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

Inter Pipeline Fund

November 10, 2005 12:34 ET

Inter Pipeline Fund Announces Third Quarter 2005 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 10, 2005) - Inter Pipeline Fund (Inter Pipeline) (TSX:IPL.UN) announced today its financial and operating results for the three and nine month period ended September 30, 2005.

Highlights

- Funds from operations(1) of $40.0 million, up $1.3 million over the same quarter last year

- Net income of $21.2 million, up $2.4 million or 12.8% from the same quarter a year ago

- Quarterly payout ratio(1) of 86.1%; year-to-date payout ratio of 89.2%

- Announced acquisition of Simon Storage Limited for approximately $250 million (Pounds Sterling 120 million)

- Increased annualized cash distributions to $0.78 per unit from $0.75 per unit, commencing in December 2005

- Transported 267,700 barrels per day (b/d) on the Cold Lake pipeline system, up 13,100 b/d from the comparable quarter in 2004

- After the Simon Storage Limited acquisition, Standard & Poor's affirmed Inter Pipeline's BBB corporate credit rating with a stable outlook

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

Funds From Operations

During the third quarter of 2005, Inter Pipeline generated funds from operations of $40.0 million; an increase of $1.3 million over the same period last year. For the nine months ended September 30, 2005, funds from operations increased $20.7 million to $115.1 million over the same nine months of 2004. This increase is primarily due to the positive contribution from Inter Pipeline's natural gas liquids (NGL) extraction business.

In the quarter, Inter Pipeline's NGL extraction, conventional pipeline and Cold Lake pipeline businesses contributed $21.6 million, $19.8 million and $11.3 million, respectively to funds from operations. This was offset by corporate charges that totaled $12.7 million.

Cash Distributions

Cash distributions to unitholders during the quarter totaled $34.4 million, or $0.1875 per unit, representing 86.1% of funds from operations. For the nine month period ended September 30, 2005, Inter Pipeline's payout ratio was 89.2%, which is in line with our anticipated full year payout ratio of approximately 90%.

As a result of the Simon Storage Limited (Simon) acquisition, Inter Pipeline announced an increase to its monthly cash distribution to $0.0650 per unit, or $0.78 per unit on an annualized basis. This higher distribution level represents a $0.03 per unit increase relative to the current annualized distribution payment of $0.75 per unit. Unitholders on record at the close of business on December 30, 2005, will be eligible for the increased cash distribution payment.

Inter Pipeline's announced regular monthly cash distribution rate of $0.0650 per unit is expected to be maintained subject to review from time to time by the Board of Directors of Inter Pipeline's general partner, Pipeline Management Inc.

Acquisition of Simon Storage

On September 29, 2005, Inter Pipeline announced it had entered into an agreement to acquire Simon, the largest independent petroleum and petrochemical storage business in the United Kingdom for Pounds Sterling 120 million or approximately $250 million. The acquisition closed on October 4, 2005, and was financed from Inter Pipeline's bank credit facilities.

Simon owns and operates seven storage terminals located on the coasts of the United Kingdom and the Republic of Ireland. The business has a combined bulk liquid storage capacity of over six million barrels and is highly integrated with the operations of major regional oil refining and petrochemical complexes. Simon's terminals have the flexibility to receive and distribute petroleum and petrochemical products via deep water tanker, rail, truck and pipeline.

"We are extremely excited about the acquisition of Simon Storage and the future growth opportunities that it will bring to Inter Pipeline," commented David Fesyk, President and Chief Executive Officer. "As our first international transaction, we were attracted by Simon's long-life energy infrastructure assets, its stable and fee based cash flow and strong accretion to our distributable cash flow."

On November 4, 2005, Simon entered into a 20-year fee based storage and lease contract with Greenergy Biofuels Ltd (Greenergy). As part of the agreement, Simon will sublease a site and associated existing infrastructure at its Immingham West terminal to Greenergy for the construction of a 750,000 barrel per year biodiesel production plant. Simon will invest approximately Pounds Sterling 4.9 million of capital to complete modifications to existing facilities and will act as the primary contractor on all infrastructure development. Operations are expected to commence in late 2006.

Petroleum Transportation

Throughput volumes on the Cold Lake pipeline system averaged 267,700 b/d, during the third quarter. This represents a 13,100 b/d increase over volumes achieved during the same period in 2004. Higher volumes were attributable to increasing production from operations in the Cold Lake region. Throughput volumes on the Cold Lake system are expected to continue to increase during the fourth quarter as producer turnarounds are completed.

Throughput volumes on Inter Pipeline's four conventional oil pipeline systems averaged 197,800 b/d during the third quarter, compared to 213,500 b/d for the same period last year. Despite the decrease in conventional volumes, revenues from this business segment continued to remain stable at $28.1 million, compared to $28.3 million in the third quarter of 2004. Conventional operating margins in the quarter increased to $1.09 per barrel, up from $1.06 per barrel during the same period in 2004.

During the quarter, Inter Pipeline continued to advance several organic growth projects on the conventional oil pipeline systems. The initial phase of the Bow River South mainline expansion is expected to be in service in November 2005. In addition a new battery connection is near completion in the Princess region of the Bow River pipeline system, a new stream transfer facility is presently under construction at Hardisty, and a Nexen owned pipeline will be connected to Inter Pipeline's facilities at Kerrobert in December 2005.

NGL Extraction

During the quarter, Inter Pipeline's NGL extraction facilities processed 4.3 billion cubic feet per day (bcf/d) of natural gas, producing an average of 153,600 b/d of NGLs, comprised of 97,900 b/d of ethane and 55,700 b/d of propane plus.

The Cochrane extraction facility processed 1.4 bcf/d of natural gas in the quarter, compared to 1.8 bcf/d a year ago. Mild weather in California decreased natural gas demand on the west coast as compared to the third quarter of 2004, thereby reducing volumes through the Cochrane facility. Combined natural gas volumes through the Empress II and Empress V facilities increased to 2.9 bcf/d in the third quarter of 2005, compared 2.1 bcf/d for the 65 day period ending September 30, 2004.

Financing Activity

In September, Inter Pipeline extended the term and increased its bank credit facility by $100 million to $500 million in support of the Simon Storage acquisition. The amended three year revolving facility contains improved interest rates and enhanced financial terms.

Subsequent to quarter end, Inter Pipeline completed the Simon Storage acquisition. This resulted in an outstanding debt balance, including convertible debentures, of approximately $783 million, and a total debt to total capitalization ratio of approximately 42.7%.

Conference Call

Inter Pipeline will hold a conference call today at 2:00 p.m. (Mountain Time) / 4:00 p.m. (Eastern Time) to discuss its third quarter 2005 financial and operating results.

To participate in the conference call, please dial 877-323-2093 or 416-695-9747. A recording of the call will be available for replay until November 17, 2005, by dialing 888-509-0081 or 416-695-5275. Pass codes are not required.



Selected Financial and Operating Highlights

------------------------------------------------------------------------
(millions of dollars,
except where noted) Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------------------------------------------------------------------------
Extraction Production (1,2)(000 b/d)
Ethane 97.9 83.1 93.7 83.1
Propane Plus 55.7 49.0 52.8 49.0
----- ----- ----- ------
Total Extraction 153.6 132.1 146.5 132.1

Pipeline Volumes (000 b/d)
Conventional 197.8 213.5 200.9 214.0
Cold Lake Pipeline(1) 267.7 254.6 283.1 248.2
----- ----- ----- ------
Total Pipeline 465.5 468.1 484.0 462.2

Revenue
Extraction(2) $ 174.8 $ 114.7 $ 490.2 $ 114.7
Conventional Pipeline $ 28.1 $ 28.3 $ 81.7 $ 80.6
Cold Lake Pipeline $ 15.4 $ 19.8 $ 45.5 $ 54.7

Net Income $ 21.2 $ 18.8 $ 56.9 $ 42.5

Funds From Operations(3) $ 40.0 $ 38.7 $ 115.1 $ 94.3

Cash Distributions(3) $ 34.4 $ 32.5 $ 102.7 $ 81.9
Per Unit $0.1875 $0.1825 $0.5625 $0.5425

Payout Ratio(3) 86.1% 83.8% 89.2% 86.8%

Capital Expenditures(3)
Growth $ 3.6 $ 6.4 $ 5.7 $ 15.3
Sustaining $ 0.7 $ 1.3 $ 3.2 $ 1.9

(1) Volumes reported on a 100% basis.
(2) Extraction business was acquired by Inter Pipeline on July 28, 2004.
Therefore, the comparable 2004 figures include only 65 days of NGL
extraction operations.
(3) Please refer to the Non-GAAP Financial Measures section of the MD&A.
------------------------------------------------------------------------


Inter Pipeline Fund

Inter Pipeline is a major petroleum transportation, storage and natural gas liquids extraction business based in Calgary, Alberta, Canada. Structured as a publicly traded limited partnership, Inter Pipeline is an investment grade owner and operator of energy infrastructure assets in western Canada, the United Kingdom and the Republic of Ireland. Additional information about Inter Pipeline can be found at www.interpipelinefund.com.

Inter Pipeline is a member of both the S&P/TSX Capped Energy Trust and the Capped Income Trust indices. Class A Units and convertible debentures trade on the Toronto Stock Exchange under the symbols IPL.UN and IPL.DB, respectively.

Eligible Investors

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

Disclaimer

Certain information set forth above may contain forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by Inter Pipeline at the time of preparation, may later prove to be incorrect and actual results may differ materially from those anticipated in the statements made. For this purpose, any statements that are contained herein that are not statements of historical fact may be deemed to be forward-looking statements.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THIRD QUARTER OF 2005

The following Management's Discussion and Analysis ("MD&A") provides a detailed explanation of Inter Pipeline Fund's ("Inter Pipeline") operating results for the three and nine month periods ended September 30, 2005 as compared to the three and nine month periods ended September 30, 2004. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements of Inter Pipeline for the three and nine month periods ended September 30, 2005 and 2004, the audited consolidated financial statements and MD&A for the years ended December 31, 2004 and 2003 and the Annual Information Form and other information filed by Inter Pipeline at www.sedar.com.

