
September 30
-------------------------------------------------
2006 2005
($ millions) Growth Sustaining Total Total
---------------------------------------------------------------------------
NGL extraction $ 4.5 $ 1.0 $ 5.5 $ 1.7
Conventional oil pipeline 12.3 1.4 13.7 7.1
Oil sands transportation 10.9 - 10.9 0.1
Bulk liquid storage 9.5 5.6 15.1 -
---------------------------------------------------------------------------
Total $ 37.2 $ 8.0 $ 45.2 $ 8.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Payout ratio is calculated by expressing cash distributions for the period as a percentage of funds from operations for the period. This measure, in combination with other measures, is used by the investment community to assess the sustainability of the current cash distributions.

Senior debt to total capitalization is calculated by dividing long-term debt by the sum of long-term debt, Debentures and total partners' equity. This measure, in combination with other measures, is used by the investment community to assess the sustainability of the current cash distributions.

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

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 9th day of November, 2006.

Disclaimer

This MD&A highlights significant business results and statistics for Inter Pipeline's three month and nine month periods ended September 30, 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.



CONSOLIDATED BALANCE SHEETS
As at As at
September 30, December 31,
(unaudited) (thousands of dollars) 2006 2005
---------------------------------------------------------------------------

ASSETS
Current Assets
Cash $ 33,797 $ 17,525
Funds held in trust (note 4) - 37,964
Accounts receivable 119,375 130,175
Prepaid expenses and other deposits 6,696 12,771
---------------------------------------------------------------------------
Total Current Assets 159,868 198,435

Intangible assets (note 6) 376,215 385,977
Property, plant and equipment (note 7) 1,508,605 1,442,367
Deferred financing charges 1,594 1,753
Goodwill (note 4) 70,452 53,893
---------------------------------------------------------------------------
Total Assets $ 2,116,734 $ 2,082,425
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Distributable cash payable $ 14,096 $ 11,998
Accounts payable and accrued liabilities 112,992 131,626
Deferred revenue 10,960 4,149
---------------------------------------------------------------------------
Total Current Liabilities 138,048 147,773

Long-term debt (note 8) 671,800 805,800
Convertible debentures 12,111 15,948
Asset retirement obligation (note 9) 17,833 16,715
Environmental liabilities 10,729 5,025
Pension liabilities 3,699 2,060
Long-term compensation accrual 895 4
Future income taxes (note 4) 80,348 56,025
---------------------------------------------------------------------------
Total Liabilities 935,463 1,049,350
---------------------------------------------------------------------------

Partners' Equity
Conversion feature on convertible
debentures 535 707
Cumulative foreign currency translation 2,036 (9,706)
Partners' equity (note 10) 1,178,700 1,042,074
---------------------------------------------------------------------------
Total Partners' Equity 1,181,271 1,033,075
---------------------------------------------------------------------------
Total Liabilities and Partners' Equity $ 2,116,734 $ 2,082,425
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.

CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Nine months ended September 30
2006 2005
---------------------------------------------------------------------------
(restated
Class A Class B see Note 2)
Limited Unlimited
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 102,254 102 102,356 68,379
Cash distributions
declared (118,305) (119) (118,424) (102,671)
Issuance of
Partnership units
Conversion of
debentures (note 10) 4,009 4 4,013 14,637
Issued under
Distribution
Reinvestment and
Optional Unit Purchase
Plan (note 10) 4,189 3 4,192 2,822
Issued under Unit
Incentive Option Plan
(note 10) 2,102 2 2,104 3,906
Equity issuances, net
of issue costs (note 10) 142,089 142 142,231 -
Amortization of
debenture issue costs - - - (335)
Unit incentive options
(note 11) 154 - 154 597
---------------------------------------------------------------------------
Balance, end of period $ 1,177,524 $ 1,176 $ 1,178,700 $ 1,050,660
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.

