Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

March 16, 2007 06:15 ET

CORRECTION FROM SOURCE: Gateway Casinos Income Fund Reports 2006 Financial Results

BURNABY, BRITISH COLUMBIA--(CCNMatthews - March 16, 2007) - A correction from source is issued with respect to the news release published at MARCH 15, 2007, 17:33 ET titled: "Gateway Casinos Income Fund Reports 2006 Financial Results."

Gateway Casinos Income Fund (the "Fund" or "Gateway") (TSX:GCI.UN), one of the largest casino operators in Western Canada, today reported its financial results for the fourth quarter and fiscal year ended December 31, 2006.

2006 Highlights

- Completed acquisition of Cascades Langley Casino and Hotel ("Cascades")

- Total revenue increased 30.9% to $133.3 million, from $101.9 million in 2005

- EBITDA(i) increased 19.7% to $50.8 million, compared with $42.5 million in 2005

- The Fund generated distributable cash of $45.6 million, or $1.557 per unit, and declared distributions totaling $42.7 million, or $1.458 per unit

Q4 2006 Highlights

- Total revenue increased 38.1% to $35.5 million, from $25.7 million in Q4 2005

- EBITDA increased 14.2% to $11.2 million, compared with $9.9 million in Q4 2005

- Net earnings of $8.4 million, or $.291 per unit, for the fourth quarter

"Overall, fiscal 2006 was another very strong year for the Fund," said Dave Gadhia, CEO of Gateway Casinos G.P. Inc. "The year was highlighted by record yearly results from our Burnaby and Lake City Casinos, based largely on continued growth in slot machine revenue. These gains helped offset the revenue decline at our Palace Casino caused by the employee strike. Results from Cascades were ahead of our initial projections, and we are excited about the growth potential from this facility as it matures and we see the positive impact of recent enhancements, including the new parking facility."

Mr. Gadhia added the Fund's flagship Burnaby Casino redevelopment is proceeding on schedule. "We achieved several important development milestones in 2006, including completion of a fixed-price construction contract and an agreement with Delta Hotels to manage the Hotel, Convention Centre and Restaurant. In 2007, we expect to see major progress with this project and the redevelopments of our Lake City properties as we aim to capitalize on strong demand in the fast-growing Thompson-Okanagan region."

Financial Results

Full-Year Results

Consolidated revenue for 2006 increased 30.9% to $133.3 million, compared with $101.9 million in 2005. The majority of the increase reflects the impact of Cascades, which contributed $26.4 million in revenue for the period from May 19, 2006 to December 31, 2006. Excluding Cascades, revenue was $106.9 million, a 4.9% increase over 2005. Slot machine revenue growth at both the Burnaby and Lake City properties continued strongly and offset the revenue decline at the Palace location caused by the strike that began on September 9, 2006. Total revenue from slot machines and other electronic games increased 28.7% over the prior year to $85.4 million, and table games revenue rose 18.3% over 2005 to $33.9 million.

For 2006, the Fund generated EBITDA of $50.8 million, or 38.1% of revenue, compared with $42.5 million, or 41.7% of revenue, in 2005. The reduction in the EBITDA margin for the year is mainly due to the increase in the BCLC joint marketing fee at the Burnaby Casino and the inclusion of the results of Cascades, which operates at a lower margin than the Burnaby Casino.

After amortization and net interest expense, the Fund generated net earnings of $40 million, or $1.36 per basic unit in 2006. This compares with $35.8 million or $1.35 per basic unit, in 2005.

In 2006, the Fund generated distributable cash of $45.7 million, or $1.557 per unit, and paid distributions of $42.8 million or $1.458 per unit, representing 93.7% of cash available for distributions.

Q4 2006 Results

Revenue for the fourth quarter of 2006 increased 38.1% to $35.5 million, compared with $25.7 million in the fourth quarter of 2005. The increase in revenue resulted primarily from the inclusion of results from Cascades, which accounted for $10.9 million of revenue in the quarter, as well as the continued strong performance of the slot machines at Burnaby and Lake City Casinos.

For the three months ended December 31, 2006, the Fund generated EBITDA of $11.2 million, compared with $9.9 million in the fourth quarter 2005, representing an increase of 13.1%. Net earnings for the quarter were $8.4 million, or $.27 per unit, compared to $8.7 million or $0.33 per unit, in the fourth quarter of 2005.

(i) EBITDA is not a defined term under Canadian generally accepted accounting principles . Management has determined EBITDA is a useful supplemental measure in evaluating the Fund's performance as it provides investors with an indication of cash available for debt service, working capital needs and capital expenditures. This non-GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Please refer to the discussion under "EBITDA" and Net Earnings in the 2006 Management's Discussion & Analysis.

Notice of Conference Call

Management of Gateway Casinos Income Fund will host a conference call on March 16, 2007 at 8 am Pacific Time (11:00 a.m. Eastern Time) to discuss its financial results for fiscal 2006. The call can be accessed by dialing 1.800-769-8320 or 416-695-9719. A replay will be available until March 23, 2007 at: 1-888-509-0081 or 416-695-5275 (access code: 641271).

The call will also be webcast and will be accessible by going to www.gatewaycasinosincomefund.com.

About the Fund

The Fund is an unincorporated, open-ended limited purpose trust established under the laws of British Columbia, which operates the Burnaby Casino and Cascades Langley Casino and Hotel in Greater Vancouver, BC, the Palace Casino in Edmonton, Alberta and the Lake City Casinos in Kamloops, Kelowna, Penticton and Vernon, BC. Headquartered in Burnaby, BC, the Fund is one of the largest casino operators in Western Canada.

GATEWAY CASINOS INCOME FUND

MANAGEMENT'S DISCUSSION & ANALYSIS

FOR THE YEAR ENDED DECEMBER 31, 2006

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") of our operating results and financial position is dated as of March 15, 2007, and should be read in conjunction with the audited consolidated financial statements of the Gateway Casinos Income Fund (the "Fund") for the year ended December 31, 2006, as well as the accompanying notes, (the "Audited Financial Statements") which are reported in Canadian dollars and have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP").

Forward-looking statements

This management's discussion and analysis may contain forward-looking statements, which reflect management's expectations regarding the future growth, results of operations, performance and business prospects and opportunities of the Fund and its subsidiaries. Forward-looking statements typically contain words such as "anticipates", "believes", "continue", "could", "expects", "indicates", "plans" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including the effects, as well as changes in: national and local business and economic conditions; competition within the gaming business; consumer preferences, spending patterns and demographic trends; legislation and governmental regulation. Although the forward-looking statements contained in this management's discussion and analysis are based upon what management believes to be reasonable assumptions, the Fund cannot assure readers that actual results will be consistent with these forward-looking statements.

Additional information about these factors can be found under Risk Factors in our 2006 Annual Information Form.

We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.

Structure of the Fund

The Fund was launched on November 28, 2002, when it completed its initial public offering and indirectly acquired the operating assets of the Burnaby Casino in Greater Vancouver, British Columbia, the four Lake City Casinos in the Thompson/Okanagan region of British Columbia and the Palace Casino in Edmonton, Alberta, from wholly owned subsidiaries of Gateway Casinos Inc. ("GCI").

The casinos are operated by the Gateway Casinos Limited Partnership ("Gateway" or "the Partnership"), through operating agreements and licenses with the British Columbia Lottery Corporation ("BCLC") and the Alberta Gaming and Liquor Commission ("AGLC"). The Fund is, indirectly, a limited partner in Gateway, and holds all of the voting rights with respect to its operations. The Fund makes monthly cash distributions to its unitholders based on Gateway's operating results.

On May 19, 2006 the Fund acquired the Cascades Langley Casino and Hotel ("Cascades") in Langley, British Columbia, which is discussed in more detail below.

The following chart outlines the structure of the fund as at December 31, 2006 and as at the date of this MD&A.

To view the chart please click on the following link: http://www.ccnmatthews.com/docs/gci0315a.pdf

Fund Units

The Fund had 31,110,362, units outstanding as at December 31, 2006, and as at the date of this management's discussion and analysis.

On April 25, 2006, the Fund issued $35 million of extendible convertible debentures, which are discussed further in the Capital Resources section below. The debentures are convertible into units of the Fund at the option of the holders at a price of $19.10 per unit, representing 52.3560 units per $1,000 principal amount.

As discussed below, the acquisition of Cascades provides for an adjustment to the purchase price of up to $10.6 million based on the actual distributable cash generated by Cascades during 2006. Should the purchase price be adjusted upwards, the Fund will issue additional units at a price equal to the 10-day volume weighted average price of the units on the date of issue.

Relationship Between the Class A Units of the Partnership & Secured Loans

The Class A Units of the Partnership, which are fully described in note 13 to the Audited Financial Statements, entitle the holder to a preferential allocation of income and distributable cash equal to 8.01% per year of the stated capital of the Class A Units. All of the Class A units are held by subsidiaries of GCI, and, along with all distributions from and redemptions of the units, are pledged as security Secured Loans advanced by the Trust.

Since the Fund's inception, the stated capital of the Class A units and the amount outstanding under the Secured Loans have been equal. This effectively balances the cash the Partnership pays out on the preferential distribution on the Class A Units with the interest the subsidiaries of GCI pay to the Trust on the Secured Loans, so that all the distributable cash generated by the Partnership is available for distribution to unitholders of the Fund.

Under the terms of the Partnership Agreement, the Partnership may redeem the Class A Units in the event that the Trust subscribes for additional Class B Units of the Partnership. If the Secured Loans are repaid in part or in full, the Trust can use these proceeds to subscribe for additional Class B Units of the Partnership, which can in turn redeem Class A Units. In this way, the Fund can ensure that the stated capital of the Class A Units is equal to the amount of the outstanding Secured Loans and maintain the balance between the distributions on the Class A Units and the interest on the Secured Loans.

