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News Releases

Pembina Pipeline Income Fund second interim report for the six months ended June 30, 2006

CALGARY, Jul 26, 2006 (Canada NewsWire via COMTEX News Network) -- PEMBINA INCREASES DISTRIBUTION RATE AGAIN IN 2006 ON GROWTH AND SOLID

RESULTS

    <<
    -  Following a 9 percent distribution rate increase implemented in
       January of this year, Pembina announced a further 5 percent increase
       on July 26, 2006, lifting the monthly distribution rate to 10 cents
       per unit ($1.20 per unit annualized) effective for the August 2006
       distribution. This sustainable increase in the distribution rate
       reflects Pembina's confidence in ongoing strength in the operating
       performance of its premium asset base and material growth across all
       three of Pembina's key business units.

    -  The Fund distributed $0.2850 per Trust Unit during the second quarter
       of 2006 ($0.095 per month) for total cash distributions of $34.6
       million. Per Trust Unit distributions were 9 percent higher than for
       the same quarter of 2005.

    -  The conventional pipelines continued to perform well, transporting an
       average of 443,500 barrels per day during the second quarter of 2006,
       a 6 percent increase over the comparable quarter of the previous year.
       Pembina anticipates that several new developments on the conventional
       pipeline systems will contribute increasing cash flow over the balance
       of the year.

    -  Pembina's oil sands business unit contributed $13.7 million in revenue
       and $9.5 million in operating income during the quarter, up 4 percent
       from $13.1 million and $9.1 million, respectively, recorded in the
       second quarter of 2005. Pembina's projections indicate that the
       operating income contribution from this business unit will expand in
       coming quarters as the Cheecham Lateral Pipeline is placed into
       service later this year and the Horizon Pipeline becomes operational
       in 2008.

    -  Results generated by the midstream unit exceeded Pembina's
       expectations for the quarter. Pembina's net share of revenue earned by
       the Swan Hills joint venture was higher than anticipated and other
       pilot projects advanced through the quarter. Midstream activities
       generated $12.6 million in revenue during the second quarter of 2006,
       up 71 percent from $7.4 million in the second quarter of 2005.

    -  Work progressed under a Development Support Agreement with prospective
       shippers on the proposed Kitimat, British Columbia to Summit Lake,
       British Columbia condensate pipeline. Pembina launched the public
       consultation process during the second quarter, conducting numerous
       open house forums across the proposed pipeline route and initiating
       discussions with First Nations, governmental agencies and other key
       project stakeholders. Engineering, consultation and environmental
       teams are now fully staffed and, with all substantive commercial and
       operational terms in place, Pembina expects to confirm capacity
       commitments by the end of 2006.

    -------------------------------------------------------------------------
    HIGHLIGHTS(1)      3 Months 3 Months          6 Months 6 Months
    ($ millions except    Ended    Ended             Ended    Ended
     where noted)       June 30, June 30,    %     June 30, June 30,    %
                           2006     2005   Change     2006     2005   Change
    -------------------------------------------------------------------------
    Average throughput
     - conventional
     (mbbls/d)            443.5    419.4      5.7    448.9    432.5      3.8
    Contracted capacity
     - oil sands
     (mbbls/d)            389.0    389.0        -    389.0    389.0        -
    Total volumes         832.5    808.4      3.0    837.9    821.5      2.0
    Capital expenditures   41.5     10.3    303.1     80.4     18.4    336.8
    Revenue                80.9     70.1     15.4    162.4    139.8     16.2
    Operating expenses     27.7     24.8     12.0     57.3     49.7     15.2
    Net operating
     income(2)             53.2     45.3     17.3    105.1     90.1     16.8
    General &
     administrative
     expense                7.3      4.9     47.0     14.0      9.1     54.4
    Interest expense        5.4      6.3    (15.2)    11.2     12.9    (13.1)
    Distributed cash(2)    34.6     27.5     25.8     68.1     54.7     24.5
      $ Per Trust Unit  $0.2850  $0.2625      8.6  $0.5700  $0.5250      8.6
    -------------------------------------------------------------------------
    (1) This second quarter 2006 Interim Report to Unitholders reports
    unaudited results of the Fund for the three and six months ended June 30,
    2006.
    (2) Refer to "Non-GAAP Measures" below.
    >>

Management's Discussion and Analysis

This Management's Discussion and Analysis (MD&A) is dated July 26, 2006 and is supplementary to, and should be read in conjunction with, the unaudited comparative interim financial statements and notes of Pembina Pipeline Income Fund (the Fund) as at and for the three and six months ended June 30, 2006, along with the Fund's Management's Discussion and Analysis and audited financial statements and notes for the year ended December 31, 2005.

This MD&A has been reviewed and approved by both the Audit Committee of the Board of Directors and by the Board of Directors. All amounts are listed in Canadian dollars unless otherwise specified.

References to "mbbls/d, "bpd" and "$/bbl" mean thousands of barrels per day, barrels per day and dollars per barrel, respectively. This MD&A contains certain forward-looking statements and information, see "Forward-Looking Information and Statements".

Fund Description

Pembina Pipeline Income Fund is among the predominant issuers in the Canadian energy infrastructure trust sector. Pembina's extensive network of conventional liquids feeder pipelines, and growing presence in the oil sands and midstream sectors, provide an integral service to the western Canadian energy industry. This balanced portfolio of high quality, long-life energy infrastructure assets supports the stability and sustainability of the Fund.

Pembina Pipeline Income Fund, an unincorporated open-ended trust, pays monthly cash distributions to Unitholders. Pembina's publicly traded securities trade on the Toronto Stock Exchange under the symbols: PIF.UN - Trust Units; PIF.DB.A - 7.50% convertible debentures, and PIF.DB.B - 7.35% convertible debentures. Pembina's corporate head office is located in Calgary, Alberta.

Fund Strategy

Pembina's principal objective is to provide a stable stream of distributions to Unitholders that are sustainable over the long-term while pursuing opportunities for enhancement through accretive growth. We believe the most prudent manner to achieve this objective is to maintain and to develop assets around our hydrocarbon-liquids services business within western Canada. We plan to develop this business through the continuous improvement and ongoing expansion of our asset base and the acquisition of quality energy infrastructure assets. To Pembina, "quality" means assets that are imbued with inherent competitive advantages, which are under long-term contract with credit-worthy customers, and either service or are in close proximity to long-life and economic hydrocarbon reserves. This strategy is intended to generate stable or increasing per-unit cash distributions to Pembina's Unitholders over the long-term.

Pembina's business is structured in three key segments: conventional pipelines, oil sands infrastructure and midstream.

The primary objective for Pembina's conventional pipeline assets is the maintenance of operating margin contribution while pursuing opportunities for throughput and revenue enhancement. Margins are maintained through the use of toll management, strict adherence to operating cost control and by asset rationalization. By offering cost-effective, competitively positioned and reliable transportation services to our customers, we undertake to attract new business to our conventional pipeline systems.

Pembina intends to leverage its uniquely positioned infrastructure and operating knowledge in the oil sands sector to pursue future opportunities in this key development area. Pembina's existing oil sands assets, and those currently under development, offer fully contracted and long term returns which provide a secure stream of stable cash flow to the Fund. Further expansion of Pembina's business interests in this area is a priority.

The ongoing expansion of Pembina's midstream business is a strategic imperative and, Pembina intends to initiate new terminalling, storage and hub services over segments of its conventional pipeline systems. Pembina anticipates that this integration strategy will produce significant benefits to both pipeline customers and Unitholders of the Fund, by expanding the range of services offered, extending the economic life of Pembina's conventional asset base and by providing substantial revenue enhancement potential.