THIRD QUARTER 2005 RESULTS SUMMARY

- Announced the acquisition of Simon Storage Limited ("Simon Storage") for approximately $250.0 million (Pounds Sterling 120 million), before closing adjustments. The transaction closed October 4, 2005.

- Announced a distribution increase of $0.03 per unit, on an annualized basis, to $0.78 per unit, beginning with unitholders of record as at the close of business on December 30, 2005.

- Increased unsecured revolving credit facility from $400 million to $500 million and obtained more favourable terms.

- Net income of $21.2 million, up $2.4 million from the same quarter a year ago.

- Quarterly payout ratio of 86.1%; year to date payout ratio of 89.2%.

- Funds from operations of $40.0 million, up $1.3 million over the same quarter last year.

- Produced 153,600 barrels per day ("b/d") of natural gas liquids ("NGL"), up 21,500 b/d from the period July 28, 2004 to September 30, 2004.

- Cold Lake system volumes increased to 267,700 b/d, up 13,100 b/d from the comparable quarter in 2004.

- Conventional system revenues were stable at $28.1 million compared to $28.3 million in the third quarter of 2004, despite volumes decreasing by 15,700 b/d.

- After the Simon Storage acquisition, Standard & Poor's affirmed Inter Pipeline's BBB corporate credit rating with a stable outlook.

PERFORMANCE OVERVIEW

Three Months Ended September 30

For the quarter ended September 30, 2005, Inter Pipeline's funds from operations increased $1.3 million to $40.0 million, up from $38.7 million in the three months ended September 30, 2004. Inter Pipeline began recognizing earnings from the NGL extraction business on July 28, 2004. As such, Inter Pipeline recognized only 65 days of earnings from the NGL extraction business in the third quarter of 2004. The NGL extraction, conventional pipeline, and Cold Lake pipeline businesses each contributed $21.6 million, $19.8 million and $11.3 million of funds from operations, respectively (Q3 2004 - $19.2 million, $20.8 million and $14.7 million, respectively). These cash contributions were offset by corporate cash costs of $12.7 million (Q3 2004 - $16.0 million).

Inter Pipeline paid monthly cash distributions to unitholders in each of July, August, and September 2005 of $0.0625 per Partnership unit ("unit") for a total of $0.1875 per unit in the third quarter of 2005. This compares with cash distributions paid of $0.0600 per unit per month for July and August of 2004 and $0.0625 for September 2004 or $0.1825 per unit for the comparable period of 2004.

Total cash distributed in the third quarter of 2005 of $34.4 million was $2.0 million higher than the $32.5 million distributed in the three month period ended September 30, 2004. This represents an 86.1% payout ratio of funds from operations for the period ended September 30, 2005, as compared to a payout ratio of 83.8% for the same period of 2004. This increase in total cash distributed is attributable to the increase in the amount paid per unit and to the issuance of 5.9 million new units since September 30, 2004 due to the conversion of 10% Convertible Extendible Unsecured Subordinated Debentures (the "Debentures"), the Distribution Reinvestment and Optional Unit Purchase Plan, and the exercise of Unit Incentive Options.

Inter Pipeline increased its outstanding debt level from June 30, 2005 by $21.0 million primarily to fund preliminary costs to acquire Simon Storage. This provides Inter Pipeline with a total debt to total capitalization ratio of 33.7% at quarter-end. Of the total $533.8 million of debt as at September 30, 2005, $73.5 million, or 13.8% is exposed to interest rate fluctuations. Inter Pipeline acquired Simon Storage on October 4, 2005 using floating rate debt. Therefore, subsequent to the quarter end, the debt exposed to variable interest rates increased by approximately $250 million to 41.2% of total debt.

Nine Months Ended September 30

For the nine months ended September 30, 2005, Inter Pipeline's funds from operations increased $20.7 million to $115.1 million, up from $94.3 million in the nine months ended September 30, 2004. The NGL extraction, conventional pipeline and Cold Lake pipeline businesses each contributed $59.0 million, $58.9 million and $33.8 million of funds from operations, respectively (nine months ended September 30 ("YTD"), 2004 - $19.2 million, $59.1 million and $43.0 million, respectively). These cash flow contributions were offset by corporate cash costs of $36.7 million (YTD 2004 -$27.0 million).

Total cash distributed in the first nine months of 2005 of $102.7 million was $20.8 million higher than $81.9 million distributed in the nine month period ended September 30, 2004. This represents an 89.2% payout ratio of funds from operations for the period ended September 30, 2005, as compared to a payout ratio of 86.8% for the same period of 2004.

ACQUISITION OF SIMON STORAGE

On October 4, 2005, Inter Pipeline announced that it had closed the acquisition of Simon Storage, the largest independent petroleum and petrochemical storage business in the United Kingdom. The transaction involved the purchase of all outstanding share capital in Simon Storage Holdings Ltd., the privately held parent company of Simon Storage, for a cash consideration of Pounds Sterling 120 million, or approximately $250 million, plus closing adjustments.

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

Simon Storage wholly-owns and operates seven deep water storage terminals located on the coasts of the United Kingdom and the Republic of Ireland with a combined liquid storage capacity of over six million barrels. The business is highly integrated with the operations of major regional oil refining and petrochemical complexes. Simon Storage's liquid storage terminals have the flexibility to receive and distribute products via ship, rail, truck and pipeline.

Simon Storage also offers a broad range of complementary services through its bulk liquid trucking, engineering, training and facilities management divisions. Simon Storage currently operates ten fuel distribution terminals in England, Wales and Ireland on behalf of Shell, ConocoPhillips, Total and ChevronTexaco.

On November 4, 2005, Inter Pipeline announced that Simon Storage has entered into a 20 year fuel storage contract with Greenergy Biofuels Ltd. ("Greenergy"). Under the terms of the contract, Simon Storage will invest approximately Pounds Sterling 4.9 million (CDN $10.3 million) to modify existing storage facilities at the Immingham West terminal to accommodate production from a new 750,000 barrel per year biodiesel production plant to be constructed by Greenergy. Simon Storage will provide approximately 100,000 barrels of storage capacity to support plant operations and will sublease land to Greenergy for the new plant. Operations are expected to commence in late 2006.

OUTLOOK

Inter Pipeline's acquisition of the Simon Storage business in the United Kingdom and the previously announced Bow River southbound expansion demonstrate Inter Pipeline's ability to execute its long term strategic plan regarding both external and internal growth initiatives. The acquisition of Simon Storage has added a new long-term stable source of cash flow to Inter Pipeline given its revenue is entirely generated from fee-based contracts. The Bow River southbound expansion is a good example of an internal growth initiative which provides strong unitholder value with minimal capital investment. Inter Pipeline will continue to seek opportunities to enhance value by growing both its existing businesses and seeking new acquisitions.

The strong business fundamentals of the pipeline and NGL extraction operations have continued into the third quarter of 2005. In fact, Inter Pipeline's Board of Directors announced, concurrent with the acquisition of Simon Storage, a distribution increase of $0.03 per unit to $0.78 per unit on an annualized basis beginning with the distribution to be made to the unitholders of record as at December 30, 2005. The announced regular monthly cash distribution rate of $0.0650 per unit is expected to be maintained subject to review from time to time by the Board of Directors.

The Government of Canada has recently announced a review of flow-through entity structures ("FTEs") and suspended the issuance of advance tax rulings connected with FTEs, such as income trusts and limited partnerships, which has created some uncertainty in capital markets. Certain analysts have indicated the Government's comments have contributed to a decline in unit value. Inter Pipeline continues to monitor this issue and hold discussions with other interested parties. Inter Pipeline intends to provide a written response to the Government of Canada expressing its opinion and concerns. It is our desire to see these efforts, and those of others impacted by this announcement, result in actions by the Government that will be in the best interest of our unitholders.

Notwithstanding the Government of Canada's position on the tax issues of the FTE sector, Standard & Poor's has announced that it will continue with its plans to introduce FTEs, including trusts and limited partnerships, into the S&P/TSX Composite Index as originally scheduled. Standard & Poor's has named Inter Pipeline Fund as one of the entities to be included in the revised index. Inter Pipeline is proud to have been selected for inclusion in the index and views this as a positive event for Inter Pipeline and its unitholders.



SELECTED CONSOLIDATED FINANCIAL INFORMATION

------------------------------------------------------------------------
For the As at and for the
Three Months Ended Nine Months Ended
(millions, except September 30 September 30
per unit and % amounts) 2005 2004 2005 2004
------------------------------------------------------------------------
Revenues
NGL extraction(1) $ 174.8 $ 114.7 $ 490.2 $ 114.7
Conventional pipeline $ 28.1 $ 28.3 $ 81.7 $ 80.6
Cold Lake pipeline $ 15.4 $ 19.8 $ 45.5 $ 54.7

Net income(1) $ 21.2 $ 18.8 $ 56.9 $ 42.5
Per unit - basic and diluted $ 0.11 $ 0.12 $ 0.31 $ 0.29

Funds from operations(1)(4) $ 40.0 $ 38.7 $ 115.1 $ 94.3
Per unit(4) $ 0.22 $ 0.23 $ 0.63 $ 0.64

Cash distributions(1)(3)(4) $ 34.4 $ 32.5 $ 102.7 $ 81.9
Per unit(4) $ 0.1875 $ 0.1825 $ 0.5625 $ 0.5425

Payout ratio(4) 86.1% 83.8% 89.2% 86.8%

Total assets $1,704.5 $1,759.5
Long-term debt $ 515.3 $ 554.3
Debentures(2) $ 18.5 $ 40.8
Total partners' equity $1,051.9 $1,057.7
Partnership units outstanding,
end of period 183.9 178.0

Total enterprise value(4) $2,373.1 $2,056.8

(1) The NGL extraction business was acquired on July 28, 2004.
Therefore, the comparable 2004 figures include only 65 days of
NGL extraction operations.
(2) $23.4 million of Debentures were converted into Class A units since
September 30, 2004.
(3) Cash distributions are calculated based on the number of units
outstanding at each record date.
(4) Please refer to the "Non-GAAP Financial Measures" section of this
MD&A.


