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Executives

William A. van Yzerloo – Chief Financial Officer-Pipeline Management Inc.

Jeremy Allan Roberge – Vice President-Capital Markets

Christian P. Bayle – Chief Operating Officer

Analysts

Juan Plessis – Canaccord Genuity

Linda Ezergailis – TD Securities

Steven Paget – First Energy

Robert Kwan – RBC Capital Markets LLC

Robert Catellier – Macquarie Capital Markets

Osvaldo Matias – CIBC World Markets Inc.

Inter Pipeline Fund (OTCPK:IPPLF) Q1 2013 Earnings Call May 9, 2013 4:30 PM ET

Operator

All participants please stand by. Your conference is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the Inter Pipeline Fund’s First Quarter Conference Call and Webcast. I’d now like to turn the meeting over to Mr. Bill van Yzerloo, Chief Financial Officer of Inter Pipeline Fund. Please go ahead, Mr. Van Yzerloo.

William A. van Yzerloo

Well thank you, Marcus, and good afternoon, ladies and gentlemen. Welcome to Inter Pipeline Fund’s quarter end conference call. Joining me today are Jeremy Roberge, Inter Pipeline’s Vice President, Capital Markets; as well as Christian Bayle, our Chief Operating Officer. Today, we will discuss our first quarter financial and operating results.

Before we get started, we’d like to remind you that certain information relayed in this conference call may contain forward-looking information that involves risks, uncertainties and assumptions. Such information, although considered reasonable by Inter Pipeline at this time, may later prove incorrect and actual results may differ materially from those stated or implied by our comments today. Undue reliance should not be placed on such information. A discussion of the related risk factors, uncertainties and assumptions is available in our year end MD&A available on our website at www.interpipelinefund.com or at www.sedar.com.

Now to the results, I’m going to go offer you few highlights of the quarter, then quickly walk you our current capital investment program and finally provide a few operational highlights before turning things over to Jeremy for more detailed look at our financial results.

We began 2013 with another very good quarter. Financially, our funds from operations total was among our best ever. Operationally, we set new records for throughput volumes on our pipeline systems. We affirmed our long-term development plans by finalizing agreements for a $2.6 billion Cold Lake and Polaris pipeline expansion program.

After the quarter, we announced a new long-term ethane sales agreement and also increased the capacity on our revolving credit facility to $1.25 billion. It has been a busy start to the year. Funds from operations for the quarter totaled $109 million, similar to that generated in the first quarter of last year.

All four of our business segments turned in strong performances with higher cash flow in our Oil Sands Transportation segment, being offset by weaker propane-plus frac spreads in the NGL extraction segment.

Our Oil Sands Transportation business segment moved to record volumes and generated record results primarily due to the strong contribution from the Polaris pipeline system, which entered commercial service in the third quarter of 2012. The conventional oil pipeline systems transported higher volumes with a quarterly average coming in 6000 barrels per day higher than last year at 185,000 barrels per day.

These results are indicative of how our balance portfolio of assets continue to generate stable and predictable cash flow and continue to support sustainable distributions. In the first quarter of 2013, we made excellent progress advancing our largest ever organic growth program.

In the quarter, we spent over $400 million on capital investments primarily in the Oil Sands Transportation segment where demand for new transportation services is driving large scale infrastructure investments.

The $2.6 billion expansion program will meet the needs of our customers over the long- term and also provide a growth platform as we pursue additional third-party opportunities.

Once the expansion program is completed, our Cold Lake and Polaris pipeline systems will have a combined ultimate capacity of 3.1 million barrels per day forming an integrated diluents and bitumen blend transportation system that will be in close proximity to a large number of oil sands production projects in various stages of development. We believe the substantial transportation capability will position us well to capture further business.

In our NGL extraction business, we are happy to announce in April that we have signed a long-term ethane sales agreement with NOVA Chemicals. NOVA has agreed to a 10-year contract that will see them acquire the majority of ethane volumes produced at our Cochrane facility. We are pleased to be a leading ethane supplier to one of Canada’s largest petrochemical producers. The new agreement will approximately double the EBITDA received on NOVA’s ethane purchases compared to the previous agreement.