Results from Operations

Conventional Pipelines

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    -------------------------------------------------------------------------
                       3 Months 3 Months          6 Months 6 Months
                          Ended    Ended             Ended    Ended
                        June 30, June 30,    %     June 30, June 30,    %
                           2006     2005   Change     2006     2005   Change
    -------------------------------------------------------------------------
    Throughput
     (mbbls/d)            443.5    419.4      5.7    448.9    432.5      3.8
    Revenue              $ 54.7   $ 49.7     10.1  $ 111.1  $ 100.9     10.1
    Operating expenses     22.5     19.9     13.1     45.3     40.8     10.1
    Net operating
     income(1)             32.2     29.8      8.2     65.8     60.1      9.5
    Capital expenditures   14.9      9.4     59.7     26.9     17.3     55.4
    Operating expenses
     ($/bbl)               0.52     0.48      8.3     0.52     0.48      8.3
    Average revenue
     ($/bbl)               1.26     1.21      4.1     1.27     1.21      5.0
    -------------------------------------------------------------------------
    (1) Refer to "Non-GAAP Measures" below.
    >>

Pembina transported an average of 443,500 bpd on its conventional pipeline systems during the second quarter of 2006 and an average of 448,900 bpd year-to-date, up 6 percent and 4 percent respectively from the same periods of 2005. The Alberta pipeline systems transported an average of 426,300 bpd during the quarter, up 8 percent from the same period of the prior year, and an average of 427,000 bpd year-to-date, a 4 percent increase over the first half of 2005. British Columbia (BC) gathering volumes were consistent with the prior year at 32,000 bpd however, Western system volumes were sharply lower, at 17,200 bpd during the second quarter of 2006 compared to 22,900 bpd a year earlier, as refinery turnarounds and maintenance outages temporarily disrupted operations on that system.

The Calven pipeline connection to the Peace system became fully operational during the second quarter and volumes from this new receipt point achieved Pembina's initial expectations in May 2006. Weaker natural gas liquids (NGL) receipts from several connected gas plants on extended turnaround on the Peace system partially offset the positive volume impact of the Calven connection. Volumes tendered by the three new Nisku zone production batteries fluctuated widely during the second quarter as producers encountered significant operational issues.

Pembina anticipates that 2006 exit volumes from these battery connections should approximate Pembina's previous expectations, based on guidance provided by producers at these facilities. Seasonal factors, including the scheduled plant turnarounds referenced above, impacted conventional pipeline receipts during the second quarter and Pembina expects these factors to persist into the third quarter of 2006.

The conventional systems generated $54.7 million in revenue during the quarter and $111.1 million year-to-date, up from $49.7 million and $100.9 million respectively a year earlier. Revenue earned by the Alberta systems during the second quarter of 2006 was 12 percent higher than the same quarter of 2005, at $48.6 million and $43.2 million, respectively. Year-to-date revenue generated by the Alberta systems was 9 percent higher than the first half of 2005. Average revenue per barrel on the Alberta systems of $1.25 during both the second quarter and first half of 2006 was up 5 cents per barrel and 6 cents per barrel respectively from the averages for the same periods of 2005. Higher per barrel revenue on the Alberta systems was partially attributable to toll adjustments implemented on certain systems at the end of 2005 and during the first quarter of 2006.

Oil Sands Infrastructure

    <<
    -------------------------------------------------------------------------
                       3 Months 3 Months          6 Months 6 Months
                          Ended    Ended             Ended    Ended
                        June 30, June 30,    %     June 30, June 30,    %
                           2006     2005   Change     2006     2005   Change
    -------------------------------------------------------------------------
    Average throughput
     (mbbls/d)(1)         245.9    238.0      3.3    227.8    200.4     13.7
    Revenue              $ 13.7   $ 13.1      4.4   $ 28.4   $ 25.3     12.5
    Operating expenses      4.2      4.0      4.3      9.9      7.2     37.2
    Net operating
     income(2)              9.5      9.1      4.4     18.5     18.1      2.6
    Capital expenditures   16.2      0.9  1,771.5     42.7      1.0  3,948.7
    Operating expenses
     ($/bbl)               0.19     0.19        -     0.24     0.20     20.0
    Average revenue
     ($/bbl)               0.62     0.61      1.6     0.69     0.70     (1.4)
    -------------------------------------------------------------------------
    (1) Actual throughput.  Contracted capacity was 389,000 bpd in all
        periods.
    (2) Refer to "Non-GAAP Measures" below.
    >>

Pembina's fully contracted Alberta Oil Sands Pipeline (AOSPL) system generated revenue of $13.7 million during the second quarter of 2006, slightly higher than the same quarter of the prior year. Year-to-date 2006 revenue of $28.4 million was 12.5 percent higher than the first half of the prior year, reflecting higher flow-through operating expenses during the first six months of 2006 and, to a lesser extent, incremental returns on rate base additions. AOSPL revenue is contracted to recover operating costs and earn a return on invested capital, therefore returns are not impacted by actual pipeline receipts. Average throughput on this system increased to 245,900 bpd during the second quarter of 2006 and achieved a new intra-day record of 372,000 bpd on May 15th, approaching the available contracted capacity on this system of 389,000 bpd.

Pembina's two new oil sands infrastructure investments, the Cheecham Lateral pipeline and the Horizon Pipeline, are proceeding as expected. Pipeline construction on the Cheecham Lateral is complete and facilities construction will occur over the third and fourth quarters, in line with the scheduled late 2006 start-up of this new pipeline service. Pembina and Canadian Natural Resources Limited have a binding agreement regarding the Horizon Pipeline, and negotiations on formal documentation are nearing completion. Pembina expects to finalize these arrangements by the end of August 2006. Pembina anticipates that the $50 million of pipe ordered during the first quarter of 2006 will be installed over the coming eighteen months and, the Horizon Pipeline is scheduled to be placed in service mid-2008 (see "New Developments and Outlook").

Midstream Business

    <<
    -------------------------------------------------------------------------
                       3 Months 3 Months          6 Months 6 Months
                          Ended    Ended             Ended    Ended
                        June 30, June 30,    %     June 30, June 30,    %
                           2006     2005   Change     2006     2005   Change
    -------------------------------------------------------------------------
    Revenue(1)           $ 12.6    $ 7.4     70.5   $ 22.9   $ 13.6     68.9
    Operating expenses      1.0      0.9     22.8      2.1      1.7     24.2
    Net operating
     income(2)             11.6      6.5     76.7     20.8     11.9     75.3
    Capital expenditures   10.4        -    100.0     10.8      0.1  1,711.3
    -------------------------------------------------------------------------
    (1) Net of $2.5 million in product purchase expense.
    (2) Refer to "Non-GAAP Measures" below.
    >>

Pembina's midstream business unit consists of its 50 percent interest in the Fort Saskatchewan Ethylene Storage Facility together with its wholly-owned terminalling, storage and hub services.

Pembina's 50 percent interest in the Fort Saskatchewan Ethylene Storage Facility generates fixed contracted returns over the term of the agreement that extends through June 2023. Along with stable, long-term cash flow, this asset provides diversification of Pembina's business into the petrochemical sector without corresponding commodity price exposure.

Ongoing development of Pembina's terminalling, storage and hub services progressed through the second quarter of 2006. The material quarter-over-quarter increase in revenue and net operating income contribution generated by the midstream unit is the result of the evolution of these services. Net operating income rose from $6.5 million and $11.9 million generated through the second quarter and first six months of 2005 to $11.6 million and $20.8 million for the same periods of 2006, with the increase attributable to returns on the Swan Hills joint venture (JV). Activities under the JV became fully operational during the first quarter of this year and recent results have exceeded Pembina's initial expectations. On June 1, 2006, Pembina converted its Pembina Pipeline (Drayton Valley) system to single shipper status, the first phase in the development of midstream services on that system. Pembina anticipates that these new operations will positively impact results beginning in the third quarter of this year and, expects returns on the Pembina (Drayton) midstream business to escalate to full potential over the coming year. Several smaller projects are currently in various stages of development and Pembina expects these undertakings to further boost the operating income contribution from the midstream business unit in future periods.

Expenses

Operating expenses totaled $27.7 million during the second quarter of 2006 and $57.3 million for the first half of the year, up from operating expenses incurred during the same periods of the prior year of $24.8 million and $49.7 million respectively. Operating costs on the conventional pipeline systems totaled $45.3 million through the first half of 2006, up from $40.8 million incurred during the first half of 2005. On a per barrel of throughput basis, operating expenses on the conventional systems averaged 52 cents for both the second quarter and first half of 2006. This represents an 8 percent increase over the same periods of the prior year. Higher maintenance spending on the Alberta pipelines contributed to the increase and Pembina expects operating expenditures during the second half of 2006 to approximate the level recorded during the first six months of the year.

