Funds From Operations

Funds from operations during the quarter totaled CAD66.1 million, down CAD9.7 million or 13% from the same period in 2008. Lower results were primarily due to weaker frac-spread prices realized on propane-plus sales at the Cochrane natural gas liquids (NGL) extraction facility. NGL pricing impacts were partially offset by increased revenue in the conventional oil pipelines business segment and reductions in corporate costs.

In the first quarter, Inter Pipeline’s oil sands transportation, NGL extraction, conventional oil pipelines and bulk liquid storage businesses contributed CAD18 million, CAD26.2 million, CAD28.5 million and CAD10.5 million, respectively, to funds from operations. Corporate charges, including interest and general & administrative expenses totaled CAD17.1 million.

Cash Distributions

Cash distributions to unitholders during the first quarter totaled CAD46.9 million or CAD0.21 per unit, resulting in a payout ratio before sustaining capital of 71%. After including CAD2.9 million of sustaining capital costs incurred during the quarter, Inter Pipeline’s payout ratio remained strong at 74.3%.

On a monthly basis, Inter Pipeline’s current cash distributions are CAD0.07 per unit or CAD0.84 per unit on an annualized basis.

Inter Pipeline continues to believe that it is well positioned to maintain its current level of cash distributions to unitholders through 2010 and beyond, despite becoming a taxable entity in 2011. Attractive fundamentals within each of Inter Pipeline’s four business segments combined with a strong inventory of organic growth opportunities continue to support this positive outlook.

Oil Sands Transportation

Inter Pipeline’s oil sands transportation business segment is comprised of the Cold Lake and Corridor pipeline systems and forms the largest oil sands gathering business in Canada. Volumes transported on the Cold Lake and Corridor systems averaged 592,700 b/d in total in the first quarter of 2009, up 4% over the comparable period of 2008.

Cold Lake pipeline volumes reached record levels during the quarter, averaging 386,800 b/d, an increase of 14,500 b/d compared to the first quarter in 2008. Producers in the Cold Lake region have been successful increasing oil production through recent capital expenditure programs.

Throughput on the Corridor system, including bitumen blend and supplemental feedstock volumes, averaged 205,900 b/d during the quarter, up 4% from first quarter 2008 volumes. Production volumes from the Athabasca oil sands project were adversely affected by weather-related factors during the first quarter last year. Cash flow on the Corridor system is generated under a 25-year cost of service contract with Shell, Chevron and Marathon. This contract provides highly stable cash flow which is not dependent on throughput volumes or commodity prices

Corridor Expansion Project

The CAD1.8 billion capacity expansion project on the Corridor system, the largest growth project in Inter Pipeline’s history, continued to progress successfully in the first quarter. With all line pipe successfully installed and facility work substantially complete, the project remains on schedule and on budget. When completed, bitumen blend capacity on Corridor is expected to increase from 300,000 b/d to 465,000 b/d.

In the first quarter of 2009, capital expenditures on the Corridor expansion project were about CAD41 million. As of March 31, 2009, total capital of roughly CAD1,174 million has been spent on the project. About 92% of pipeline and facility costs susceptible to major cost overruns have now either been expended or committed. Accordingly, Inter Pipeline’s exposure to significant capital cost overruns has largely been mitigated. Inter Pipeline has no capital risk on certain other cost components, including line fill, interest during construction and storage tank costs. These variable cost items will be added to Corridor’s rate base at their actual cost.

NGL Extraction

Inter Pipeline’s NGL extraction business segment generated strong financial results in the first quarter of 2009, despite lower natural gas processing rates and weaker NGL sales prices compared to last year. Revenue for the period was about CAD143 million and funds from operations were over CAD26 million.

Propane-plus sales at the Cochrane NGL extraction facility are exposed to frac-spread, which is the difference between the price of propane-plus product sales and the cost of natural gas feedstock. Frac-spreads decreased year-over-year as the price of propane-plus products, which tends to follow crude oil prices, fell relative to natural gas prices. Inter Pipeline’s realized frac-spread was CAD0.45 US/US gallon in the quarter, 39% lower than the CAD0.74 US/US gallon realized in the same period in 2008. Since bottoming in late 2008, frac-spread prices have continued to improve. Current prices are significantly higher than the 15 year average market frac-spread of CAD0.32 US/US Gallon.

Inter Pipeline’s three NGL extraction facilities processed 3.5 billion cubic feet per day (bcf/d) of natural gas during the quarter, producing an average of 127,200 b/d of NGL, comprised of 80,000 b/d of ethane and 47,200 b/d of propane-plus. Combined NGL production was 19,500 b/d lower than extraction rates achieved in the first quarter of 2008, mainly the result of a construction-related shutdown at the Empress V extraction plant

Conventional Oil Pipelines

Throughput on Inter Pipeline’s conventional oil pipeline systems averaged 182,100 b/d in the first quarter, a decrease of 12% from the same period in 2008. Lower throughput volumes were the result of natural production declines and the impact of maintenance activities at a refinery that sources crude oil from the Bow River pipeline system. Toll increases on certain gathering and mainline segments more than offset the revenue impact of volume declines. Inter Pipeline also continued to earn additional revenue under its marketing agreement with Nexen.

The average revenue per barrel realized on Inter Pipeline’s conventional oil pipeline systems was CAD2.36, an increase of 30% over the CAD1.81 per barrel realized in the same quarter of 2008.

In the first quarter, Inter Pipeline announced the sale of its Valley pipeline system for CAD28 million. The Valley system is a small condensate delivery pipeline located in southern Alberta. Inter Pipeline’s divestiture decision was based on the attractive sale price realized and the fact that the Valley system is a non-core asset with limited growth potential. In 2008, the Valley system generated less that 1% of Inter Pipeline’s total cash flow, and represented less than 1% of combined throughput volumes on its operated pipeline systems in Canada. The transaction closed in early April 2009.

Subsequent to quarter end, Inter Pipeline announced plans to proceed with a CAD72 million expansion project on the Bow River pipeline system. The project will allow customers to ship segregated oil streams from the Hardisty oil storage hub to refining customers in Montana. Inter Pipeline’s investment is backed by firm shipping commitments of 30,000 b/d for an initial term of 7 years. Construction activities are scheduled to be complete in the first quarter of 2010. As a result of this investment, Inter Pipeline expects to generate about CAD16.5 million per year in incremental cash flow.

Bulk Liquid Storage

In the first quarter of 2009, Inter Pipeline’s European bulk liquid storage business contributed CAD10.5 million to funds from operations, an increase of CAD1.2 million over results in the first quarter of 2008. This increase is primarily due to additional revenue from core storage and handling activities.