Operationally, we had a very safe and successful quarter. Total pipeline throughput volumes averaged over 1,75,000 barrels per day, a new quarterly record. Both the Oil Sands Transportation and conventional oil pipeline systems increased throughput levels over the first quarter of 2012.

Our NGL extraction segment had a good quarter processing $2.8 billion cubic feet per day and generating 115,000 barrels per day of liquids. Our bulk liquid storage business continued to show steady cash flow despite the weak European economic climate. In that segment, we had a renewed 400,000 barrel tank in Denmark, which we immediately put to use, helping us generate some additional business. From an operations prospective, the quarter was very successful indicating once again the strength of our operations teams.

In summary then, another strong quarter for Inter Pipeline and that was also marked by continued progress in advancing major gold projects that will add stability and predictability to future cash flows. We are pleased to report that the quarter’s results are right in line with our stated long-term objectives and strategies to provide stable and growing returns to unit holders.

With that, I’ll now turn the things over to Jeremy.

Jeremy Allan Roberge

Thank you, Bill, and good afternoon, everyone. As mentioned, Inter Pipeline had another very strong quarter. Before going into the financial results, it’s important to note for 2013, Inter Pipeline adopted a new International Financial Reporting Standards for consolidated financial statements. This impacts our non-wholly owned subsidiaries specifically Inter Pipeline’s 85% interest in Cold Lake are consolidated and reported.

Financial results including funds from operations and net income are now reported on a 100% basis with a non-controlling interest portion reported separately on the financial statement. Further information on this reporting change is described in detail in our MD&A and financial notes, which are available on our website.

Now to the financial results; funds from operations totaled $109.4 million, similar to that generated in the first quarter of 2012. More frac spreads on propane plus sales at the Cochrane extraction facility were substantially offset by increased results from the Oil Sands Transportation and bulk liquid storage businesses.

Net income for the quarter was $72.2 million compared to $82.1 million earned in Q1 of 2012. Net income was impacted by lower NGL results, higher non-cash expenses as well as $1.7 million loss on the disposal of certain assets. Cash distribution to unitholders grew compared to the same period last year to do a $0.06 per unit increase in annual distributions beginning in December of 2012 and to an increased number of units outstanding.

Total distributions to unit holders in the quarter were $76.8 million and resulted in a low payout ratio of 72.2%. Inter Pipeline’s balance sheet is strong and we remain well positioned to finance our future capital commitments. Our distribution reinvestment programs continue to be well supported and brought in $54 million of new equity capital in the quarter.

Subsequent to quarter end, the capacity of Inter Pipeline’s revolving credit facility was increased by $500 million to $1.25 billion. The facility matures in December 2017 and can be further increased to $1.5 billion with lender approval. At March 31 2013, Inter Pipeline had roughly $1.6 billion of recourse debt that resulted in a recourse debt to capitalization ratio of 49%.

Inter Pipeline’s cash flow will continue to grow and increases stability as our development plans unfold, recently executed oil sands contracts governed by long-term cost-of-service contracts that will further strengthen the quality and predictability of our cash flow base.

Cost-of-service type agreements, which are not subject to commodity price or volume risk presently account for 41% of Q1 2013 EBITDA and our forecast to go to roughly 6% of 2015 consolidated EBITDA.

Here is a complete summary of our first quarter 2013 EBITDA by business segment and contract type. In the quarter, EBITDA totaled $146.2 million by business segment, Oil Sands Transportation contributed $55.9 million, conventional oil pipelines $34 million, NGL extraction $36.2 million and bulk liquid storage $20.1 million.

By contract type, first quarter EBITDA can be broken down as 41% from cost-of-service agreements, 45% from fee-based contracts with no commodity price risk and the remaining 14% from commodity-based agreements that are subject to both commodity price and volume risk.

Inter Pipeline maintains a hedging program to protect the portion of commodity-based cash flow, which is primarily the sale of propane-plus volumes at the Cochrane NGL extraction facility.

As of March 31, 2013, we have hedged approximately 42% of forecast propane-plus volumes for the period April 1, 2013 to December 31, 2013 at an average price of $0.95 per U.S. gallon. We currently have no frac hedges in place beyond 2013, but we may consider additional hedges in the future.

