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

Inter Pipeline Fund

August 10, 2006 13:31 ET

Inter Pipeline Fund Announces Strong Second Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 10, 2006) - Inter Pipeline Fund (TSX:IPL.UN) (Inter Pipeline) announced today its financial and operating results for the three and six month period ended June 30, 2006.

Highlights

- Funds from operations(1) increased $16.0 million or 48.9% to $48.8 million compared to the same quarter last year

- Quarterly payout ratio(1) of 80.2%; year-to-date payout ratio of 80.8%

- Net income of $30.8 million, up $13.8 million or 80.6% from the same quarter a year ago

- Cash distributions(1) to unitholders totaled $39.2 million or $0.1950 per unit

- Volumes on the Cold Lake pipeline system reached a new quarterly record, transporting 334,000 barrels per day (b/d), up approximately 54,800 b/d or 19.7% over the comparable period in 2005

- Southbound crude oil volumes sourced at Hardisty, Alberta and delivered on the Bow River pipeline system to refining markets in the northwest United States averaged 24,000 b/d, up 252% from the second quarter of 2005

- Subsequent to quarter end, completed expansion of the Bow River south pipeline system, finalized construction of Cactus Lake pipeline interconnection facilities at the Kerrobert terminal and filed regulatory application for the Cochrane Ethane Recovery Project

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

Funds From Operations

During the second quarter of 2006, Inter Pipeline generated funds from operations of $48.8 million, up $16.0 million over the comparable 2005 period. For the six month period ended June 30, 2006, funds from operations increased $21.8 million to $96.7 million over the same six months of 2005. The 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 at the Cochrane natural gas liquids (NGL) extraction facility.

In the second quarter, Inter Pipeline's NGL extraction, conventional oil pipeline, oil sands transportation and bulk liquid storage business segments contributed $25.4 million, $18.3 million, $10.6 million, and $9.4 million respectively to funds from operations. Corporate charges including general & administrative and interest expenses totalled $14.9 million.

Cash Distributions

Cash distributions to unitholders during the quarter totaled $39.2 million, or $0.1950 per unit, representing a very positive payout ratio of 80.2% of funds from operations. These results compare favourably to a 104.4% payout ratio achieved during the second quarter of 2005, which were impacted by lower than expected conventional crude oil and NGL throughput volumes due to severe weather conditions.

Inter Pipeline's monthly cash distributions are currently $0.0650 per unit, or $0.78 per unit on an annualized basis.

NGL Extraction

The NGL extraction business continued to generate strong results during the second quarter as throughput volumes and commodity prices remained favourable. During the quarter, Inter Pipeline's three NGL extraction facilities processed 3.6 billion cubic feet per day of natural gas, producing an average of 124,400 b/d of NGLs, comprised of 79,000 b/d of ethane and 45,400 b/d of propane plus.

Inter Pipeline's realized frac-spread, or the difference between the weighted average price of propane-plus products and AECO natural gas, averaged $0.529 US/US gallon in the quarter, compared to $0.281 US/US gallon in the same quarter last year. The frac-spread increases in commodity environments when NGL prices rise and natural gas prices fall, as characterized by the market conditions in this quarter. In general, NGL commodity prices are correlated to the price of crude oil.

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 15,000 b/d to 80,000 b/d making it among the largest and most efficient NGL extraction facilities in North America. CERP involves 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.

"The Cochrane Ethane Recovery Project will provide significant incremental ethane feedstock to Alberta's petrochemical industry in a very cost effective manner", commented David Fesyk, President and Chief Executive Officer. "Higher ethane recovery rates at Inter Pipeline's Cochrane plant will help alleviate current concerns regarding the tight supply of ethane extracted from natural gas produced in the Province of Alberta".

"We strongly believe our project will provide the Alberta ethane market with a superior alternative to the proposed Harmattan field plant conversion and new pipeline construction project being proposed by Taylor NGL Limited Partnership. Our project provides key advantages with respect to the production of truly incremental ethane volumes and less landowner, operational and environmental impacts".

Pending regulatory approval, CERP is expected to commence construction in the spring of 2007, and be operational by late 2008 at a cost of approximately $80 million.

Conventional Oil Pipeline

Throughput volumes on Inter Pipeline's Bow River, Central Alberta, Mid- Saskatchewan, and Valley conventional pipeline systems averaged 200,300 b/d during the second quarter, compared to 198,400 b/d one year ago. The increase in conventional volumes is primarily the result of higher Bow River southbound volumes sourced at Hardisty, Alberta which increased by 17,200 b/d to 24,000 b/d over the comparable period in 2005. The average revenue per barrel from the conventional oil pipelines in the second quarter of 2006 was $1.49 versus $1.47 per barrel in the second quarter of 2005.

Subsequent to quarter end, Inter Pipeline completed two organic growth projects on its conventional oil pipeline systems. The first project was the expansion of the Bow River pipeline system to facilitate the transfer of higher southbound crude oil volumes from the oil storage hub at Hardisty to refining markets in the United States. Total southbound capacity from Hardisty is now approximately 36,000 b/d. The final cost of the project was approximately $13 million.

The second growth project involved the construction of new metering and interconnection facilities at the Kerrobert terminal to provide storage and condensate supply services to shippers on the Cactus Lake pipeline system. The cost to build the additional facilities was approximately $3.6 million.

Oil Sands Transportation

Throughput volumes on the Cold Lake pipeline system continued to increase during the quarter establishing a new quarterly record of 334,000 b/d. This represents an increase of approximately 54,800 b/d over volumes delivered during the second quarter of 2005. Aggressive development by the producers in the Cold Lake region continues to increase oil sands production. Cold Lake receipt volumes reached an all-time record in June averaging approximately 339,000 b/d.

In the second quarter, Inter Pipeline incurred approximately $6.8 million of growth capital on the Cold Lake system, primarily for capacity expansions at Foster Creek and Wolf Lake pump stations.

Bulk Liquid Storage

Inter Pipeline's European bulk liquid storage business continued to meet expectations in the second quarter by contributing $34.3 million to revenue and $9.4 million to funds from operations.

During the second quarter, approximately $2.6 million of growth capital was invested primarily related to the reconfiguration of existing storage facilities at the Immingham West terminal to accommodate biodiesel.

Financing Activity

Inter Pipeline has applied excess cash generated in the quarter to partially fund the organic growth projects identified in each of the four business segments. At June 30, 2006, Inter Pipeline's outstanding debt balance, including convertible debentures, was $670.0 million, resulting in a total debt to total capitalization ratio of approximately 36.4%.

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 second quarter 2006 financial and operating results.

To participate in the conference call, please dial 888-280-8277 or 416-695-5261. A recording of the call will be available for replay until August 17, 2006, by dialing 888-509-0081 or 416-695-5275. The pass code for the replay is 627805.

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



Selected Financial and Operating Highlights

------------------------------------------------------------------------
Three months ended Six months ended
(millions of dollars, June 30 June 30
except where noted) 2006 2005 2006 2005
------------------------------------------------------------------------
Extraction Production (1)
(000 b/d)
Ethane 79.0 83.2 89.7 91.6
Propane Plus 45.4 45.7 50.8 51.4
------- ------- ------- -------
Total Extraction 124.4 128.9 140.5 143.0

Pipeline Volumes
(000 b/d)
Conventional Oil 200.3 198.4 205.2 202.5
Cold Lake Pipeline(1) 334.0 279.2 323.1 291.0
------- ------- ------- -------
Total Pipeline 534.3 477.6 528.3 493.5

Revenue
NGL Extraction $ 133.0 $ 144.8 $ 328.6 $ 315.4
Conventional Oil
Pipeline $ 27.1 $ 26.5 $ 55.8 $ 53.6
Oil Sands
Transportation $ 15.3 $ 15.1 $ 29.2 $ 30.1
Bulk Liquid Storage(2) $ 34.3 n/a $ 65.9 n/a

Net Income $ 30.8 $ 17.1 $ 59.9 $ 43.9
Per Unit
(basic & diluted) $ 0.15 $ 0.09 $ 0.30 $ 0.24

Funds From
Operations(3) $ 48.8 $ 32.8 $ 96.7 $ 74.9
Per Unit $ 0.24 $ 0.18 $ 0.49 $ 0.41

Cash Distributions(3) $ 39.2 $ 34.2 $ 78.2 $ 68.2
Per Unit $ 0.1950 $ 0.1875 $ 0.3900 $ 0.3750

Payout Ratio(3) 80.2% 104.4% 80.8% 91.1%

Capital Expenditures(3)
Growth $ 15.2 $ 0.5 $ 25.8 $ 2.1
Sustaining $ 2.5 $ 1.1 $ 4.2 $ 2.6

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


Inter Pipeline Fund

Inter Pipeline is a major petroleum transportation, 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 SECOND QUARTER ENDED JUNE 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 six month periods ended June 30, 2006 as compared to the three and six month periods ended June 30, 2005. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements of Inter Pipeline for the three and six month periods ended June 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.

SECOND QUARTER 2006 HIGHLIGHTS

- Funds from operations(1) increased $16.0 million, or 48.9% to $48.8 million compared to the same quarter last year

- Quarterly payout ratio(1) of 80.2%; year-to-date payout ratio of 80.8%

- Net income of $30.8 million, up $13.8 million or 80.6% from the same quarter a year ago

- Cash distributions(1) to unitholders totaled $39.2 million or $0.195 per unit

- Volumes on the Cold Lake pipeline system reached a new quarterly record, transporting over 334,000 barrels per day (b/d), up 54,800 b/d or 19.7% over the comparable period in 2005

- Southbound crude oil volumes sourced at Hardisty, Alberta and delivered on the Bow River pipeline system to refining markets in the northwest United States averaged 24,000 b/d, up 252% from the second quarter of 2005

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

SUBSEQUENT EVENTS

- Completed expansion of the Bow River south pipeline system, and Cactus Lake pipeline interconnection facilities at the Kerrobert terminal

- Regulatory application filed for Cochrane Ethane Recovery Project

PERFORMANCE OVERVIEW

Three Months Ended June 30, 2006

For the second quarter ended June 30, 2006, Inter Pipeline's funds from operations increased $16.0 million to $48.8 million, up from $32.8 million in the quarter ended June 30, 2005. This increase was primarily due to favourable commodity prices in the NGL extraction business and the acquisition of 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 second quarter of 2005.

