Results of Operations
Throughputs for the Saskatchewan System have increased compared to the prior year due to increased volumes on connected facilities as well as from new volumes being trucked to the pipelines. Higher throughputs do not directly impact earnings on the Saskatchewan Gathering and Westspur Systems since they are cost of service based. However, they may impact earnings for the Weyburn and Virden Systems.

Revenue has increased due to recovery in tolls of increased operating expenses.

Earnings are higher primarily due to the reduction in future tax rates substantively enacted during the second quarter resulting in an increase to earnings of $14.0 million. Future taxes in the Saskatchewan System result from temporary differences between the accounting value of the property, plant and equipment versus the tax basis. The remaining increase in earnings is due to several factors that are the result of a higher rate base on the Saskatchewan Gathering and Westspur Systems.

Earnings from both the Saskatchewan Gathering System and the Westspur System reflect a return on equity applied to rate base accounts. The rate used to calculate the equity return is not expected to change. However, the rate base upon which the equity return is calculated will change due to depreciation over time as well as maintenance and enhancement capital additions. Earnings from both the Weyburn System and the Virden System reflect toll revenues less costs incurred.

Strategy
The Saskatchewan System operates its pipelines and supporting assets with the objective of providing reliable, cost effective transportation solutions and generating strong cashflows. In addition, the Saskatchewan System is focused on meeting demand for increased capacity through expansion and development initiatives.

Capital Expenditures
Capital expenditures in 2006 were $12.2 million (2005 – $6.6 million) including $3.5 million (2005 – $3.9 million) in maintenance capital and $8.7 million (2005 – $2.7 million) in enhancement capital. Expenditures in 2006 were focused on sustaining capital infrastructure, the completion of new customer connections, pipeline integrity, and the commencement of an expansion of the Westspur and Weyburn Systems.

The Saskatchewan System anticipates capital expenditures of approximately $22.0 million in 2007. Of this amount, approximately $5.9 million is allocated to maintenance capital expenditures, including the annual repair and inspection programs involving electronic pipe corrosion inspection tools, or “smart pigs”. The remaining $16.1 million is for enhancement capital including the capacity expansion on the Westspur and Weyburn Systems. These expansions will increase capacity on the Weyburn System between Weyburn and Midale by approximately 8,000 bpd, as well as increase capacity on the Westspur System between Midale and Steelman by approximately 20,000 bpd and between Alida and Cromer by approximately 77,000 bpd. These expansions are expected to be in service by the end of 2007.

Business Risks
The risks identified below are specific to the Saskatchewan System. General risks that affect the Fund as a whole are described under Risk Factors.

Exposure to Shippers
Operations and tolls for the Saskatchewan Gathering System and the Westspur System are based on agreements with certain crude oil shippers, which expired in 1995. At present, operations and tolls are monitored on a customer complaint basis. The majority of the volumes shipped on the Saskatchewan Gathering and Westspur pipeline systems are transported on terms similar to a common carrier basis with no specific on-going volume commitments. There is no assurance that shippers will continue to utilize these systems in the future or transport volumes on similar terms or at similar tolls.

There is no assurance that the regulators will continue to permit the Saskatchewan Gathering System and the Westspur System to use the present form of tolls. Shippers could file complaints with respect to the effective toll or protest any proposed changes to the toll, including the terms and conditions of service. In addition, changes in regulator policy or statutory changes could affect the relationship between the respective system and its shippers. The Saskatchewan System’s cash flow, and ultimately cash flow available for distribution to unitholders, could be reduced by an adverse change to the Saskatchewan Gathering System and/or the Westspur System’s tolls, rate structures and terms and conditions of service.

Competition
The Saskatchewan System faces competition in pipeline transportation from other pipelines as well as other forms of transportation, most notably trucking. For the Weyburn and Virden pipeline systems, which use market-based tolls, the cost of alternative transportation options affects the rates that can be charged for transportation service on these pipelines. The cost of alternative transportation options also provides competition on the Saskatchewan System’s cost of service-based pipelines, the Saskatchewan Gathering and Westspur pipeline systems. These alternative transportation options could charge rates or provide service to locations that result in greater net profit for shippers with the effect of forcing the Saskatchewan System, for commercial reasons, to lower the transportation rates to avoid losing shippers, thereby reducing the Saskatchewan System’s cash flow from transportation services. The Saskatchewan System manages exposure to shippers and competition by ensuring the shipping rates are competitive and by providing a high level of service.

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