Acquisition of Cascades Langley Casino and Hotel

On April 18, 2006, the Partnership entered into an acquisition agreement with Gateway Casinos Inc. ("GCI") and Gateway Langley Holdings Ltd. ("GLHL") to acquire substantially all of the operating assets related to the Cascades Langley Casino and Hotel to the Partnership (the "Acquisition"). The transaction was valued for accounting purposes at approximately $112.7 million and closed on May 19, 2006. The purchase price was satisfied through the issue of 4,692,675 units of the Fund and $32.6 million in cash from the net proceeds of an offering by the Fund (the "Offering") of 5.35% Convertible Extendible Unsecured Subordinated Debentures (the "Debentures"). Under Canadian GAAP, where equity is issued in connection with an acquisition, the acquirer must value the units on the basis of the quoted market price of the units two days before and after the acquisition was announced. Using this methodology, for accounting purposes the units issued have been valued at $16.82 per unit, compared to the preliminary value of $15.70 per unit used in the prospectus. This transaction resulted in the GCI Shareholders now holding approximately 32% of the Fund's units.

The acquisition agreement provided for an adjustment to the purchase price based on the actual distributable cash generated by Cascades in the twelve months ended December 31, 2006. If the actual distributable cash is less than the estimated distributable cash of $10.8 million, then units issued to GCI in connection with the transaction are to be surrendered to the Fund at a price of $15.70 per unit and distributions paid on the surrendered units will be repaid in full. If the actual distributable cash is greater than the estimated distributable cash, the Fund will issue additional units at a price equal to the 10-day volume weighted average price of the units on the date of issue. Any adjustment to the purchase price is subject to a maximum of 10% of the initial transaction value, or $10.6 million. 676,910 of the units issued to GCI, and any cash distributions received thereon, are being held in escrow until settlement of the purchase price adjustment.

Actual distributable cash generated by Cascades during the twelve months ended December 31, 2006 was $12.3 million, resulting in the maximum adjustment to the purchase price of $10.6 million. Based on the 10-day volume weighted average trading price of the Fund on March 14, 2006, the Fund would be required to issue an additional 550,240 units. The actual number of units to be issued will be determined immediately prior to the issue of the units.

Including the purchase price adjustment, the total acquisition price for accounting purposes was $116.9 million, which equates to a multiple of 9.0 times 2006 EBITDA of Cascades.

The acquisition provided the Fund with a number of key benefits. These included:

- Immediate accretion to distributable cash;

On closing of the Acquisition the Board of Trustees of the Fund approved an increase in the Fund's monthly distribution to $0.1195 per unit from $0.115 per unit, effective with the Fund's distribution for the month of June 2006;

- Enhanced geographic and operational diversification;

Cascades is located within the GVRD, but is approximately 40 km east of the Burnaby Casino. As a result, Cascades principal target market is in the Fraser Valley region, as opposed to the Burnaby Casino's principal targeted markets of the City of Vancouver and the suburban cities of the GVRD adjacent to the City of Vancouver. In addition, Cascades has full food and beverage operations as well as hotel, entertainment and convention centre amenities, which will provide operational diversity to the Burnaby Casino.

- Future growth in distributable cash as the operations continue to mature;

Management believes that Cascades provides for potential growth in distributable cash as the operations continue to mature. Since the Cascades Casino opened in May 2005 in its new market, operating results have improved as local market awareness of the entertainment experience has increased. In addition, based upon management's experience with the other casinos that they have opened or extensively renovated, operational results typically require a period of approximately 12 to 18 months to reach maturity. Management also believes that hotel and convention centre operations typically have a longer period to maturity than casino operations. Additionally, operations of Cascades have exceeded expectations since opening and experienced a shortage of parking. This has resulted in the theatre within the facility operating on only a very limited basis. Completion of the new parkade, discussed below, will allow the theatre to operate at its full capacity and the facility to be marketed as an entertainment destination; and

- An attractive acquisition opportunity with minimal integration risk, as Cascades has been operated by Gateway's management team since inception.

As part of the transaction, GCI indirectly retained the right to receive approximately $27.8 million from the British Columbia Lottery Corporation (the "BCLC") under its Facility Development Commission ("FDC") program relating to costs incurred in connection with the construction and development of Cascades. In consideration, the Partnership has agreed to assign the FDC receivable from the BCLC to GCI by way of a note payable equal to the amount of the FDC receivable. The note is unsecured and is repayable as, and when, the Partnership receives a recovery of the FDC receivable from Cascades, subject to the Partnership's preferential right to recover any eligible maintenance capital expenditures at Cascades prior to repayment under the note. Due to its contingent nature, the note is not reflected on the Fund's balance sheet.

GCI also agreed to fund the completion of the construction of a 500-stall parkade. The parkade opened in January 2007 at total cost of approximately $9.6 million, of which approximately $4.6 million had been incurred at closing of the acquisition. This project is estimated to be 100% eligible for recovery under FDC and the Partnership has agreed to assign the related FDC receivable to GCI, by way of a similar note payable as with the construction FDC receivable. The amount of the note will be determined in the near future based on the total eligible expenditures approved by the BCLC.

General

Gateway operates seven casinos in Western Canada; six in British Columbia and one in Alberta. The location of each casino and the number of slot machines and table games at December 31, 2006, is listed in the table below.



Number of slot Percent of
machines & Slots
electronic converted to Number of
Casino Location games TITO table games
------------------------------------------------------------------------
Gateway Casino -- Burnaby,
Burnaby B.C. 679 100% 32
Cascades Casino Langley,
B.C. 539(1) 100% 26(2)
Lake City Casinos
Kamloops Kamloops,
B.C. 300 88% 8
Kelowna Kelowna,
B.C. 342 97% 10
Penticton Penticton,
B.C. 228(3) 86% 9(4)
Vernon Vernon,
B.C. 210 94% 8

Palace Casino(5) Edmonton,
AB 706(6) 100% 25(7)

Totals 3,004 97% 118

(1) On September 14th, Cascades Casino added 17 slot machines.
(2) The Cascades Casino also operates an 8-table poker room.
(3) Four additional slot machines were added to the Penticton Casino on
August 29th.
(4) Two poker tables were added to the Penticton Casino in the second
quarter of 2006.
(5) Employees at the Palace Casino have been on strike since September 9,
2006 and the casino has operated on a reduced basis since that day.
(6) On February 1st 2006, five electronic poker games were removed by AGLC
upon completion of their trial period.
(7) The Palace Casino also operates a 7-table poker room. Six gaming tables
were removed when the casino floor was reconfigured on October 19th.


In Canada, most gaming activities, including casino operations, are conducted and managed by the provincial governments. They retain the majority of the revenue generated after pay out to customers, and use these funds to support charitable organizations and government initiatives. The gaming industry is generally considered to include lotteries, bingo games, pari-mutuel wagering (such as horse racing) and games typically associated with casinos, such as table games and slot machines. Casino revenue is measured in terms of "win", which is the amounts wagered on gaming activities, less pay out to customers.

Western Canadian Casino Market

In Western Canada, the provincial governments have developed a casino model where they contract third-party operators, like Gateway, to oversee the day-to-day operations of casinos.

Under this model, the operators provide the facilities, the furniture and fixtures, the labour, security, surveillance and administration required to ensure the casinos operate efficiently. In return, they are paid a fee equal to a percentage of the revenue generated at each casino. This fee differs between provinces, as shown below:



British Columbia Alberta
-----------------------------------------------------
Slot machines and
other electronic games 25% 15%
Table games 40% 50%
Poker 75% 75%
Craps 75%(1) 75%

(1) In BC, the revenue retained by the service provider is 75% of the Craps
win up to $240,000 per quarter. Win above hat threshold is split at the
40% level.


In both BC and Alberta, the provincial governments decide which games and products will be available, set the rules of play (including the pay out on slot machines and other electronic games), determine the procedures by which the casinos must be operated, and monitor the operations. They also provide and maintain all of the gaming equipment, including the slot machines. In BC, this is the responsibility of the BCLC and in Alberta, the AGLC.

Alberta

The casino marketplace in Alberta is beginning to move towards the early stages of a mature gaming marketplace but still has excellent opportunities for targeted new and expanded facilities. The province has a total of 19 casinos and three racing entertainment centers (also known as racinos) and provides video lottery terminals ("VLTs") in over 1,000 locations. According to the AGLC, at the end of 2006 there were a total of 10,235 slot machines and approximately 6,000 VLTs in the province. The number of slot machines in the province increased from 8,665 in 2005, due to the opening of two new casinos and expansions at a number of existing casinos.

There are currently six full-service casinos, one racing entertainment centre and 188 VLT retailers in the Greater Edmonton region, serving a population of just over 1 million residents. At December 31, 2006, these facilities offered a total of 4,446 slot machines, 179 table games, 65 poker tables and 1,116 VLTs.

The number of casinos in the Edmonton market grew during 2006. On October 26, 2006, the River Cree Resort and Casino opened. This facility is located on the lands of the Enoch Cree First Nation, located west of the City of Edmonton. The development includes a 255-room, four-star Marriott hotel, an ice sports complex, a convention centre and a 62,000 square foot casino with 600 slot machines, 40 table games and 12 poker tables.

On November 17, 2006, the Century Casino and Hotel opened. This facility is located in the Northwest section of Greater Edmonton, approximately eight kilometers from the city centre, and is connected to an existing hotel. The casino features 600 slot machines, 25 table games, 6 poker tables, a dinner theatre and food and beverage facilities. This facility derives its visitation from a separate area of the city and does not directly compete with the Palace Casino.