General and Administrative expense (G&A) totaled $7.3 million during the second quarter of 2006 and $14.0 million year-to-date, compared to $4.9 million and $9.1 million for the same periods of 2005. Higher year-over-year costs are related to increased staffing levels related to growth in Pembina's business operations and to a highly competitive local employment market. Pembina intends to increase its staff complement by more than 15 percent by the end of the year, to facilitate growth initiatives underway in all areas of its business. Market-based salary increases together with higher short-term initiatives and the introduction of a company-wide long-term incentive program in 2006 reflect Pembina's response to competitive pressures. Pembina expects G&A expenditures to approximate 11 percent of net operating income in 2006 compared to 9 percent in 2005.

The internalization of Pembina Management Inc.'s (PMI) management contract took effect on June 30, 2006. A payment of $6 million was made on that date representing the initial payment for PMI under a Share Purchase Agreement (the Agreement) between Pembina and PMI. No further payments under this Agreement are payable until 2009, however amounts will be accrued as specified under the terms of the Agreement, a copy of which is available at www.sedar.com and on Pembina's website. Pursuant to the Agreement, no future management fees will be payable by the Fund (see Note 4 to the Financial Statements).

The Future Income Tax Reduction was impacted by a reduction in the future income tax rates that changed from 33.62 percent to 29.38 percent. This resulted in an additional reduction of $11.3 million in the second quarter of 2006.

Cash Distributions

The Fund pays cash distributions on a monthly basis to Unitholders of record on the last calendar day of each month. Distributions are payable on the 15th day of the month following the record date. In late 2005, Pembina announced a 9 percent increase in its distribution objective, to an annual rate of $1.14 per Trust Unit commencing in January 2006. On July 26, 2006, Pembina announced a further increase to the distribution rate, effective for the August 2006 distribution. The distribution rate will increase by 5.3 percent to 10 cents per Trust Unit per month, or $1.20 per Trust Unit on an annualized basis.

During the second quarter of 2006, the Fund declared distributions of $0.2850 per Trust Unit, or $34.6 million in aggregate, compared to $0.2625 per Trust Unit, or $27.5 million in aggregate, paid in the second quarter of 2005. 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 that 75 percent of the distributions declared in 2006 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 a 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.

Distributed Cash

    <<
    -------------------------------------------------------------------------
                                      3 Months  3 Months  6 Months  6 Months
                                         Ended     Ended     Ended     Ended
                                       June 30,  June 30,  June 30,  June 30,
                                          2006      2005      2006      2005
    -------------------------------------------------------------------------
    Net earnings                      $ 16,940  $ 14,373  $ 37,090  $ 28,926
    Add (deduct):
    Depreciation and amortization       21,937    21,333    43,504    41,901
    Accretion on asset retirement
     obligations                           347       255       698       509
    Future income tax reduction         (6,616)   (7,344)  (12,619)  (14,688)
    Maintenance capital expenditures      (934)     (666)   (1,356)   (1,084)
    Decrease (increase) in
     distribution reserve                2,893      (477)      820      (848)
    -------------------------------------------------------------------------
    Distributed cash(1)               $ 34,567  $ 27,474  $ 68,137  $ 54,716
    -------------------------------------------------------------------------
    Distributed cash per Trust
     Unit(1)                          $ 0.2850  $ 0.2625  $ 0.5700  $ 0.5250
    -------------------------------------------------------------------------
    Diluted distributed cash per
     Trust Unit(1)                    $ 0.2814  $ 0.2558  $ 0.5676  $ 0.5114
    -------------------------------------------------------------------------
    (1) Refer to "Non-GAAP Measures" below.
    >>

Pembina maintains a notional distribution reserve in order to ensure stability over economic and industry cycles and to absorb the impact of material one-time events, therefore not all available cash is distributed to Unitholders but instead reduces bank indebtedness. During the second quarter of 2006, Pembina's business operations and interests generated a $3.1 million increase in the notional distribution reserve, resulting in a notional balance of $20.3 million. On June 30, 2006, $6 million of the reserve was utilized to facilitate the share purchase of Pembina Management Inc. (see Note 4 to the Financial Statements), with a resultant notional amount of $14.3 million on reserve at the end of the second quarter of 2006. Excluding the impact of the management internalization, the payout ratio was 92 percent for the three months ended June 30, 2006. Pembina calculates the payout ratio as the percentage of distributed cash, prior to distribution reserve adjustments, that is distributed to Unitholders. This compares to a payout ratio of 98 percent for the same quarter of the prior year. Pembina estimates that the full year payout ratio will approximate 90 percent, as compared to 92 percent in 2005. See "Non-GAAP Measures".

Liquidity and Capital Resources

Pembina's bank facilities include an unsecured $230 million revolving credit facility and a $30 million operating line of credit. At June 30, 2006, Pembina had $159 million drawn, leaving $101 million of undrawn capacity on the $260 million in established bank facilities. On July 24, 2006, the revolving credit facility and operating line of credit were renewed for a period of five years. There are no repayments due over the term (see Note 6 to the Financial Statements). Other debt includes $96 million in Senior Secured Notes due 2017, $175 million in Senior Unsecured Notes due 2014 and $75 million of Floating Rate Senior Unsecured Notes due 2009. At June 30, 2006, Pembina had long-term debt of $505 million, compared to $464 million at December 31, 2005. This long-term debt, together with $128 million market value of outstanding convertible debentures, resulted in a ratio of debt to total enterprise value of 24 percent. This compares to a ratio of 27 percent at the end of 2005.

Net debt financing costs of $5.4 million were recorded during the second quarter of 2006, and $11.2 million for the first half of 2006, compared with $6.3 million and $12.9 million during the same periods of 2005. Interest rate exposure on Pembina's floating rate debt is managed utilizing interest rate swap instruments. At June 30, 2006, Pembina had interest rate swaps in place on a principal amount of $85 million at an average rate of 5.5 percent and an average term to maturity of 1.4 years. The mark-to-market value of these instruments represented an unrealized gain of $0.5 million at June 30, 2006. As at the end of the second quarter of 2006, Pembina has fixed interest on approximately 70 percent of its long-term debt in order to minimize exposure to rising interest rates.

On April 18, 2006, Pembina Pipeline Corporation, the Fund's primary operating subsidiary, announced that it had entered into an agreement with institutional investors in the United States and Canada for the private placement of $200 million of Senior Unsecured Notes. The notes will mature September 30, 2021 and have a fixed interest rate of 5.58 percent. Closing of the placement is expected to occur on September 29, 2006. This financing, together with capacity available on the existing bank facilities and additional equity raised through the Fund's distribution reinvestment plan, will be utilized to finance Pembina's committed capital projects.

Pembina considers the maintenance of investment grade credit agency ratings as critical to its ongoing ability to access capital markets on attractive terms. The rating systems employed by the agencies referenced below recognize the stable profile of Pembina's assets and financial results and the sustainability of the per Trust Unit distributions of the Fund. The Dominion Bond Rating Service Ltd. (DBRS) stability rating system measures the volatility and sustainability of distributions per Trust Unit. DBRS has assigned Pembina Pipeline Income Fund a STA-2 (low) stability rating. DBRS's stability rating scale is from STA-1 to STA-7, with STA-1 representing the highest rating possible, and STA-7 the lowest. Pembina Pipeline Corporation, the Fund's primary operating subsidiary, is also rated by DBRS, which has assigned a senior secured debt rating of 'BBB High' and a 'BBB' senior unsecured debt rating. Standard & Poor's (S&P) rates Pembina Pipeline Corporation as follows: 'BBB' long-term corporate credit with a stable outlook, 'BBB plus' senior secured debt and 'BBB' senior unsecured debt. According to S&P's rating system, debt instruments rated BBB have adequate protection parameters.