The natural gas liquids ("NGL") extraction, conventional oil pipeline, oil sands transportation, and bulk liquid storage businesses contributed $25.4 million, $18.3 million, $10.6 million and $9.4 million of funds from operations, respectively (Q2 2005 - $15.1 million, $18.9 million, $10.9 million and nil, respectively). These cash contributions were offset by corporate cash costs of $14.9 million (Q2 2005 - $ 12.2 million).

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

Total cash distributed in the second quarter of 2006 of $39.2 million was $5.0 million higher than the $34.2 million distributed in the quarter ended June 30, 2005. This increase in total cash distributed is primarily attributable to the 4% increase in the amount of cash distributed on a per unit basis and the January 31, 2006 equity issuance of 15.0 million Class A units. An 80.2% payout ratio of funds from operations was realized in the second quarter of 2006, as compared to 104.4% for the second quarter of 2005.

Inter Pipeline increased its outstanding long-term debt level, excluding the 10% Convertible Extendible Unsecured Subordinated Debentures (the "Debentures"), by $162.5 million compared to June 30, 2005. This net increase was primarily required to fund the two separate acquisitions that make up the bulk liquid storage business. The long-term debt level decreased by $149.0 million since December 31, 2005 primarily due to the equity offering in January 2006 which provided net proceeds of $142.2 million.

Six Months Ended June 30, 2006

For the six months ended June 30, 2006, Inter Pipeline's funds from operations increased $21.8 million or 29.1% to $96.7 million, up from $74.9 million in the six months ended June 30, 2005. Again, for comparative purposes, Inter Pipeline did not acquire the Simon Storage bulk liquid storage business until the fourth quarter of 2005 and the TLG bulk liquid storage business until January 1, 2006. 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 NGL extraction, conventional oil pipeline, oil sands transportation, and bulk liquid storage businesses contributed $49.3 million, $39.1 million, $20.2 million and $18.3 million of funds from operations, respectively (YTD 2005 - $37.3 million, $39.2 million, $22.5 million and nil, respectively). These cash contributions were offset by corporate cash costs of $30.2 million (YTD 2005 - $24.1 million).

The total cash distributed in the first six months of 2006 of $78.2 million, was $10.0 million higher than the $68.2 million distributed in the six month period ended June 30, 2005. This represents a favourable 80.8% payout ratio of funds from operations for the period ended June 30, 2006, as compared to a payout ratio of 91.1% for the same period of 2005.

OUTLOOK

Inter Pipeline announced earlier this year that it intended to spend approximately $70 million to $80 million on organic growth capital projects in 2006. In the second quarter of 2006, Inter Pipeline expended $15.2 million on organic growth capital projects, and $25.8 million on a year-to-date basis. The full year 2006 organic growth capital continues to be forecast in the $70 to $80 million range. 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. For example, Inter Pipeline announced in July, 2006 the completion of the Bow River south expansion project for approximately $13.0 million. This project increased the southbound capacity of the Bow River pipeline system out of Hardisty to approximately 36,000 b/d from 7,000 b/d and is expected to contribute approximately $0.02 of cash flow per unit on an annual basis. Inter Pipeline also completed construction of new metering and interconnection facilities at its Kerrobert terminal to provide storage and condensate supply services to shippers on the Cactus Lake pipeline system. The cost to build the additional facilities was approximately $3.6 million.

The propane plus frac-spreads in the NGL extraction business have been well above historical averages during the first six months of 2006, and continue to be strong into the third quarter of 2006. Frac-spread opportunities are created in periods of high NGL prices (which are highly 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. Please see the "Financial Instruments and Off Balance Sheet Financing" section below for further details.

Excess cash generated for the six months ended June 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 June 30, 2006 is only 36.4% of total capitalization. This represents a strong balance sheet position which, when combined with $243.0 million available under the revolving credit facility, positions Inter Pipeline well for further growth. Of the $656.8 million of total debt outstanding (excluding Debentures) as at June 30, 2006, only $216.0 million or 32.9% is subject to variable interest rates (11.7% of total capitalization). Standard & Poor's continues to rate Inter Pipeline at a BBB corporate credit rating with a stable outlook.

Inter Pipeline's four business segments continue to provide stable and predictable cash flow while providing opportunities in the near term to organically grow the business. 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 the continued expansion of Alberta's vast oil sands deposits and northern natural gas development.

The announced monthly distribution rate of $0.065 per unit, or $0.78 per unit on an annualized basis. Any excess cash generated will be applied against debt to further strengthen the balance sheet.

Cochrane Ethane Recovery Project

On August 9, 2006, Inter Pipeline filed a regulatory application with the Alberta Energy and Utilities Board for a new project to enhance ethane recovery at the Cochrane extraction plant. This project, known as the "Cochrane Ethane Recovery Project", will significantly increase the ethane recovery efficiency of the plant and contribute incremental ethane to Alberta's overall supply. The project involves the installation of a single, new state-of-the-art cryogenic extraction unit capable of processing 750 million cubic feet per day (mmcf/d) of inlet gas supply, and the use of an existing electric driven compressor. The new cryogenic unit will increase the ethane extraction capacity of the Cochrane facility by approximately 15,000 b/d, from 65,000 b/d to 80,000 b/d making it among the largest and most efficient NGL extraction facility in North America. Upon completion of the project, Inter Pipeline will deactivate Cochrane's two existing, less efficient lean oil absorbtion trains.

Pending regulatory approval, the project will commence construction in the spring of 2007, and be operational by late 2008 at a cost of approximately $80 million.



SELECTED CONSOLIDATED FINANCIAL INFORMATION

Three months ended Six months ended
June 30 June 30
------------------------------------------------------------------------
(millions, except per
unit and % amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
Revenues
NGL extraction $ 133.0 $ 144.8 $ 328.6 $ 315.4
Conventional oil
pipeline $ 27.1 $ 26.5 $ 55.8 $ 53.6
Oil sands
transportation $ 15.3 $ 15.1 $ 29.2 $ 30.1
Bulk liquid storage(1) $ 34.3 n/a $ 65.9 n/a

Net income(1)(4) $ 30.8 $ 17.1 $ 59.9 $ 43.9
Per unit - basic(4) $ 0.15 $ 0.09 $ 0.30 $ 0.24
Per unit - diluted(4) $ 0.15 $ 0.09 $ 0.30 $ 0.24

Funds from
operations(1)(3)(4) $ 48.8 $ 32.8 $ 96.7 $ 74.9
Per unit(3) $ 0.24 $ 0.18 $ 0.49 $ 0.41

Cash distributions(2)(3)$ 39.2 $ 34.2 $ 78.2 $ 68.2
Per unit(2)(3) $ 0.1950 $ 0.1875 $ 0.3900 $ 0.3750

Payout ratio(3)(4) 80.2% 104.4% 80.8% 91.1%

Total assets(1) $2,070.9 $1,668.7

Long-term debt(1)(5) $ 656.8 $ 494.3

Debentures $ 13.2 $ 22.9

Total partners' equity(5) $1,172.7 $1,055.5

Partnership units
outstanding, end of
period(5) 200.9 183.0
Total enterprise
value(1)(3)(4)(5) $2,661.4 $2,306.9


(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

Volumes and Extraction Revenues

Three Months Ended
June 30
-------------------------------------------------------
2006 2005
-------------------------------------------------------
Bcf/d (000's b/d) Bcf/d (000's b/d)
-------------------------------------------------------
Through Propane Through Propane
put Ethane plus Total put Ethane plus Total
------------------------------------------------------------------------
Cochrane 1.4 42.3 20.4 62.7 1.2 42.2 20.9 63.1
Empress V
(100% basis) 0.9 12.6 9.9 22.5 1.0 17.2 11.4 28.6
Empress II 1.3 24.1 15.1 39.2 1.2 23.8 13.4 37.2
------------------------------------------------------------------------
Total 3.6 79.0 45.4 124.4 3.4 83.2 45.7 128.9
------------------------------------------------------------------------
------------------------------------------------------------------------


Six Months Ended
June 30
-------------------------------------------------------
2006 2005
-------------------------------------------------------
Bcf/d (000's b/d) Bcf/d (000's b/d)
-------------------------------------------------------
Through Propane Through Propane
put Ethane plus Total put Ethane plus Total
------------------------------------------------------------------------
Cochrane 1.5 46.9 22.5 69.4 1.5 46.6 24.3 70.9
Empress V
(100% basis) 1.0 14.3 11.0 25.3 1.0 18.2 11.8 30.0
Empress II 1.5 28.5 17.3 45.8 1.4 26.8 15.3 42.1
------------------------------------------------------------------------
Total 4.0 89.7 50.8 140.5 3.9 91.6 51.4 143.0
------------------------------------------------------------------------
------------------------------------------------------------------------


The three NGL extraction plants processed a combined 3.6 billion cubic feet per day (Bcf/d) of natural gas for the second quarter ended June 30, 2006, which is consistent with the 3.4 Bcf/d for the three month period ended June 30, 2005. As a result, the NGL extraction facilities produced an average of 124,400 b/d in the second quarter of 2006, which is 4,500 b/d lower than the average of 128,900 b/d produced during the second quarter of 2005. The decrease in volumes is primarily the result of lower ethane volumes at the Empress V facility and a fifteen day maintenance turnaround.