CONSOLIDATED STATEMENTS OF NET INCOME

Three months ended Nine months ended
September 30 September 30
(unaudited) (thousands of dollars) 2006 2005 2006 2005
---------------------------------------------------------------------------
(restated - (restated
see Note 2) see Note 2)

REVENUES $ 256,344 $ 218,358 $ 735,864 $ 617,429
---------------------------------------------------------------------------

EXPENSES
Shrinkage gas 100,251 117,886 311,937 332,805
Operating 77,495 47,754 212,908 133,233
Depreciation and amortization 17,070 14,886 52,144 44,573
Financing charges (note 12) 10,146 8,379 29,955 25,079
General and administrative 6,641 3,704 19,300 9,763
Management fee to General Partner 1,401 992 3,885 2,867
Acquisition fee to General Partner
(note 4) - - 376 -
Unit incentive options (note 11) 23 231 154 597
---------------------------------------------------------------------------
213,027 193,832 630,659 548,917
---------------------------------------------------------------------------
---------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 43,317 24,526 105,205 68,512
---------------------------------------------------------------------------

Provision for income taxes:
Current income tax expense 95 - 1,171 -
Future income tax expense 768 57 1,678 133
---------------------------------------------------------------------------
863 57 2,849 133
---------------------------------------------------------------------------
---------------------------------------------------------------------------
NET INCOME $ 42,454 $ 24,469 $ 102,356 $ 68,379
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net income per Partnership unit
(note 10)
Basic $ 0.21 $ 0.13 $ 0.51 $ 0.37
Diluted $ 0.21 $ 0.13 $ 0.51 $ 0.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended Nine months ended
September 30 September 30
(unaudited) (thousands of dollars) 2006 2005 2006 2005
---------------------------------------------------------------------------
(restated - (restated
see Note 2) see Note 2)

OPERATING ACTIVITIES
Net income $ 42,454 $ 24,469 $ 102,356 $ 68,379
Depreciation and amortization 17,070 14,886 52,144 44,573
Amortization of deferred
financing charges (note 12) 53 301 159 824
Unit incentive options 23 231 154 597
Non-cash operating expense 933 (5) 1,133 371
Non-cash general and administrative
expense 225 - 591 -
Future income tax expense 768 57 1,678 133
Accretion of discount on Annual
Service Contract Recovery Amounts - - - (53)
---------------------------------------------------------------------------
Funds from operations 61,526 39,939 158,215 114,824
Net change in non-cash working
capital (note 14) (9,804) (8,720) (902) 23,986
---------------------------------------------------------------------------
Cash provided by operating
activities 51,722 31,219 157,313 138,810
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Funds held in trust - (12,566) 37,851 (12,566)
Acquisition of TLG (note 4) (6) - (37,732) -
Assumption of cash on the
acquisition of TLG (note 4) - - 303 -
Acquisition of Simon Storage (note 3) - - (187) -
Annual Service Contract Recovery
Payment - - - 2,402
Expenditures on property, plant
and equipment (15,187) (4,271) (45,182) (8,945)
Proceeds on sale of assets 59 - 87 196
Acquisition of the NGL extraction
business - - - 342
Net change in non-cash working
capital (note 14) (1,317) 1,890 5,037 (3,627)
---------------------------------------------------------------------------
Cash used in investing activities (16,451) (14,947) (39,823) (22,198)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Cash distributions declared (40,253) (34,431) (118,424) (102,671)
Increase (decrease) in long-term
debt, net of repayments 15,000 21,000 (134,000) (15,500)
Issuance of Partnership units,
net of issue costs - - 142,231 -
Cash received under Distribution
Reinvestment and Optional Unit
Purchase Plan 1,534 1,115 4,192 2,822
Issuance of units under Unit
Incentive Option Plan 363 233 2,104 3,906
Issuance of Class B units upon
debenture conversions 1 5 4 15
Deferred financing charges - (100) - (241)
Net change in non-cash working
capital (note 14) 1,034 59 2,098 241
---------------------------------------------------------------------------
Cash used in financing activities (22,321) (12,119) (101,795) (111,428)
---------------------------------------------------------------------------

Effect of foreign currency
translation on cash 98 - 577 -

Increase in cash 13,048 4,153 16,272 5,184
Cash, beginning of period 20,749 5,443 17,525 4,412
---------------------------------------------------------------------------
Cash, end of period $ 33,797 $ 9,596 $ 33,797 $ 9,596
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Cash interest paid $ 3,908 $ 2,049 $ 23,909 $ 18,675
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2006
(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 three and nine month periods ended September 30, 2005. The impact of the change in accounting policy is:



Change in Consolidated Statement of Net Income

Three months ended Nine months ended
Increase (decrease) September 30, 2005 September 30, 2005
---------------------------------------------------------------------------
Unit incentive options $ (3,334) $ (11,681)
Management fee to General Partner 67 234
---------------------------------------------------------------------------
Total expenses (3,267) $ (11,447)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Net income $ 3,267 $ 11,447
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Net income per Partnership unit
- Basic $ 0.02 $ 0.06
Net income per Partnership unit
- Diluted $ 0.02 $ 0.06
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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 UARs are held. Unless otherwise provided in an individual grant agreement, 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 UARs are accounted for on a mark-to-market basis whereby a liability and expense are recorded each period based on the number of UARs 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 results of the operations of Simon Storage have been included in the consolidated financial statements since that date. The acquisition was funded through an existing revolving credit facility (see note 8). 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 were amended during the first quarter of 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 results of the operations of TLG have been included in the consolidated financial statements since that date. The cash consideration for this transaction was approximately $37.7 million ($38 million (EUR 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. The purchase price allocation was amended during the third quarter of 2006, which increased the amounts allocated to goodwill and the future tax liability. 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 14,486
Asset retirement obligation (301)
Environmental liability (3,849)
Pension liability (1,491)
Future tax liability (20,733)
---------------------------------------------------------------------------
$ 37,732
---------------------------------------------------------------------------
---------------------------------------------------------------------------


5. SEGMENT REPORTING

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

Three months ended September 30, 2006
---------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
---------------------------------------------------------------------------
Revenues $ 177,090 $ 30,243 $ 14,873 $ -
---------------------------------------------------------------------------
Expenses
Shrinkage gas 100,251 - - -
Operating 40,467 9,958 5,722 -
Depreciation
and
amortization 6,288 4,543 3,997 -
Financing
charges - - - 10,274
General and
administrative - - - 4,018
Management fee
to General
Partner - - - 1,401
Acquisition fee
to General
Partner - - - -
Unit incentive
options - - - 23
---------------------------------------------------------------------------
Total expenses 147,006 14,501 9,719 15,716
---------------------------------------------------------------------------
Income before
income taxes 30,084 15,742 5,154 (15,716)
---------------------------------------------------------------------------
Provision for
income taxes - - 46 -
---------------------------------------------------------------------------
Net income $ 30,084 $ 15,742 $ 5,108 $ (15,716)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on
property,
plant
and equipment $ (3,030) $ (2,417) $ (1,207) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 758,428 $ 475,980 $ 454,868 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Three months ended September 30, 2006
---------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(1) Operations
---------------------------------------------------------------------------
Revenues $ 222,206 $ 34,138 $ 256,344
---------------------------------------------------------------------------
Expenses
Shrinkage gas 100,251 - 100,251
Operating 56,147 21,348 77,495
Depreciation and
amortization 14,828 2,242 17,070
Financing charges 10,274 (128) 10,146
General and administrative 4,018 2,623 6,641
Management fee to General
Partner 1,401 - 1,401
Acquisition fee to
General Partner - - -
Unit incentive options 23 - 23
---------------------------------------------------------------------------
Total expenses 186,942 26,085 213,027
---------------------------------------------------------------------------
Income before income taxes 35,264 8,053 43,317
---------------------------------------------------------------------------
Provision for income taxes 46 817 863
---------------------------------------------------------------------------
Net income $ 35,218 $ 7,236 $ 42,454
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property,
plant and equipment $ (6,654) $ (8,533) $ (15,187)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 1,689,276 $ 427,458 $2,116,734
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