Contractual Obligations

The Fund is committed to annual payments as follows:

    <<
    -------------------------------------------------------------------------
     ($ thousands)                       Payments Due By Period
    -------------------------------------------------------------------------
    Contractual                   Less than      1 - 3      4 - 5      After
     Obligations           Total     1 year      years      years    5 years
    -------------------------------------------------------------------------
    Office and
     vehicle leases    $  11,584  $   2,833  $   4,236  $   2,916  $   1,599
    Long-term debt       504,830     15,718    244,378     15,973    228,761
    Convertible
     debentures           92,220     18,207                74,013
    -------------------------------------------------------------------------
    Total contractual
     obligations       $ 608,634  $  36,758  $ 248,614  $  92,902  $ 230,360
    -------------------------------------------------------------------------

    On July 24, 2006, Pembina renewed its revolving bank facilities for a five
year-term to July 24, 2011. These facilities were previously renewed annually,
therefore drawn amounts under the facilities previously payable in 1-3 years
are now repayable in 4-5 years, should the credit facilities not be renewed
(see Note 6 to the Financial Statements).

    -------------------------------------------------------------------------
                                      3 Months  3 Months  6 Months  6 Months
                                         Ended     Ended     Ended     Ended
    Capital Expenditures               June 30,  June 30,  June 30,  June 30,
     ($ millions)                         2006      2005      2006      2005
    -------------------------------------------------------------------------
    Development capital
      Conventional Pipelines            $ 14.2    $  8.8    $ 25.8    $ 16.3
      Oil Sands                           16.2       0.9      42.7       1.0
      Midstream                           10.2                10.6
    -------------------------------------------------------------------------
    Total development capital           $ 40.6    $  9.7    $ 79.1    $ 17.3
    -------------------------------------------------------------------------
    Maintenance capital
      Conventional Pipelines            $  0.7    $  0.6    $  1.1    $  1.0
      Oil Sands
      Midstream                            0.2                 0.2       0.1
    -------------------------------------------------------------------------
    Total maintenance capital           $  0.9    $  0.6    $  1.3    $  1.1
    -------------------------------------------------------------------------
    Total capital expenditures          $ 41.5    $ 10.3    $ 80.4    $ 18.4
    -------------------------------------------------------------------------
    >>

During the second quarter of 2006, Pembina expended $41.5 million on capital projects, up significantly from the prior year when $10.3 million was spent during the same quarter. Year-to-date 2006 capital spending of $80.4 million compares to $18.4 million in capital expended during the first half of 2005. Development capital dominated this spending, with just $0.9 million of the total for the quarter and $1.3 million year-to-date directed to maintenance capital. Maintenance expenditures are typically expensed for accounting purposes and represent roughly 35 percent of all operating expenses.

Development capital spending totaled $40.6 million for the second quarter of 2006 and $79.1 million year-to-date. Spending on the conventional pipeline systems comprised $14.2 million and $25.8 million of total expenditures respectively. Capital outlays in this segment during the first half of the year included completion costs on the Peace and Northern systems pipeline interconnection and major facility upgrades and new connections. Oil sands spending totaled $16.2 million in the second quarter and $42.7 million for the first half of 2006, up significantly from the prior year. Of the oil sands related capital expended during the first six months of 2006, $38.1 million related to the Cheecham Lateral pipeline, $4.0 million was spent on the Horizon Pipeline and $0.6 million was invested in upgrades on the AOSPL system. Spending in the Midstream segment of $10.2 million during the quarter and $10.6 million for the first half of 2006 related mainly to product acquisition costs in relation to single shipper operations on the Swan Hills and Pembina pipeline systems which represents $8.6 million of total year-to-date spending. A further $2.0 million was spent on business development by this unit during the first half of the year.

Development capital is financed utilizing existing credit facilities and Pembina's distribution reinvestment plan, whereas maintenance capital is financed from Pembina's operating cash flow. As previously stated, planned capital expenditures will be financed utilizing existing credit facilities and proceeds from the Fund's distribution reinvestment plan.

Trust Unit and Convertible Debenture Information

The Fund's Premium Distribution, Distribution Reinvestment and Optional Cash Purchase Plan (DRIP) raised $20.5 million during the second quarter of 2006 through the issuance of 1,289,978 Trust Units, compared with $7.5 million in the second quarter of 2005 through the issuance of 577,888 Trust Units. DRIP proceeds totaled $33.8 million through the issuance of 2,120,978 Trust Units for the first six months of 2006, up from the same period of the prior year when $12.5 million was raised under the plan through the issuance of 963,654 Trust Units. The plan continues to attract significant Unitholder interest, and targeted plan proceeds for 2006 have been increased to $80 million, in line with Pembina's expanded capital program. DRIP plan proceeds are directed towards debt repayment and funding development capital expenditures.

The Fund's Trust Units, together with both of the two remaining series of convertible debentures, are traded on the Toronto Stock Exchange.

    <<
    -------------------------------------------------------------------------
                                           July 21,     June 30,     June 30,
                                              2006         2006         2005
    -------------------------------------------------------------------------

    Trust Units Outstanding            122,510,218  122,029,824  104,948,558
    Average Daily Volume
     (Units per day)                     178,544(1)     240,000      160,000
    Unit Trading Price ($/Unit)(3)    $      16.30  $     16.25  $     13.90

    Principal Amount of Debentures
     Outstanding ($millions)          $     95.8(2) $      96.1  $     254.5

    8.25% Convertible Debentures
     Trading Price(3)                 $        nil  $       nil  $    154.65
    7.50% Convertible Debentures
     Trading Price(3)                 $     154.61  $    149.65  $    133.00
    7.35% Convertible Debentures
     Trading Price(3)                 $     130.00  $    129.25  $    111.85

    Total Market Value of
     Securities Outstanding
     ($millions)(3)                   $    2,126.1  $   2,111.0  $   1,760.0
    -------------------------------------------------------------------------
    Pembina's convertible debentures are convertible
     to Trust Units at conversion prices of ($/Unit):
      7.50% Convertible Debentures
       maturing June 30, 2007                       $     10.50
      7.35% Convertible Debentures
       maturing December 31, 2010                   $     12.50
    -------------------------------------------------------------------------
    (1) Based on the 14 trading days from July 4 to July 21, 2006, inclusive.
    (2) Full conversion to Trust Units of the remaining principal amount of
        the two remaining debenture issues as at July 21, 2006 would result
        in the issuance of 7.9 million Trust Units.
    (3) Based on closing trading values as at July 21, 2006, June 30, 2006
        and June 30, 2005.
    >>

As at July 17, 2006, non-resident holdings in the Pembina Pipeline Income Fund totaled approximately 35%. This level is within the 49% restriction on non-resident ownership in the Fund imposed by Pembina's Declaration of Trust and is consistent with guidelines under the Income Tax Act (Canada).

Critical Accounting Estimates and Changes in Accounting Principles and

Practices

There were no changes in Pembina's critical accounting estimates or principles and practices that affected the disclosure of or the accounting for its operations for the quarter ended June 30, 2006. Such critical accounting estimates are presented in Management's Discussion and Analysis for the year ended December 31, 2005.

New Developments and Outlook

Persistent strength in crude oil prices, along with positive industry fundamentals, continues to drive the record pace of oil and natural gas industry activity in western Canada, including new and ongoing industry development in many of Pembina's traditional service areas. Pembina projects that volumes transported on the conventional pipeline systems will continue on an uptrend through the balance of 2006, as new developments on these systems build toward potential. Renewed industry exploitation of the Nisku formation in south-central Alberta has resulted in a material increase in Pembina's projected exit volumes on the Pembina (Drayton) system for 2006, as producers in this area work through operational issues that have recently impaired production. Pembina continues to work with customers in attracting new NGL volumes to take up the incremental 25,000 bpd of NGL carrying capacity created on the southern leg of the Peace system by the upstream interconnection completed earlier this year. The operating performance of the conventional systems has remained strong through the first half of 2006, despite several delays in receipt of new volumes resulting from start-up and other issues impacting customers' operations and production. Pembina anticipates that these results will be supported through the balance of the year, as producer issues are expected to be resolved and returns from several development projects that are currently underway are projected to materialize.