The NGL extraction business generated $133.0 million in revenues in the second quarter of 2006 as compared to $144.8 million for the three month period ended June 30, 2005. The decreased revenue is primarily due to the lower cost recoveries from customers due to lower AECO natural gas prices in the second quarter and lower production volumes discussed above.

In the second 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 June 30, 2006, the actual market frac-spread was $0.684 Cdn$/US gallon (Q2 2005 - $0.405 Cdn$/US gallon). Based on the average monthly Bank of Canada US$/Cdn$ rate, the actual market frac-spread was $0.610 US$/US gallon (Q2 2005 - $0.326 US$/US gallon).

The frac-spread realized by Inter Pipeline during the second quarter, including hedged and unhedged production, was $0.594 Cdn$/US gallon (Q2 2005 - $0.350Cdn$/US gallon) or $0.529 US$/US gallon (Q2 2005 - $0.281 US$/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.

As at August 8, 2006, Inter Pipeline has hedged approximately 51% and 19% of forecast propane plus volumes for the period July 1, 2006 to December 31, 2006 and January 1, 2007 to December 31, 2007, respectively at average prices of $0.434 Cdn$/US gallon and $0.389 Cdn$/US gallon. This average price would approximate $0.387 US$/US gallon and $0.351 US$/US gallon, respectively based on the average US$/Cdn$ forward curve as at August 8, 2006.

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

On a year-to-date basis, the three NGL extraction plants processed a combined 4.0 Bcf/d of natural gas, which is consistent with the 3.9 Bcf/d for the same period ended June 30, 2005. As a result, the NGL extraction facilities produced an average of 140,500 b/d in the six months ended June 30, 2006, which is 2,500 b/d lower than the average of 143,000 b/d produced during the six months ended June 30, 2005. As discussed earlier, the decrease in volumes is primarily due to the lower ethane production allocated to the Empress V facility. The NGL extraction business generated $328.6 million in revenues in the six months ended June 30, 2006 as compared to $315.4 million for the six month period ended June 30, 2005. Overall, the increased YTD 2006 revenue is primarily due to higher ethane sale prices and the higher 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 shrinkage gas cost was $78.3 million for the second quarter of 2006 (Q2 2005 - $99.2 million). 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 $5.95 per gigajoule in the second quarter of 2006 as compared with a weighted average price of $7.00 per gigajoule in the three month period ended June 30, 2005.

Operating and maintenance costs were $29.3 million in the three months ended June 30, 2006 as compared to $30.5 million for the comparable period of 2005. Fuel and power costs, included in operating costs, were $19.6 million in the second quarter of 2006 compared to $21.7 million for the three month period ended June 30, 2005.

Shrinkage gas in the first six months of 2006 was $211.7 million compared to $214.9 million for the same period of 2005. Operating and maintenance costs totaled $67.6 million on a year-to-date basis compared to $63.1 million incurred in the six month period ended June 30, 2006.



CONVENTIONAL OIL PIPELINE BUSINESS SEGMENT

Volumes and Revenues

Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------
(000's b/d) 2006 2005 2006 2005
------------------------------------------------------------------------
Bow River 139.9 134.6 140.8 136.8
Central/Valley/Mid
Saskatchewan 60.4 63.8 64.4 65.7
------------------------------------------------------------------------
200.3 198.4 205.2 202.5
------------------------------------------------------------------------
------------------------------------------------------------------------


Overall volumes in the second quarter of 2006 were 1,900 b/d higher than in the comparable period of 2005. Natural volume declines were more than offset by increased Hardisty South volumes resulting from the recently expanded Bow River system (up 17,200 b/d, or 252%, to 24,000 b/d).

Total conventional revenues of $27.1 million in the three months ended June 30, 2006 were $0.6 million higher than the $26.5 million earned in the quarter ended June 30, 2005. The increased revenue was the result of the volume increase described above, combined with mainline toll increases on average of 5% to 6% effective on each of July 1, 2005 and January 1, 2006, respectively, and revenues earned from the Oil Storage and Marketing Agreement with Nexen Marketing Inc. The average revenue per barrel from the conventional systems in the three months ended June 30, 2006 was $1.49 versus $1.47 per barrel in the second quarter of 2005.

On a year-to-date basis, the volumes on the conventional systems were up 2,700 b/d, from 202,500 b/d in 2005 to 205,200 b/d in 2006. The corresponding revenue increased by $2.2 million to $55.8 million from $53.6 million due to the increased volumes and the toll increases.

Operating Expenses

The operating expenses for the conventional system were $8.9 million, which is $1.0 million higher than the $7.9 million incurred in the second quarter of 2005. This increase is primarily due to increased tank maintenance ($0.9 million) and increases in other routine operating costs ($0.1 million).

In addition, conventional system power costs were consistent with the second quarter of 2005. The average Alberta market power price for the three months ended June 30, 2006 was $53.62 per MWh compared to $51.44 per MWh 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, which fixed 5.0 megawatts ("MW") of power at an average price of $49.50 per MWh for the second quarter of 2006 (Q2 2005 - 5.0 MW of power at an average price of $46.95 per MWh).

Operating expenses were $16.9 million for the six month period ended June 30, 2006 as compared to $14.8 million for the six months ended June 30, 2005. The increase in costs, similar to above, is primarily due to increased tank maintenance and other routine operating costs.




OIL SANDS TRANSPORTATION BUSINESS SEGMENT

Volumes and Revenues

Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------
(000's b/d) 2006 2005 2006 2005
------------------------------------------------------------------------
Cold Lake Pipeline
(100% basis) 334.0 279.2 323.1 291.0
------------------------------------------------------------------------
------------------------------------------------------------------------


Volumes on the Cold Lake pipeline system increased by 19.7% or 54,800 b/d from 279,200 b/d in the second quarter of 2005 to 334,000 b/d in the three months ended June 30, 2006. This increase is the result of the continued development of the oil sands by the founding shippers on the Cold Lake pipeline system of their respective Cold Lake oil sands projects.

Revenues from Inter Pipeline's 85% interest in the Cold Lake Pipeline Limited Partnership were $15.3 million during the three months ended June 30, 2006, up $0.2 million from $15.1 million earned in the second quarter of 2005. The nominal $0.2 million increase in revenues is primarily a result of increases in volumes and operating revenue net of the contractual reduction in capital fees (per barrel) that became effective January 1, 2006. The 54,800 b/d (on a 100% basis) increase in volumes contributed $1.8 million in revenue, and operating revenue increased by $0.7 million as a result of increased recoverable operating expenses. These increases were offset by the capital fee reduction of approximately $2.2 million when compared to the second quarter of 2005.

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

For the six months ended June 30, 2006, Cold Lake pipeline system volumes increased by 11.0% or 32,100 b/d (on a 100% basis) to 323,100 b/d, up from 291,000 b/d in the first six months of 2005. Although the volumes have increased, the revenues of $29.2 million remain comparable to revenues of $30.1 million YTD 2005, as the increased volumes offset the decrease in the capital fees per barrel charged as explained above.

Operating Expenses

Cold Lake operating expenses for the three months ended June 30, 2006 were $4.7 million compared to $4.2 million for the comparable period of 2005. The increase was primarily due to a $0.6 million increase in fuel and power costs, attributable to power price and transportation charge increases offset by a reduction of $0.1 million of other routine operating expense. 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's year-to-date operating cost was $9.0 million which is $1.4 million higher than the comparable 2005 operating cost primarily due to increases in fuel and power costs.

BULK LIQUID STORAGE BUSINESS SEGMENT

Operating Results

The bulk liquid storage business earned revenues of $34.3 million (YTD 2006 - $65.9 million) for the three months ended June 30, 2006. Rental and handling income benefited from continued high demand across the European terminal network, with an average tank utilization rate of approximately 93%. The Immingham storage terminals continued to benefit from close proximity to, and pipeline links with the ConocoPhillips and Total refineries. TLG experienced strong demand in the second quarter and results continue to be in line with management expectations.

Operating expenses for the three months ended June 30, 2006 were $22.0 million (YTD 2006 - $41.9 million). These costs are primarily composed of variable costs, including direct operating costs ($8.8 million), staffing costs ($6.7 million) and fuel and power costs ($2.5 million).

CORPORATE

Depreciation and Amortization

Inter Pipeline's depreciation and amortization of its operating and intangible assets totaled $17.8 million in the three months ended June 30, 2006, which is $2.9 million higher than the $14.9 million charged in the second quarter of 2005. For the six months ended June 30, 2006, depreciation and amortization increased $5.4 million from $29.7 million to $35.1 million. These increases 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 Six Months Ended
June 30 June 30
---------------------------------------------
(millions) 2006 2005 2006 2005
------------------------------------------------------------------------
Credit facility interest
expense $ 3.6 $ 1.7 $ 7.5 $ 3.4
Interest on loan payable
to General Partner 5.7 5.7 11.5 11.5
Debentures interest
expense 0.3 0.6 0.7 1.3
------------------------------------------------------------------------
Cash related financing
charges 9.6 8.0 19.7 16.2
Amortization of deferred
financing costs 0.1 0.3 0.1 0.5
------------------------------------------------------------------------
Total financing charges $ 9.7 $ 8.3 $ 19.8 $ 16.7
------------------------------------------------------------------------
------------------------------------------------------------------------


Inter Pipeline incurred $3.6 million (YTD 2006 - $7.5 million) of total credit facility interest expense during the quarter, compared to $1.7 million (YTD 2005 - $3.4 million) in the comparable quarter in 2005. Short-term interest rates for the quarter ranged from a weighted average bankers acceptance rate, including stamping fees, of 4.83% to a weighted average prime rate of 5.58% (Q2 2005 - 3.45% for bankers acceptances, including stamping fees, and 4.23% for prime rate). The weighted average principal outstanding on the credit facilities was $278.8 million for the three months ended June 30, 2006 (Q2 2005 - $121.1 million) and $310.1 million (YTD 2005 - $134.6 million) for the six months ended June 30, 2006. The increase in the weighted average principal balance outstanding was related to the use of debt to acquire 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 of $5.7 million (YTD 2006 - $11.5 million) was incurred in the quarter on the $379.8 million loan payable to Pipeline Management Inc., Inter Pipeline's "General Partner" and 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

Inter Pipeline's general and administrative expenses totaled $6.3 million during the second quarter of 2006, which is $3.0 million higher than the $3.3 million in the comparable period of 2005. This increase in costs is primarily attributable to the addition of $2.5 million in general and administrative costs associated with the acquisition of the bulk liquid storage businesses: Simon Storage on October 4, 2005 and TLG on January 1, 2006, respectively. The remaining $0.5 million increase in general and administrative expenses relates to Canadian operations, with $0.4 million included for the new Long Term Incentive Plan ("LTIP"). Please see NEW ACCOUNTING POLICIES - Long Term Incentive Plan below for further information.