RESULTS OF OPERATIONS

EXTRACTION OPERATIONS

Volumes and Extraction Revenues

Three Months Ended
September 30
------------------------------------------------------------------------
2005 2004(1)
------------------------------------------------------------------------
Propane Propane
(000's b/d) Ethane -plus Total Ethane -plus Total
------------------------------------------------------------------------
Cochrane 45.6 23.2 68.8 47.4 27.3 74.7
Empress V
(100% basis) 17.3 11.7 29.0 13.1 8.7 21.8
Empress II 35.0 20.8 55.8 22.6 13.0 35.6
------------------------------------------------------------------------
Total 97.9 55.7 153.6 83.1 49.0 132.1
------------------------------------------------------------------------
------------------------------------------------------------------------


Nine Months Ended
September 30
------------------------------------------------------------------------
2005 2004(1)
------------------------------------------------------------------------
Propane Propane
(000's b/d) Ethane -plus Total Ethane -plus Total
------------------------------------------------------------------------
Cochrane 46.2 23.9 70.1 47.4 27.3 74.7
Empress V
(100% basis) 17.9 11.8 29.7 13.1 8.7 21.8
Empress II 29.6 17.1 46.7 22.6 13.0 35.6
------------------------------------------------------------------------
Total 93.7 52.8 146.5 83.1 49.0 132.1
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) The 2004 comparative figures are calculated based on a 65 day
period ending September 30, 2005 as the extraction business
was acquired on July 28, 2004.


The three NGL extraction plants combined processed approximately 4.3 Bcf/d and 4.1 Bcf/d of gas during the three and nine months ended September 30, 2005, respectively. These numbers compare with approximately 3.8 Bcf/d of gas for the 65 day period ending September 30, 2004. As a result, the NGL extraction facilities produced an average of 153,600 b/d in the third quarter of 2005 compared to 132,100 b/d during the 65 day period ended September 30, 2004. The increase in the gas processed on a daily basis at the Empress II and V facilities, compared to the prior year's quarter, is primarily due to greater demand for Alberta natural gas in eastern Canada and the eastern United States. This demand for Alberta natural gas was a result of hotter weather together with lower production from the U.S. Gulf Coast after hurricanes Katrina and Rita. Also contributing to the increase was the redirection of gas from within the Empress complex due to certain third party plants being temporarily shut down. These increases were offset by lower volumes at the Cochrane facility due to lower demand out of the California market as a result of milder summer weather.

The NGL extraction business generated $174.8 million in revenues in the third quarter of 2005 and $490.2 million on a year to date basis. This compares with $114.7 million for the 65 day period ending September 30, 2004. Inter Pipeline has partially hedged a portion of its cash flow that is subject to commodity prices (the "frac-spread") to December 31, 2005. That portion is only related to the propane-plus volumes at the Cochrane plant. See the Off Balance Sheet Arrangements section for further explanation.

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 period July 1 through September 30, 2005, the actual market frac-spread was $0.485 CAD/US gallon (YTD -$0.437 CAD/US gallon). Based on the average monthly Bank of Canada USD/CAD rate, the actual market frac-spread was $0.403 US/US gallon (YTD - $0.358 US/US gallon). This compares to $0.507 CAD/US gallon ($0.390 US/US gallon) for the two month period ended September 30, 2004.

The frac-spread realized by Inter Pipeline during the third quarter, including the production hedged and unhedged, was $0.395 CAD/US gallon (YTD - $0.356 CAD/US gallon) or $0.328 US/US gallon (YTD - $0.291 US/US gallon), based on the average monthly Bank of Canada CAD/USD rate. This realized price is higher than the 15-year historical average frac-spread to December 31, 2004 of $0.227 US/US gallon. This compares to $0.511 CAD/US gallon ($0.393 US/US gallon) for the two month period ended September 30, 2004.

As at September 30, 2005, Inter Pipeline has hedged approximately 37% of estimated propane-plus frac spread exposure, for the period October 1, 2005 to December 31, 2005, at an average price of $0.356 CAD/US gallon. This average price would approximate $0.307 US/US gallon, based on the average USD/CAD forward curve as at September 30, 2005

Shrinkage and Operating Expenses

Shrinkage gas represents natural gas bought by Inter Pipeline to replace the heat content of the liquids extracted from the gas processed at the extraction plants. The shrinkage gas cost was $117.9 million for the third quarter of 2005 (2005 YTD - $332.8 million). This compares with the shrinkage gas cost for the 65 day period ending September 30, 2004 of $73.3 million. Notwithstanding the fact that the 2005 quarter represents a 92 day operating period, the increase in cost is also directly associated with the increased AECO monthly index price for natural gas, which averaged $7.73 per gigajoule in the third quarter of 2005 as compared with an average cost of $6.32 per gigajoule in the same quarter of 2004.

Operating and maintenance costs were $35.3 million in the third quarter of 2005 as compared to $22.2 million for the 65 day period ending September 30, 2004 (2005 YTD - $98.4 million). Fuel and power costs, included in operating costs, to produce NGLs at the three extraction facilities were $27.7 million in the quarter compared to $16.3 million for the 65 day period ended September 30, 2004 (2005 YTD - $73.7 million).

Inter Pipeline continued to use its fuel switching capability to optimize fuel and power costs at the Cochrane extraction plant. The recompressor on one of the processing trains can be driven with either a gas turbine or electric motor, allowing Inter Pipeline to select the less expensive operating mode. During Q3 2005, when natural gas prices were relatively high, the electric motor was primarily utilized. In October 2005, Inter Pipeline completed refurbishing a second electric motor drive which will double the fuel switching capability and further optimize fuel and power costs, subject to establishing that the power service to the Cochrane plant is adequate to operate both motors simultaneously. Verification and testing the power service capacity will be completed in Q4 2005.

PIPELINE OPERATIONS

Volumes and Pipeline Revenues

The average throughput statistics for the respective periods are as follows:



Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------------------
Pipeline System (000's b/d) 2005 2004 2005 2004
------------------------------------------------------------------------
Conventional
Bow River 135.1 144.4 136.2 145.5
Central /Valley/Mid Saskatchewan 62.7 69.1 64.7 68.5
------------------------------------------------------------------------
197.8 213.5 200.9 214.0
------------------------------------------------------------------------
------------------------------------------------------------------------
Cold Lake Pipeline (100% basis) 267.7 254.6 283.1 248.2
------------------------------------------------------------------------
------------------------------------------------------------------------


Conventional Pipeline System ("Conventional")

Total conventional revenues of $28.1 million in the third quarter of 2005 were $0.2 million lower than the $28.3 million earned in the three months ended September 30, 2004. The volume decrease of 15,700 b/d in the quarter, as compared to the same quarter of 2004, was due primarily to the slower than anticipated recovery from the June storms and the persistent wet weather throughout the summer of 2005. In addition, the high price of diluent during the quarter reduced the amount of crude oil blending on the system which contributed to lower throughput. The financial impact of this decrease in volume was substantially offset by mainline toll increases of 5% effective on each of January 1, 2005 and July 1, 2005, respectively, as well as revenues earned from the Oil Storage and Marketing Agreement with Nexen Inc. The average revenue per barrel from the conventional systems in the third quarter of 2005 was $1.54 vs. $1.44 per barrel in the same three month period of 2004.

Year to date volumes decreased 13,100 b/d from the comparable nine month period ended September 30, 2004, predominantly due to the severe spring and summer weather of 2005. The revenues for the nine months ended September 30, 2005 were $81.7 million as compared to $80.6 million for the comparable period of 2004.

Cold Lake Pipeline System ("Cold Lake")

Revenues from Inter Pipeline's 85% interest in Cold Lake were $15.4 million during the three months ended September 30, 2005, down $4.4 million from $19.8 million earned in the same period of 2004. Despite the increase of 13,100 b/d in Cold Lake volumes, on a 100% basis, the decrease in revenues is primarily a result of the expected reduction in capital fees per barrel that became effective January 1, 2005. This resulted in an approximately $3.5 million reduction in revenue when compared to the third quarter of 2004.

Inter Pipeline's share of the Cold Lake revenues for the nine months ended September 30, 2005 was $45.5 million, a decrease of $9.3 million from the comparable period of 2004. This revenue decrease was also primarily a result of the expected reduction in capital fees per barrel that became effective January 1, 2005, despite an increase in the average volumes moving through Cold Lake of 34,900 b/d.

The Cold Lake Transportation Services Agreement is supported with an annual minimum ship or pay commitment of $38.0 million ($44.7 million - 100% basis) in 2005 and, thereafter, reduces to approximately $30.8 million ($36.3 million - 100% basis) annually through to the end of December, 2011.

Operating Expenses

Conventional

The operating expenses for the conventional system were $8.3 million (YTD 2005 - $23.1 million), which is $0.8 million higher than the $7.5 million (YTD 2004 - $21.6 million) incurred in the comparable quarter of 2004, primarily due to increases in integrity program expenditures ($0.5 million), abandonment projects ($0.2 million) and administrative costs ($0.2 million).

Conventional power expenses were comparable in the third quarter of 2005 compared to the same period in 2004. The average Alberta market power price for the three months ended September 30, 2005 was $66.71 per mega-watt hour ("MW.h") compared to $54.33 per MW.h in the comparable period in 2004. The impact of higher Alberta market power prices on fuel and power costs was offset by lower consumption and Inter Pipeline's electricity hedging program, which fixed 5.0 mega-watts of power at an average price of $46.95 per MW.h for both comparative quarters.