The pace of activity in Pembina's oil sands business unit continues to accelerate, as the Cheecham Lateral project nears completion and Pembina prepares to commence construction of the Horizon Pipeline. Facilities construction on the Cheecham Lateral is expected to be complete in the fourth quarter and this new pipeline service is scheduled to be placed in service by the end of 2006. The Cheecham Lateral, with 136,000 bpd of synthetic crude oil carrying capacity, will transport product from Pembina's existing AOSPL system to a new terminalling facility near Cheecham, Alberta. The Horizon Pipeline is proceeding as expected, with formal agreements nearing execution and construction expected to commence later this year. The Horizon Pipeline, with carrying capacity of 250,000 bpd, will provide exclusive transportation to Canadian Natural Resources Limited's Horizon Oil Sands project, located 70 kilometers north of Fort McMurray, Alberta. This service is scheduled to become operational in 2008. Pembina has worked in close association with our customers in the development of these projects to contain cost pressures and, through proactive contracting and procurement practices, has created a high degree of certainty surrounding costs and execution on these projects. Together with Pembina's existing AOSPL pipeline, which provides dedicated transportation service to the Syncrude facility, the Horizon Pipeline and Cheecham Lateral initiatives will elevate Pembina to among the largest of the oil sands infrastructure players and positions Pembina to capture further growth in this area. As several of the many multi-billion dollar oil sands initiatives proposed by industry progress, Pembina intends to vigorously pursue opportunities to participate in serving the transportation needs of these important new developments.

Pembina continues to expand its midstream business, and intends to implement new services across segments of its conventional pipeline asset base. Several projects are currently under development and Pembina anticipates that this unit will provide significant operating income contribution in the coming quarters. Current services on the Swan Hills system are producing results in excess of Pembina's initial expectations and new developments on the Pembina (Drayton) and other systems will be implemented over the balance of 2006. The potential for significant contribution by this business unit arises from Pembina's ability to utilize its existing infrastructure and market position to create new revenue streams with minimal capital outlay. Pembina expects that the layering of new midstream services over its traditional pipeline operations will enhance the returns on and extend the economic life of Pembina's conventional asset base.

The proposed Kitimat, BC to Summit Lake, BC Condensate Pipeline project progressed during the second quarter, financially backstopped by the Development Support Agreement ("DSA") entered into with prospective shippers early in the second quarter of 2006. The proposed project involves the establishment of a marine terminal in Kitimat and the construction and operation of approximately 465 kilometres of pipeline and related facilities capable of transporting 100,000 bpd of imported condensate from Kitimat for delivery to Pembina's Western system. Once on the Western system, the condensate can access Pembina's network of provincial and inter-provincial pipelines. Pembina believes that this project could represent an attractive transportation solution for shippers seeking to satisfy demand for diluent required in the transportation of heavy oil sands production. Pembina launched a series of preliminary project activities during the quarter, notably the stakeholder engagement process and detailed engineering, environmental and regulatory undertakings. Introductions to key project stakeholders, including First Nations and governmental agencies, were initiated and several open house forums were conducted along the proposed pipeline right of way to acquire local community feedback to incorporate into Pembina's project planning process. Pembina has established a skilled team of professionals who, in the coming months, will advance the project on all fronts, with a view to obtaining firm capacity commitments by the end of this year. Should the project receive the necessary approvals, this new pipeline transportation service could be operational by 2009.

The potential for miscible carbon dioxide ("CO(2)") flooding, a method of enhanced oil recovery, in western Canada continues to garner industry support. Several producer CO(2) pilot projects are currently underway and certain producers have announced the intent to expand these pilots to commercial operations. This longer-term prospect has potential to significantly increase production in several of the key crude oil producing fields delivering into Pembina's Alberta conventional pipelines. These fields, most particularly in Pembina's Swan Hills, Redwater and Pembina (Drayton) service areas, have been identified by industry as likely amenable to the application of this technology. In addition to the potential for incremental volumes on our existing pipelines, Pembina may also have the opportunity to participate in the construction of new CO(2) pipelines utilizing its existing network of right of ways and its pipelining expertise.

Pembina's established reputation for stable operations and record of consistent and growing distributions to Unitholders was bolstered by two consecutive announcements of distribution rate increases in 2006. In January 2006 Pembina implemented a 9 percent increase in the distribution rate, lifting the long-standing monthly rate from the 8.75 cents per unit level, or $1.05 annually, to 9.5 cents per unit, or $1.14 on an annualized basis. Following that rate hike, Pembina announced another increase on July 26, 2006, raising the distribution rate a further 5 percent to 10 cents per unit per month, or a total of $1.20 per unit on an annual basis.

For some time, Pembina has projected that growth in its underlying business interests, and the strong performance of its premium energy infrastructure asset base, would generate cash flow sufficient to support a sustainable increase in distributions to Unitholders. Those increases have now materialized. In light of the numerous opportunities that are currently under development across all of Pembina's operating segments, the potential exists for consideration of further distribution rate adjustment should this new business become operational. Since our initial public offering in October 1997, Pembina has distributed a total of $8.825 per Trust Unit, on a $10 per unit original issue price. We have met our distribution objective in each year of our public history, and current industry conditions lend confidence in our continuing ability to meet our objectives.

Risk Factors

Management has identified the primary risk factors that could potentially have a material impact on the financial results and operations of the Fund. Such risk factors are presented in Management's Discussion and Analysis for the year ended December 31, 2005, and in the Fund's Annual Information Form for the year ended December 31, 2005. See "Additional Information" below.

    <<
    Selected Quarterly Information
    -------------------------------------------------------------------------
    (unaudited)                2006                       2005
    -------------------------------------------------------------------------
    ($ thousands,
     except where noted)     Q2       Q1       Q4       Q3       Q2       Q1
    -------------------------------------------------------------------------

    Revenue              80,924   81,506   77,644   73,100   70,120   69,658
    Operating expenses   27,733   29,572   28,520   24,480   24,763   24,973
    EBITDA(1)            39,554   44,732   45,027   44,558   40,207   39,738
    Net earnings         16,940   20,150   21,705   19,778   14,373   14,553

    Net earnings per
     Trust Unit
     ($/Unit):
      Basic and diluted    0.14     0.17     0.19     0.18     0.14     0.14

    Distributed cash(1)  34,567   33,570   29,667   29,099   27,474   27,242

    Distributed cash
     per Trust Unit
     ($/Unit):(1)
      Basic              0.2850   0.2850   0.2625   0.2625   0.2625   0.2625
      Diluted            0.2814   0.2786   0.2526   0.2599   0.2556   0.2548

    Trust Units
     outstanding
     (thousands):
      Weighted average
       (basic)          121,289  117,784  113,019  110,845  104,669  103,776
      Weighted average
       (diluted)        129,539  129,692  128,254  128,632  126,104  125,679
      End of period     122,030  119,816  113,897  111,938  104,949  104,127
    -------------------------------------------------------------------------


    -------------------------------------
    (unaudited)                2004
    -------------------------------------
    ($ thousands,
     except where noted)     Q4       Q3
    -------------------------------------

    Revenue              71,840   70,974
    Operating expenses   25,279   25,481
    EBITDA(1)            42,490   40,694
    Net earnings         15,374   15,112

    Net earnings per
     Trust Unit
     ($/Unit):
      Basic and diluted    0.15     0.15

    Distributed cash(1)  26,939   26,645

    Distributed cash
     per Trust Unit
     ($/Unit):(1)
      Basic              0.2625   0.2625
      Diluted            0.2547   0.2529

    Trust Units
     outstanding
     (thousands):
      Weighted average
       (basic)          102,622  101,502
      Weighted average
       (diluted)        125,384  124,575
      End of period     102,933  101,874
    -------------------------------------

    (1) Refer to "Non-GAAP Measures" below.
    >>

Pembina's stable operations typically produce limited variability in quarterly results. However, continued growth in Pembina's underlying asset base has generally resulted in increased revenues, expenses and cash flows over the last eight quarters. Variations in this trend result from one-time events and expected seasonal factors which impact pipeline receipts and operating expenses, occurring most frequently during the second quarter of each year. Such factors include, but are not limited to, regularly scheduled facilities maintenance, road bans and weather-related impact on receipts and spending patterns.