For the six months ended June 30, 2006, general and administrative expenses of $12.7 million increased $6.6 million from $6.1 million in the comparable period in 2005. As noted above, $4.9 million of the increase is due to the acquisition of the bulk liquid storage business and $0.9 million relates to the new LTIP.

Unit Incentive Options

The unit incentive option expense for the second quarter of 2006 is $0.1 million (Q2 2005 - $0.2 million). Inter Pipeline's policy for amortizing the fair value of the options from the date of grant results in larger amounts being amortized in the early years of the vesting period such that they are fully amortized in the year the unit incentive options ("Options") are fully vested. There 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.

Management and Acquisition Fees

The General Partner was paid a management fee equivalent to 2% of "Operating Cash," as defined in the Partnership Agreement. The fees of $1.3 million for the three months ended June 30, 2006 (YTD 2006 - $2.5 million) are $0.4 million higher than the $0.9 million (YTD 2005 - $1.9 million) expensed in the same period in 2005.

There were no acquisition fees paid in the second quarter of 2006 and 2005. The acquisition fees of $0.4 million incurred in the six months ended June 30, 2006 relate to the acquisition of TLG.

Income Taxes

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

The future tax recovery of $0.2 million primarily represents the change in the difference between the tax value and the accounting book value of the acquired bulk liquid storage assets and liabilities in the period, multiplied by the statutory future income tax rate.

Capital Expenditures

Inter Pipeline incurred a total of $17.7 million on capital expenditures during the second quarter of 2006 (Q2 2005 - $1.6 million) as follows:



Three Months Ended
June 30
-------------------
2006 2005
(millions) Growth Sustaining Total Total
------------------------------------------------------------------------
NGL extraction $ 1.3 $ 0.1 $ 1.4 $ 0.4
Conventional oil pipeline 4.5 0.2 4.7 1.2
Oil sands transportation 6.8 - 6.8 -
Bulk liquid storage 2.6 2.2 4.8 -
------------------------------------------------------------------------
Total $ 15.2 $ 2.5 $ 17.7 $ 1.6
------------------------------------------------------------------------
------------------------------------------------------------------------


Six Months Ended
June 30
-------------------
2006 2005
(millions) Growth Sustaining Total Total
------------------------------------------------------------------------
NGL extraction $ 2.2 $ 0.4 $ 2.6 $ 0.9
Conventional oil pipeline 10.5 0.7 11.2 3.4
Oil sands transportation 9.7 - 9.7 0.4
Bulk liquid storage 3.4 3.1 6.5 -
------------------------------------------------------------------------
Total $ 25.8 $ 4.2 $ 30.0 $ 4.7
------------------------------------------------------------------------
------------------------------------------------------------------------


The majority of the 2006 second quarter capital expenditures in the conventional oil pipeline segment relate to the previously announced Bow River South expansion and Cactus Lake interconnection facilities at the Kerrobert terminal. During Q2 2006, $3.0 million was spent on the Bow River project, primarily related to construction costs. On July 11, 2006, Inter Pipeline announced the successful completion of the Bow River South expansion for total costs of approximately $13.0 million. This project increased the south bound 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. Approximately $0.6 million was spent on the Cactus Lake facility in Q2 2006, also primarily related to construction costs.

The majority of capital expenditures spent in the oil sands transportation business were related to the detailed engineering, procurement and construction work on various expansion projects at the Foster Creek and Wolf Lake pump stations, as well as the La Corey terminal, for a total of $6.8 million during the second quarter.

The bulk liquid storage business capital expenditures relate primarily to the Greenergy Biofuels project at Immingham for which $1.8 million has been expended in the second quarter of 2006.



SUMMARY OF QUARTERLY RESULTS

------------------------------------------------------------------------
2004 2005
------------------------------------------------------------------------
(millions, except per unit Third Fourth First Second
and % amounts) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------
Revenue
NGL extraction $ 114.7 $ 185.5 $ 170.5 $ 144.8
Conventional oil pipeline(4) $ 28.3 $ 27.9 $ 27.1 $ 26.5
Oil sands
transportation(4) $ 19.8 $ 18.6 $ 15.0 $ 15.1
Bulk liquid storage(1) n/a n/a n/a n/a
Net income(5) $ 20.2 $ 33.5 $ 26.8 $ 17.1
Per unit -- basic(5) $ 0.12 $ 0.19 $ 0.15 $ 0.09
Per unit --diluted(5) $ 0.12 $ 0.18 $ 0.15 $ 0.09
Funds from operations(3)(5) $ 38.7 $ 55.8 $ 42.1 $ 32.8
Per unit(3)(5) $ 0.23 $ 0.31 $ 0.23 $ 0.18
Cash distributions(2)(3) $ 32.5 $ 33.7 $ 34.0 $ 34.2
Per unit(2)(3) $0.1825 $0.1875 $0.1875 $0.1875
Payout ratio(3)(5) 83.9% 60.4% 80.8% 104.4%
Partnership units
outstanding
Weighted average 166.1 179.4 181.0 182.3
End of period 178.0 180.1 181.9 183.0
------------------------------------------------------------------------

------------------------------------------------------------------------
2005 2006
Third Fourth First Second
(millions, except per unit Quarter Quarter Quarter Quarter
and % amounts) (1)
------------------------------------------------------------------------
Revenue
NGL extraction $ 174.8 $ 233.8 $ 195.5 $ 133.0
Conventional oil pipeline(4) $ 28.1 $ 28.2 $ 28.7 $ 27.1
Oil sands
transportation(4) $ 15.4 $ 17.2 $ 13.9 $ 15.3
Bulk liquid storage(1) n/a $ 30.4 $ 31.6 $ 34.3
Net income(5) $ 24.5 $ 20.9 $ 29.1 $ 30.8
Per unit - basic(5) $ 0.13 $ 0.11 $ 0.15 $ 0.15
Per unit -diluted(5) $ 0.13 $ 0.11 $ 0.15 $ 0.15
Funds from operations(3)(5) $ 40.0 $ 38.1 $ 47.9 $ 48.8
Per unit(3)(5) $ 0.22 $ 0.21 $ 0.25 $ 0.24
Cash distributions(2)(3) $ 34.4 $ 35.0 $ 39.0 $ 39.2
Per unit(2)(3) $0.1875 $0.1900 $0.1950 $0.1950
Payout ratio(3)(5) 86.2% 91.8% 81.5% 80.2%
Partnership units outstanding
Weighted average 183.4 184.2 194.7 200.7
End of period 183.9 184.6 200.4 200.9
------------------------------------------------------------------------

(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 June 30
---------------------
(millions, except for % amounts) 2006 2005
------------------------------------------------------------------------
Cash, cash equivalents $ 20.7 $ 5.4
------------------------------------------------------------------------
------------------------------------------------------------------------
Working capital (deficiency) excluding cash(1) $ (22.0) $ (7.1)
------------------------------------------------------------------------
------------------------------------------------------------------------
Variable rate debt
Revolving credit facility available $ 500.0 $ 400.0
Revolving demand loan facility available 20.0 n/a
------------------------------------------------------------------------
Total credit facilities available 520.0 400.0
Less unutilized revolving credit facility (243.0) (285.5)
------------------------------------------------------------------------
Total outstanding revolving credit facility 277.0 114.5
Less variable rate debt swapped to fixed (61.0) (62.0)
------------------------------------------------------------------------
Total outstanding variable rate debt 216.0 52.5
------------------------------------------------------------------------
Fixed rate long-term debt
Loan payable to General Partner 379.8 379.8
Debentures 13.2 22.9
Add variable rate debt swapped to fixed 61.0 62.0
------------------------------------------------------------------------
Total outstanding fixed rate long-term debt 454.0 464.7
------------------------------------------------------------------------
Total debt and Debentures outstanding $ 670.0 $ 517.2
------------------------------------------------------------------------
------------------------------------------------------------------------
Senior debt to total capitalization (1) 35.6% 31.4%
Total debt to total capitalization (1) 36.4% 32.9%
------------------------------------------------------------------------
------------------------------------------------------------------------

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


Inter Pipeline applies any excess cash against its outstanding debt to reduce interest costs. Of the $656.8 million of total debt outstanding at June 30, 2006 (excluding Debentures at 10%), $216.0 million or 32.9% was exposed to a period ending variable interest rate of 5.19% with the remaining $440.8 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, while no fees are payable on undrawn amounts.