In addition to these new facilities, the Baccarat Casino, located in downtown Edmonton and which is operated by GCI, has received approval from the AGLC to build a new facility to replace the existing casino. The project, which is designed for 700 slot machines (increased from 328), approximately 45 gaming tables, a 10-table poker room and various food and beverage offerings, has experienced challenges in receiving rezoning approval. In the interim, GCI is considering a temporary expansion to the existing facility, which will increase the size of the facility by approximately 20,000 square feet, increase the number of slots machines to 600 and improve the food and beverage amenities.

On July 1, 2005, the City of Edmonton implemented a smoking ban on all public places, including casinos, bingo halls, bars and pubs. The impact of this ban on the Palace Casino is discussed in more detail in the Operations section below. As the River Cree Resort and Casino is not located within the Edmonton city limits, it is not subject to the smoking ban. This puts casinos within the City at a competitive disadvantage. However, in negotiations with the City for services to the Casino, the River Cree Resort and Casino have agreed to restrict smoking to approximately 35% of the casino floor area. This has mitigated some of the disadvantage.

British Columbia

In contrast to Alberta, BC's casino market is relatively immature. However, it is in the middle of a strong growth phase designed to make it competitive with other Canadian and US gaming jurisdictions.

During early 2003 the BCLC made changes to the product offerings in existing BC casinos, and followed this up with the introduction of a new casino model for the Greater Vancouver Regional District (the "GVRD"). This model calls for a smaller number of larger facilities, providing more entertainment options to customers, and is designed to allow BC casinos to complete more effectively with casinos in Alberta and Washington State.

There are seven casinos and one racino (horse racing track that operates slot machines) operating in the GVRD. Despite a number of new and redeveloped casinos opening during 2004 and 2005, no new facilities were opened in the GVRD during 2006. However, there were the following changes in the GVRD casino marketplace:

1. The acquisition of Cascades by Gateway Casinos Income Fund.

Prior to the acquisition the casino was operated by GCI since opening in May 2005. The acquisition closed on May 19, 2006, as discussed above.

2. The opening of Boulevard Casino's Show Lounge

The completion of the second phase of the redevelopment at the Boulevard Casino (formerly the Coquitlam Casino) introduced a 1,200-seat theatre and meeting and conference facilities in September 2006.

3. The sale of the Edgewater Casino

During 2005, the owners of the Edgewater Casino in Vancouver filed for protection under the Companies' Creditors Arrangement Act. In September 2006, as part of a court approved restructuring, Paragon Gaming LLC purchased the operations of the Casino. The new owners have made a number of changes to the facility, such as a reconfiguration of the gaming floor and adding an additional eight poker tables to the previous 4-table poker room.

The individual facilities in the GVRD and the number of games being operated are provided in the following table:



Year Year
Lower Mainland: Municipality Opened Expanded # Slots # Tables Poker
---------------------------------------------------------------------------
Edgewater Vancouver 2005 600 45 12
Holiday Inn Vancouver 1986 - 32 6
River Rock Richmond 2004 918 85 25
Burnaby Burnaby 1999 2005 679 32 -
Boulevard Coquitlam 2001 2005 950 58 12
Royal City Star New Westminster 2001 341 18 -
Cascades Langley 2005 539 26 8
Fraser Downs Surrey 2004 420 - -

Total 4,447 296 63


In addition to these new facilities, there are three projects that are currently under development, which, in order of projected opening, as are follows:

1. New casino in Queensborough area of New Westminster, BC

A new 100,000 square foot casino is currently under development in the Queensborough area of New Westminster, BC, which sits on the eastern border of the City of Richmond. The new facility, known as Starlight Casino, will operate approximately 800 slot machines and 45 table games, as well as a 12-table poker room, a private gaming area and a high limit area. The facility will also have a 140 seat show bar that will feature live entertainment and extensive food and beverage services. There will also be a cafe with an exterior south facing deck. The casino will provide several food and beverage options on the gaming floor and will be connected to a popular interactive sports bar concept, operated by Schanks Athletic Club and a high end Chinese restaurant, operated by the Kirin Restaurant Group. Construction began in December 2005 and the facility is projected to open in the winter of 2007.

2. Hastings Racecourse slot machine installation

The Hastings Racecourse in Vancouver has been approved for the installation of between 600 and 900 slot machines within the existing racetrack. Rezoning approval was granted in July 2004, but the project has yet to receive its development permit due to legal issues surrounding the approval of slot machines by the City. Shortly after approval, the Hastings Park Conservancy, a local-area residents group, filed a suit against the City of Vancouver in the BC Supreme Court, claiming that the rezoning by-law was not within their powers. The court found in favour of the City in August 2006; however the Hastings Park Conservancy filed an appeal in September 2006. Although no formal target opening date has been announced, the company developing the project has stated that construction will take approximately six months after receiving a development permit. It is widely anticipated that the installation of slot machines will not take place until early 2008.

3. Redevelopment of the Burnaby Casino

Gateway is currently redeveloping the Burnaby Casino into a new state-of-the art facility. The new casino will operate up to 1,000 slot machines and 60 table games, a 16-table poker room and a high limit gaming area, as well as a number of food and beverage options within the casino. The project will also offer a stand-alone full service restaurant, a 200-room hotel and a 21,000 square foot convention centre. During 2006, Gateway entered into a management agreement with Delta Hotels Ltd. to operate the hotel, convention centre and stand-alone restaurant. The project is scheduled to open in late spring 2008. Please see the Outlook section for a further discussion.

Once these projects are complete, the GVRD will have six full service casinos and two racinos, operating a total of approximately 5,800 slot machines. The following map provides the locations of these facilities.

To view the map please click on the following link: http://www.ccnmatthews.com/docs/1gci0315.pdf

The BCLC have stated on a number of occasions that there are no plans for any additional casinos in the province. However, the BCLC has expanded the number of Community Gaming Centers ("CGCs") operating in the province. CGCs are smaller scale gaming facilities that provide both bingo and slot machines, and are generally located in communities that are too small for a full-service casino. CGC's typically allow for the introduction of between 25 and 100 slot machines into existing bingo halls. CGC's are not designed to compete directly with casinos as their machine offerings are limited and their payouts maximum to players is quite small.

To date, CGCs have opened in Campbell River, Dawson Creek, Duncan, Williams Lake, Kamloops and Kelowna and have been approved in seven other municipalities in B.C.. The first of these facilities was opened in October 2004 in Dawson Creek and the six facilities operate a combined total of 497 slot machines. The facilities in Kamloops and Kelowna were opened in March 2005 and operate 50 and 75 slot machines, respectively.

Financial Performance



Selected Annual Information
(C$ in thousands, except per unit figures)
Year ended December 31,
2006 2005 2004
--------------------------------------------------------------------------
Revenue
Table games 33,896 28,651 28,174
Slot machines and other electronic games 85,419 66,383 58,996
Hotel revenue 1,046 - 3,029
Other 12,981 6,844 6,361
--------------------------------------------------------------------------
133,342 101,878 96,560

Expenses 82,517 59,424 56,002
--------------------------------------------------------------------------

Earnings before interest and amortization 50,825 42,454 40,558
--------------------------------------------------------------------------

Net earnings 40,019 35,753 32,830
--------------------------------------------------------------------------
Basic earnings per unit 1.36 1.35 1.24
--------------------------------------------------------------------------
Fully-diluted earnings per unit 1.36 1.35 1.24
--------------------------------------------------------------------------

Distributable cash generated from Operations,
per unit 1.5569 1.4700 1.4235
--------------------------------------------------------------------------
Distributions declared, per unit 1.4580 1.3550 1.3012
--------------------------------------------------------------------------



Year ended December 31,
2006 2005 2004
--------------------------------------------------------------------------
Total Assets 440,782 210,176 209,039
--------------------------------------------------------------------------

Total long-term financial liabilities 296,914 171,205 163,869
--------------------------------------------------------------------------

Unitholders' equity 99,497 21,403 21,446
--------------------------------------------------------------------------


Results of Operations

The Fund's results of operations include the results of the Burnaby Casino, the Lake City Casinos and the Palace Casino from the 2004 year end, and the results of Cascades Casino from its acquisition date of May 19, 2006.

Revenue

Gateway's revenue is primarily earned through fees paid by the BCLC for operating the six BC casinos and by the AGLC for operating the Palace Casino. We also generate revenue by providing related casino services such as hotel, food and beverage, parking, foreign exchange services, and automated teller machines.