Additional Information

Additional information relating to Pembina Pipeline Income Fund, including the Fund's Annual Information Form and financial statements, can be found on the Fund's profile on the SEDAR website at www.sedar.com.

Non-GAAP Measures

Throughout this MD&A the Fund and Pembina use the term "distributed cash" to refer to the amount of cash that has been or is to be available for distribution to the Fund's Unitholders. "Distributed cash" is not a measure recognized by Canadian generally accepted accounting principles (GAAP). Therefore, distributed cash of the Fund may not be comparable to similar measures presented by other issuers, and investors are cautioned that distributed cash should not be construed as an alternative to net earnings, cash from operating activities or other measures of financial performance calculated in accordance with GAAP as an indicator of the Fund's performance.

Further, the use of terms "EBITDA" (earnings before interest, taxes, depreciation and amortization), "net operating income", "payout ratio" and "enterprise value" are not recognized under Canadian GAAP. Management believes that in addition to earnings, EBITDA, net operating income, payout ratio and enterprise value are useful measures. They provide an indication of the results generated by the Fund's business activities prior to consideration of how activities were financed, how the results are taxed and measured and, in the case of enterprise value, the aggregate value of the Fund. Investors should be cautioned, however, that EBITDA, net operating income, payout ratio and enterprise value should not be construed as an alternative to net earnings, cash flows from operating activities or other measures of financial performance determined in accordance with GAAP as an indicator of the Fund's performance. Furthermore, these measures may not be comparable to similar measures presented by other issuers.

Forward-Looking Information and Statements

The information contained in this Management's Discussion and Analysis contains certain forward-looking statements and information that are based on the Fund's current expectations, estimates, projections and assumptions in light of its experience and its perception of historical trends. In some cases, forward-looking statements and information can be identified by terminology such as "may", "will", "should", "expects", "projects", "plans", "anticipates", "targets", "believes", "estimates", "continue", " designed", "objective" and similar expressions. In particular, this Management's Discussion and Analysis contains forward-looking statements with respect to: future stability and sustainability of cash distributions to Unitholders; ongoing expansions of and additions to our asset base; future growth and growth potential in Pembina oil sands and midstream operations; potential revenue enhancement; continued high levels of oil and gas activity and increased oil and gas production in proximity to our pipelines and other assets; additional throughput potential on additional connections; expected project start-up and construction dates; completion of formal documentation on the Horizon Project; future distribution, payout ratios and taxation of distributions; the completion of future debt and equity financings; future capital expenditure requirements; the future development of the condensate project and CO(2) flooding. These statements are not guarantees of future performance and are subject to a number of known and unknown risks and uncertainties, including but not limited to, the impact of competitive entities and pricing, reliance on key alliances and agreements, the strength and operations of the oil and natural gas production industry and related commodity prices, regulatory environment, tax laws and treatment, fluctuations in operating results, the ability of Pembina to raise sufficient capital to complete future projects and satisfy future commitments, construction delays and labour and material shortages, and certain other risks detailed from time to time in the Fund's public disclosure documents. The Fund believes the expectations reflected in these forward-looking statements and information are reasonable as of the date hereof but no assurance can be given that these expectations will prove to be correct. Undue reliance should not be placed on these forward-looking statements and information as both known and unknown risks and uncertainties, including those business risks stated above, may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements and information. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted. Such forward-looking statements and information are expressly qualified by the above statements. The Fund does not undertake any obligation to publicly update or revise any forward-looking statements or information contained herein, except as required by applicable laws.

consolidated balance sheets

(In thousands of dollars)

    <<
    -------------------------------------------------------------------------
                                                        June 30      Dec. 31
                                                           2006         2005
                                                     (Unaudited)    (Audited)
    -------------------------------------------------------------------------

    Assets
    Current assets:
      Accounts receivable                           $    34,558  $    31,012
    -------------------------------------------------------------------------
                                                         34,558       31,012
    Property, plant and equipment                     1,209,352    1,161,691
    Goodwill and other                                  368,865      366,416
    -------------------------------------------------------------------------
                                                    $ 1,612,775  $ 1,559,119
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity
    Current liabilities:
      Bank indebtedness                             $     4,381  $     7,311
      Accounts payable and accrued liabilities           30,567       18,489
      Distributions payable to Unitholders               11,593        9,966
      Current portion of long-term debt                  15,718        7,968
      Current portion of convertible debentures          18,207        8,000
    -------------------------------------------------------------------------
                                                         80,466       51,734
    Long-term debt                                      489,112      456,094
    Convertible debentures                               74,013      150,040
    Asset retirement obligations                         29,192       19,716
    Future income taxes                                 125,304      137,923
    -------------------------------------------------------------------------
                                                        798,087      815,507
    -------------------------------------------------------------------------
    Unitholders' equity:
      Trust Units (note 3)                            1,175,660    1,073,537
      Deficit                                          (360,972)    (329,925)
    -------------------------------------------------------------------------
                                                        814,688      743,612
    -------------------------------------------------------------------------
                                                    $ 1,612,775  $ 1,559,119
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

       See accompanying notes to the consolidated financial statements


    consolidated statements of earnings
    (Unaudited)

    (In thousands of dollars, except per Trust Unit amounts)
    -------------------------------------------------------------------------
                             3 Months     3 Months     6 Months     6 Months
                                Ended        Ended        Ended        Ended
                              June 30,     June 30,     June 30,     June 30,
                                 2006         2005         2006         2005
    -------------------------------------------------------------------------
    Revenues:
      Conventional
       pipelines          $    54,685  $    49,661  $   111,094  $   100,948
      Oil Sands                13,660       13,090       28,411       25,264
      Midstream, net of
       product purchases
       of $2,575 for 3
       and 6 months ended
       June 30, 2006           12,579        7,369       22,925       13,566
    -------------------------------------------------------------------------
                               80,924       70,120      162,430      139,778
    -------------------------------------------------------------------------
    Expenses:
      Operations               27,733       24,763       57,305       49,736
      General and
       administrative           7,264        4,940       13,984        9,056
      Management fee              519          269        1,027          534
      Depreciation and
       amortization            21,937       21,333       43,504       41,901
      Accretion on asset
       retirement
       obligations                347          255          698          509
      Internalization of
       management contract
      (note 4)                  6,000                     6,000
      Other                      (146)         (59)        (173)         507
    -------------------------------------------------------------------------
                               63,654       51,501      122,345      102,243
    -------------------------------------------------------------------------
    Earnings before interest
     and taxes                 17,270       18,619       40,085       37,535
    Interest on long-term
     debt                       5,371        6,332       11,174       12,863
    Interest on convertible
     debentures                 1,880        4,762        4,440        9,538
    -------------------------------------------------------------------------
    Earnings before taxes      10,019        7,525       24,471       15,134

      Capital and income
       taxes                     (305)         496                       896
      Future income tax
       reduction               (6,616)      (7,344)     (12,619)     (14,688)
    -------------------------------------------------------------------------
    Net earnings               16,940       14,373       37,090       28,926
    Deficit, beginning of
     period                  (343,345)    (299,541)    (329,925)    (286,852)
    Distributed cash          (34,567)     (27,474)     (68,137)     (54,716)
    -------------------------------------------------------------------------
    Deficit, end of
     period               $  (360,972) $  (312,642) $  (360,972) $  (312,642)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings per Trust
     Unit
      Basic and diluted   $      0.14  $      0.14  $      0.31  $      0.28
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

       See accompanying notes to the consolidated financial statements


    consolidated statement of cash flows
    (Unaudited)

    (In thousands of dollars)
    -------------------------------------------------------------------------
                             3 Months     3 Months     6 Months     6 Months
                                Ended        Ended        Ended        Ended
                              June 30,     June 30,     June 30,     June 30,
                                 2006         2005         2006         2005
    -------------------------------------------------------------------------