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

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



Payments Due by Period
------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
(millions) Total one Year Years Years Years
------------------------------------------------------------------------
Credit facilities $ 277.0 $ - $ 277.0 $ - $ -
Loan payable to General
Partner 379.8 - - - 379.8
Debentures 13.2 - 13.2 - -
Operating leases 52.9 6.2 14.3 6.4 26.0
------------------------------------------------------------------------
Total obligations $ 722.9 $ 6.2 $ 304.5 $ 6.4 $ 405.8
------------------------------------------------------------------------
------------------------------------------------------------------------


In the first six months of 2006, Inter Pipeline has expended $25.8 million of the $70 million to $80 million it had planned to spend on organic growth projects during the year. Inter Pipeline remains on target to utilize its 2006 organic growth capital forecast by the end of the current fiscal year.

DISTRIBUTIONS TO UNITHOLDERS

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

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



Three Months Ended Six Months Ended
Ended June 30 June 30
-------------------------------------------------
(millions, except per
unit and % amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
Operating revenue $ 209.8 $ 186.4 $ 479.5 $ 399.0
Shrinkage gas expense (78.3) (99.2) (211.7) (214.9)
Cash operating expense (64.7) (42.2) (135.2) (85.1)
Cash, general and
administrative expense (6.4) (3.3) (12.2) (6.0)
Management fees
expense(3) (1.3) (0.9) (2.5) (1.9)
Acquisition fee expense - - (0.4) -
Credit facility
interest expense (3.6) (1.7) (7.5) (3.4)
Loan payable to General
Partner interest
expense (5.7) (5.7) (11.5) (11.5)
Interest on Debentures (0.3) (0.6) (0.7) (1.3)
Current income taxes (0.7) - (1.1) -
------------------------------------------------------------------------
Funds from
operations(1)(3) 48.8 32.8 96.7 74.9
Net change in non-cash
working capital(3) (10.5) (5.3) 8.9 32.7
------------------------------------------------------------------------
Cash provided by
operating
activities(3) $ 38.3 $ 27.5 $ 105.6 $ 107.6
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash
distributions(1)(2) $ 39.2 $ 34.2 $ 78.2 $ 68.2
------------------------------------------------------------------------
------------------------------------------------------------------------
Per unit(1)(2) $ 0.1950 $ 0.1875 $ 0.3900 $ 0.3750
------------------------------------------------------------------------
------------------------------------------------------------------------
Payout ratio(1)(3) 80.2% 104.4% 80.8% 91.2%
------------------------------------------------------------------------
------------------------------------------------------------------------
Growth capital
expenditures(1) $ 15.2 $ 0.5 $ 25.8 $ 2.1
Sustaining capital
expenditures(1) 2.5 1.1 4.2 2.6
------------------------------------------------------------------------
Total capital
expenditures $ 17.7 $ 1.6 $ 30.0 $ 4.7
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Please refer to the "Non-GAAP Financial Measures" section of this
MD&A.
(2) Cash distributions are calculated based on the number of units
outstanding at each record date.
(3) Restated comparative periods due to change in accounting policy
regarding Unit Incentive Option Plan.


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



OUTSTANDING UNIT DATA

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

(millions) Class A Class B Total
------------------------------------------------------------------------
Units outstanding 200.7 0.2 200.9
Units reserved for issuance upon exercise of
vested Unit Incentive Options 1.9 - 1.9
Units reserved for issuance upon conversion of
Debentures 2.3 - 2.3
------------------------------------------------------------------------


As at August 8, 2006, Inter Pipeline had 201.0 million Class A units outstanding and 0.2 million Class B units outstanding, for a total of 201.2
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 June 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 June 30, 2006, Inter Pipeline had hedged approximately 51% and 19% of forecast propane plus volumes for the periods July 1 to December 31, 2006 and January 1 to September 30, 2007 at the Cochrane NGL extraction plant at an average price of $0.43 Cdn$/US gallon and $0.35 Cdn$/US gallon, respectively. These average prices would approximate $0.39 US$/US gallon and $0.32 US$/US gallon, respectively based on the average US$/Cdn$ forward curve as at June 30, 2006.

Subsequent to June 30, 2006, Inter Pipeline entered into additional frac-spread swap contracts, increasing the percentage of forecast propane plus volumes hedged for the period January 1 to December 31, 2007 to 19% at an average price of $0.39 Cdn$/US gallon. This average price would approximate $0.35 US$/US gallon based on the average US$/Cdn$ forward curve as at August 8, 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 June 30, 2006 to hedge NGL revenues fixed NGL prices at average prices for the following periods:



2006 2007
------------------------------------------------------------------------
Hedge Period: July to December January to September
------------------------------------------------------------------------
Average Average Average Average
Price (US$/ Quantity (b/d) Price (US$/ Quantity (b/d)
US gallon) US gallon)
------------------------------------------------------------------------
Propane 0.951 4,500 1.048 1,659
Normal Butane 1.134 770 1.194 288
Iso Butane 1.155 477 1.206 179
Pentanes Plus 1.616 382 1.772 143
------------------------------------------------------------------------

The mark-to-market value of these contracts resulted in an unrecognized
loss of US$7.5 million at June 30, 2006.

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

2005
------------------------------------------------------------------------
Hedge Period: July to December
------------------------------------------------------------------------
Average Average
Price (US$/ Quantity
US gallon) (b/d)
------------------------------------------------------------------------
Propane 0.800 3,832
Normal Butane 0.950 656
Iso Butane 0.957 406
Pentanes Plus 1.198 325
------------------------------------------------------------------------

The mark-to-market value of these contracts resulted in an unrecognized
loss of US$5.2 million at June 30, 2005.


Natural Gas

Contracts outstanding at June 30, 2006 to hedge natural gas purchases fix natural gas prices at average prices of $7.33 and $8.77 per gigajoule for the periods from July 1, 2006 to December 31, 2006 and January 1, 2007 to September 30, 2007 for average quantities of 28,261 and 8,791 gigajoules per day, respectively. The mark-to-market value of the natural gas contracts at June 30, 2006 resulted in an unrecognized loss of $6.4 million.

Contracts outstanding at June 30, 2005, fixed natural gas prices at an average price of $7.23 per gigajoule for the period from July 1, 2005 to December, 2005 for average quantities of 23,261 gigajoules per day. The mark-to-market value of these contracts at June 30, 2005 resulted in an unrecognized gain of $0.4 million.

Foreign Currency

The NGL price swap agreements are calculated based on US dollar prices. As at June 30, 2006, Inter Pipeline had foreign exchange contracts outstanding to sell an average of US$8.1 million and US$3.3 million per month, at average fixed rates of US$0.88 and US$0.91 per Canadian dollar for the periods from July 1, 2006 to December 31, 2006 and January 1 to September 30, 2007, respectively. The mark-to-market value of these contracts at June 30, 2006 resulted in an unrecognized gain of $0.8 million.

As at June 30, 2005, Inter Pipeline had outstanding foreign exchange contracts to sell an average of US$5.8 million per month at an average fixed rate of US$0.80 per Canadian dollar for the period from July 1, 2005 to December 31, 2005. The mark-to-market value of these contracts resulted in an unrecognized gain of $0.9 million at June 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/MWh multiplied by the AECO monthly index price. These contracts have not been accounted for as hedges. They have been and will be marked to market each reporting period. As a result, an unrealized gain of $0.3 million has been included in operating expenses for the three months ended June 30, 2006 representing the change in the mark-to-market value of the contract as at June 30, 2006.

CONVENTIONAL OIL PIPELINE BUSINESS

Power Prices

Inter Pipeline has entered into electricity price swap agreements for 5.0 MW for 2006 at average prices of $49.50 per MWh, 5.0 MW for 2007 at average prices of $52.75 per MWh and 2.5 MW for 2008 at an average price of $54.00 per MWh. The mark-to-market value of these contracts at June 30, 2006 is an unrecognized gain of $1.0 million.

Contracts outstanding at June 30, 2005 were for 5.0 MW for 2005 at average prices of $46.95 per MWh, 5.0 MW for 2006 at average prices of $49.50 per MWh and 2.5 MW for 2007 at average prices of $51.50 per MWh. The mark-to-market value of these contracts resulted in an unrecognized gain of $0.9 million at June 30, 2005.

CORPORATE

Interest Rates

$61.0 million of the outstanding debt at June 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 6.1%. The fair market value of the remaining interest rate swap agreements aggregates to an unrecognized loss of $3.0 million at June 30, 2006 compared to an unrecognized loss of $ 6.3 million at June 30, 2005. Of the $61.0 million of interest rate swaps outstanding at June 30, 2006, $15.0 million is set to expire on September 30, 2006.

TRANSACTIONS WITH RELATED PARTIES

No revenue was earned from related parties for the three months ended June 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 months ended June 30, 2006 or 2005 under the support agreement.

Amounts due to/from the General Partner and its affiliates related to these services are non-interest bearing and have no fixed repayment terms with the exception of the loan agreement with the General Partner. At June 30, 2006, there were amounts owed to the General Partner by Inter Pipeline of $0.5 million (June 30, 2005 - $0.3 million).

Management fees of $1.3 million were earned by the General Partner in the quarter ended June 30, 2006 (Q2 2005 - $0.9 million). There were no acquisition fees paid in the three months ended June 30, 2006 and 2005.

The General Partner's 0.1% partnership interest, represented by Class B units, is controlled by PAC. The General Partner is a wholly-owned subsidiary of PAC, a corporation controlled solely by the Chairman of the Board of the General Partner. Certain of the officers and director of the General Partner have non-voting shares in PAC that entitle them to dividends. The entitlement to retain these shares of PAC and to receive dividends is tied to the continuing employment or service as a director of the General Partner. These certain officers and director of the General Partner received a total of $0.2 million in dividends during the quarter from PAC pursuant to their non-voting shares (Q2 2005 - $0.2 million).