Three months ended Twelve months ended
December 31, December 31,
----------------------- -----------------------
C$ in thousands 2006 2005 % change 2006 2005 % change
--------------------------------------------------------------------------
Table games revenue 8,810 7,175 33,896 28,651
Slot machines and
other electronic
games revenue 22,276 16,902 85,419 66,383
Hotel revenue 412 - 1,046 -
Other revenue 4,019 1,639 12,981 6,844
--------------------------------------------------------------------------
35,517 25,716 38.1% 133,342 101,878 30.9%
--------------------------------------------------------------------------


In 2006, total consolidated revenue was $133.3 million, which was approximately 30.9% greater than 2005. $26.4 million of this increase is due to the revenue generated at Cascades since its acquisition. Excluding this, revenue from Gateway's previously existing casinos was $106.9 million, or an increase of 4.9% from 2005. Slot machine revenue growth at both the Burnaby and Lake City properties continued strongly and offset the decline of revenues at the Palace location from the strike that began on September 9, 2006. A full discussion of the impact of the strike at the Palace Casino has been included in the Operating Segments section

On a quarterly basis, revenue was:



C$ in thousands Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
-------------------------------------------------------

Table games revenue 8,810 9,314 8,656 7,116 7,175 6,916 7,043 7,517

Slot machines and
other electronic
games revenue 22,276 25,134 20,982 17,027 16,902 16,959 16,839 15,684
Other revenue 4,019 3,945 2,916 2,101 1,639 1,460 1,847 1,897
-------------------------------------------------------
Revenue from gaming
operations 35,105 38,393 32,554 26,244 25,716 25,335 25,729 25,098
Hotel revenue 412 420 214 - - - - -
-------------------------------------------------------
Total revenue 35,517 38,813 32,768 26,244 25,716 25,335 25,729 25,098
-------------------------------------------------------
-------------------------------------------------------


During the fourth quarter of 2006, the Fund changed the manner in which it reports complimentary programs at the casinos (known as comps), which consist mainly of free soft beverages to casino patrons. Prior to 2006, the majority of the food and beverage operations, with the exception of the Palace Casino, had been operated by third parties and the Fund reported the cost of comps as marketing and promotions expenses at their invoiced value from the third parties F&B operators. Beginning in late 2005, the Fund began to take over the food and beverage operations at its facilities and comps provided from internal F&B operations were reported as marketing and promotions expenses at their retail value, with an offsetting amount reported as F&B revenue. During 2006, the value of comps at the Fund's BC casinos began to increase in response to the requirement of the BCLC to provide complimentary beverages to all casino patrons in return for introducing IVS technology to the slot machines and with the acquisition of Cascades. The reporting of these comps has changed such that they are now reported at their net cost, with no reported revenue. This change had no impact on the Fund's EBITDA and net earnings. The quarterly revenue figures above have been changed from those reported in previous quarters to reflect this new method of reporting comps, as follows:



C$ in thousands Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
------------------------------------------------

Other revenue, as
previously reported 4,563 3,454 2,570 2,044 1,641 1,982 2,025
Value of comps (618) (538) (469) (405) (181) (135) (128)
------------------------------------------------
Other revenue,
as adjusted 3,945 2,916 2,101 1,639 1,460 1,847 1,897
------------------------------------------------
------------------------------------------------


The year over year increase in gaming revenue when compared to 2005 is primarily due to the inclusion of the results of the Cascades Casino, as well as the impact of the introduction of IVS (or ticket-in-ticket-out) technology at the Burnaby Casino and Lake City Casinos during the year. Additionally, other income grew in 2006 from the increase in food and beverage revenue.

Excluding Cascades, total revenue in the second, third and fourth quarters of 2006 was:



C$ in thousands Q4/06 Q3/06 Q2/06
------------------------
Table games revenue 6,154 6,714 7,241
Slot machines and other
electronic games revenue 16,537 19,290 18,324
Other revenue 1,937 2,378 2,166
------------------------
Revenue from gaming
operations 24,628 28,382 27,731
Hotel revenue - - -
------------------------
Total revenue 24,628 28,382 27,731
------------------------
------------------------


Although the fourth quarter of the year is generally one of the slowest periods of the year for the Fund due to the seasonal impacts at the Lake City Casinos and the Palace Casino, the large decrease in the fourth quarter of 2006 is due specifically to the impact of the strike at the Palace Casino that began on September 9, 2006. As discussed further in the Operating Segments discussion below, revenue at the Palace Casino fell 53.5% in the fourth quarter as compared to the third quarter, as operations were reduced.

Revenues are discussed in more detail in the Operating Segments discussion below.

Expenses

Total expenses for 2006 were $82.5 million or 61.9% of total revenue as compared to $59.4 million or 58.3% of revenue in 2005. This is consistent with the acquisition of the Cascades Casino as it operates a number of non-gaming amenities which while they contribute positively to the EBITDA of the Fund they do operate at a lower overall margin. Total expenses comprised the following:



Three months ended Twelve months ended
December 31, December 31,
------------------------ ------------------------
C$ in thousands 2006 2005 % change 2006 2005 % change
--------------------------------------------------------------------------
Corporate and general
administration 1,782 1,112 6,136 4,443
Cost of food &
beverage services 2,481 867 7,192 2,516
Human resources 14,493 10,999 52,260 41,962
Marketing and
promotions 2.070 675 5,170 2,864
Occupancy 984 875 3,555 3,127
Casino Operating
Expenses 2,252 1,338 7,667 4,512
Hotel Operating
Expenses 208 - 537 -
-------------- --------------
24,270 15,866 53% 82,517 59,424 38.9%
-------------- --------------
-------------- --------------
Percentage of total
revenue 68.3% 61.7% 61.9% 58.3%
-------------- --------------
-------------- --------------


Total expenses in the fourth quarter of 2006 were $8.4 million higher than expenses in the fourth quarter of 2005. The increase from 2005 is mainly attributable to increases related to the Cascades acquisition. Excluding the expenses from Cascades, total expenses in 2006 are $66.5 million, or 12%, higher than in 2005.

Expenses on a quarterly basis, adjusted to reflect the change in reporting comps discussed above, were:



C$ in thousands Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------------------------------------------

Corporate and
general
administration 1,782 1,575 1,649 1,114 1,112 686 1,431 1,214

Cost of food &
beverage services 2,481 2,754 1,136 821 867 504 564 581
Human resources 14,493 14,199 12,979 10,589 10,999 10,415 10,314 10,235
Marketing and
promotions 2,070 790 1,482 828 675 735 692 762
Occupancy 984 979 822 770 875 780 758 715
Casino Operating
Costs 2,252 2,294 1,720 1,401 1,338 907 1,003 1,264
Hotel Operating
costs 208 216 113 - - - - -
--------------------------------------------------------------------------
24,270 22,807 19,901 15,523 15,866 14,027 14,762 14,771
--------------------------------------------------------------------------

--------------------------------------------------------------------------
Percentage of
total revenue 68.3% 58.8% 60.7% 59.2% 61.7% 55.4% 57.4% 58.9%
--------------------------------------------------------------------------


If we exclude the expenses from Cascades in the fourth quarter of 2006, total expenses rose 5.8% from the same period in 2005, as shown below



Q4/06
Total
Q4/06 Q4/06 Expenses Q4/05
Total Cascades Excluding Total
C$ in thousands Expenses Only Cascades Expenses
------------------------------------

Corporate and general administration 1,782 380 1,402 1,112
Cost of food & beverage services 2,481 1,707 774 867
Human resources 14,493 3,355 11,138 10,999
Marketing and promotions 2,070 811 1,259 675
Occupancy 984 255 729 875
Casino Operating Expenses 2,252 761 1,491 1,338
Hotel Operating Expenses 208 208 0 -
------------------------------------
24,270 7,477 16,793 15,866
------------------------------------


The 5.8% increase in the expenses of the operations excluding Cascades is attributable primarily to the increase in the joint marketing fund percentage from .75% of the win to 1.5% of the win. This change affected only the Burnaby Casino. Human resources at the Burnaby Casino saw an overall increase in costs due to a number of factors including the full year inclusion of food and beverage human resource expenses. Additionally, there was a net reduction of expenses at the Palace Casino due to the reduced operations from the strike.

Expenses are discussed in more detail in the Operating Segments discussion below.

EBITDA and Net Earnings

EBITDA is not a defined term under Canadian GAAP, nor does it have a standard, agreed upon meaning. Accordingly, the Fund's EBITDA may not be directly comparable to EBITDA reported by other issuers. Management has determined EBITDA is a useful supplemental measure in evaluating the Fund's performance as it provides investors with an indication of cash available for debt service, working capital needs and capital expenditures. This non-GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

The Fund generated earnings before loss on sale of assets, interest, income allocation on Class A units, amortization and unrealized gain or loss on interest rate swap contract ("EBITDA") of $50.8 million for 2006, for an EBITDA margin of 38.1%, compared to $42.5 million, or an EBITDA margin of 41.3%, in 2005. For the fourth quarter of 2006, the Fund generated EBITDA of $11.2 million, resulting in an EBITDA margin of 31.7%, compared to $9.9 million, or 38.3%, in the fourth quarter of 2005. The reduction in EBITDA margin in 2006 is a result of the acquisition of Cascades, which operates at a lower EBITDA margin than the Burnaby Casino do to its range of non-casino amenities, and to the impact of the strike at the Palace Casino.

After amortization and net interest expense, the Fund generated net earnings of $8.4 million, or $.291 per unit, for the fourth quarter. This compares to $11.7 million, or $0.476 per unit, in the third quarter of 2006. This compares to $8.7 million, or $0.338 per unit, in the fourth quarter of 2005.

The reconciliation between EBITDA and Net Earnings is:



C$ in thousands Three months ended Twelve months ended
December 31, December 31,
2006 2005 2006 2005
------------------ -------------------

EBITDA 11,248 9,850 50,825 42,454

Interest income on
secured loans 3,998 2,450 13,068 9,721
Income allocation on Class
A Partnership Units (4,003) (2,453) (13,084) (9,733)
Interest expense, net (999) (664) (3,829) (2,995)
Unrealized gain (loss) on
interest rate swap contracts 172 588 396 164
Gain (Loss) on sale of
property and equipment 6 1 (141) 208
Income Tax Expense - - (16) -
Amortization (2,018) (1,055) (7,216) (4,066)
------------------ -------------------
Net Earnings 8,404 8,717 40,019 35,753
------------------ -------------------
------------------ -------------------


The increase in the interest income on secured loans and in the income allocation on Class A Partnership units is related to the additional secured loans and Class A Partnership units that were issued in connection with the acquisition of the Cascades Casino on May 19, 2006.

Amortization increased in both the fourth quarter and the 2006 year due to the acquisition of the Cascades Casino.

Loss on sale of property and equipment in the current year was related to the disposal of obsolete hotel assets acquired with the purchase of the Villa Hotel on June 30, 2004.