Cold Lake

Cold Lake operating expenses for the three months ended September 30, 2005 were $4.1 million (YTD 2005 - $11.7 million) compared to $5.2 million for the comparable three months of 2004 (YTD 2004 - $11.8 million). The decrease was primarily due to a $1.3 million decrease in integrity and other program spending offset by a $0.3 million increase in fuel and power costs, consistent with power price increases noted above. The majority of operating expenses are recoverable from the shippers and the recoveries are recorded as revenue.

CORPORATE

General and Administrative

Inter Pipeline's general and administrative expenses totaled $3.7 million during the third quarter of 2005, which is $0.9 million higher than the $2.8 million in the comparable period of 2004. This increase in costs is primarily attributable to the increased staff levels and other expenses resulting from the acquisition of the NGL extraction business in July of 2004. An increase in expenses incurred pursuing other growth projects, ensuring regulatory compliance and the cancelled special unitholder meeting also contributed to the increase.

The increase in general and administrative expenses of $3.0 million to $9.8 million for the first nine months of 2005 compared to $6.8 million for the same period in 2004 is also driven by the increased costs described above.

Non-Cash Compensation

During the three months ended September 30, 2005, Inter Pipeline incurred non-cash compensation expense of $3.6 million related to its Unit Incentive Option Plan ("UIOP") compared to an expense of $1.8 million in the comparable three month period of 2004. New grants and an increase in the number of vested options, offset by exercises and cancellations, resulted in a net increase in the number of eligible vested options outstanding. There was also an increase in Inter Pipeline's Class A unit price from $9.78 per unit at June 30, 2005 (2004 - $7.95) to $10.00 per unit at September 30, 2005 (2004 - $8.21).

On a 2005 year to date basis, $12.3 million has been expensed compared to $6.1 million for the first nine months of 2004. The increase of $6.2 million is also primarily attributable to both the increase in unit price and the increase in the number of vested units outstanding in the nine month period.

The non-cash compensation expense amount will likely rise and fall from one reporting period to the next. It is primarily based on the number of vested options outstanding multiplied by the difference between the market price of the Class A unit at the end of the quarter versus the exercise price of the options at the end of the same period, less what has been recorded as an expense to date. Unit Incentive Options are granted at various times in the year with one third of the grant vesting immediately upon the grant, and the remaining two thirds vesting as to one third on each of the subsequent two anniversary dates.

Depreciation and Amortization

Inter Pipeline's depreciation and amortization of its operating and intangible assets totaled $14.9 million in the three months ended September 30, 2005, which is $2.6 million lower than the $17.5 million charged in the third quarter of 2004. The depreciation and amortization in the first nine months of 2005 and 2004 was $44.6 million, respectively. This decrease in the three month period and consistency in the nine month period is attributable to the depreciation and amortization associated with the operating and intangible assets of the NGL extraction business, offset by a reduction in depreciation on the conventional pipeline assets due to a change in depreciation method. Beginning January 1, 2005, the conventional pipeline assets are being depreciated on a straight line basis over the next 30 years.



Financing Charges

Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------------------
($millions) 2005 2004 2005 2004
------------------------------------------------------------------------
Credit facility interest
expense $1.8 $3.9 $ 5.2 $ 6.7
Interest on loan payable to
General Partner 5.8 - 17.3 -
Debentures interest expense 0.5 1.1 1.8 4.1
------------------------------------------------------------------------
Cash related financing charges 8.1 5.0 24.3 10.8
Amortization of deferred
financing costs 0.3 0.5 0.8 0.8
Accretion of discount on
Debentures - 0.1 - 0.3
------------------------------------------------------------------------
Total financing charges $8.4 $5.6 $25.1 $11.9
------------------------------------------------------------------------
------------------------------------------------------------------------


Inter Pipeline incurred $1.8 million of total credit facility interest expense during the quarter, compared to $3.9 million in the comparable quarter of the prior year. Short-term interest rates for the quarter ranged from a weighted average bankers acceptance rate of 3.49% to a weighted average prime rate of 4.33% (2004 - 3.00% for bankers acceptances and 3.81% for prime rate). The weighted average principal outstanding on the credit facilities was $123.2 million for the three months ended September 30, 2005 (2004 - $431.9 million).

Interest of $5.8 million was incurred in the quarter and $17.3 million year-to-date on the $379.8 million loan payable to the General Partner. The loan payable to the General Partner was part of the financing plan to acquire the NGL extraction business in July 2004. This loan payable did not exist in the first nine months of 2004.

Debenture holders converted $23.4 million of Debentures into 3.9 million Class A units since September 30, 2004, including $14.6 million since December 31, 2004. Inter Pipeline incurred $0.5 million of interest expense in respect of its Debentures during the third quarter of 2005, as compared to $1.1 million in the comparable three month period of 2004. Debenture interest on a year to date basis was $1.8 million as compared to $4.1 million in the same period of 2004. Issue costs for the Debentures are being amortized over their five year term adjusted for conversions. The difference between the amount amortized over the five year term and the amount adjusted for conversions is being included in equity as these costs relate to the equity component of the Debentures.

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 $0.9 million for the third quarter of 2005 are consistent with the $1.0 million paid for the third quarter of 2004. Year to date management fees have increased $0.4 million from $2.2 million in 2004.

There were no acquisition fees paid during the third quarter of 2005 (2004 - $7.2 million). An acquisition fee of approximately $2.5 million, representing 1% of the purchase price, before closing adjustments, on the acquisition of Simon Storage, was paid in October 2005.

Capital Expenditures

Inter Pipeline incurred a total of $4.3 million on capital expenditures in the three months ended September 30, 2005 (YTD - $8.9 million). Approximately $3.6 million was growth capital primarily related to the conventional system. The remaining $0.7 million was spent on sustaining capital projects mainly for the conventional system ($0.2 million) and NGL extraction business ($0.3 million).

Capital expenditures of $0.7 million were incurred in the third quarter of 2005 on the previously announced Bow River south expansion.

In addition, Inter Pipeline completed various commercial development projects including multiple battery connections, a pipeline connection to additional diluent supply on the Bow River pipeline as well as additional facility infrastructure to further enhance the Nexen marketing partnership.




SUMMARY OF QUARTERLY RESULTS

------------------------------------------------------------------------
2003 2004
------------------------------------------------------------------------
(millions,
except per unit Fourth First Second Third Fourth
and % amounts) Quarter Quarter Quarter Quarter(1) Quarter
------------------------------------------------------------------------
Revenue
NGL Extraction
Business(1) n/a n/a n/a $ 111.4 $ 188.9
Conventional
Pipeline(4) $27.0 $26.2 $26.1 $ 28.3 $ 27.9
Cold Lake
Pipeline(4) $18.5 $17.1 $17.8 $ 19.8 $ 18.6
Net Income $ 1.7 $ 9.1 $14.5 $ 18.8 $ 29.5
Per unit - basic
and diluted $0.01 $0.07 $0.10 $ 0.12 $ 0.17
Funds from
Operations(1)(3) $24.4 $27.9 $27.7 $ 38.7 $ 55.9
Per unit $0.20 $0.21 $0.20 $ 0.23 $ 0.33
Cash distributions
(1)(2)(3) $22.3 $24.4 $25.1 $ 32.5 $ 33.7

Per unit(3) $0.18 $0.18 $0.18 $0.1825 $0.1875
Payout ratio(3) 91.3% 87.4% 90.4% 83.8% 60.3%

Partnership units
outstanding
Weighted
Average 121.7 133.6 138.9 166.1 179.4
End of Period 128.8 138.1 139.4 178.0 180.1

------------------------------------------------------------------------
2005
------------------------------------------------------------------------
(millions, except per unit First Second Third
and % amounts) Quarter Quarter Quarter
------------------------------------------------------------------------
Revenue
NGL Extraction Business(1) $ 170.5 $ 144.8 $ 174.8
Conventional Pipeline(4) $ 27.1 $ 26.5 $ 28.1
Cold Lake Pipeline(4) $ 15.0 $ 15.1 $ 15.4

Net Income $ 22.6 $ 13.1 $ 21.2
Per unit - basic and diluted $ 0.12 $ 0.08 $ 0.11

Funds from Operations(1)(3) $ 42.2 $ 32.9 $ 40.0
Per unit $ 0.23 $ 0.18 $ 0.22
Cash distributions (1)(2)(3) $ 34.0 $ 34.2 $ 34.4
Per unit(3) $0.1875 $0.1875 $0.1875
Payout ratio(3) 80.6% 104.2% 86.1%
Partnership units outstanding
Weighted Average 181.0 182.3 183.4
End of Period 181.9 183.0 183.9

(1) The incremental change in the third quarter of 2004 is due to the
acquisition of the extraction business on July 28, 2004.
(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.


LIQUIDITY AND CAPITAL RESOURCES

As at September 30
------------------------------------------------------------------------
(millions, except for % amounts) 2005 2004
------------------------------------------------------------------------

Cash, cash equivalents and funds held in trust $ 22.2 $ 9.7
------------------------------------------------------------------------
------------------------------------------------------------------------
Working capital excluding cash and funds
held in trust(1) 0.1 $ 10.7
------------------------------------------------------------------------
------------------------------------------------------------------------

Variable rate debt
Revolving credit facility $500.0 $200.0
Non-revolving credit facility - 443.0
Revolving credit facility - unutilized (364.5) (88.7)
------------------------------------------------------------------------
Revolving credit facility outstanding 135.5 554.3
Less variable rate debt swapped to fixed (62.0) (63.0)
------------------------------------------------------------------------
Total variable rate debt outstanding 73.5 491.3
------------------------------------------------------------------------

Fixed rate long-term debt
Loan payable to General Partner 379.8 -
Debentures 18.5 40.8
Add variable rate debt swapped to fixed 62.0 63.0
------------------------------------------------------------------------
Total fixed rate long-term debt outstanding 460.3 103.8
------------------------------------------------------------------------

Total debt and Debentures outstanding $533.8 $595.1
------------------------------------------------------------------------
------------------------------------------------------------------------

Senior debt to total capitalization (1) 32.5% 33.5%
Total debt to total capitalization (1) 33.7% 36.1%
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Please refer to the Non-GAAP Financial Measures section of this
MD&A.