CRITICAL ACCOUNTING ESTIMATES

There were no changes in Inter Pipeline's critical accounting estimates that affected the disclosure or the accounting for its operations for the quarter ended June 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 June 30, 2006 was $0.6 million (YTD 2006 - $1.3 million). This represents the amortized value of the initial grant, the value of the distributions associated with the vested grants since the grant date, the increase/decrease in unit price per vested grant and cancelled grants.

NON-GAAP FINANCIAL MEASURES

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

The following non-GAAP financial measures are provided to assist investors 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.

Distributable Cash is an amount calculated in accordance with the terms of the Partnership Agreement. This is an important measure used by the investment community to assess the source and sustainability of Inter Pipeline's cash distributions.

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:



Six Months Ended
June 30
-----------------------
(millions, except per unit amounts) 2006 2005
------------------------------------------------------------------------
Closing unit price $ 9.91 $ 9.78
Total number of partnership units outstanding 200.9 183.0
------------------------------------------------------------------------
1,991.4 1,789.7
Long-term debt 656.8 494.3
Debentures 13.2 22.9
------------------------------------------------------------------------
Enterprise value $ 2,661.4 $ 2,306.9
------------------------------------------------------------------------
------------------------------------------------------------------------


Funds from operations are reconciled from net income as seen on the Consolidated Cash Flow Statement and is 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.

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.

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.

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.

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 10th day of August, 2006.

Disclaimer

This MD&A highlights significant business results and statistics for Inter Pipeline's three month and six month periods ended June 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.





Inter Pipeline Fund

CONSOLIDATED BALANCE SHEETS

As at As at
June 30, December 31,
(unaudited) (thousands of dollars) 2006 2005
------------------------------------------------------------------------

ASSETS
Current Assets
Cash $ 20,749 $ 17,525
Funds held in trust (note 4) - 37,964
Accounts receivable 92,597 130,175
Prepaid expenses and other deposits 9,842 12,771
------------------------------------------------------------------------
Total Current Assets 123,188 198,435

Intangible assets (note 6) 379,493 385,977
Property, plant and equipment (note 7) 1,503,931 1,442,367
Deferred financing charges 1,647 1,753
Goodwill 62,660 53,893
------------------------------------------------------------------------
Total Assets $ 2,070,919 $ 2,082,425
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Distributable cash payable $ 13,062 $ 11,998
Accounts payable and accrued liabilities 97,978 132,135
Deferred revenue 13,400 3,640
------------------------------------------------------------------------
Total Current Liabilities 124,440 147,773

Long-term debt (note 8) 656,800 805,800
Convertible debentures 13,212 15,948
Asset retirement obligation (note 9) 17,561 16,715
Environmental liabilities 9,937 5,025
Pension liabilities 3,661 2,060
Long-term compensation accrual 567 4
Future income taxes (notes 3 and 4) 72,084 56,025
------------------------------------------------------------------------
Total Liabilities 898,262 1,049,350
------------------------------------------------------------------------

Partners' Equity
Conversion feature on convertible debentures 585 707
Cumulative foreign currency translation (1,356) (9,706)
Partners' equity (note 10) 1,173,428 1,042,074
------------------------------------------------------------------------
Total Partners' Equity 1,172,657 1,033,075
------------------------------------------------------------------------
Total Liabilities and Partners' Equity $ 2,070,919 $ 2,082,425
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund

CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

Six months ended June 30
2006 2005
------------------------------------------------------------------------
Class A Class B (restated -
Limited Unlimited see Note 2)
(unaudited) Liability Liability
(thousands of Partnership Partnership
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 59,842 60 59,902 43,910
Cash distributions
declared (78,093) (78) (78,171) (68,240)
Issuance of
Partnership units
Conversion of
debentures (note 10) 2,859 3 2,862 10,020
Issued under
Distribution
Reinvestment and
Optional Unit
Purchase Plan (note 10) 2,655 3 2,658 1,707
Issued under Unit
Incentive Option
Plan (note 10) 1,740 1 1,741 3,673
Equity issuances,
net of issue costs
(note 10) 142,089 142 142,231 -
Amortization of
debenture issue
costs - - - (242)
Unit incentive
options (note 11) 131 - 131 366
------------------------------------------------------------------------
Balance, end of
period $ 1,172,255 $ 1,173 $ 1,173,428 $ 1,054,519
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund

CONSOLIDATED STATEMENTS OF NET INCOME

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

REVENUES $ 209,772 $ 186,437 $ 479,520 $ 399,071
------------------------------------------------------------------------

EXPENSES
Shrinkage gas 78,331 99,211 211,686 214,919
Operating 64,952 42,603 135,413 85,479
Depreciation and
amortization 17,764 14,862 35,074 29,687
Financing charges (note 12) 9,737 8,253 19,809 16,700
General and administrative 6,335 3,330 12,659 6,059
Management fee to General
Partner 1,296 862 2,484 1,875
Acquisition fee to General
Partner (notes 3 and 4) - - 376 -
Unit incentive options
(note 11) 48 186 131 366
------------------------------------------------------------------------
178,463 169,307 417,632 355,085
------------------------------------------------------------------------

------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 31,309 17,130 61,888 43,986
------------------------------------------------------------------------

Provision for income taxes:
Current income tax expense 684 - 1,076 -
Future income tax expense (216) 56 910 76
------------------------------------------------------------------------
468 56 1,986 76
------------------------------------------------------------------------

------------------------------------------------------------------------
NET INCOME $ 30,841 $ 17,074 $ 59,902 $ 43,910
------------------------------------------------------------------------

Net income per Partnership
unit (note 10)
Basic and Diluted $ 0.15 $ 0.09 $ 0.30 $ 0.24
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

OPERATING ACTIVITIES
Net income $ 30,841 $ 17,074 $ 59,902 $ 43,910
Depreciation and
amortization 17,764 14,862 35,074 29,687
Amortization of deferred
financing charges (note 12) 53 255 106 523
Unit incentive options 48 186 131 366
Non-cash operating expense 252 376 200 376
Non-cash general and
administrative expense 74 - 366 -
Future income tax expense (216) 56 910 76
Accretion of discount on
Annual Service Contract
Recovery Amounts - (30) - (53)
------------------------------------------------------------------------
Funds from operations 48,816 32,779 96,689 74,885
Net change in non-cash
working capital (note 14) (10,477) (5,293) 8,902 32,706
------------------------------------------------------------------------
Cash provided by operating
activities 38,339 27,486 105,591 107,591
------------------------------------------------------------------------

INVESTING ACTIVITIES
Funds held in trust - - 37,851 -
Acquisition of TLG (note 4) 10 - (37,726) -
Assumption of cash on the
acquisition of TLG (note 4) - - 303 -
Acquisition of Simon Storage
(note 3) - - (187) -
Annual Service Contract
Recovery Payment - 930 - 2,402
Expenditures on property,
plant and equipment (17,750) (1,594) (29,995) (4,674)
Proceeds on sale of assets 13 173 28 196
Acquisition of the NGL
extraction business - - - 342
Net change in non-cash
working capital (note 14) 6,124 (1,320) 6,354 (5,517)
------------------------------------------------------------------------
Cash used in investing
activities (11,603) (1,811) (23,372) (7,251)
------------------------------------------------------------------------

FINANCING ACTIVITIES
Cash distributions declared (39,159) (34,224) (78,171) (68,240)
Increase (decrease) in
long-term debt, net of
repayments 8,000 9,000 (149,000) (36,500)
Issuance of Partnership
units, net of issue costs 33 - 142,231 -
Cash received under
Distribution Reinvestment
and Optional Unit Purchase
Plan 1,386 1,084 2,658 1,707
Issuance of units under Unit
Incentive Option Plan 639 2,177 1,741 3,673
Issuance of Class B units
upon debenture conversions 1 2 3 10
Deferred financing charges - (20) - (141)
Net change in non-cash
working capital (note 14) 38 68 1,064 182
------------------------------------------------------------------------
Cash used in financing
activities (29,062) (21,913) (79,474) (99,309)
------------------------------------------------------------------------

Effect of foreign currency
translation on cash 143 - 479 -

Increase in cash (2,183) 3,762 3,224 1,031
Cash, beginning of period 22,932 1,681 17,525 4,412
------------------------------------------------------------------------
Cash, end of period $ 20,749 $ 5,443 $ 20,749 $ 5,443
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash interest paid $ 16,283 $ 14,825 $ 20,001 $ 16,626
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 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. The second quarter for the NGL extraction business is typically a time when there is lower demand for natural gas and thus results in lower input volumes and related NGL production at Inter Pipeline's NGL extraction plants. The conventional pipeline business normally experiences lower second quarter throughput caused by lower overall crude oil production due to seasonal road bans and production facility maintenance.