Three months ended September 30, 2005
---------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
---------------------------------------------------------------------------
Revenues $ 174,838 $ 28,114 $ 15,406 $ -
---------------------------------------------------------------------------
Expenses
Shrinkage gas 117,886 - - -
Operating 35,314 8,312 4,128 -
Depreciation and
amortization 6,144 4,728 4,014 -
Financing charges - - - 8,379
General and
administrative - - - 3,704
Management fee to
General Partner - - - 992
Unit incentive
options - - - 231
---------------------------------------------------------------------------
Total expenses 159,344 13,040 8,142 13,306
---------------------------------------------------------------------------
Income before
income taxes 15,494 15,074 7,264 (13,306)
---------------------------------------------------------------------------
Provision for
income taxes - - 57 -
---------------------------------------------------------------------------
Net income $ 15,494 $ 15,074 $ 7,207 $ (13,306)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ (795) $ (3,699) $ 223 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

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


Three months ended September 30, 2005
---------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(2) Operations
---------------------------------------------------------------------------
Revenues $ 218,358 $ - $ 218,358
---------------------------------------------------------------------------
Expenses
Shrinkage gas 117,886 - 117,886
Operating 47,754 - 47,754
Depreciation and
amortization 14,886 - 14,886
Financing charges 8,379 - 8,379
General and administrative 3,704 - 3,704
Management fee to
General Partner 992 - 992
Unit incentive options 231 - 231
---------------------------------------------------------------------------
Total expenses 193,832 - 193,832
---------------------------------------------------------------------------
Income before income taxes 24,526 - 24,526
---------------------------------------------------------------------------
Provision for income taxes 57 - 57
---------------------------------------------------------------------------
Net income $ 24,469 $ - $ 24,469
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property, plant
and equipment $ (4,271) $ - $ (4,271)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
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 three and nine
month periods ending September 30, 2005.


Nine months ended September 30, 2006
---------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
---------------------------------------------------------------------------
Revenues $ 505,665 $ 86,042 $ 44,098 $ -
---------------------------------------------------------------------------
Expenses
Shrinkage gas 311,937 - - -
Operating 108,075 26,827 14,735 -
Depreciation and
amortization 18,869 13,745 12,028 -
Financing charges - - - 30,356
General and
administrative - - - 11,797
Management fee to
General Partner - - - 3,885
Acquisition fee to
General Partner - - - 376
Unit incentive
options - - - 154
---------------------------------------------------------------------------
Total expenses 438,881 40,572 26,763 46,568
---------------------------------------------------------------------------
Income before
income taxes 66,784 45,470 17,335 (46,568)
---------------------------------------------------------------------------
Provision for
income taxes - - 150 -
---------------------------------------------------------------------------
Net income $ 66,784 $ 45,470 $ 17,185 $ (46,568)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ (5,550) $ (13,641) $ (10,912) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 758,428 $ 475,980 $ 454,868 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Nine months ended September 30, 2006
---------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(1) Operations
---------------------------------------------------------------------------
Revenues $ 635,805 $ 100,059 $ 735,864
---------------------------------------------------------------------------
Expenses
Shrinkage gas 311,937 - 311,937
Operating 149,637 63,271 212,908
Depreciation and
amortization 44,642 7,502 52,144
Financing charges 30,356 (401) 29,955
General and administrative 11,797 7,503 19,300
Management fee to
General Partner 3,885 - 3,885
Acquisition fee to
General Partner 376 - 376
Unit incentive options 154 - 154
---------------------------------------------------------------------------
Total expenses 552,784 77,875 630,659
---------------------------------------------------------------------------
Income before income taxes 83,021 22,184 105,205
---------------------------------------------------------------------------
Provision for income taxes 150 2,699 2,849
---------------------------------------------------------------------------
Net income $ 82,871 $ 19,485 $ 102,356
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property,
plant and equipment $ (30,103) $ (15,079) $ (45,182)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 1,689,276 $ 427,458 $ 2,116,734
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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


Nine months ended September 30, 2005
---------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
---------------------------------------------------------------------------
Revenues $ 490,220 $ 81,673 $ 45,483 $ 53
---------------------------------------------------------------------------
Expenses
Shrinkage gas 332,805 - - -
Operating 98,431 23,105 11,697 -
Depreciation and
amortization 18,410 14,130 12,033 -
Financing charges - - - 25,079
General and
administrative - - - 9,763
Management fee to
General Partner - - - 2,867
Unit incentive
options - - - 597
---------------------------------------------------------------------------
Total expenses 449,646 37,235 23,730 38,306
---------------------------------------------------------------------------
Income before
income taxes 40,574 44,438 21,753 (38,253)
---------------------------------------------------------------------------
Provision for
income taxes - - 133 -
---------------------------------------------------------------------------
Net income $ 40,574 $ 44,438 $ 21,620 $ (38,253)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Expenditures on
property, plant
and equipment $ (1,670) $ (7,066) $ (209) $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