Although Inter Pipeline has increased its borrowing by $21.0 million in the three months ended September 30, 2005, Inter Pipeline applies any excess cash against its outstanding debt to avoid interest costs. Since December 31, 2004, Inter Pipeline has reduced its outstanding debt by $15.5 million. Of the $515.3 million of total debt outstanding at September 30, 2005 (excluding Debentures), only $73.5 million was exposed to a period ending variable interest rate of 3.62% with the remaining $441.8 million of fixed term debt having rates ranging from 5.41% to 6.31%.

On October 3, 2005, immediately prior to the acquisition of Simon Storage, total variable rate debt outstanding increased by $249 million. Had this increase occurred at September 30, 2005, the debt to total capitalization would have been approximately:



Senior debt to total capitalization 41.7%
Total debt to total capitalization 42.7%


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

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



Payments Due by Period
------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
($ millions) Total one Year Years Years Years
------------------------------------------------------------------------
Credit facility $135.5 $ - $135.5 $ - $ -
Loan payable to
General Partner 379.8 - - - 379.8
Debentures 18.5 - 18.5 - -
Operating leases 9.5 1.3 3.9 2.2 2.1
------------------------------------------------------------------------
Total obligations $543.3 $ 1.3 $157.9 $2.2 $381.9
------------------------------------------------------------------------
------------------------------------------------------------------------


Inter Pipeline incurred $0.7 million during the three months ended September 30, 2005 on the Bow River south expansion and continues to enter into construction contracts and to procure equipment as the project progresses.

As at September 30, 2005, Inter Pipeline had not committed to any construction contracts or equipment procurement for the approximately Pounds Sterling 4.9 million (CDN $10.3 million) investment to be incurred in relation to the recently announced 20 year fuel storage contract between Simon Storage and Greenergy. However, Inter Pipeline expects to commence contractual arrangements in Q4 2005.

Inter Pipeline increased its credit facility from $400 million to $500 million on September 30, 2005. The total amount outstanding under this facility was $384.5 million immediately after the acquisition of Simon Storage on October 4, 2005.

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 Nine Months Ended
September 30 September 30
------------------------------------------------------------------------
(millions, except
per unit and % amounts) 2005 2004 2005 2004
------------------------------------------------------------------------
Extraction revenue $174.8 $114.7 $490.2 $114.7
Pipeline revenue, excluding
accretion of discount on
Annual Service
Contract Recovery Amounts 43.5 48.1 127.2 135.4
Shrinkage gas expense (117.9) (73.3) (332.8) (73.3)
Cash operating expense (47.7) (34.8) (132.8) (55.5)
General and administrative
expense (3.7) (2.8) (9.8) (6.8)
Management fees expense (0.9) (1.0) (2.6) (2.2)
Acquisition fee expense - (7.2) - (7.2)
Credit facility interest
expense (1.8) (3.9) (5.2) (6.7)
Loan payable to General
Partner interest expense (5.8) - (17.3) -
Interest on Debentures (0.5) (1.1) (1.8) (4.1)
------------------------------------------------------------------------
Funds from operations(1) 40.0 38.7 115.1 94.3
Net change in non-cash
working capital (8.8) (5.2) 23.7 0.9
------------------------------------------------------------------------
Cash provided by operating
activities $31.2 $33.5 $138.8 $95.2
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash distributions(1) (2) $34.4 $32.5 $102.7 $81.9
------------------------------------------------------------------------
------------------------------------------------------------------------

Per unit(1) $0.1875 $0.1825 $0.5625 $0.5425
------------------------------------------------------------------------
------------------------------------------------------------------------

Payout ratio(1) 86.1% 83.8% 89.2% 86.8%
------------------------------------------------------------------------
------------------------------------------------------------------------

Growth capital
expenditures(1) $3.6 $6.4 $5.7 $15.3
Sustaining capital
expenditures(1) 0.7 1.3 3.2 1.9
------------------------------------------------------------------------
Total capital expenditures $4.3 $7.7 $8.9 $17.2
------------------------------------------------------------------------
------------------------------------------------------------------------

(1) Please refer to the "Non-GAAP Financial Measures" section of this
MD&A.
(2) Cash distributions are calculated based on the number of units
outstanding at each record date.


Concurrently with the acquisition of Simon Storage, Inter Pipeline announced an increase to its monthly cash distributions from $0.0625 to $0.065 per unit, or $0.78 per unit on an annualized basis. The new target distribution level represents a $0.03 per unit increase relative to Inter Pipeline's previous annualized distribution rate of $0.75 per unit. Unitholders of record at the close of business on December 30, 2005 will be eligible for the expected distribution increase, payable in mid January 2006.

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, proceeds on the sale of assets and an amount equivalent to certain Annual Service Contract Recovery Amounts. 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 September 30, 2005 are as follows:



(millions) Class A Class B Total
------------------------------------------------------------------------
Units outstanding 183.7 0.2 183.9
Units reserved for issuance upon
exercise of vested Unit Incentive Options 2.5 - 2.5
Units reserved for issuance upon
conversion of Debentures 2.9 - 2.9
------------------------------------------------------------------------
------------------------------------------------------------------------


As at November 8, 2005, Inter Pipeline had 183.9 million Class A units outstanding and 0.2 million Class B units outstanding, for a total of 184.1 million units outstanding.

FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ARRANGEMENTS

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

Inter Pipeline's risk management policies are intended to minimize the volatility of Inter Pipeline's exposure to commodity price risk and foreign exchange risk and to assist with stabilizing funds from operations. Inter Pipeline attempts to accomplish this primarily through the use of financial instruments. Inter Pipeline is prohibited from using financial instruments for speculative purposes. All hedging policies are authorized and approved by the Board of Directors through the risk management policy.

Inter Pipeline has four "off-balance sheet" financial instruments: power price swap agreements, commodity price swap agreements, foreign currency exchange contracts and interest rate swap agreements, all of which are being accounted for as hedges.

PIPELINE BUSINESS

Power Prices

Inter Pipeline has entered into power price swap agreements in respect of 5.0 MW per hour for 2005 and 2006 at average prices of $46.95 and $49.50 per MW.h, respectively, and 2.5 MW per hour for 2007 at an average price of $51.50 per MW.h. The mark-to-market value of these contracts at September 30, 2005 is an unrecognized gain of $1.8 million (September 30, 2004 - $0.5 million).

EXTRACTION BUSINESS

The following three financial instruments are used collectively to mitigate the frac-spread risk at the Cochrane extraction facility.

Commodity Prices

Inter Pipeline established a hedge program to sell certain quantities of NGL products at fixed prices to third party counter parties and buy related quantities of natural gas at fixed prices from third party counter parties in order to manage commodity price ("frac-spread") risk in its extraction business. Contracts outstanding at September 30, 2005 to hedge NGL revenues fix NGL prices at the following average prices for the period from October 1, 2005 to December 31, 2005:


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


Contracts outstanding at September 30, 2005 to hedge natural gas purchases fix natural gas prices at an average price of $7.775 per gigajoule for the period from October 1, 2005 to December 31, 2005 for average quantities of 20,870 gigajoules per day. The mark-to-market value of the NGL and natural gas contracts at September 30, 2005 resulted in unrecognized gains (losses) of US$(4.5) million and $8.6 million, respectively. The mark-to-market value of similar contracts in place at September 30, 2004 resulted in unrecognized gains of US$1.5 million and $3.0 million on NGL and natural gas swaps, respectively.

Foreign Currency

The NGL price swap agreements are calculated based on US dollar prices. Therefore, at September 30, 2005, Inter Pipeline had outstanding foreign exchange contracts to sell an average of US$6.4 million per month at an average fixed rate of US$0.798 per Canadian dollar for the period October 1, 2005 to December 31, 2005. The mark-to-market value of these contracts at September 30, 2005 results in an unrecognized gain of $1.8 million. The mark-to-market value of similar contracts in place at September 30, 2004 resulted in an unrecognized gain of $2.5 million.

CORPORATE

Interest Rates

$62.0 million of the outstanding debt at September 30, 2005 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 $6.2 million at September 30, 2005 compared to an unrecognized loss of $5.5 million at September 30, 2004.

TRANSACTIONS WITH RELATED PARTIES

No revenue was earned from related parties for the three months ended September 30, 2005 and 2004.

Inter Pipeline has entered into a support agreement that enables Inter Pipeline to request Pipeline Assets Corp., 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. Amounts due to/from the General Partner related to these services are non-interest bearing and have no fixed repayment terms. Management fees of $0.9 million were paid to the General Partner in the third quarter of 2005 (2004 - $1.0 million). No acquisition fees were paid in the quarter (2004 - $7.2 million). No amounts were paid in the third quarter of 2005 under the support agreement.

Inter Pipeline has entered into a loan agreement with the General Partner for $379.8 million. The General Partner has earned $0.1 million from Inter Pipeline in interest income during the quarter (YTD - $0.1 million), on a net basis, after paying interest expense to the ultimate note holders.

ACCOUNTING POLICIES

Variable Interest Entities

The Accounting Standards Board has issued Canadian Accounting Guideline 15 (AcG 15), "Consolidation of Variable Interest Entities" which is now effective as of January 1, 2005. This standard requires companies to identify variable interest entities in which they have an interest, determine whether they are the primary beneficiary of such entities and, if so, consolidate them for financial reporting purposes. Inter Pipeline has reviewed its investments and has concluded that no adjustments are required to the consolidation methods being used to account for its ownership interests in these entities. An assessment of this standard as it relates to the acquisition of Simon Storage will be completed in the fourth quarter of 2005.

Unit-Based Compensation

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, Inter Pipeline Fund is reviewing its method of determining the fair value of its unit based compensation expense. It is anticipated that this review process will be completed in time for year end financial reporting.