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 six month periods ended June 30, 2005. The impact of the change in accounting policy is:



Change in Consolidated Statement of Net Income

Three months ended Six months ended
Increase (decrease) June 30, 2005 June 30, 2005
------------------------------------------------------------------------
Unit incentive options $ (4,014) $ (8,347)
Management fee to General Partner 80 167
------------------------------------------------------------------------
Total expenses (3,934) (8,180)
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Net income $ 3,934 $ 8,180
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Net income per Partnership unit -
Basic and diluted $ 0.01 $ 0.04
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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



Cash $ 303
Non-cash working capital deficiency (1,609)
Property, plant and equipment (note 7) 50,926
Goodwill 7,768
Asset retirement obligation (301)
Environmental liability (3,849)
Pension liability (1,491)
Future tax liability (14,021)
------------------------------------------------------------------------
$ 37,726
------------------------------------------------------------------------
------------------------------------------------------------------------


5. SEGMENT REPORTING

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

Three months ended June 30, 2006
------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
------------------------------------------------------------------------
Revenues $ 133,028 $ 27,077 $ 15,330 $ -
------------------------------------------------------------------------
Expenses
Shrinkage gas 78,331 - - -
Operating 29,340 8,945 4,708 -
Depreciation and
amortization 6,291 4,628 4,015 -
Financing charges - - - 9,871
General and
administrative - - - 3,839
Management fee to
General Partner - - - 1,296
Acquisition fee to
General Partner - - - -
Unit incentive options - - - 48
------------------------------------------------------------------------
Total expenses 113,962 13,573 8,723 15,054
------------------------------------------------------------------------

Income before income
taxes 19,066 13,504 6,607 (15,054)
------------------------------------------------------------------------
Provision for income
taxes - - 56 -
------------------------------------------------------------------------
Net income $ 19,066 $ 13,504 $ 6,551 $ (15,054)
------------------------------------------------------------------------
------------------------------------------------------------------------

Expenditures on
property, plant
and equipment $ (1,445) $ (4,692) $ (6,837) $ -
------------------------------------------------------------------------
Total assets $ 737,044 $ 471,515 $ 453,611 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months ended June 30, 2006
------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(1) Operations
------------------------------------------------------------------------
Revenues $ 175,435 $ 34,337 $ 209,772
------------------------------------------------------------------------
Expenses
Shrinkage gas 78,331 - 78,331
Operating 42,993 21,959 64,952
Depreciation and
amortization 14,934 2,830 17,764
Financing charges 9,871 (134) 9,737
General and administrative 3,839 2,496 6,335
Management fee to General
Partner 1,296 - 1,296
Acquisition fee to
General Partner - - -
Unit incentive options 48 - 48
------------------------------------------------------------------------
Total expenses 151,312 27,151 178,463
------------------------------------------------------------------------

Income before income taxes 24,123 7,186 31,309
------------------------------------------------------------------------
Provision for income taxes 56 412 468
------------------------------------------------------------------------
Net income $ 24,067 $ 6,774 $ 30,841
------------------------------------------------------------------------
------------------------------------------------------------------------

Expenditures on property,
plant and equipment $ (12,974) $ (4,776) $ (17,750)
------------------------------------------------------------------------
Total assets $ 1,662,170 $ 408,749 $ 2,070,919
------------------------------------------------------------------------
------------------------------------------------------------------------

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

Three months ended June 30, 2005
------------------------------------------------------------------------
NGL Conventional Oil Sands
Extraction Oil Pipeline Transportation
Business Business Business Corporate
------------------------------------------------------------------------
Revenues $ 144,845 $ 26,511 $ 15,051 $ 30
------------------------------------------------------------------------
Expenses
Shrinkage gas 99,211 - - -
Operating 30,493 7,943 4,167 -
Depreciation and
amortization 6,133 4,717 4,012 -
Financing charges - - - 8,253
General and
administrative - - - 3,330
Management fee to
General Partner - - - 862
Unit incentive options - - - 186
------------------------------------------------------------------------
Total expenses 135,837 12,660 8,179 12,631
------------------------------------------------------------------------

Income before income
taxes 9,008 13,851 6,872 (12,601)
------------------------------------------------------------------------
Provision for income
taxes - - 56 -
------------------------------------------------------------------------
Net income $ 9,008 $ 13,851 $ 6,816 $ (12,601)
------------------------------------------------------------------------
------------------------------------------------------------------------

Expenditures on
property, plant
and equipment $ (409) $ (1,215) $ 30 $ -
------------------------------------------------------------------------

------------------------------------------------------------------------
As at December 31, 2005
Total assets $ 780,434 $ 471,158 $ 456,430 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Three months ended June 30, 2005
------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(2) Operations
------------------------------------------------------------------------
Revenues $ 186,437 $ - $ 186,437
------------------------------------------------------------------------
Expenses
Shrinkage gas 99,211 - 99,211
Operating 42,603 - 42,603
Depreciation and
amortization 14,862 - 14,862
Financing charges 8,253 - 8,253
General and administrative 3,330 - 3,330
Management fee to
General Partner 862 - 862
Unit incentive options 186 - 186
------------------------------------------------------------------------
Total expenses 169,307 - 169,307
------------------------------------------------------------------------
Income before income taxes 17,130 - 17,130
------------------------------------------------------------------------
Provision for income taxes 56 - 56
------------------------------------------------------------------------
Net income $ 17,074 $ - $ 17,074
------------------------------------------------------------------------
------------------------------------------------------------------------

Expenditures on property,
plant and equipment $ (1,594) $ - $ (1,594)
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
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 six
month periods ending June 30, 2005.

Six months ended June 30, 2006
------------------------------------------------------------------------
Conventional Oil Sands
NGL Extraction Oil Pipeline Transportation
Business Business Business Corporate
------------------------------------------------------------------------
Revenues $ 328,575 $ 55,799 $ 29,225 $ -
------------------------------------------------------------------------
Expenses
Shrinkage gas 211,686 - - -
Operating 67,608 16,869 9,013 -
Depreciation and
amortization 12,581 9,202 8,031 -
Financing
charges - - - 20,082
General and
administrative - - - 7,779
Management fee
to General
Partner - - - 2,484
Acquisition fee
to General
Partner - - - 376
Unit incentive
options - - - 131
------------------------------------------------------------------------
Total expenses 291,875 26,071 17,044 30,852
------------------------------------------------------------------------
Income before
income taxes 36,700 29,728 12,181 (30,852)
------------------------------------------------------------------------
Provision for
income taxes - - 104 -
------------------------------------------------------------------------
Net income $ 36,700 $ 29,728 $ 12,077 $ (30,852)
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ (2,520)$ (11,224)$ (9,705)$ -
------------------------------------------------------------------------
------------------------------------------------------------------------
Total assets $ 737,044 $ 471,515 $ 453,611 $ -
------------------------------------------------------------------------
------------------------------------------------------------------------


Six months ended June 30, 2006
------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(1) Operations
------------------------------------------------------------------------
Revenues $ 413,599 $ 65,921 $ 479,520
------------------------------------------------------------------------
Expenses
Shrinkage gas 211,686 - 211,686
Operating 93,490 41,923 135,413
Depreciation and
amortization 29,814 5,260 35,074
Financing charges 20,082 (273) 19,809
General and administrative 7,779 4,880 12,659
Management fee to
General Partner 2,484 - 2,484
Acquisition fee to
General Partner 376 - 376
Unit incentive options 131 - 131
------------------------------------------------------------------------
Total expenses 365,842 51,790 417,632
------------------------------------------------------------------------
Income before income taxes 47,757 14,131 61,888
------------------------------------------------------------------------
Provision for income taxes 104 1,882 1,986
------------------------------------------------------------------------
Net income $ 47,653 $ 12,249 $ 59,902
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on property, plant
and equipment $ (23,449)$ (6,546)$ (29,995)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total assets $ 1,662,170 $ 408,749 $ 2,070,919
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) The European bulk liquid storage business includes operations in
the United Kingdom, Germany and Ireland.


Six months ended June 30, 2005
------------------------------------------------------------------------
Conventional Oil Sands
NGL Extraction Oil Pipeline Transportation
Business Business Business Corporate
------------------------------------------------------------------------
Revenues $ 315,382 $ 53,559 $ 30,077 $ 53
------------------------------------------------------------------------
Expenses
Shrinkage gas 214,919 - - -
Operating 63,117 14,793 7,569 -
Depreciation and
amortization 12,266 9,402 8,019 -
Financing
charges - - - 16,700
General and
administrative - - - 6,059
Management fee
to General
Partner - - - 1,875
Unit incentive
options - - - 366
------------------------------------------------------------------------
Total expenses 290,302 24,195 15,588 25,000
------------------------------------------------------------------------
Income before
income taxes 25,080 29,364 14,489 (24,947)
------------------------------------------------------------------------
Provision for
income taxes - - 76 -
------------------------------------------------------------------------
Net income $ 25,080 $ 29,364 $ 14,413 $(24,947)
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ (875) $ (3,367) $ (432) $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
As at December 31, 2005
------------------------------------------------------------------------

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


Six months ended June 30, 2005
------------------------------------------------------------------------
European Total
Total Bulk Liquid Canadian and
Canadian Storage European
Operations Business(2) Operations
------------------------------------------------------------------------
Revenues $ 399,071 $ - $ 399,071
------------------------------------------------------------------------
Expenses
Shrinkage gas 214,919 - 214,919
Operating 85,479 - 85,479
Depreciation and
amortization 29,687 - 29,687
Financing charges 16,700 - 16,700
General and administrative 6,059 - 6,059
Management fee to
General Partner 1,875 - 1,875
Unit incentive options 366 - 366
------------------------------------------------------------------------
Total expenses 355,085 - 355,085
------------------------------------------------------------------------
Income before income taxes 43,986 - 43,986
------------------------------------------------------------------------
Provision for income taxes 76 - 76
------------------------------------------------------------------------
Net income $ 43,910 $ - $ 43,910
------------------------------------------------------------------------
Expenditures on property,
plant and equipment $ (4,674) $ - $ (4,674)
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
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 six
month periods ending June 30, 2005.