    Cash provided by
     (used in):
    Operating activities:
    Net earnings          $    16,940  $    14,373  $    37,090  $    28,926
    Items not involving
     cash:
      Depreciation and
       amortization            21,937       21,333       43,504       41,901
      Accretion on asset
       retirement
       obligations                347          255          698          509
      Future income tax
       reduction               (6,616)      (7,344)     (12,619)     (14,688)
      Employee future
       benefits expense         2,899        1,035        3,241        1,890
      Other                        91           87          181          177
    Employee future
     benefits
     contributions             (1,675)      (1,167)      (3,350)      (2,334)
    Changes in non-cash
     working capital           (7,868)      (4,588)       1,574        4,203
    -------------------------------------------------------------------------
    Cash flow from
     operations                26,055       23,984       70,319       60,584

    Financing activities:
      Bank borrowings          17,110       (3,318)      43,495       (7,706)
      Issue cost of senior
       unsecured notes            (29)                   (3,734)
      Repayment of senior
       secured notes           (1,376)                   (2,727)
      Issue of Trust Units
       on exercise of
       options                    350                     2,525
      Issue of Trust Units     20,472        7,823       33,778       15,568
      Distributions to
       Unitholders -
       current year           (34,356)     (27,401)     (56,544)     (45,532)
      Distributions to
       Unitholders -
       prior year                                        (9,966)      (9,007)
    -------------------------------------------------------------------------
                                2,171      (22,896)       6,827      (46,677)
    Investing activities:
      Capital expenditures    (41,517)     (10,300)     (80,424)     (18,410)
      Changes in non-cash
       working capital          8,491        1,241        6,208          687
    -------------------------------------------------------------------------
                              (33,026)      (9,059)     (74,216)     (17,723)
    Change in cash             (4,800)      (7,971)       2,930       (3,816)
    Cash (bank
     indebtedness),
     beginning of period          419        1,184       (7,311)      (2,971)
    -------------------------------------------------------------------------
    Bank indebtedness,
     end of period        $    (4,381) $    (6,787) $    (4,381) $    (6,787)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Other cash
     disclosures:
      Interest on long-
       term debt paid     $    (8,980) $    (8,566) $   (13,582) $   (12,655)
      Interest on
       convertible
       debentures paid    $    (3,547) $    (9,024) $    (3,786) $    (9,461)
      Taxes paid          $      (204) $      (377) $      (419) $      (821)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

       See accompanying notes to the consolidated financial statements
    >>

Notes to the consolidated financial statements:

(Tabular amounts in thousands of dollars, except per Trust Unit amounts)

    <<
    1.  Significant accounting policies:

        The interim consolidated financial statements of Pembina Pipeline
        Income Fund ("the Fund") have been prepared by management in
        accordance with accounting principles generally accepted in Canada.
        The interim consolidated financial statements have been prepared
        following the same accounting policies and methods of computation as
        the consolidated financial statements for the fiscal year ended
        December 31, 2005.  The disclosure provided below is incremental to
        that included with the annual consolidated financial statements.  The
        interim consolidated financial statements should be read in
        conjunction with the Fund's consolidated financial statements and the
        notes thereto for the year ended December 31, 2005.

    2.  Business segments:

        The Fund conducts its operations through three operating segments:
        Conventional Pipelines, Oil Sands Infrastructure and Midstream
        Business.

        Conventional Pipelines consists of the tariff based operations of
        pipelines and related facilities to deliver crude oil, condensates
        and natural gas liquids in Alberta and British Columbia.

        Oil Sands Infrastructure consists of the Alberta Oil Sands Pipeline
        (AOSPL) system, the partially completed Cheecham Lateral and the
        Horizon Pipeline.  As at June 30, 2006, only the AOSPL system was
        operational.

        Midstream Business consists of the Fund's direct and indirect
        interest in the Fort Saskatchewan Ethylene Storage Partnership (the
        "Partnership") and terminalling, storage and hub service assets.

        The financial results of the business segments are as follows:

        ---------------------------------------------------------------------
                                         Oil Sands
                         Conventional       Infra-    Midstream
                            Pipelines    structure     Business        Total
        ---------------------------------------------------------------------

        Three months ended
         June 30, 2006
        Revenues:
          Pipeline
           transportation $    54,685  $    13,660  $            $    68,345
          Terminalling,
           storage and
           hub services(1)                               12,579       12,579
        ---------------------------------------------------------------------
          Revenue before
           expenses            54,685       13,660       12,579       80,924
        ---------------------------------------------------------------------

        Expenses:
          Operations           22,483        4,206        1,044       27,733
          General and
           administrative       6,474          314          476        7,264
          Management fee          519                                    519
          Depreciation and
           amortization        17,222        2,543        2,172       21,937
          Accretion on
           asset
           retirement
           obligations            330           17                       347
          Internalization
           of management
           contract             6,000                                  6,000
          Other                  (146)                                  (146)
        ---------------------------------------------------------------------
                               52,882        7,080        3,692       63,654
        ---------------------------------------------------------------------
        Earnings before
         interest and
         taxes            $     1,803  $     6,580  $     8,887  $    17,270
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Property, plant
         and equipment    $   750,900  $   336,328  $   122,124  $ 1,209,352
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Goodwill and
         other            $   211,758  $    28,300  $   128,807  $   368,865
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        (1) Net of product purchases of $2,575.



        ---------------------------------------------------------------------
                                         Oil Sands
                         Conventional       Infra-    Midstream
                            Pipelines    structure     Business        Total
        ---------------------------------------------------------------------

        Six months ended
         June 30, 2006
         Revenues:
          Pipeline
           transportation $   111,094  $    28,411  $            $   139,505
          Terminalling,
           storage and hub
           services(1)                                   22,925       22,925
        ---------------------------------------------------------------------
          Revenue before
           expenses           111,094       28,411       22,925      162,430
        ---------------------------------------------------------------------

        Expenses:
          Operations           45,293        9,891        2,121       57,305
          General and
           administrative      12,495          628          861       13,984
          Management fee        1,027                                  1,027
          Depreciation and
           amortization        34,019        5,019        4,466       43,504
          Accretion on asset
           retirement
           obligations            664           34                       698
          Internalization of
           management
           contract             6,000                                  6,000
          Other                  (173)                                  (173)
        ---------------------------------------------------------------------
                               99,325       15,572        7,448      122,345
        ---------------------------------------------------------------------
        Earnings before
         interest and
         taxes            $    11,769  $    12,839  $    15,477  $    40,085
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Property, plant
         and equipment    $   750,900  $   336,328  $   122,124  $ 1,209,352
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Goodwill and
         other            $   211,758  $    28,300  $   128,807  $   368,865
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        (1) Net of product purchases of $2,575.



        ---------------------------------------------------------------------
                                         Oil Sands
                         Conventional       Infra-    Midstream
                            Pipelines    structure     Business        Total
        ---------------------------------------------------------------------

        Three months ended
         June 30, 2005
        Revenues:
          Pipeline
           transportation $    49,652  $    13,090  $            $    62,742
          Terminalling,
           storage and
           hub services                                   7,378        7,378
        ---------------------------------------------------------------------
          Revenue before
           expenses            49,652       13,090        7,378       70,120
        ---------------------------------------------------------------------

        Expenses:
          Operations           19,882        4,031          850       24,763
          General and
           administrative       4,635          305                     4,940
          Management fee          269                                    269
          Depreciation and
           amortization        16,493        2,546        2,294       21,333
          Accretion on
           asset
           retirement
           obligations            241           14                       255
          Other                   (59)                                   (59)
        ---------------------------------------------------------------------
                               41,461        6,896        3,144       51,501
        ---------------------------------------------------------------------
        Earnings before
         interest and
         taxes             $    8,191  $     6,194  $     4,234  $    18,619
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Property, plant
         and equipment     $  743,111  $   296,544  $   102,401  $ 1,142,056
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Goodwill and
         other             $  198,963  $    28,300  $   132,453  $   359,716
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        ---------------------------------------------------------------------
                                         Oil Sands
                         Conventional       Infra-    Midstream
                            Pipelines    structure     Business        Total
        ---------------------------------------------------------------------

        Six months ended
         June 30, 2005
        Revenues
          Pipeline
           transportation  $  100,939  $    25,264  $            $   126,203
          Terminalling,
           storage and
           hub services                                  13,575       13,575
        ---------------------------------------------------------------------
        Revenue before
         expenses             100,939       25,264       13,575      139,778
        ---------------------------------------------------------------------

        Expenses:
          Operations           40,821        7,207        1,708       49,736
          General and
           administrative       8,446          610                     9,056
          Management fee          534                                    534
          Depreciation and
           amortization        32,255        5,058        4,588       41,901
          Accretion on asset
           retirement obligations 480           29                      509
          Other                   507                                   507
        ---------------------------------------------------------------------
                               83,043       12,904        6,296     102,243
        ---------------------------------------------------------------------
        Earnings before
         interest
         and taxes         $   17,896  $    12,360  $     7,279  $   37,535
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Property, plant
         and equipment     $  743,111  $   296,544  $   102,401  $1,142,056
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Goodwill and
         other             $  198,963  $    28,300  $   132,453  $  359,716
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    3.  Trust Units:

        The Fund is authorized to create and issue an unlimited number of
        Trust Units.