BUSINESS RISKS

Foreign Currency Exchange Risk

With the acquisition of Simon Storage on October 4, 2005, and the expiration of the hedges in the NGL extraction business at December 31, 2005, Inter Pipeline has increased its exposure to foreign currency exchange risk. Inter Pipeline has not hedged its exposure with regard to the acquisition of Simon Storage, but will continue to monitor and evaluate the exchange rates in effect and may enter into hedging transactions in the future. The increase in the strength of the Canadian dollar relative to the Pound Sterling benefited Inter Pipeline in relation to the acquisition economics. Inter Pipeline would benefit from a weakening of the Canadian dollar in both the NGL extraction and the Simon Storage businesses.

Commodity Price Risk: Frac-Spread

At the Cochrane extraction facility, Inter Pipeline is exposed to frac-spread or the relative price differential between propane-plus volumes produced and the natural gas purchased to replace the heat content removed during the extraction process. As at September 30, 2005, Inter Pipeline has not entered into any 2006 contracts to hedge this commodity price exposure. Existing hedge contracts associated with the frac-spread expire on December 31, 2005. Inter Pipeline will continue to monitor and evaluate commodity prices and may enter into hedging transactions in the future.

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 Canadian generally accepted accounting principles ("GAAP"). These non-GAAP financial measures do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities. Investors are cautioned that these non-GAAP financial measures should not be construed as alternatives to other measures of financial performance calculated in accordance with GAAP.

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

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

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

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

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

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

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

Growth capital expenditures are generally defined as expenditures that are related to system capacity expansions, business growth, volume or revenue increases and/or sustainable operating efficiencies.

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

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

Sustaining capital expenditures are generally defined as new assets that provide support to operations and/or expenditures that involve an enhancement to existing assets without the associated benefits characteristic of growth capital expenditures.

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

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

ADDITIONAL INFORMATION

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

Dated at Calgary, Alberta this 10th day of November, 2005.

Disclaimer

This Management's Discussion and Analysis ("MD&A") highlights significant business results and statistics for Inter Pipeline Fund's three and nine month period ended September 30, 2005. This information may contain forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by the General Partner of Inter Pipeline Fund 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 Fund 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
September 30, December 31,
(unaudited) (thousands of dollars) 2005 2004
------------------------------------------------------------------------

ASSETS
Current Assets
Cash $ 9,596 $ 4,412
Funds held in trust (note 12) 12,566 -
Accounts receivable 99,674 115,471
Prepaid expenses and other deposits 4,970 5,592
Current portion of Annual Service
Contract Recovery
Amounts (note 3) - 2,349
------------------------------------------------------------------------
Total Current Assets 126,806 127,824

Intangible and other assets (note 4) 369,109 379,562
Property, plant and equipment (note 5) 1,206,727 1,232,817
Deferred financing charges,
net of accumulated
amortization of $9,319
(December 31, 2004 - $8,160) 1,830 2,748
------------------------------------------------------------------------
Total Assets $ 1,704,472 $ 1,742,951
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Distributable cash payable $ 11,496 $ 11,255
Accounts payable and accrued
liabilities 93,029 90,125
------------------------------------------------------------------------
Total Current Liabilities 104,525 101,380

Long-term debt (note 6) 515,300 530,800
Convertible Debentures (note 7) 18,521 32,510
Asset retirement obligation 9,168 8,743
Environmental liabilities 3,951 3,580
Future income taxes 1,141 1,007
------------------------------------------------------------------------
Total Liabilities 652,606 678,020
------------------------------------------------------------------------

Partners' Equity
Conversion feature on Convertible
Debentures (note 7) 762 1,395
Partners' Equity (note 8) 1,051,104 1,063,536
------------------------------------------------------------------------
Total Partners' Equity 1,051,866 1,064,931
------------------------------------------------------------------------
Total Liabilities and Partners' Equity $ 1,704,472 $ 1,742,951
------------------------------------------------------------------------
------------------------------------------------------------------------

Commitments (notes 6 and 11)

See accompanying notes to the interim consolidated financial statements.

Inter Pipeline Fund
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

Nine months ended
------------------------------------------------------------------------
(unaudited) September 30, September 30,
(thousands of dollars) 2005 2004
------------------------------------------------------------------------
Class A Class B
Limited Unlimited
Liability Liability
Partnership Partnership
Units Units Total Total
------------------------------------------------------------------------
Balance,
beginning
of period $ 1,062,472 $ 1,064 $ 1,063,536 $ 753,510
Net income
for the
period 56,875 57 56,932 42,463
Cash
distributions
declared (102,568) (103) (102,671) (81,900)
Issuance of
Partnership
units
Conversion
of Debentures
(notes 7 and 8) 14,622 15 14,637 62,487
Issued under
Distribution
Reinvestment
and Optional
Unit Purchase
Plan (note 8) 2,819 3 2,822 2,249
Issued under
Unit Incentive
Option Plan
(note 9) 10,533 11 10,544 4,687
Equity issuances,
net of issue
costs - - - 271,889
Amortization of
Debenture issue
costs (335) - (335) (3,400)
Unit-based
compensation
(note 9) 5,633 6 5,639 3,988
------------------------------------------------------------------------
Balance,
end of period $ 1,050,051 $ 1,053 $ 1,051,104 $ 1,055,973
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
CONSOLIDATED STATEMENTS OF NET INCOME

Three months ended Nine months ended
(unaudited) September 30 September 30
(thousands of dollars) 2005 2004 2005 2004
------------------------------------------------------------------------

REVENUES
Extraction revenue $ 174,838 $ 114,734 $ 490,220 $ 114,734
Transportation revenue 43,520 48,111 127,156 135,363
Accretion of discount
on Annual Service Contract
Recovery Amounts (note 3) - 63 53 246
------------------------------------------------------------------------
218,358 162,908 617,429 250,343
------------------------------------------------------------------------

EXPENSES
Shrinkage gas 117,886 73,272 332,805 73,272
Operating 47,754 34,879 133,233 55,519
General and
administrative 3,704 2,799 9,763 6,799
Non-cash compensation
expense 3,565 1,760 12,278 6,088
Depreciation and
amortization 14,886 17,493 44,573 44,630
Financing charges
(note 10) 8,379 5,603 25,079 11,942
Management fee to
General Partner 925 1,035 2,633 2,229
Acquisition fee to
General Partner - 7,150 - 7,150
Future income taxes 57 86 133 251
------------------------------------------------------------------------
197,156 144,077 560,497 207,880
------------------------------------------------------------------------

NET INCOME $ 21,202 $ 18,831 $ 56,932 $ 42,463
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per
Partnership unit
(note 8)
Basic and Diluted $ 0.11 $ 0.12 $ 0.31 $ 0.29
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
CONSOLIDATED STATEMENTS OF CASH FLOWS


Three months ended Nine months ended
(unaudited) September 30 September 30
(thousands of dollars) 2005 2004 2005 2004
------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income $ 21,202 $ 18,831 $ 56,932 $ 42,463
Depreciation and
amortization 14,886 17,493 44,573 44,630
Amortization of deferred
financing charges (note 10) 301 491 824 773
Accretion of discount
on Debentures (note 10) - 109 - 379
Non-cash compensation expense 3,565 1,760 12,278 6,088
Non-cash operating expense (5) - 371 -
Future income taxes 57 86 133 251
Accretion of discount on
Annual Service Contract
Recovery Amounts - (63) (53) (246)
------------------------------------------------------------------------
Funds from operations 40,006 38,707 115,058 94,338
Net change in non-cash
working capital (8,787) (5,239) 23,752 848
------------------------------------------------------------------------
Cash provided by
operating activities 31,219 33,468 138,810 95,186
------------------------------------------------------------------------

INVESTING ACTIVITIES
Funds held in trust (12,566) - (12,566) -
Annual Service Contract
Recovery Payment (note 3) - 1,622 2,402 4,917
Expenditures on property,
plant and equipment (4,271) (7,706) (8,945) (17,180)
Proceeds on sale of assets - 122 196 616
Acquisition of the
Extraction Business (note 2) - (705,089) 342 (705,089)
Net change in non-cash
working capital 1,890 (21,150) (3,627) (20,737)
------------------------------------------------------------------------
Cash used in investing
activities (14,947) (732,201) (22,198) (737,473)
------------------------------------------------------------------------

FINANCING ACTIVITIES
Cash distributions declared (34,431) (32,454) (102,671) (81,900)
Increase / (decrease) in
long-term debt, net of
repayments 21,000 467,310 (15,500) 452,310
Issuance of Partnership
units, net of issue
costs - 271,889 - 271,889
Cash received under
Distribution Reinvestment
and Optional Unit Purchase
Plan 1,115 471 2,822 2,249
Issuance of units under Unit
Incentive Option Plan 238 325 3,921 2,650
Deferred financing charges (100) (2,434) (241) (2,434)
Net change in non-cash
working capital 59 2,764 241 3,400
------------------------------------------------------------------------
Cash (used in) provided
by financing activities (12,119) 707,871 (111,428) 648,164
------------------------------------------------------------------------
Increase in cash 4,153 9,138 5,184 5,877
Cash, beginning of period 5,443 565 4,412 3,826
------------------------------------------------------------------------
Cash, end of period $ 9,596 $ 9,703 $ 9,596 $ 9,703
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash interest paid $ 2,049 $ 5,579 $ 18,675 $ 10,843
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to the interim consolidated financial statements.


Inter Pipeline Fund
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(tabular amounts in thousands of dollars, except unit and per unit
information)
(unaudited)


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, 2004, except as discussed 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 ("the Partnership") annual report for the year ended December 31, 2004.