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


Nine months ended September 30, 2005
---------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(2) Operations
---------------------------------------------------------------------------
Revenues $ 617,429 $ - $ 617,429
---------------------------------------------------------------------------
Expenses
Shrinkage gas 332,805 - 332,805
Operating 133,233 - 133,233
Depreciation and
amortization 44,573 - 44,573
Financing charges 25,079 - 25,079
General and administrative 9,763 - 9,763
Management fee to
General Partner 2,867 - 2,867
Unit incentive options 597 - 597
---------------------------------------------------------------------------
Total expenses 548,917 - 548,917
---------------------------------------------------------------------------
Income before income taxes 68,512 - 68,512
---------------------------------------------------------------------------
Provision for income taxes 133 - 133
---------------------------------------------------------------------------
Net income $ 68,379 $ - $ 68,379
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expenditures on property,
plant and equipment $ (8,945) $ - $ (8,945)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
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 three and nine
month periods ending September 30, 2005.


6. INTANGIBLE ASSETS

September December
30, 2006 31, 2005
---------------------------------------------------------------------------
Accumulated
Depreciation & Net Net
Cost Amortization Book Value Book Value
---------------------------------------------------------------------------
NGL extraction business
Customer contracts $ 287,612 $ (20,777) $ 266,835 $ 274,025
Patent 8,727 (1,351) 7,376 7,844
Oil sands
transportation
business
Transportation Services
Agreement 93,548 (12,086) 81,462 83,881
Bulk liquid storage
business
Customer contracts 21,250 (708) 20,542 20,227
---------------------------------------------------------------------------
$ 411,137 $ (34,922) $ 376,215 $ 385,977
---------------------------------------------------------------------------
---------------------------------------------------------------------------


7. PROPERTY, PLANT AND EQUIPMENT

September December
30, 2006 31, 2005
---------------------------------------------------------------------------
Accumulated
Depreciation & Net Net
Cost Amortization Book Value Book Value
---------------------------------------------------------------------------
NGL extraction business
Facilities and
equipment $ 437,229 $ (30,099) $ 407,130 $ 412,140
Spare parts 3,449 - 3,449 3,418
Conventional oil
pipeline business
Facilities and
equipment 773,189 (324,341) 448,848 448,180
Deferred receipt
facilities
expenditures 6,137 (5,641) 496 1,161
Oil sands
transportation
business
Facilities and
equipment 383,288 (46,732) 336,556 335,440
Pipeline linefill 10,384 - 10,384 10,384
Bulk liquid storage
business
Facilities and
equipment 309,365 (7,623) 301,742 231,644
---------------------------------------------------------------------------
$1,923,041 $ (414,436) $1,508,605 $1,442,367
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. LONG-TERM DEBT

The following amounts have been drawn under Inter Pipeline's credit
facilities:

September December
30, 2006 31, 2005
---------------------------------------------------------------------------
Loan Payable to General Partner $ 379,800 $ 379,800
$500 million Unsecured Revolving Credit Facility
(a),(c) 292,000 426,000
$20 million Unsecured Revolving Demand Loan
Facility (b) - -
---------------------------------------------------------------------------
$ 671,800 $ 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) Effective May 1, 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. On September 29, 2006, pricing margins on the demand loan facility were amended to reflect the new pricing margins as contained in the $500 million Unsecured Revolving Credit Facility.

(C) On September 29, 2006, the $500 million Unsecured Revolving Credit Facility was amended to extend the revolving period and reduce pricing margins. Under the amendment, the facility is fully revolving for a period of five years from September 29, 2006. This revolving period may be extended at any time with the agreement of the lenders, but it cannot exceed five years from the date of extension. The amendment contains an option to increase the total facility up to a maximum of $750 million subject to satisfying certain conditions.