This concludes the formal portion of the conference call and we’d now like to turn the meeting back to Marcus to open the floor for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from Juan Plessis at Canaccord Genuity. Please go ahead. Your line is now open.

Juan Plessis – Canaccord Genuity

Well thanks very much and congratulations on another strong quarter. You purchased tank capacity in Denmark in the quarter for $9.5 million. Can you comment on what you’re seeing with respect to liquid storage acquisition opportunities in Europe and perhaps your appetite for acquiring additional assets in that market?

Christian P. Bayle

It’s Chris. I will fill that question. I think it’s fair to say the market is relatively soft in Europe for storage. We are being quite successful in keeping product in the tanks, but that is at the cost of reducing rates to meet the current market environment.

So overall the business is humming along, but we would look to see it improve, I guess over the next several years – when it comes to answer your question about opportunities to buy additional storage. This deal that we completed this year was really a part of the original transaction with DONG Energy, there is just some tanks there that they wanted to keep control for a period of time and it was baked in the original deal, what we would acquire them this year at predetermined price.

Juan Plessis – Canaccord Genuity

Great, thanks for that. Now with respect to the Cold Lake west leg expansion project, it looks like there is certainly a change in the wording for the start-up of that project to second half of the year and I think it was mid-year previously, so I’m wondering if that’s just simply wording or if there is actually a delay in the start-up of that project and if so, are you able to put a more definitive timeframe around the expected start-up.

Christian P. Bayle

I think it’s just the corporate wording. There is really, the project as far as we are concerned is on schedule. It will start-up probably in the early fall and we think that project is going extremely well in terms of both cost and schedule.

Juan Plessis – Canaccord Genuity

Okay. Great. Thank you very much.

Operator

Thank you. The next question is from Linda Ezergailis at TD Securities. Please go ahead. Your line is now open.

Linda Ezergailis – TD Securities

Thank you. Just a follow-up question from Juan’s, with respect to the Dan acquisition, what are the remaining amount of tanks to be purchased and what is the schedule for doing that?

Unidentified Company Representative

This last acquisition is the last purchase associated with the original deal.

Linda Ezergailis – TD Securities

Okay. That’s helpful. And can you give us a sense of what the forward markets for frac spreads are looking like right now?

Christian P. Bayle

Certainly Linda. For the balance of 2013 on the U.S. cents per U.S. gallon basis, the frac spreads were $0.76, and in 2014 roughly $0.69; and in 2015 relatively flat at $0.67.

Linda Ezergailis – TD Securities

Great that’s very helpful and can you give us a sense of how you see or how have Empress extraction premiums trended recently?

Christian P. Bayle

I don’t have the recent trends in front of us right now.

Linda Ezergailis – TD Securities

Okay.

Christian P. Bayle

I don’t have any color to add to that. I just want to give you a higher than historical, but we would have to get back to them.

Linda Ezergailis – TD Securities

Okay no worries, that’s great. And can you give us a sense of what you’re seeing at Cochrane, how the volumes are looking right now?

Christian P. Bayle

Yeah the volumes have been very strong still 1.6 and above year-to-date. So, I would say that things are looking very, very good for Cochrane at start of this year.

Linda Ezergailis – TD Securities

Great. That’s great. Thank you.

Christian P. Bayle

You’re welcome.

Operator

Thank you. The next question is from Steven Paget at First Energy. Please go ahead. Your line is now open.

Steven Paget – First Energy

Good afternoon and thank you. I’m wondering about growth opportunities in storage elsewhere in the role as I’m noticing some storage companies buying in Southern part of the Western Hemisphere or elsewhere in the Eastern Mediterranean?

Christian P. Bayle

Well, I think our focus currently is your income storage. We particularly are fond of the Northern Europe, when it comes to that particular geographies but broadly speaking anywhere in Europe is probably in our real house. We aren’t actively looking at opportunities outside of that, certainly not in the Caribbean or (inaudible) simply because we don’t think the credit quality of those deals are generally quite as high as European deals.

Steven Paget – First Energy

Thank you for that. And how much of your storage is petroleum and products and how much is chemical, other chemicals, other things and so on?

Christian P. Bayle

It’s roughly I would say 50-50.

Steven Paget – First Energy

50-50?