Change in Estimate

Effective January 1, 2005, the Partnership has amended its estimates for calculating depreciation on the pipeline facilities and equipment of the conventional gathering system of the Pipeline Business. It was determined that due to a change in circumstances and experience gained in the last few years, the straight-line method of depreciation would better reflect a matching of the depreciation of the pipeline assets to the decline in the revenue-producing volume throughput of these assets. The estimated remaining service life of these assets has also been re-evaluated and revised to thirty years to better reflect the number of years over which these pipeline facilities and equipment will be in operation, which is also tied in to the estimated remaining life of the crude oil reserves expected to be gathered and shipped on these pipeline systems. The impact of this change on the three and nine months ended September 30, 2005, is to decrease depreciation and amortization expense and increase net income by $4.2 million and $13.0 million respectively.

Change in Policy for Segment Reporting

The Partnership has changed its policy for segment reporting to separate the previously reported Pipeline Business into the Cold Lake Pipeline and Conventional Pipeline businesses. This change has been made to distinguish the contractual-based results of operations of the Cold Lake Pipeline business from the Conventional Pipeline business. These segments' operations are still primarily the transportation, storage and processing of hydrocarbons, however the revenues and costs are derived differently and therefore they are being evaluated and managed separately. This change in accounting policy has been applied retroactively in Note 15 - Segmented Information.

2. ACQUISITION OF EXTRACTION BUSINESS

On July 28, 2004, the Partnership acquired interests in three natural gas liquids ("NGL") extraction plants for $715 million less closing adjustments and acquisition costs of $1.9 million, for a net cash consideration paid of $713.1 million. The purchase was financed through $443 million of long-term debt and a portion of the proceeds from the issuance of 37.95 million Class A units. Concurrent with this transaction, an acquisition fee of $7.15 million was paid to Pipeline Management Inc, 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 July 28, 2004. The working capital adjustment was finalized during the first quarter of 2005, and the Partnership allocated the final Purchase Price as follows:



Cash $ 3,677
Working capital deficiency (3,401)
Intangible assets - Customer contracts and patent (note 4) 296,339
Property, plant and equipment (note 5) 424,966
Asset retirement obligation (8,507)
---------------------------------------------------------------------
$ 713,074
---------------------------------------------------------------------
---------------------------------------------------------------------


3. INVESTMENT IN ANNUAL SERVICE CONTRACT RECOVERY AMOUNTS

During the three and nine months ended September 30, 2005, the Partnership received net payments of nil and $2.4 million, respectively (three and nine months ended September 30, 2004 - $1.6 million and $4.9 million, respectively) related to its net investment in the Annual Service Contract Recovery Amounts. As at September 30, 2005, no Annual Service Contract Recovery Amounts remain to be paid by the Cold Lake Partnership to the Partnership in priority to the distribution of its earnings (December 31, 2004 - $2.3 million).



4. INTANGIBLE AND OTHER ASSETS

September 30, December 31,
2005 2004
---------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
---------------------------------------------------------------------
Transportation
Services Agreement $ 93,548 $ (8,860) $ 84,688 $ 87,107
Customer contracts
(note 2) 287,612 (11,191) 276,421 283,988
Patent (note 2) 8,727 (727) 8,000 8,467
---------------------------------------------------------------------
$ 389,887 $ (20,778) $ 369,109 $ 379,562
---------------------------------------------------------------------
---------------------------------------------------------------------


5. PROPERTY, PLANT AND EQUIPMENT

September 30, December 31,
2005 2004
---------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
---------------------------------------------------------------------
Conventional Pipeline
system facilities
and equipment $ 753,553 $ (307,146)$ 446,407 $ 452,191
Cold Lake Pipeline
system facilities
and equipment 372,353 (33,897) 338,456 347,855
Extraction plants
and equipment
(note 2) 423,356 (16,126) 407,230 416,624
Cold Lake Pipeline
system linefill 10,384 - 10,384 10,384
Spare parts 3,339 - 3,339 3,379
Deferred receipt
facility expenditures 5,571 (4,660) 911 2,384
---------------------------------------------------------------------
$ 1,568,556 $ (361,829)$1,206,727 $1,232,817
---------------------------------------------------------------------
---------------------------------------------------------------------


6. LONG-TERM DEBT

At September 30, 2005, the following amounts have been drawn under
the Partnership's credit facilities:

September 30, December 31,
2005 2004
---------------------------------------------------------------------
Loan Payable to General Partner $ 379,800 $ 379,800
$500 million Unsecured Revolving
Credit Facility(a) 135,500 151,000
---------------------------------------------------------------------
$ 515,300 $ 530,800
---------------------------------------------------------------------
---------------------------------------------------------------------

(a) On September 30, 2005, the $400 million Unsecured Revolving
Credit Facility was increased to $500 million, with a portion
of the incremental amount being utilized to fund the acquisition
of Simon Storage Limited (see note 12 - Subsequent Events). This
facility is fully revolving for a period of three years from
September 30, 2005. The revolving period may be extended at any
time with the agreement of the lenders, but it cannot exceed
three years from the date of the extension.

Amounts borrowed under this facility bear interest at a floating
rate based on bankers' acceptances plus 75 basis points provided
the Partnership maintains its current credit rating while fees on
undrawn amounts are equal to 15 basis points per annum. If the
Partnership's credit rating changes, the interest rate could
increase by up to 75 basis points or reduce by up to 37.5 basis
points.


7. CONVERTIBLE DEBENTURES

During the nine months ended September 30, 2005, $14.6 million of 10% Convertible Extendible Unsecured Subordinated Debentures ("Debentures") were converted into Class A units, $14.0 million of which related to the Debt component and $0.6 million to the Equity Component. Issue costs for the Debentures are being amortized over their five year term adjusted for conversions. The difference between the amount amortized over the five year term and the amount adjusted for conversions is being included in equity as these costs relate to the equity component of the Debentures.



8. PARTNERS' EQUITY
Number of units issued and outstanding

Class A Units Class B Units Total
---------------------------------------------------------------------
Balance at December
31, 2004 179,911,495 180,217 180,091,712
Issued on conversion
of Debentures (note 7) 2,436,974 2,476 2,439,450
Issued under Distribution
Reinvestment and
Optional Unit Purchase
Plan 305,681 314 305,995
Issued under Unit Incentive
Option Plan (note 9) 1,094,012 1,158 1,095,170
---------------------------------------------------------------------
Balance at September
30, 2005 183,748,162 184,165 183,932,327
---------------------------------------------------------------------
---------------------------------------------------------------------


Calculation of net income per Partnership unit

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



Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------
Basic 183,408,790 166,104,974 182,254,065 146,299,552
Effect of dilutive
exercisable unit
options 1,765,873 1,285,070 1,854,320 1,403,627
---------------------------------------------------------------------
Diluted 185,174,663 167,390,044 184,108,385 147,703,179
---------------------------------------------------------------------
---------------------------------------------------------------------


9. UNIT-BASED COMPENSATION

The following table summarizes information regarding unit options
outstanding at September 30, 2005:

Weighted-
Weighted- average
average adjusted
Number of exercise exercise
options price(a) price(b)
---------------------------------------------------------------------
Options outstanding,
December 31, 2004 4,353,080 $ 7.04 $ 4.93
Options granted 186,000 $ 10.31 $ 10.13
Options exercised (1,094,012) $ 6.54 $ 3.10
Options cancelled (68,001) $ 7.31 $ 5.13
--------------------------------------------
Options outstanding, September
30, 2005 3,377,067 $ 7.37 $ 4.91
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) The weighted-average exercise price based on the exercise price
on the date of grant.
(b) The weighted-average exercise price adjusted for the incentive
reduction.


As a result of options exercised in the nine months ended September 30, 2005, $10.5 million was credited to Partners' Equity representing an amount equal to the market value of the units issued on the date of exercise. An additional $5.6 million was credited to Partners' Equity for the cost of outstanding and exercisable options at September 30, 2005.



10. FINANCING CHARGES

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------
Interest expense $ 7,570 $ 3,926 $ 22,474 $ 6,687
Interest on Debentures 508 1,077 1,781 4,103
Amortization of deferred
financing charges 301 491 824 773
Accretion of discount
on Debentures - 109 - 379
---------------------------------------------------------------------
Total financing charges $ 8,379 $ 5,603 $ 25,079 $ 11,942
---------------------------------------------------------------------
---------------------------------------------------------------------


11. RISK MANAGEMENT

Frac spread risk management
Hedge contracts outstanding at September 30, 2005 were as follows:

Average
Price Average
(US$/ Quantity
NGL swaps US gallon) (b/d) Hedged Period
---------------------------------------------------------------------

Propane 0.852 4,000 October 1, 2005 - December 31, 2005
Normal Butane 1.003 685 October 1, 2005 - December 31, 2005
Iso Butane 1.012 424 October 1, 2005 - December 31, 2005
Pentanes Plus 1.267 339 October 1, 2005 - December 31, 2005
---------------------------------------------------------------------


Average Average
Price Quantity
(Cdn$/GJ) (GJ/day) Hedged Period
---------------------------------------------------------------------
Natural gas
swaps 7.775 20,870 October 1, 2005 - December 31, 2005
---------------------------------------------------------------------


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

Foreign
exchange
swaps 0.798 6,381 October 1, 2005 - December 31, 2005
---------------------------------------------------------------------


The fair market value of the NGL, natural gas and foreign exchange swap contracts at September 30, 2005, results in unrecognized gains/ (losses) of US$(4.5) million, $8.6 million, and $1.8 million respectively. The fair market value of similar contracts in place at September 30, 2004, resulted in unrecognized gains of US$1.5 million, $3.0 million and $2.5 million on NGL, natural gas and foreign exchange swaps, respectively.

During the three and nine months ended September 30, the realized gains/ (losses) on the frac spread hedge swap contracts recognized in income were:



Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------
NGL swaps $ (5,954) $ 287 $ (10,443) $ 287
Natural gas swaps 2,056 (1,022) (823) (1,022)
Foreign exchange swaps 749 220 2,011 220
---------------------------------------------------------------------
Net realized (loss)
on frac spread swaps $ (3,149) $ (515) $ (9,255) $ (515)
---------------------------------------------------------------------
---------------------------------------------------------------------


Interest rate risk management

The fair market value of the outstanding interest rate hedge swap contracts on $62 million of the outstanding debt as at September 30, 2005, results in an unrecognized loss of $6.2 million (September 30, 2004 - $5.5 million). During the three and nine months ended September 30, 2005, the realized loss on the interest rate hedge swap contracts recognized in income was $0.5 million and $1.6 million, respectively (three and nine months ended September 30, 2004 - $0.6 million and $1.8 million, respectively).