6. INTANGIBLE ASSETS

June 30, December 31,
2006 2005
------------------------------------------------------------------------
Accumulated Net Net
Depreciation & Book Book
Cost Amortization Value Value
------------------------------------------------------------------------
NGL extraction
business
Customer contracts $ 287,612 $ (18,380) $ 269,232 $ 274,025
Patent 8,727 (1,195) 7,532 7,844
Oil sands
transportation
business
Transportation
Services Agreement 93,548 (11,279) 82,269 83,881
Bulk liquid
storage business
Customer contracts 20,985 (525) 20,460 20,227
------------------------------------------------------------------------
$ 410,872 $ (31,379) $ 379,493 $ 385,977
------------------------------------------------------------------------
------------------------------------------------------------------------


7. PROPERTY, PLANT AND EQUIPMENT

June 30, December 31,
2006 2005
------------------------------------------------------------------------
Accumulated Net Net
Depreciation & Book Book
Cost Amortization Value Value
------------------------------------------------------------------------
NGL extraction
business
Facilities and
equipment $ 434,265 $ (26,595) $ 407,670 $ 412,140
Spare parts 3,391 - 3,391 3,418
Conventional oil
pipeline business
Facilities and
equipment 770,968 (320,008) 450,960 448,180
Deferred receipt
facilities
expenditures 6,114 (5,571) 543 1,161
Oil sands
transportation
business
Facilities and
equipment 382,081 (43,522) 338,559 335,440
Pipeline linefill 10,384 - 10,384 10,384
Bulk liquid storage
business
Facilities and
equipment 297,955 (5,531) 292,424 231,644
------------------------------------------------------------------------
$1,905,158 $ (401,227) $1,503,931 $1,442,367
------------------------------------------------------------------------
------------------------------------------------------------------------


8. LONG-TERM DEBT

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

June 30, December 31,
2006 2005
------------------------------------------------------------------------
Loan Payable to General Partner $ 379,800 $ 379,800
$500 million Unsecured Revolving Credit
Facility (a) 277,000 426,000
$20 million Unsecured Revolving Demand Loan
Facility (b) - -
------------------------------------------------------------------------
$ 656,800 $ 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.



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 507
Foreign currency adjustments 38
------------------------------------------------------------------------
Obligation at June 30, 2006 $ 17,561
------------------------------------------------------------------------
------------------------------------------------------------------------

At June 30, 2006, $0.8 million is included in accounts payable and
accrued liabilities for asset retirement obligations related to the
retirement of property, plant and equipment in the conventional oil
pipeline business (December 31, 2005 - $0.7 million).

10. PARTNERS' EQUITY

Number of units issued and outstanding

Class A Units Class B Units Total
------------------------------------------------------------------------
Balance at December 31, 2005 184,407,576 184,855 184,592,431
Equity issuance 15,000,000 15,016 15,015,016
Issued on conversion of
debentures 469,656 486 470,142
Issued under Distribution
Reinvestment and Optional Unit
Purchase Plan 282,827 290 283,117
Issued under Unit Incentive
Option Plan 583,002 614 583,616
------------------------------------------------------------------------
Balance at June 30, 2006 200,743,061 201,261 200,944,322
------------------------------------------------------------------------
------------------------------------------------------------------------


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 Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Net income
attributable to
unitholders $ 30,841 $ 17,074 $ 59,902 $ 43,910
------------------------------------------------------------------------

Weighted-average
units outstanding-
Basic 200,701,266 182,301,056 197,731,231 181,667,133
Effect of debenture
conversions 2,339,104 - 2,455,869 -
Effect of unit
options 1,230,472 1,812,156 1,416,445 1,860,173
------------------------------------------------------------------------
Weighted-average
units outstanding-
Diluted (1) 204,270,842 184,113,212 201,603,545 183,527,306
------------------------------------------------------------------------
Net income per
Partnership unit-
Basic and
Diluted $ 0.15 $ 0.09 $ 0.30 $ 0.24
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The debenture conversions have an anti-dilutive impact for the three
and six months ended June 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 - $ - $ - 427,000
Exercised (583,002) $ 6.61 $ 3.01 -
Cancelled (58,169) $ 8.10 $ 6.39 (15,000)
--------------------------------------- --------
Balance outstanding, June
30, 2006 2,405,430 $ 7.53 $ 5.01 412,000
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The weighted-average exercise price based on the exercise price on
the date of grant.

(2) The weighted-average exercise price adjusted for the incentive
reduction.


12. FINANCING CHARGES
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Interest expense $ 9,335 $ 7,416 $ 18,974 $ 14,904
Interest on debentures 349 582 729 1,273
Amortization of deferred
financing charges 53 255 106 523
------------------------------------------------------------------------
Total financing charges $ 9,737 $ 8,253 $ 19,809 $ 16,700
------------------------------------------------------------------------
------------------------------------------------------------------------


13. RISK MANAGEMENT

Inter Pipeline has not recognized assets or liabilities associated with the swap contracts outstanding at June 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 June 30, 2006 represent approximately 51% of forecast propane plus volumes at the Cochrane extraction plant for the period July to December 2006 at average prices of approximately $0.43 Cdn/US gallon and 19% of forecast volumes for the period January to September 2007 at average prices of approximately $0.35 Cdn/US gallon. These average prices would approximate $0.39 US/US gallon and $0.32 US/US gallon, respectively, based on the average US$/Cdn$ forward curve as at June 30, 2006. Contracts outstanding at June 30, 2006 were as follows:



2006 2007
------------------------------------------------------------------------
Hedged Period July 1 to December 31 January 1 to September 30
------------------------------------------------------------------------
Average Average
Price Average Price Average
(US$/US Quantity (US$/US Quantity
NGL Swaps gallon) (b/d) gallon) (b/d)
------------------------------------------------------------------------
Propane 0.951 4,500 1.048 1,659
Normal Butane 1.134 770 1.194 288
Iso Butane 1.155 477 1.206 179
Pentanes Plus 1.616 382 1.772 143
------------------------------------------------------------------------
------------------------------------------------------------------------

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

Natural gas swaps 7.33 28,261 8.77 8,791
------------------------------------------------------------------------
------------------------------------------------------------------------

Average Average
Monthly Monthly
Average Notional Average Notional
Price Amount (US$ Price Amount (US$
(US$/Cdn$) thousands) (US$/Cdn$) thousands)
------------------------------------------------------------------------
Foreign exchange swaps 0.880 8,143 0.912 3,252
------------------------------------------------------------------------
------------------------------------------------------------------------

Contracts outstanding at June 30, 2005 were as follows:
2005
------------------------------------------------------------------------
Hedged Period July 1 to December 31
------------------------------------------------------------------------
Average Average
Price Quantity
NGL Swaps (US$/US gallon) (b/d)
------------------------------------------------------------------------

Propane 0.800 3,832
Normal Butane 0.950 656
Iso Butane 0.957 406
Pentanes Plus 1.198 325
------------------------------------------------------------------------
------------------------------------------------------------------------

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

Natural gas swaps 7.232 23,261
------------------------------------------------------------------------
------------------------------------------------------------------------

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

Foreign exchange swaps 0.800 5,753
------------------------------------------------------------------------
------------------------------------------------------------------------

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

2006 2005
------------------------------------------------------------------------
US$
NGL Swaps $ (7,494) $ (5,238)
------------------------------------------------------------------------
------------------------------------------------------------------------

Cdn$
Natural gas swaps (6,393) 400
Foreign exchange swaps 789 947
------------------------------------------------------------------------
Unrecognized (loss) gain $ (5,604) $ 1,347
------------------------------------------------------------------------
------------------------------------------------------------------------

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

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
NGL swaps $ (2,768) $ (2,482) $ (1,716) $ (4,489)
Natural gas swaps (1,503) 573 (5,005) (2,879)
Foreign exchange swaps 484 (8) 581 1,262
------------------------------------------------------------------------
Net settlement on frac
spread swaps $ (3,787) $ (1,917) $ (6,140) $ (6,106)
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest rate risk management

The fair market value of the outstanding interest rate swap contracts as at June 30, 2006, results in an unrecognized loss of $3.0 million (as at June 30, 2005 - $6.3 million). During the three and six months ended June 30, 2006, the realized loss on the interest rate swap contracts recognized in income was $0.3 million and $0.7 million, respectively (three and six months ended June 30, 2005 - $0.5 million and $1.1 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 $1.0 million as at June 30, 2006 (as at June 30, 2005 - $0.9 million). The realized gain on the electricity price swap contracts recognized in income in the three and six months ended June 30, 2006 was $nil and $0.1 million, respectively (three and six months ended June 30, 2005 - $nil).

Heat Rate Swap Contracts

The fair market value of the outstanding heat rate swap contracts results in an unrealized gain of $1.3 million as at June 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 for the three and six month periods ended June 30, 2006. The realized gain on the heat rate swap contracts recognized in income for the three and six month periods ended June 30, 2006 was $0.4 million and $0.3 million, respectively.



14. CHANGES IN NON-CASH WORKING CAPITAL

Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
------------------------------------------------------------------------
Accounts receivable $ 11,348 $ 19,951 $ 37,578 $ 44,916
Prepaid expense and
other deposits 692 224 2,929 1,327
Distributable cash
payable 37 67 1,064 182
Accounts payable and
accrued liabilities (13,305) (25,329) (34,157) (31,897)
Deferred revenue (3,870) (1,458) 9,760 12,041
Working capital
(deficiency)
acquired on
acquisitions - - (1,609) 802
Impact of foreign
exchange rate
differences and other 783 - 755 -
------------------------------------------------------------------------
Changes in non-cash
working capital $ (4,315) $ (6,545) $ 16,320 $ 27,371
------------------------------------------------------------------------
------------------------------------------------------------------------

These changes relate to the following activities:
Operating $ (10,477) $ (5,293) $ 8,902 $ 32,706
Investing 6,124 (1,320) 6,354 (5,517)
Financing 38 68 1,064 182
------------------------------------------------------------------------
(Increase) decrease in
working capital $ (4,315) $ (6,545) $ 16,320 $ 27,371
------------------------------------------------------------------------
------------------------------------------------------------------------


15. COMPARATIVE FIGURES

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

Contact Information

  • Inter Pipeline Fund
    Investor Relations: Jeremy Roberge
    Vice President, Capital Markets
    (403) 290-6015 or 1-866-716-7473
    Email: jroberge@interpipelinefund.com
    or
    Inter Pipeline Fund
    Media Relations: Michelle Dawson
    Director, Public and Regulatory Affairs
    (403) 290-2643
    Email: mdawson@interpipelinefund.com