Christian P. Bayle

Yeah, with the Inter terminals business being 100% petroleum and Simon Storage being largely petrochemical with some petroleum in it.

Steven Paget – First Energy

Okay, thank you. Those are my questions.

Christian P. Bayle

Thank you.

Operator

Thank you. The next question is from Robert Kwan at RBC Capital Markets. Please go ahead, your line is now open.

Robert Kwan – RBC Capital Markets LLC

Just by housekeeping on the accounting in the IFRS change on Cold Lake, so are all of the figures are for Cold Lake in the MD&A and then in the segmented financials of those presented in the 100% basis?

Christian P. Bayle

Right. With the minority interest pulled out below.

Robert Kwan – RBC Capital Markets LLC

At down below, okay. Just I guess keeping on Cold Lake and adding Polaris in terms of the expansion projects, can you just talk about what percentage of cost you’ve already secured and then the strategy and timeline for locking down major costs going forward?

Christian P. Bayle

Are you speaking to the FCCL expansion?

Robert Kwan – RBC Capital Markets LLC

Correct.

Christian P. Bayle

Okay. I could give you some order of magnitude estimates right now, but we have walked down substantially all of our long lead and major material orders for the project, which is probably 40% of the total capital investment. The other remaining large chunk is of course the construction and what we’ve done there is something a little bit unusual, I guess maybe in the pipeline industry as we secured a long-term arrangement with both Waschuk and Somerville, Aecon to do the pipeline construction for all the FCCL and players requirement and that’s essentially secures us the manpower that’s necessary to execute the project. We believe to be pretty competitive rates, given the heated environment and industry rate.

Robert Kwan – RBC Capital Markets LLC

Okay. And where would that do you think represent for the remainder of the project costs, another…

Christian P. Bayle

That’s probably another 40%, so that’s probably 80% but just to be completely clear, the construction is certainly not a lump some adventure, it’s more of a timing material type arrangement with certain incentives related to scheduling cost.

Robert Kwan – RBC Capital Markets LLC

Okay, so really the way we look at it as is, you’ve locked down 40% so the residual 60% but then again it’s only on the part that’s not allocated to SCCL, because SCCL write your forecast protection under kind of their portion.

Christian P. Bayle

Yes, which is by far the dominant part of the capital investment is related to their passive orders.

Robert Kwan – RBC Capital Markets LLC

Okay. And then just I guess last question, the mid-stream margin for the quarter unconventional.

Christian P. Bayle

Think about $2.2 million for the Midstream margin for the quarter and I think we’re forecasting some, maybe upticks to that but still be in that kind of $50 million range, I think by the end of the year, Robert.

Robert Kwan – RBC Capital Markets LLC

Okay. So you’re actually seeing better trends say this quarter already?

Christian P. Bayle

Little bit.

Robert Kwan – RBC Capital Markets LLC

Okay that’s great, thank you.

Operator

Thank you. The next question is from Robert Catellier at Macquarie. Please go ahead. Your line is now open.

Robert Catellier – Macquarie Capital Markets

Just two questions here. I just wanted if there is any advancement in the ability to add tank engine terminals to the Cold Lake expansion.

Christian P. Bayle

We are in discussions with certain shippers related to storage opportunities, tied to the expansion but nothing has been secured right now, and that nothing like I said in the past, as the market is pretty well served by several infrastructure players. So if we have an advantage related to owning only pipelines we’re willing to use that but there’s certainly lots of competition in that area.

Robert Catellier – Macquarie Capital Markets

All right. So there’s nothing in the current budget then or the 250 million of back stopping the earmark specifically for tankage, for additional terminals?

Christian P. Bayle

Well, I can safely say that there’s nothing in the FCCL cost the $2.6 billion related to terminal and I can’t speak to what may or may not be in the…

Robert Catellier – Macquarie Capital Markets

Right.

Christian P. Bayle

The 250 million of where the backlog is.

Robert Catellier – Macquarie Capital Markets

Okay. And then just on the financing side, obviously because that’s just a capital another increase in the credit facility, but can you give your comments or view on how the management contracts or the general partnership agreement impacts your financing strategy if there’s any view of may be internalizing or how do you look at that?

