Oil Sands & Heavy Oil Infrastructure

Pembina has 775,000 bbls/d of fully contracted crude oil transportation capacity in three distinct pipelines serving customers in the Athabasca oil sands region. Pembina's oil sands assets, the Syncrude Pipeline, Cheecham Lateral, and Horizon Pipeline, operate under long-term, extendible contracts that provide for the flow through of Pembina's operating costs to shippers. Operating income generated by these assets is related to invested capital and is not sensitive to fluctuations in costs or capacity utilization.

Syncrude Pipeline

The Syncrude Pipeline has a transportation capacity of 389,000 bbls/d and is fully contracted to the owners of Syncrude Canada Ltd. under a long-term agreement, which expires in 2035. Net operating income generated by the Syncrude Pipeline during the third quarter and first nine months of 2009 was $7.3 million and $23.6 million, respectively. This compares to $8.4 million and $24.8 million of net operating income generated over the comparable periods in 2008.

Cheecham Pipeline

The Cheecham Pipeline has a capacity of 136,000 bbls/d and is fully contracted to shippers under the terms of a 25-year agreement, which expires in 2032. Net operating income generated by this asset was $1.1 million and $3.5 million during the third quarter and first nine months of 2009. This compares to $1.1 million and $3.4 million of net operating income generated over the comparable periods in 2008.

Horizon Pipeline

The Horizon Pipeline is fully contracted to Canadian Natural Resources Ltd. ("CNRL") and has an ultimate capacity of 250,000 bbls/d. The pipeline is operated under the terms of a 25-year extendible transportation agreement providing Pembina a fixed return on invested capital and full recovery of operating expenses. The Horizon Pipeline contributed $11.7 million in net operating income during the third quarter of 2009 and $34.8 million in net operating income year-to-date. No comparisons can be made, as the Horizon Pipeline began earning revenue in November, 2008.

Midstream & Marketing Business

Pembina's Midstream & Marketing business unit is comprised of its 50 percent non-operated interest in the Fort Saskatchewan Ethylene Storage Facility, the Cutbank Complex gas gathering and processing facilities, and its wholly-owned terminals, storage and hub services operated on several of its Conventional Pipeline systems.

The Midstream & Marketing business recorded revenue, net of product purchases, of $40.4 million during the third quarter of 2009, compared to $28.3 million during the same period in 2008. For the first nine months of 2009, this business generated $90.4 million in revenue, net of product purchases, compared to $79.4 million for the same period the prior year. Factors influencing revenues include energy market conditions, the volume of product receipts on Pembina's single shipper assets and gas production volumes. During the third quarter of 2009, the impact of throughput decline on the pipeline systems on which midstream activities are conducted offset incremental revenue contributed by expanded service offerings at two truck terminals on the Peace system. However, Midstream & Marketing results were bolstered by new revenues generated by the Cutbank Complex, a gas gathering and processing facility acquired in June 2009. The Cutbank Complex generated revenues of $14.9 million during the third quarter and $19.3 million year-to-date.

During the quarter, Midstream & Marketing operating expenses were $7.2 million, compared to the third quarter of 2008 when operating expenses totaled $2.2 million. The $7.2 million in operating expenses includes $4.6 million of Cutbank Complex operating expenses, which flow through to customers under various service agreements. Excluding operating expenses related to the Cutbank Complex, operating expenses for this business were comparable quarter-over-quarter. Year-to-date operating expenses of $14 million compares to $6.2 million during the first nine months of 2008. This increase in year-over-year operating expenses reflects the ongoing expansion of the Midstream & Marketing business and the inclusion of $6.2 million in Cutbank Complex expenses.

The Midstream & Marketing business contributed $33.2 million in net operating income during the third quarter of 2009, compared to $26.1 million for the same quarter of the prior year. Net operating income totaled $76.4 million for the first nine months of 2009 and $73.2 million for the comparable period in 2008. Of these totals, the Cutbank Complex generated $10.3 million and $13.1 million in net operating income for the third quarter and year-to-date, respectively.

On October 1, 2009, Pembina began a planned maintenance shutdown on portions of its Cutbank Complex. Management originally expected the maintenance work to last a total of 30 days; however, the work was completed ahead of schedule. Thorough, advance planning and excellent on-site coordination of tradespeople resulted in timelines being reduced; in some cases by more than half. As a result, Pembina expects production volumes at Cutbank during October to be down by only ten percent, with minimal impact on revenue. The Cutbank Complex is comprised of three gas plants (the Cutbank, Musreau and Kakwa gas plants) and related assets. The Cutbank gas plant and the Musreau gas plant are 100 percent and 86 percent owned and operated by Pembina, and the Kakwa gas plant, in which Pembina has a 50 percent interest, is operated by a third party. During the third quarter and first nine months of 2009, average throughput at the Cutbank Complex was 200.5 mmcf/d and 200.2 mmcf/d, respectively.

Pembina expects the stability of results generated by its Midstream & Marketing business to benefit from cash flow contributed by contracted assets such as the Cutbank Complex and its 50 percent interest in the fully contracted Fort Saskatchewan Ethylene Storage Facility. Pembina anticipates the Cutbank Complex to contribute additional fee-for-service revenue and the Fort Saskatchewan Ethylene Storage Facility to continue to generate stable, long-term returns that are independent of capacity utilization and operating expenses. The Fund intends to pursue additional contracted opportunities in this business unit to assist in further diversifying and stabilizing revenues going forward.

Cash Distributions

During the third quarter of 2009, the Fund declared distributions of $0.39 per Trust Unit, or $60.2 million in aggregate, compared to $0.38 per Trust Unit, or $50.7 million in aggregate paid in the third quarter of 2008. Under Canadian tax laws, a component of the Fund's cash distributions are taxable in the hands of the Unitholder, with the remaining portion a return of capital, unless held in a tax-deferred account. Pembina estimates 75 percent of the distributions declared in 2009 will be taxable and 25 percent will be a return of capital for Canadian tax purposes. For purposes of calculating the capital gains upon disposition of the Trust Units, the amount considered return of capital will reduce the Unitholders' adjusted cost base of each Trust Unit for Canadian tax purposes. Pembina's distributions are subject to current domestic tax laws which require a withholding tax from distribution income to non-residents of Canada.

Pembina generated $0.4293 per Trust Unit in distributable cash during the third quarter of 2009, compared to $0.3923 during the third quarter of 2008.

Pembina believes it is well positioned to maintain its current level of cash distributions to Unitholders through 2013, despite becoming a taxable entity in 2011. Attractive fundamentals within each of Pembina's three business units combined with a strong inventory of organic growth opportunities continue to support this positive outlook.

Liquidity and Capital Resources

The Fund's credit facilities at September 30, 2009 consisted of an unsecured $500 million revolving credit facility due July 2012 and an unsecured $150 million non-revolving credit facility due December 2010, which was used to partially fund the Cutbank Complex transaction in the second quarter. In addition, Pembina has an operating facility of $50 million, which matures July 2010. There are no repayments due over the term of either facility. At September 30, 2009, Pembina had $569.2 million drawn leaving $130.8 million of undrawn capacity on the $700 million of established bank facilities. Borrowings bear interest at either prime lending rates or bankers' acceptances, plus applicable margins. The margins are based on the credit rating of the senior unsecured debt of Pembina Pipeline Corporation and range from zero percent to 2.75 percent.