Fees on amounts borrowed at floating rates based on bankers' acceptances decreased from 75 basis points to 60 basis points, while fees on unborrowed amounts decreased from 15 basis points to 12.5 basis points. If Inter Pipeline's credit rating changes, the fees on floating rate amounts could increase by up to 35 basis points or reduce by up to 22.5 basis points, while fees on undrawn amounts could increase by up to 15 basis points and decrease by up to 2.5 basis points.



9. ASSET RETIREMENT OBLIGATION

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

Obligation at December 31, 2005 $ 16,715
Additions to liabilities 301
Accretion expense 762
Foreign currency adjustments 55
---------------------------------------------------------------------------
Obligation at September 30, 2006 $ 17,833
---------------------------------------------------------------------------
---------------------------------------------------------------------------


At September 30, 2006, $0.9 million is included in accounts payable and accrued liabilities for asset retirement obligations related to the retirement of property, plant and equipment in the conventional oil pipeline business (December 31, 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 15,000,000 15,016 15,015,016
Issued on conversion of
debentures 661,315 617 661,932
Issued under Distribution
Reinvestment and Optional
Unit Purchase Plan 443,631 341 443,972
Issued under Unit Incentive
Option Plan 654,506 664 655,170
---------------------------------------------------------------------------
Balance at September 30, 2006 201,167,028 201,493 201,368,521
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Equity issuance

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 Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Net income attributable to
unitholders $ 42,454 $ 24,469 $ 102,356 $ 68,379
---------------------------------------------------------------------------

Weighted-average units
outstanding - Basic 201,166,924 183,408,790 198,889,098 182,254,065
Effect of debenture
conversions 2,146,857 - 2,351,688 -
Effect of unit options 1,204,086 1,765,873 1,346,036 1,854,320
---------------------------------------------------------------------------
Weighted-average units
outstanding - Diluted (1) 204,517,867 185,174,663 202,586,822 184,108,385
---------------------------------------------------------------------------

Net income per Partnership
unit - Basic $ 0.21 $ 0.13 $ 0.51 $ 0.37
Net income per Partnership
unit - Diluted $ 0.21 $ 0.13 $ 0.51 $ 0.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) The debenture conversions have an anti-dilutive impact for the three
and nine months ended September 30, 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
UARs:

---------------------------------------------------------------------------
Unit Options UARs
---------------------------------------------------------------------------
Weighted-
Weighted- average
average adjusted
exercise exercise
Numbers price(1) price(2) Number
---------------------------------------------------------------------------
Balance outstanding,
December 31, 2005 3,046,601 $ 7.37 $ 4.65 -
Granted - $ - $ - 448,983
Exercised (654,506) $ 6.70 $ 3.15 -
Cancelled (72,837) $ 8.08 $ 6.26 (21,500)
------------------------------------- ---------
Balance outstanding,
September 30, 2006 2,319,258 $ 7.53 $ 4.92 427,483
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(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 Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Interest expense $ 9,769 $ 7,570 $ 28,743 $ 22,474
Interest on debentures 324 508 1,053 1,781
Amortization of deferred
financing charges 53 301 159 824
---------------------------------------------------------------------------
Total financing charges $ 10,146 $ 8,379 $ 29,955 $ 25,079
---------------------------------------------------------------------------
---------------------------------------------------------------------------


13. RISK MANAGEMENT

Inter Pipeline has not recognized assets or liabilities associated with the swap contracts outstanding at September 30, 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).

Frac spread risk management

Contracts outstanding at September 30, 2006 represent approximately 45% of forecast propane plus volumes at the Cochrane extraction plant for the period October to December 2006 at average prices of approximately $0.37 Cdn/US gallon and 24% of forecast volumes for the period January to December 2007 at average prices of approximately $0.41 Cdn/US gallon. These average prices would approximate $0.34 US/US gallon and $0.37 US/US gallon, respectively, based on the average US$/Cdn$ forward curve as at September 30, 2006. Contracts outstanding at September 30, 2006 were as follows:



2006 2007
---------------------------------------------------------------------------
Hedged Period October 1 to December 31 January 1 to December 31
---------------------------------------------------------------------------
Average Average
Price Average Price Average
(US$/US Quantity (US$/US Quantity
NGL Swaps gallon) (b/d) gallon) (b/d)
---------------------------------------------------------------------------