Christian P. Bayle

I don’t think it impacts our financial strategy. Our financing is kind of we’ve laid out in a couple of news releases and here again in the current documentation, so the management contract itself certainly doesn’t impede financing or driver or financing decisions.

Robert Catellier – Macquarie Capital Markets

Okay. So, it sounds we’re not going to address it, but bigger an advantage do you think it would be if you didn’t have the foreign ownership restrictions, is that I don’t tell your ability to fund your plans here, but I’m just curious how significant of an advantage you think it would be to top rate with our foreign ownership restriction?

Christian P. Bayle

I think we got a reminder on that there maybe some upside to that, but based on what we see in some of the other construction businesses as we expect to foreign ownership. We not think it would be material, right now we are quite comfortable at the Canadian equity capital markets conserve our equity needs that we may need, so obviously you can’t say it would be negative, but I’m not sure there is like 100% improvement for example in our ability to access capital and I think it might be just marginal.

Robert Catellier – Macquarie Capital Markets

Okay, thank you.

Christian P. Bayle

You’re welcome.

Operator

Thank you. The next question is from Steven Paget at FirstEnergy again. Please go ahead sir, your line is now open.

Steven Paget – FirstEnergy Capital Corp

Thank you. At this time last year, you’re 48% frac spread hedged for 2013. You’re unhedged now for next year. Does this reflect your view on next year’s frac spreads or is it of long-term changing your hedging philosophy?

William A. van Yzerloo

I think we’ve touched on this previously, and probably the first of all, from the philosophy prospective, I think if we do hedge, we will see lower proportions of volumes being hedged in the future, simply because that piece of our business is becoming smaller as of course to oil sand begins to grow.

We’re probably sitting back now because of the dramatic price decrease that’s occurred and just trying to get a fuel for where we think the markets might go in the next little while, so we have been kind of holding tight at forward rates, that are sub $0.70 right now, much at this stage willing to move too quickly at that level, if we do see opportunities even to grab something because at any timeframe, we may see opportunities really by gas prices dropping or NGL prices spiking in the near-term, we may take advantage of that.

Steven Paget – FirstEnergy Capital Corp

Well, thank you, Bill, so short-term and long-term thinking here. Second question, Empress II it’s kind of been a while since it really did sheathes. It’s the new operator planes is there and settling in after about a year. Is there a possibility of some sort of consolidation of the asset that keeps you entirely whole on your earnings and revenue?

William A. van Yzerloo

That’s a tough question to answer it. Certainly the Empress market is the challenge market. We – there is nothing we could really see today regarding a view on consolidation activities. We can say that the contracts that we have in place at Empress, specific for Empress II are pretty solid whether the plot runs or not.

Steven Paget – FirstEnergy Capital Corp

Excellent. Thank you, those are my questions.

Operator

Thank you. (Operator Instructions) A following question comes from Osvaldo Matias from CIBC. Please go ahead.

Osvaldo Matias – CIBC World Markets Inc.

Thank you. Just a quick question on the Ethane agreement and whether or not it contributed anything to Q1 results, and how you see that profile over the remaining three quarters of the year?

Christian P. Bayle

Yeah, we’re quite pleased with that new Ethane agreement; we believe it’s a good deal for NOVA and for us lucky and some pretty attractive pricing for the next 10 years. We can’t say that there was color in early adoption of certain terms that kicked in certainly this year, so I think we said in our news release, we do expect to see an increase in EBITDA of $10 million both for 2013 and 2014.

Osvaldo Matias – CIBC World Markets Inc.

Did that start in Q1, like you actually get any $10 million in Q1, yeah?

Christian P. Bayle

Yes.

Osvaldo Matias – CIBC World Markets Inc.

And you would imagine it would be flat, I guess for the next three quarters roughly equal contributions for the remainder?

Christian P. Bayle

That’s our expectation on that spot.

Osvaldo Matias – CIBC World Markets Inc.

All right. Thanks.

Operator

Thank you. We have no further question registered at this time. Please go ahead Mr. van Yzerloo.

William A. van Yzerloo

Very well thank you, Marcus and thanks to everyone who participated on the call. We look forward to discussing our Q2 2013 financial and operating results with you at our next scheduled conference call, currently set for 2:30 p.m Calgary time on August 8, 2013. Bye for now.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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