Power price risk management

Electricity price hedge swap contracts outstanding at September 30, 2005 were as follows:



Price Quantity
Hedged Period ($/MW.h) (MW)
---------------------------------------------------------------------

January 1, 2005 to December 31, 2005 46.95 5.0
January 1, 2006 to December 31, 2006 49.50 5.0
January 1, 2007 to December 31, 2007 51.50 2.5
---------------------------------------------------------------------


The fair market value of the electricity price hedge swap contracts results in an unrecognized gain of $1.8 million at September 30, 2005 (September 30, 2004 - $0.5 million).

During the three and nine months ended September 30, 2005, the realized gains on the power hedge swap contracts recognized in income were $0.2 million and $0.3 million, respectively (three and nine months ended September 30, 2004 - $0.1 million and $0.2 million, respectively).

12. SUBSEQUENT EVENT

Subsequent to September 30, 2005, the Partnership acquired all of the outstanding shares of Simon Storage Limited ("Simon Storage") for cash consideration of Pounds Sterling 120 million, or approximately $250 million plus closing adjustments. The acquisition closed on October 4, 2005, and was funded through an existing revolving credit facility (see note 6 - Long-term Debt). Concurrent with this transaction, an acquisition fee of $2.5 million was paid to Pipeline Management Inc, the General Partner, pursuant to the terms of the Partnership Agreement. In addition, the Partnership will be increasing its monthly distribution to $0.065 per unit effective with the December, 2005 distribution which is payable in January, 2006.

At September 30, 2005, $12.6 million was held in trust pending the closing of the acquisition of Simon Storage.

On November 4, 2005, Inter Pipeline announced that Simon Storage has entered into a 20 year fuel storage contract with a non-related third party. Under the terms of the contract, Simon Storage will invest approximately Pounds Sterling 4.9 million ($10.3 million) to modify existing storage facilities and systems to accommodate production from a new 750,000 barrel per year biodiesel production plant to be constructed by the third party. Simon Storage will provide approximately 100,000 barrels of storage capacity to support plant operations and will sublease land to the third party for the new plant. Operations are expected to commence in late 2006.



13. CHANGES IN NON-CASH WORKING CAPITAL

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------
Accounts receivable (29,119) (65,210) 15,797 (63,826)
Prepaid expense and
other deposits (705) (3,443) 622 (2,072)
Distributable cash
payable 59 2,765 241 3,401
Accounts payable and
accrued liabilities 22,927 65,467 2,904 69,212
Working capital
deficiency acquired
on acquisition of
Extraction Business
(note 2) - (23,204) 802 (23,204)
---------------------------------------------------------------------
Changes in non-cash
working capital (6,838) (23,625) 20,366 (16,489)
---------------------------------------------------------------------
---------------------------------------------------------------------

These changes relate to
the following activities:
Operating (8,787) (5,239) 23,752 848
Investing 1,890 (21,150) (3,627) (20,737)
Financing 59 2,764 241 3,400
---------------------------------------------------------------------
(Increase) decrease
in working capital (6,838) (23,625) 20,366 (16,489)
---------------------------------------------------------------------
---------------------------------------------------------------------


For the period ended September 30, 2004, the working capital deficiency acquired on acquisition of the Extraction Business was classified as a Change in Working Capital from Operating Activities. During 2005, the amount was reclassified to a Change in Working Capital from Investing Activities to be consistent with the current presentation.

14. COMPARATIVE FIGURES

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



15. SEGMENTED INFORMATION

Three months ended September 30
------------------------------------------------------------------------
Cold Lake Conventional Extraction
Pipeline Pipeline Business
2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------
REVENUES
Extraction
revenue $ - $ - $ - $ - $174,838 $114,734
Transportation
revenue 15,406 19,837 28,114 28,274 - -
Accretion of
discount on
Annual Service
Contract
Recovery
Amounts (note 3) - - - - - -
------------------------------------------------------------------------
15,406 19,837 28,114 28,274 174,838 114,734
------------------------------------------------------------------------

EXPENSES
Shrinkage gas - - - - 117,886 73,272
Operating 4,128 5,178 8,312 7,488 35,314 22,213
General and
administrative - - - - - -
Non-cash
compensation
expense - - - - - -
Depreciation and
amortization 4,014 3,877 4,728 9,507 6,144 4,109
Financing charges
(note 10) - - - - - -
Management
fee to General
Partner - - - - - -
Acquisition fee
to General Partner - - - - - -
Future income
taxes - - - - - -
------------------------------------------------------------------------
8,142 9,055 13,040 16,995 159,344 99,594
------------------------------------------------------------------------

NET INCOME $ 7,264 $10,782 $15,074 $11,279 $15,494 $15,140
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures
on property,
plant and
equipment $ 223 $(6,386) $(3,699) $(1,181) $ (795) $ (139)
------------------------------------------------------------------------
------------------------------------------------------------------------



Three months ended September 30
Corporate Total
2005 2004 2005 2004
------------------------------------------------------------------------

REVENUES
Extraction revenue $ - $ - $174,838 $114,734
Transportation revenue - - 43,520 48,111
Accretion of discount on
Annual Service Contract
Recovery Amounts (note 3) - 63 - 63
------------------------------------------------------------------------
- 63 218,358 162,908
------------------------------------------------------------------------

EXPENSES
Shrinkage gas - - 117,886 73,272
Operating - - 47,754 34,879
General and administrative 3,704 2,799 3,704 2,799
Non-cash compensation expense 3,565 1,760 3,565 1,760
Depreciation and amortization - - 14,886 17,493
Financing charges (note 10) 8,379 5,603 8,379 5,603
Management fee to General
Partner 925 1,035 925 1,035
Acquisition fee to General
Partner - 7,150 - 7,150
Future income taxes 57 86 57 86
------------------------------------------------------------------------
16,630 18,433 197,156 144,077
------------------------------------------------------------------------
NET INCOME $(16,630) $(18,370) $ 21,202 $ 18,831
------------------------------------------------------------------------
------------------------------------------------------------------------

Expenditures on property,
plant and equipment $ - $ - $ (4,271) $ (7,706)
------------------------------------------------------------------------
------------------------------------------------------------------------


Nine months ended September 30
------------------------------------------------------------------------
Cold Lake Conventional Extraction
Pipeline Pipeline Business
2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------

REVENUES
Extraction
revenue $ - $ - $ - $ - $490,220 $114,734
Transportation
revenue 45,483 54,748 81,673 80,615 - -
Accretion of
discount on
Annual Service
Contract
Recovery
Amounts (note 3) - - - - - -
------------------------------------------------------------------------
45,483 54,748 81,673 80,615 490,220 114,734
------------------------------------------------------------------------

EXPENSES
Shrinkage gas - - - - 332,805 73,272
Operating 11,697 11,751 23,105 21,555 98,431 22,213
General and
administrative - - - - - -
Non-cash
compensation
expense - - - - - -
Depreciation and
amortization 12,033 11,629 14,130 28,892 18,410 4,109
Financing charges
(note 10) - - - - - -
Management
fee to General
Partner - - - - - -
Acquisition
fee to General
Partner - - - - - -
Future income
taxes - - - - - -
------------------------------------------------------------------------
23,730 23,380 37,235 50,447 449,646 99,594
------------------------------------------------------------------------
NET INCOME $21,753 $31,368 $ 44,438 $ 30,168 $ 40,574 $ 15,140
------------------------------------------------------------------------
------------------------------------------------------------------------

Expenditures
on property,
plant and
equipment $ (209)$(11,430) $(7,066) $(5,611) $ (1,670) $ (139)
------------------------------------------------------------------------
------------------------------------------------------------------------


Nine months ended September 30
Corporate Total
2005 2004 2005 2004
------------------------------------------------------------------------
REVENUES
Extraction revenue $ - $ - $490,220 $114,734
Transportation revenue - - 127,156 135,363
Accretion of discount on
Annual Service Contract
Recovery Amounts (note 3) 53 246 53 246
------------------------------------------------------------------------
53 246 617,429 250,343
------------------------------------------------------------------------

EXPENSES
Shrinkage gas - - 332,805 73,272
Operating - - 133,233 55,519
General and
administrative 9,763 6,799 9,763 6,799
Non-cash compensation expense 12,278 6,088 12,278 6,088
Depreciation and
amortization - - 44,573 44,630
Financing charges (note 10) 25,079 11,942 25,079 11,942
Management fee to
General Partner 2,633 2,229 2,633 2,229
Acquisition fee to
General Partner - 7,150 - 7,150
Future income taxes 133 251 133 251
------------------------------------------------------------------------
49,886 34,459 560,497 207,880
------------------------------------------------------------------------

NET INCOME $(49,833) $(34,213) $ 56,932 $ 42,463
------------------------------------------------------------------------
------------------------------------------------------------------------
Expenditures on
property, plant
and equipment $ - $ - $ (8,945) $ (17,180)
------------------------------------------------------------------------
------------------------------------------------------------------------

Note: The Extraction Business segment only has 65 days of operations
included in the three and nine months ended September 30, 2004,
as it was acquired by the Partnership on July 28, 2004.

As at As at
September 30, December 31
2005 2004
------------------------------------------------------------------------
Total Assets
Cold Lake Pipeline $ 455,180 $ 476,433
Conventional Pipeline 484,502 475,692
Extraction Business 764,790 790,826
------------------------------------------------------------------------
$1,704,472 $1,742,951
------------------------------------------------------------------------
------------------------------------------------------------------------


Contact Information