Summary of Quarterly Results



Summary of Quarterly Results
----------------------------
(C$ in thousands, except per unit figures)

2006 2005
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenue
Table games
revenue 8,810 9,314 8,656 7,116 7,175 6,916 7,043 7,517
Slot machines and
other electronic
games revenue 22,276 25,134 20,982 17,027 16,902 16,959 16,839 15,684
Hotel revenue 412 420 214 - - - - -
Other revenue 4,019 3,945 2,916 2,101 1,639 1,460 1,847 1,897
---------------------------------------------------------------------------
Total revenue 35,517 38,813 32,768 26,244 25,716 25,335 25,729 25,098

Expenses 24,270 22,807 19,901 15,523 15,866 14,027 14,762 14,771
---------------------------------------------------------------------------
---------------------------------------------------------------------------
EBITDA(1) 11,247 16,006 12,867 10,721 9,850 11,308 10,967 10,327
---------------------------------------------------------------------------

Net earnings 8,402 11,661 10,759 9,197 8,716 10,175 8,194 8,668
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic earnings
per unit 0.27 0.38 0.38 0.35 0.33 0.39 0.31 0.33
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Diluted earnings
per unit 0.27 0.37 0.37 0.35 0.33 0.39 0.31 0.33
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Distributable cash
generated from
Operations 9,051 14,800 11,553 10,263 8,940 10,536 9,956 9,367
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Per unit 0.291 0.476 0.404 0.389 0.338 0.399 0.377 0.355
---------------------------------------------------------------------------
(1)EBITDA is not a defined term under Canadian generally accepted
accounting principles. See discussion under "EBITDA" and Net Earnings"


Operating Segments

The Partnership has four primary operating segments based on geographic markets. These are the Burnaby Casino, Cascades Casino, the Lake City Casinos and the Palace Casino.

Although the Consolidated Statements of Earnings for the three and twelve months ended December 31, 2006 include corporate and general administration expenses, interest income on secured loans, income allocation on Class A Partnership Units, interest expense, unrealized gain/loss on interest rate swap contract and loss on sale of assets in determining net earnings, these items are not expenses of any one operating segment, and have not been included in the following discussion.



Burnaby Casino
Three months ended Year ended
December 31, December 31,
------------------------ ------------------------
C$ in thousands 2006 2005 % change 2006 2005 % change
---------------------------------------------------

Revenue
Table games revenue 4,508 4,107 17,360 17,217
Slot machine revenue 7,638 7,053 30,531 27,038
Food & beverage
revenue 508 493 2,023 877
Other revenue 387 (6) 1,125 942
--------------------------------------------------------------------------
13,041 11,647 12% 51,039 46,074 10.8%
--------------------------------------------------------------------------

Operating expenses
Human resources 4,369 4,039 16,791 15,281
Occupancy 66 156 384 446
Food & beverage 347 330 1,264 490
Other operating
expenses 1,685 1,003 5,355 4,500
--------------------------------------------------------------------------
6,467 5,512 17.3% 23,794 20,717 14.8%
--------------------------------------------------------------------------
Operating earnings
before amortization 6,574 6,135 7.3% 27,245 25,357 7.5%
------------------------------------- --------------
--------------


During the year ended December 31, 2006, total revenues at the Burnaby Casino rose by $5 million or 10.8% compared to the same period in 2005, due primarily to increased slot revenue and food & beverage revenue. The trend of year-over-year slot machine revenue increases was consistent throughout 2006. The majority of this is due to the introduction of wide area progressive slot machines in early 2006, which allow players in all casinos in BC to play for a chance at winning jackpots that start at $100,000 and increase based upon coin in, and the increased play associated with the introduction of the BC Gold points program, which allows BC Gold Card members to earn cash back based on their level of slot machine play. We estimate that the BC Gold points program has resulted in an 18.6% increase in the amount played by BC Gold members.

Table games revenue was consistent with 2005. The fourth quarter of 2006 was particularly strong and offset some table weakness that we experienced in the first quarter of 2006, which we attribute to the opening of the expanded Boulevard casino and the tendency of players to visit the newer casino locations before settling back into their old visitation patterns.

F&B revenue increased from $877,000 in 2005 to approximately $2 million in 2006 as a direct result of taking over the food and beverage operations at the Burnaby Casino from a third party operator in October 2005.

Total expenses for 2006 were $23.8 million, which was $3.1 million, or 14.8%, higher than in 2005. This was mainly due to increases in human resources costs, and the costs associated with providing the food and beverage operations.

Human resources costs for 2006 were $16.8 million, or 9.9% higher than 2005. This is mainly due to an increase of approximately $650,000 in wages for the food and beverage operations in 2006, as well as scheduled wage increases across the casino.

Other operating expenses had a net increase of $900,000, which was due primarily to an increase in the BCLC joint marketing fee and the costs of the BC Gold points program introduced in 2006, offset by a one-time BCLC joint marketing fee reimbursement of $480,000 in the third quarter.

On April 1, 2006, the joint marketing fee paid to BCLC increased from 0.75% to 1.5% of net win, which amounted to an increase of $900,000 in expenses at the Burnaby Casino. These funds, as well as those paid by other operators, are put into a joint marketing fund held by the BCLC to promote BC's casino industry, both within and outside the province. Of the Fund's casinos, the Burnaby Casino and Cascades Casino are the only two casinos that currently contribute to this fund. As control of the funds rests with the BCLC, the Fund reports these as expenses of the period incurred, rather than to report them as prepaid expenses to be recognized at a later date in connection with the marketing activities.

The joint marketing fee was introduced in late 2004 in conjunction with the opening of new facilities under the BCLC's new model for the GVRD. The BCLC's fiscal year ended March 31, 2006 was the first full year of the program, and although the BCLC had begun some of the associated marketing activities, the full amount collected during that period was not spent. Gateway and the BCLC agreed to split the remaining funds equally. The Burnaby Casino received $480,000 to be applied against the cost of various marketing programs for this period. Management does not anticipate similar refunds in future years, as the BCLC has developed full marketing plans for these funds.

The following table compares the Burnaby Casino's results for the four quarters of 2006 and 2005:



C$ in thousands Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
--------------------------------------------------------
Revenue
Table games
revenue 4,508 4,131 4,448 4,273 4,107 4,090 4,363 4,657
Slot machine
revenue 7,638 7,937 7,766 7,190 7,053 6,827 6,724 6,434
Food & beverage
revenue 508 496 507 512 493 129 133 122
Other revenue 387 294 215 229 (6) 216 295 437
--------------------------------------------------------
13,041 12,858 12,936 12,204 11,647 11,262 11,515 11,650
--------------------------------------------------------

Operating expenses
Human resources 4,369 4,247 4,158 4,017 4,039 3,872 3,615 3,771
Occupancy 66 105 105 108 156 94 95 101
Food & beverage 347 317 314 286 330 48 55 57
Other operating
expenses 1,685 1,106 1,484 1,080 987 1,102 1,096 1,299
--------------------------------------------------------
6,467 5,775 6,061 5,491 5,512 5,116 4,861 5,228
--------------------------------------------------------

Operating earnings
before
amortization 6,574 7,083 6,875 6,713 6,135 6,146 6,654 6,422
--------------------------------------------------------
--------------------------------------------------------


Slot machine revenue continued to perform well during the fourth quarter of 2006; however average win per day per machine fell slightly over the third quarter of 2006 due to the impact of some unusual weather in the Vancouver area during the period. The area was hit by a number of snowstorms in the last week of November. Additionally, as widely reported in the national media, the Vancouver area was hit by three back-to-back windstorms in December that resulted in widespread power outages. Despite these storms, the casino continued to perform well during the quarter and slot machine revenue increased approximately 8.3% over the same period in 2005. Table revenues also performed well in the quarter, increasing approximately 9.1% over the third quarter of 2006 and 9.8% over the same period in 2005.

Total expenses in the fourth quarter of 2006 were $6.5 million, an increase of approximately $688,000 from the third quarter of 2006. This is consistent with the general trend of incurring higher expenses during the fourth quarter of each year due primarily to the increased number of statutory holidays and the associated higher labour costs.

Operating earnings for the fourth quarter of 2006 came in at 50.4% of revenues, compared with 55.1% in the third quarter of 2006 and 52.7% for fourth quarter of 2005.

Cascades Langley Casino & Hotel

Reported results for Cascades represent the period from acquisition on May 19, 2006. The following table compares the Cascades Casino's results for three quarters of 2006:



C$ in thousands

May 19 to May 19 to
June 30, December 31,
Revenue Q4/06 Q3/06 2006 2006
Table games revenue 2,656 2,600 1,415 6,671
Slot machine revenue 5,739 5,844 2,658 14,241
Food & beverage revenue 1,785 1,213 637 3,635
Hotel revenue 412 420 214 1,046
Other revenue 298 354 113 765
-----------------------------------------
10,890 10,431 5,037 26,358
-----------------------------------------

Operating expenses
Human resources 3,355 3,120 2,136 8,611
Occupancy 255 201 70 526
Food & beverage 1,708 1,846 243 3,797
Hotel Expenses 208 216 113 537
Other operating
expenses 1,571 993 732 3,296
-----------------------------------------
7,097 6,376 3,294 16,767
-----------------------------------------

Operating earnings before
amortization 3,793 4,055 1,743 9,591
-----------------------------------------


Overall, operations of the Cascades facility have continued to exceed projections since they were acquired by the Partnership. Total revenue exceeded projected revenue by 16.7% in the quarter and 8.3% since acquisition, driven by strong casino revenues. Table games were in line with our projections, while slot machine revenue exceeded expectations by approximately $900,000, or 18.7%, in the fourth quarter and approximately $3.3 million, or 17.5%, since acquisition. Average win per machine per day for the fourth quarter was $468, compared to an initially projected rate of $388 per machine per day. Since acquisition, average win per machine per day has been $475, compared to an expected rate of $387 per machine per day.