Propane 0.968 5,337 1.043 2,241
Normal Butane 1.160 913 1.209 388
Iso Butane 1.165 565 1.217 240
Pentanes Plus 1.639 452 1.772 192
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Natural gas swaps 8.05 27,826 8.31 11,836
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Foreign exchange
swaps 0.885 9,819 0.905 4,395
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Contracts outstanding at September 30, 2005 were as follows:

2005
---------------------------------------------------------------------------
Hedged Period October 1 to December 31
---------------------------------------------------------------------------
Average Average
Price Quantity
NGL Swaps (US$/US gallon) (b/d)
---------------------------------------------------------------------------

Propane 0.852 4,000
Normal Butane 1.003 685
Iso Butane 1.012 424
Pentanes Plus 1.267 339
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Natural gas swaps 7.775 20,870
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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

Foreign exchange swaps 0.798 6,381
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The fair market value of the frac spread swap contracts resulted in
unrecognized (losses) / gains at September 30 as follows:

2006 2005
---------------------------------------------------------------------------
US$
NGL Swaps $ (4,073) $ (4,525)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Cdn$
Natural gas swaps (11,959) 8,585
Foreign exchange swaps 144 1,767
---------------------------------------------------------------------------
Unrecognized (loss) gain $ (11,815) $ 10,352
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
NGL swaps $ (3,656) $ (5,954) $ (5,372) $ (10,443)
Natural gas swaps (3,050) 2,056 (8,055) (823)
Foreign exchange swaps 462 749 1,043 2,011
---------------------------------------------------------------------------
Net settlement on frac
spread swaps $ (6,244) $ (3,149) $ (12,384) $ (9,255)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Interest rate risk management

The fair market value of the outstanding interest rate swap contracts as at September 30, 2006 results in an unrecognized loss of $4.3 million (as at September 30, 2005 - $6.2 million). During the three and nine months ended September 30, 2006, the realized loss on the interest rate swap contracts recognized in income was $0.2 million and $0.9 million, respectively (three and nine months ended September 30, 2005 - $0.5 million and $1.6 million, respectively).

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 $0.9 million as at September 30, 2006 (as at September 30, 2005 - $1.8 million). The realized gain on the electricity price swap contracts recognized in income in the three and nine months ended September 30, 2006 was $0.5 million and $0.6 million, respectively (three and nine months ended September 30, 2005 - $0.2 million and $0.3 million).

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 September 30, 2006. As the contract is not accounted for as a hedge, the change in the fair market value has been included in operating expenses, resulting in an unrealized loss of $0.3 million and an unrealized gain of $1.0 million in the three and nine month periods ended September 30, 2006, respectively. The realized gain on the heat rate swap contracts recognized in income for the three and nine month periods ended September 30, 2006 was $1.7 million and $2.0 million, respectively.



14. CHANGES IN NON-CASH WORKING CAPITAL

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Accounts receivable $ (26,778) $ (29,119) $ 10,800 $ 15,797
Prepaid expense and other
deposits 3,146 (705) 6,075 622
Distributable cash payable 1,034 59 2,098 241
Accounts payable and
accrued liabilities 15,715 32,813 (18,634) 916
Deferred revenue (3,141) (9,819) 6,811 2,222
Working capital
(deficiency) acquired
on acquisitions - - (1,609) 802
Impact of foreign exchange
rate differences and other (63) - 692 -
---------------------------------------------------------------------------
Changes in non-cash working
capital $ (10,087) $ (6,771) $ 6,233 $ 20,600
---------------------------------------------------------------------------
---------------------------------------------------------------------------

These changes relate to the
following activities:
Operating $ (9,804) $ (8,720) $ (902) $ 23,986
Investing (1,317) 1,890 5,037 (3,627)
Financing 1,034 59 2,098 241
---------------------------------------------------------------------------
(Increase) decrease in
working capital $ (10,087) $ (6,771) $ 6,233 $ 20,600
---------------------------------------------------------------------------
---------------------------------------------------------------------------


15. COMPARATIVE FIGURES

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



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