        ---------------------------------------------------------------------
                                                 Trust Units         Amount
        ---------------------------------------------------------------------

        Balance, January 1, 2005                 102,933,221     $  941,902
        Exercise of Trust Unit options               644,039          6,762
        Debenture conversions                      8,033,423         93,623
        Distribution Reinvestment Plan             2,286,319         31,250
        ---------------------------------------------------------------------
        Balance, December 31, 2005               113,897,002      1,073,537
        Exercise of Trust Unit options               215,681          2,525
        Debenture conversions                      5,798,614         65,820
        Distribution Reinvestment Plan             2,118,527         33,778
        ---------------------------------------------------------------------
        Balance, June 30, 2006                   122,029,824     $1,175,660
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The net earnings per Trust Unit are based on earnings available to
        Unitholders and the weighted average Trust Units outstanding for the
        period. The earnings available to Unitholders for the second quarter
        of 2006 was $16.9 million (2005 - $14.4 million) and for the six
        months ended June 30, 2006 was $37.1 million (2005 - $28.9 million).
        The weighted average Trust Units outstanding for the second quarter
        of 2006 were 121,289,000 Units (2005 - 104,660,000) and for the six
        months ended June 30, 2006 were 119,546,000 (2005 - 104,220,000).

        The diluted earnings per Trust Unit are based on net earnings and the
        weighted average Trust Units outstanding adjusted for the dilutive
        effect of convertible debentures and employee Trust Unit options.
        The net earnings for the second quarter of 2006 were $18.8 million
        (2005 - $19.1 million). In computing diluted earnings per Trust Unit,
        8,250,000 Trust Units (2005 - 21,343,000) were added to the weighted
        average Trust Units outstanding for the second quarter of 2006 for
        the dilutive effect of convertible debentures and employee Trust Unit
        options. Diluted earnings per Trust Unit are not disclosed as the
        amounts are anti-dilutive. At June 30, 2006, 989,350 options
        (June 30, 2005 - 845,886) were outstanding and exercisable at a
        weighted average price of $12.06 (June 30, 2005 - $9.74).

    4.  Internalization of management contract:

        Effective June 30, 2006, the Fund acquired all of the outstanding
        common shares of Pembina Management Inc. (PMI), the manager of the
        Fund. Total consideration for the transaction consisted of an initial
        cash payment of $6 million and a contingent deferred payment payable
        in 2009 that is linked to future growth in distributable cash per
        Trust Unit of the Fund. If the future cumulative distributable cash
        in the period from January 1, 2006, to December 31, 2008 does not
        exceed $3.42 per Trust Unit ($1.14 per Trust Unit per year), the
        deferred amount is zero. Every approximate 10 cent per Trust Unit
        increase in cumulative distributable cash over $3.42 per Trust Unit
        results in a $1 million increase in purchase price to a maximum of
        $15 million, which is converted into notional Trust Units based on
        the weighted-average trading price of the Trust Units for the 20
        trading days prior to June 30, 2006 of $15.87 (the closing price).
        The purchase price will also be adjusted by the distributions payable
        on the notional trust units for the period January 1, 2006 to
        December 31, 2008, and the change in the value of the Fund's Trust
        Units from the closing price.

    5.  Long-term debt:

        On April 18, 2006, Pembina Pipeline Corporation, the principal
        operating subsidiary of the Fund, announced that it had entered into
        an agreement with institutional investors in the United States and
        Canada providing for the issuance, by way of private placement, of
        C$200 million of Senior Unsecured Notes. The Notes will mature
        September 30, 2021 and will bear interest at a fixed rate of 5.58%.
        Closing of the offering is anticipated to occur on September 29,
        2006, and the net proceeds from the offering will be used to repay
        existing bank debt and for general corporate purposes.

    6.  Subsequent event:

        On July 24, 2006, the revolving bank facilities of Pembina Pipeline
        Corporation were renewed for a period of five years to July 24, 2011.
        There are no repayments due over the term. Borrowings bear interest
        at either prime lending rates or based on 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 0.50% to 1.50%.

    >>

Pembina Pipeline Income Fund

Exchange Listing and Trading Symbols:

The Toronto Stock Exchange

Trust Units Symbol: PIF.UN

7.50% Convertible Debentures Symbol: PIF.DB.A

7.35% Convertible Debentures Symbol: PIF.DB.B

Trustee, Registrar and Transfer Agent:

Computershare Trust Company of Canada

Shareholder Communications:

1-888-267-6555

Corporate Office:

700 - 9th Avenue S.W.

P.O. Box 1948

Calgary, Alberta T2P 2M7

Telephone: (403) 231-7500

Fax: (403) 237-0254

Investor Information:

e-mail: investor-relations@pembina.com

Telephone: (403) 231-7500

1-888-428-3222

Fax: (403) 691-7356

Website: www.pembina.com

Quarterly Results Webcast:

A live internet broadcast of Pembina's Second

Quarter 2006 Results conference call is scheduled

for July 27, 2006 at 9:00 a.m. Calgary (11:00 a.m.

Eastern, 8:00 a.m. Pacific). Those wishing to access

the webcast are invited to visit Pembina's website

located at www.pembina.com, or the host site at

www.newswire.ca/webcast. An archive of the call

will be available on-line for 90 days following the

broadcast date.

INVESTOR INFORMATION

Premium Distribution, Distribution Reinvestment

and Optional Unit Purchase Plan:

Pembina offers a Premium Distribution, Distribution

Reinvestment and Optional Unit Purchase Plan to

eligible Unitholders of Pembina Pipeline

Income Fund.

The Plan allows participants an opportunity to:

    <<
    -  reinvest distributions into Trust Units at a 5
       percent discount to a weighted average market
       price, under the distribution reinvestment
       component of the Plan; or,

    -  realize 2 percent more cash on their
       distributions, under the premium distribution
       component of the Plan;

    -  eligible Unitholders may also make optional
       Trust Unit purchases at the weighted average
       market price.

    >>

A brochure, detailing administration of the Plan and

eligibility and enrolment information, is available

on-line on Pembina's web site located at

www.pembina.com, or call 1-888-428-3222 to receive

a copy by mail. Unitholders wishing to enroll in the

Plan are asked to contact their broker, investment

dealer, financial institution or other nominee through

which the Trust Units are held.

-------------------------------------------------------------------------

This document contains forward-looking statements that involve risks and uncertainties. Such information, although considered reasonable by Pembina at the time of preparation, may 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. Such risks and uncertainties include, but are not limited to risks associated with operations, such as loss of market, regulatory matters, environmental risks, industry competition, and ability to access sufficient capital from internal and external sources. See "Forward-Looking Information and Statements" presented in the Management's Discussion and Analysis contained in this document for additional information.

%SEDAR: 00008906E

SOURCE: Pembina Pipeline Income Fund

Ms. Glenys Hermanutz, Manager, Corporate Development, Pembina Pipeline Corporation, (403) 231-7500, 1-888-428-3222, e-mail: investor-relations@pembina.com