Table revenue in the fourth quarter was consistent with the previous quarter, while slot machines revenue fell by approximately $105,000. Both of these were impacted by winter storms discussed for the Burnaby Casino above. Generally, we expect that revenues in the fourth quarter would be higher than the third quarter due to the increased activity during the Christmas period however, the November snowstorm hit the Langley area harder than the rest of the GVRD and the casino was without power for several days due to the December windstorms and a faulty generator in the backup power system.

Food and beverage revenues were 47% higher than the previous quarter due primarily to the increased volume of patrons associated with the convention centre during the Christmas season.

Hotel revenue was generally in line with expectations. For the fourth quarter, the hotel achieved an average occupancy rate of 55.5% and average room rate of $104, compared to occupancy of 54.4% and an average room rate of $109 during the previous quarter. For the full year of 2006, the hotel achieved an occupancy level of 53.4% and an average rate of $108 per night

Expenses for the fourth quarter were in line with expectations. Typically, the fourth quarter sees higher human resources expenses due to the high number of statutory holidays. Other operating expenses were higher in the fourth quarter as compared to the third quarter as we received a one time marketing reimbursement of $270,000 in the third quarter, as discussed above for the Burnaby Casino.

Since the opening of the facility in May 2005, the high-limit table games section and the craps table had significantly underperformed expectations. During July 2006 the high-limit area was converted into a specialty poker games area with Four Card Poker, Three Card Poker, Texas Shootout Poker and Pai Gow Poker. Additionally, the craps table was removed and 17 additional slot machines were installed, bringing the total number of machines at Cascades to 539. The specialty poker area has performed very well. The area has since seen higher patron counts and generated incremental play compared to the previous tables, as well as successfully migrating some former poker players onto the house banked tables, which offer the house a higher margin on a per wager basis.

On December 18th, the gaming floor was further reconfigured after the completion of a utilization analysis, and the game mix was changed. The impact of these changes was seen immediately. The changes to the floor were a direct response to the needs of the facility based upon management, staff and customer input. In the first two weeks of operating our newly configured gaming floor, the overall weekly casino drop has increased approximately 18% from previous levels

With the success of Cascades, the facility had been experiencing a shortage of parking since opening, which resulted in the Summit Theatre being operated on a very limited basis and restricted the ability for the facility to be marketed to its full extent. Prior to the acquisition of Cascades, GCI had begun construction on a 500-stall parkade to provide the needed additional parking. Under the Acquisition Agreement, GCI agreed to pay the cost to complete the parkade, which was completed in January 2007 at a total cost of approximately $9.6 million. The additional parking provided by the new parkade will allow for the reopening of the 420-seat Summit Theatre, which will run regular live entertainment, maximization of the convention centre and full scale marketing of the facility as an entertainment destination, all of which will provide increased traffic for the casino.



Lake City Casinos
Three months ended Year ended
December 31, December 31,
C$ in thousands 2006 2005 % change 2006 2005 % change
------------------------ ------------------------

Revenue
Table games revenue 1,013 975 4,256 4,089
Slot machines and
other electronic
games revenue 7,780 7,209 32,000 28,498
Food & beverage
revenue 357 156 1,421 660
Other revenue 222 7 730 436
------------------------ ------------------------
9,372 8,347 12.2% 38,407 33,683 14%
------------------------ ------------------------

Operating expenses
Human resources 4,188 4,241 16,366 16,072
Occupancy 372 387 1,449 1,394
Food & beverage 221 147 923 499
Other operating
expenses 1,024 1,017 3,832 3,365
FDC expense recovery (568) (483) (2,174) (2,449)
------------------------ ------------------------
5,237 5,309 -1.4% 20,396 18,881 8%
------------------------ ------------------------
Operating earnings
before amortization 4,135 3,038 35.9% 18,011 14,802 21.6%
-------------- --------------
-------------- --------------


Results at the Lake City Casinos continued their strong organic growth trend in 2006 with double digit increases in revenue. Revenue at the Lake City Casinos for the fourth quarter of 2006 was up approximately 12.2% from the same period in 2005, bringing year to date revenue for the Lake City Casinos to $38.4 million, which is an increase of 14% over 2005. Much of the year-to-date growth came from an increase in slot machine revenue, reflecting the continuation of a general organic growth trend that we recorded throughout 2004 and 2005. The increases in 2006 can be attributed to the continued growth in the Thompson-Okanagan region, one of the fastest growing areas in Canada, as well as the impact of the introduction of wide area progressive slot machines and the BC Gold points program, discussed earlier, and the continued conversion of slot machines to ticket-in-ticket-out.

During the fourth quarter of 2006, the BCLC continued the conversion of slot machines to an integrated voucher system (or "IVS") technology and completed the conversion of an additional 4 machines at the Kelowna Casino. By the end of December 2006, 332 of 342 slot machines had been converted, reaching a 97% conversion rate. The remaining 10 machines have been converted since the end of the 2006 calendar year and the Kelowna casino is now 100% IVS. In Vernon, an additional 21 machines were converted by the BCLC bringing the total to 198 of 210 machines, a 94% conversion, by the end of the quarter. In Penticton there were no additional machines converted to IVS in the 4th quarter. At year end we had 196 of 228 machines converted for a 86% conversion rate. There are 9 additional conversions scheduled for February 2007 and we expect to be at 100% by the end of March 2007. In Kamloops, an additional 13 machines were converted by the BCLC bringing the total to 264 of 300 machines representing a 88% conversion by the end of the quarter. We had a further 22 machines converted on Feb 23, 2007 for a total of 286 machines converted. The Kamloops location anticipates moving entirely to the IVS system by the end of March 2007. The ongoing conversion has helped to increase revenues while reducing human resources costs.

During the second quarter of this year, the Penticton casino opened a two-table poker area that operates four days of the week. The overall usage of the poker area has increased since the launch of the game. Poker revenue is anticipated to grow as players increase their confidence and experience with the game.

In the fourth quarter of 2005, Gateway took over an existing food & beverage operation at the Penticton Casino that was previously operated by a third party. Accordingly, there was an increase in revenues and costs from food & beverage operations at that location. We also received approval to begin liquor service at the Kelowna Casino during this time period. In January 2007 we received approval for liquor service at the Kamloops Casino.

Total expenses in fourth quarter of 2006 were approximately 1.4% lower than the same period in 2005, bringing expenses for the full year to $20.4 million. This is an increase of approximately $1.5 million from 2005. A portion of this change is related to a smaller FDC expense recovery in 2006. If the FDC recovery is excluded from the total, expenses for the year ended December 31, 2006 were $22.5 million, compared to $21.3 million in 2005. In general, the higher expenses are directly related to the higher casino revenues.

The lower FDC expense recovery in 2006 was due to a higher amount of eligible capex in 2006. We apply the recovery first to capex and rent recovery, with the remainder to operating recoveries. We anticipate that all of the approved costs will be recovered this year.

The increased human resources in 2006 are attributed to higher volumes of casino visitation in 2006, the food and beverage operations at the Penticton Casino and scheduled wage increases. The Lake City Casinos are currently in the second year of a three-year collective agreement that provides for annual increases of 2.4% per year. This is equal to the rate of inflation for the province of B.C. for the year ended November 30, 2004.

The increase in other operating expenses for the quarter is primarily related to the increased activity in the casinos during the current year and higher marketing and promotion expenses. This resulted from increased marketing expenses related to BC Gold progressive slot machines and other promotion initiatives. These were partially offset by a one-time BCLC marketing fee reimbursement of $155,000.

The following table compares our results for each quarter of 2006 and 2005.



C$ in thousands Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
-------------------------------------------------------
Revenue
Table games
revenue 1,013 1,197 1,044 1,002 975 1,140 1,014 960
Slot machines
revenue 7,780 8,877 8,055 7,288 7,209 7,579 7,183 6,528
Food & beverage
revenue 357 464 363 237 156 159 178 166
Other revenue 222 221 151 136 7 83 226 120
-------------------------------------------------------
9,372 10,759 9,613 8,663 8,347 8,961 8,601 7,774
-------------------------------------------------------

Operating expenses
Human resources 4,188 4,253 4,039 3,886 4,241 3,980 3,951 3,900
Occupancy 372 385 334 358 387 369 338 300
Food & beverage 221 277 241 184 147 127 114 111
Other operating
expenses 1,024 885 1,023 899 1,017 798 764 786
FDC expense
recovery (568) (604) (662) (340) (483) (721) (663) (582)
-------------------------------------------------------
5,237 5,196 4,975 4,987 5,309 4,553 4,504 4,515
-------------------------------------------------------

Operating earnings
before
amortization 4,135 5,563 4,638 3,676 3,038 4,408 4,097 3,259
-------------------------------------------------------
-------------------------------------------------------


The quarterly fluctuations in gaming revenue are consistent with the historical operations of the Lake City Casinos. The fourth quarter of the year is typically slower than the second and third quarter, as visitor levels decrease from summer tourism in the Okanagan region.

Total expenses for the fourth quarter of 2006, before FDC expense recovery, were approximately the same as the third quarter of 2006.



Palace Casino
Three months ended Year ended
December 31, December 31,
C$ in thousands 2006 2005 % change 2006 2005 % change
------------------------ ------------------------
Revenue
Table games revenue 620 2,092 5,609 7,345
Slot machines and
other electronic
games revenue 1,070 2,641 8,646 10,847
Food & beverage
revenue 388 900 2,745 3,517
Other revenue 139 89 540 412
------------------------ ------------------------
2,217 5,722 -61.3% 17,539 22,121 -20.7%
------------------------ ------------------------

Operating expenses
Human resources 1,690 2,363 8,524 9,310
Occupancy 293 332 1,197 1,287
Food & beverage 205 390 1,208 1,526
Other operating
expenses 611 470 2,484 1,956
------------------------ ------------------------
2,799 3,555 -21.3% 13,413 14,079 -4.7%
------------------------ ------------------------

Operating earnings
before amortization (582) 2,167 -126.9% 4,126 8,042 -48.7%
------------------------ ------------------------
-------------- --------------


Total revenue in the fourth quarter 2006 was $2.2 million, which is down 61.3% from the same period last year due primarily to the impact of the strike that began in September 2006. Although revenue in the first half of 2006 was down due to the impact of a smoking ban implemented in the City of Edmonton on July 1, 2005, results had essentially returned to pre-ban levels prior to the strike.

Since the strike began, the Palace Casino has continued to operate, although on a reduced basis. During peak periods on Friday and Saturday, the casino operates 15 table games, two poker tables, and approximately 626 slot machines and electronic games on both floors of the facility and the Deli on the main floor as well as providing full operation of the Booker's Steak and Prime Rib restaurant. During non-peak periods, the casino operates on the main floor only and provides 411 slot machines and electronic games, up to 15 table games, two poker tables and operates the Deli. The casino continues to offer live entertainment on weekends.

The term of the strike and the continued financial impact to the Fund cannot be estimated with any certainty at this time. In early February the employees rejected a proposal vote on an offer made by the company. The proposed offer would have seen the employees receiving substantial signing bonuses and wage increases over the four-year life of the agreement ensuring our employees remain at, or close to, the top of the market in terms of the pay scale for the Edmonton Casino marketplace. Management will continue to attempt to settle the strike, and is hopeful that this can be accomplished in the short-term, but any settlement must reflect the economic realities of the Palace Casino, as well as the potential impact of the settlement on Gateway's other operations.

During the fourth quarter of 2006, two new casinos were opened in the city of Edmonton; the River Cree Resort and Casino and the Century Casino and Hotel. As previously indicated, we were anticipating a possible decline of revenues as a result of the increased level of competition

Total expenses for 2006 were approximately $13.4 million or 4.7% less than 2005, due to the impact of the strike.

The following table compares the Palace Casino's quarterly results for 2006 and 2005.



C$ in thousands Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
-------------------------------------------------------
Revenue
Table games
revenue 620 1,400 1,748 1,841 2,092 1,687 1,665 1,901
Slot machines
and other
electronic games
revenue 1,070 2,525 2,503 2,549 2,641 2,553 2,933 2,721
Food & beverage
revenue 388 730 777 850 900 778 895 945
Other revenue 139 110 153 137 89 95 120 106
-------------------------------------------------------
2,217 4,765 5,181 5,377 5,722 5,113 5,613 5,673
-------------------------------------------------------

Operating expenses
Human resources 1,690 2,223 2,286 2,326 2,363 2,314 2,362 2,271
Occupancy 293 288 313 302 332 316 325 314
Food & beverage 205 314 338 351 390 328 394 414
Other operating
expenses 611 685 611 577 470 465 499 522
-------------------------------------------------------
2,799 3,510 3,548 3,556 3,555 3,423 3,580 3,521
-------------------------------------------------------

Operating earnings
before
amortization (582) 1,255 1,633 1,821 2,167 1,690 2,033 2,152
-------------------------------------------------------
-------------------------------------------------------


During 2006, the AGLC began to convert the slot machines in province to ticket-in-ticket-out technology, beginning with a test conversion at the Palace Casino. After the successful completion of the test, the remaining machines at the Palace were converted, with 100% conversion by September 1, 2006.

Expenses for the fourth quarter were $2.8 million, which was a reduction of 21.2% from the same period in 2005 due mainly to the impact of the strike. Most notably, HR costs in the third and fourth quarter of 2006 are down by 16.4% when compared to the same periods in 2005. Other operating expenses were higher in the third and fourth quarters due to the inclusion of additional costs associated with the strike. In the third quarter we incurred $182,000 in strike related costs. This increased to $258,000 in the fourth quarter as we experienced a full quarter of the impact of the strike. On a year over year basis labour expenses decreased approximately 8.4% from the same period of last year.

Other expenses have actively been reduced wherever possible to address the decline in the volume of casino patrons. Overall expenses for the fourth quarter of 2006 are down 20% or $703,000 when compared to the third quarter of 2006.

Expenses for 2006 include a total of $441,000 in costs that were incurred specifically due to the strike, including the cost of arbitration, additional legal costs, additional security, etc.

Outlook

BC Operations

Operational Changes

During the first quarter of 2006, the BCLC introduced a number of new revenue-building initiatives in BC casinos. In January 2006 they launched a cash for points program for members of BC Gold, the recently launched player loyalty program. Members receive 1 BC Gold point for every dollar played in the slot machines. Each point is worth $0.005 and members can redeem their points for cash once they have accumulated a minimum of 1,000 points. Operators are responsible for 25% of the cost of the points and are reimbursed by BCLC for all of the redemptions. Although this has increased our operating costs, we estimate that our slot play from our BC Gold card members has increased by 18.6% more than offsetting the increased cost.

In February 2006 the BCLC launched a wide-area progressive slot machine program across all BC casinos. Each casino operates a bank of slot machines that are interconnected with other casinos. Play on these machines contributes to a province-wide progressive jackpot, which provides various levels of random bonuses. The top bonus jackpot is guaranteed to be a minimum of $100,000 and can be as high as $200,000. Although progressive bonuses are common in most casinos in North America, and very popular with slot machine players, this is the first time that such a program has been introduced in BC and to date they have been very popular.

In March 2006 the BCLC allowed casinos to introduce "Squeeze Play" mini baccarat, which Gateway has implemented in the high limit area of the Burnaby Casino. "Squeeze Play" differs from traditional baccarat in that players are allowed to hold their cards and "squeeze" their hand (or slowly look at their cards, adding an additional layer of suspense to the game). This version of the game is very popular in Asian casinos and is popular with Asian players in the GVRD.

Cascades currently offers two major tournaments annually with each tournament attracting in excess of 700 players over the duration of the tournament. In May 2006, Cascades Casino hosted the first "Pacific Poker Shootout" poker tournament. Cascades has also hosted the Canadian Women's Poker Championship since its inception in 2006. This is the only multi-day Women's Poker Tournament in North America and portions of the tournament are televised on TSN. While poker tournaments are not significant revenue generators, the value in offering them comes from the media exposure of being able to offer a major prize pool to players. This generates additional traffic to the facility and assists in creating location awareness of the casino to the general public.

The Burnaby and Cascades Casinos have also begun to test a number of slot tournament formats. Slot tournaments are very popular in other gaming jurisdictions in North America. They help to create a sense of excitement during off peak times and assist in driving players to less busy times for the casino operation. It is anticipated that the overall impact of the tournament itself will be revenue neutral but will create additional play outside of the tournament.

The Burnaby Casino is also the test site for a new type of slot machine to BC that offers what is known as 'communal gaming'. This machine allows multiple players to wager on the same outcome, effectively creating a social atmosphere where players can share in the excitement of the outcome of the group's wagers. It is expected that this will become a popular game and will drive additional revenues in the near future. This test is currently ongoing and early results have proven to be favourable.

Market Developments

As discussed earlier in this MD&A, there were a number of small changes to the casino operations in the GVRD during 2006. Looking forward, we expect to see additional growth in the market with the following projects:

1) The Hastings Racecourse in Vancouver has been approved for the installation of between 600 and 900 slot machines within the existing racetrack. Rezoning approval was granted in July 2004; however the project has yet to receive its development permit due to legal issues surrounding the approval of slot machines by the City. Shortly after approval, the Hastings Park Conservancy, a local-area residents group, filed suit against the City of Vancouver in the BC Supreme Court, claiming that the rezoning bylaw was not within their powers. The court found in favour of the City in August 2006, however the Hastings Park Conservancy filed an appeal in September 2006. Although no formal target opening date has been announced, the company developing the project has stated that construction will take approximately six months after receiving a development permit. It is widely anticipated that the installation of slot machines will not take place until early 2008.

2) A new 100,000 square foot casino is currently under development in the Queensborough area of New Westminster, BC, which sits on the eastern border of the City of Richmond. The new facility, known as Starlight Casino, will operate approximately 850 slot machines and 45 table games, a private gaming area and a high limit area as well as a large 12 table poker room,. The facility will also have a 140 seat show lounge that will feature extensive food and beverage services. There will also be a cafe with an exterior south facing deck. The casino will provide several food and beverage options on the gaming floor and will be connected to a popular interactive sports bar concept, operated by Schanks Athletic Club and a high end Chinese restaurant, operated by the Kirin Restaurant Group. Construction began in December 2005 and the facility is projected to open at the end of 2007.

3) Subsequent to the end of the year, the BC government introduced legislation to ban smoking in all indoor public spaces. Once passed, the ban will be effective January 1, 2008, and will apply to all enclosed buildings "to which the public are ordinarily invited or permitted access", including restaurants, bars, clubs, casinos, etc. Management is currently assessing the impact of the ban on our operations, as well as the development plans for the redevelopment of the Burnaby Casino. From an operational perspective, as the ban will impact all casinos in BC equally, we expect that any impact will be temporary. Similar bans in other jurisdictions have seen an immediate impact of up to approximately 10% of revenue, which returns within six to twelve months. A limited smoking ban implemented by the Workers Compensation Board of BC in 2001 resulted in a 12% reduction in revenue at the Burnaby Casino, which was fully recovered within seven months. A similar ban implemented in Edmonton on July 1, 2005 saw an impact in line with this, which was fully recovered prior to the strike on September 9, 2006. We anticipate that the impact to our BC casinos will be within the parameters experienced in other jurisdictions. The ban also has implications for the design of the new Burnaby Casino, which had included separate smoking areas within the slot area of the casino floor. We are now working through the proposed legislation to determine how we can modify the design to include specific areas for our smoking patrons.

4) The opening of the redeveloped Burnaby Casino, expected in late spring of 2008.

Redevelopment of the Burnaby Casino

As we have discussed in the past, the Fund is currently developing a new facility for the Burnaby Casino across the street from the current casino on the site of the former Radisson Hotel, purchased in 2004. The new Burnaby facility includes a 100,000 square foot casino, a full-service restaurant, a new lobby for the hotel and a convention centre, as well as upgrades to the 200 rooms in the tower portion of the hotel. The new casino will house up to 1,000 slot machines, up to 54 table games, a high-limit gaming area, a16-table poker room, as well as the necessary back-of-house amenities. The casino will also expand on the food and beverage alternatives currently offered at the Burnaby Casino by providing a number of quick serve food choices, an entertainment lounge with bar and a central bar on the main floor of the casino. Once the new facility is opened, the existing casino will be converted back into a parkade, with an additional level and a half of parking constructed. This structure will be connected to the new casino by a covered overhead walkway, allowing easy and comfortable access to the casino.

On April 30, 2006, Gateway entered into a fixed price construction contact with PCL Constructors Westcoast Inc ("PCL") for the redevelopment of the Burnaby Casino. The contract awarded to PCL has a value of $73.1 million and covers approximately 68% of the total construction costs of the Burnaby project. Including design and preliminary costs incurred to date, approximately 80% of the total construction costs have been fixed. Under the terms of the contract, which includes all base construction of the casino and convention centre, and enhancements to the exterior of the existing hotel tower, PCL has provided a guarantee of substantial completion of construction and has guaranteed the price for this construction work. Given the time required for interior finishing, installation of gaming devices and other commissioning activities, the Fund anticipates the redeveloped casino, hotel and convention centre will open in the late spring of 2008.

In addition to the work included in the contract with PCL, the project construction will include the completion of a restaurant & kitchen, interior finishings for the hotel guest rooms, including executive level suites, and the renovation and expansion of the existing parkade structure. These additions have an estimated value of $25 million and contracts for the completion of the majority of these components will be awarded as required, once all design specifications have been finalized. With the exception of the renovation and expansion of the parkade, all construction is expected to be completed by the scheduled opening. Work on the parkade will begin immediately after the opening of the new casino and is expected to take approximately six months to complete.

Excluding the cost of the acquisition of the property in June 2004, the total redevelopment project for the Burnaby Casino is now estimated at approximately $125 million including pre-opening costs, recruitment, training, furniture and equipment. The figure also includes standard construction contingencies to allow for any potential cost increases related to those components of the project not yet awarded. The Fund estimates that approximately 85% of the total budget of $150 million, including the cost of the acquisition of the Villa Hotel, will be eligible for recovery under FDC. During the fourth quarter of 2006 the Fund submitted its budget, allocated amongst the various project components, to the BCLC to determine the costs eligible for FDC. Subsequent to the end of the year we have provisional approval from BCLC to draw up to $35 million against costs incurred to date, and Gateway drew approximately $11 million in recoveries in February 2007. Final approval is expected in the second quarter, which will determine the overall percentage eligibility.

In December 2006, the Fund announced that Delta Hotels has been contracted to manage the Hotel, Convention Centre and Restaurant within the new Burnaby Casino facility. This agreement is expected to enhance the visibility of an already high profile location. The partnership with the Delta brand will enable management to focus on our core strength of the operations of the casino. With Delta as manager, we expect to generate higher average occupancy at the hotel, which may also translate into increased traffic at our casino. The hotel will be positioned as a four-star hotel and convention centre primarily serving the substantial unmet business demand surrounding the Burnaby Casino. Delta will manage the hotel for a period of 10 years from opening, with a 10-year extension option. The Fund will operate the casino and all food and beverage operations within it, including a food court, multiple bars and an entertainment lounge.

The construction continues to be materially on time for a late spring 2008 opening and is on budget. Management does not expect any material changes in either. Based on advice from Delta Hotels, management is currently working on improving the level of finishings for the hotel and the full service restaurant. While this may result in minor increases in the budget, they are expected to generate increased revenue for the hotel and restaurant. Additionally they were part of the commitment to BCLC that resulted in the introduction of the accelerated FDC discussed in the Capital Resources section below.

GVRD Market Saturation

The recent growth in casino supply that has occurred in the GVRD since 2003 has led many people to speculate that the market has become saturated. We disagree with this position, for a number of reasons.

Firstly, it is important to recognize that this has been, and will continue to be, a process closely managed by the BCLC, who received the largest share of the revenue generated at casinos. It is the BCLC that determines where a new casino will be located and the number of gaming devices that will be offered at that casino. The recent and planned growth in casinos is simply the execution of a plan developed by the BCLC in 2003 that was designed to bring BC's casino industry into line with other provinces in Canada.

Historically, BC has had one of the lowest per capita gaming spends of all of the provinces. According to a study of Canadian gaming revenue for the year ended March 31, 2005 (the most recent information available on all provinces) this gap had narrowed, however there was still a sizable difference as can be seen in the following chart. Including all forms of gaming, BC's gaming spend was $427 per adult, compared to the Canadian average of $516 and per capita spending close to $700 in Alberta and Saskatchewan. This gap is clearly supply driven, and although additional supply has been added in the GVRD since March 2005, the gap continues to exist today. More importantly, the level of gaming spending in BC continues to be the lowest in Canada for any province that offers slot machines.

To view the chart please click on the following link: http://www.ccnmatthews.com/docs/gci0315c.pdf

The BCLC recognized this and in late 2002 undertook to estimate the potential gaming market for the GVRD. Based on gaming parameters from other mature gaming jurisdictions in Canada, market demand at that time was conservatively estimated to be at least $700 million per year. The BCLC then developed a new model of fewer, larger casinos in the GVRD, with more non-gaming entertainment options, designed specifically to provide sufficient gaming supply to meet that projected demand. All of the projects that have been developed since then and those that are currently in the development stage were identified at that time, and casino operators embarked on a program of executing the plan. The BCLC has also specifically stated that there will be no additional casino licenses granted in the foreseeable future.

As the BCLC provides the slot machines for all casinos, which is a substantial capital cost, and ultimately refunds operators for a majority of their capital costs out of the FDC, it is not in the BCLC's interest to allow more casinos than necessary to meet demand.

The management of the Fund believes that the demand for casino gaming in the GVRD is approximately $1.1 billion per year. For the year ended March 31, 2006, the BCLC's fiscal year, total revenue in the GVRD was approximately $750 million (source: BCLC 2005/2006 Annual Report), and is estimated to be approximately $850 million for the year ended March 31, 2007. As further evidence of the potential market for gaming in BC, the BCLC has forecast gaming revenue to rise to $1.33 billion by 2009/2010 from projected revenue of $1.19 billion in the year ended March 31, 2007 (source: BCLC Service Plan, 2007/08 -- 2009/10). The majority of this growth is expected to come from the GVRD.

Today there are approximately 4,500 slot machines in operation, compared to approximately 1,000 slot machines in 2003, serving a population of approximately 2.1 million people. By 2008, when the projects under development are completed, the number of slot machines will have risen to approximately 5,800. However, this does not represent a level that is out of line with other Canadian gaming jurisdictions. The following table compares the number of adults per slot machine in other Canadian cities with the projection for the GVRD in 2008.



Number of adults per slot machine
and other electronic games

Ottawa / Hull 1 per 256
Montreal 1 per 372
Edmonton 1 per 198
Calgary 1 per 190
Winnipeg 1 per 338
Regina 1 per 142

Current GVRD 1 per 384(i)
Projected GVRD 1 per 293(i)

Source: HLT Advisory Inc. and company estimates
(i) Management estimates


As can be seen, once current developments are completed, the ratio for the GVRD is well within the ratios seen in other cities today. More importantly, since a higher number represents a lower number of slot machines for a given population number, the GVRD will be comparatively less saturated than Ottawa/Hull, Edmonton, Calgary and Regina are today.

To further support the idea that the market is not yet saturated, as discussed in previous MD&As, the Boulevard Casino completed their expansion in November 2005, going from 500 slot machines to 950 slot machines and from 30 table games to 58 table games. A 1,200 seat theatre was added to the facility in September 2006. Despite this increase in supply, there has been virtually no impact on the revenue of the Burnaby Casino and the Boulevard Casino has seen a significant increase in its revenue.

Potential Expansion / Redevelopment of the Lake City Casinos

As discussed in the Fund's third quarter report, management is currently considering relocations or expansions to the Lake City Casinos. The existing Lake City Casinos were opened in 1998 through 2000, with the Kamloops Casino undergoing an update in June 2003. Operations in the region continue to perform well and customer feedback and reviews have been very positive. In addition, there has been significant growth in the region in past years and the rate of population growth has continued to accelerate, with current forecasts at approximately 2% per annum. The Fund believes it is an opportune time to address longer term needs and intends to make an investment in the area to capitalize on growth opportunities in these markets, ensuring its long-term commitment to each of the communities. The strategic focus is to meet growing demand for gaming offerings and provide a more complete entertainment experience for customers. The Fund believes that opportunities exist for expansion or relocation of the casinos in Kelowna, Kamloops and Vernon. Preliminary plans for each are detailed below, which are subject to approval by BCLC and the relevant municipalities. The preliminary capital cost for all three projects is estimated to be approximately $50 million which management anticipates will be 100% eligible for FDC.

Kelowna Casino

The Kelowna Casino is located in the Grand Okanagan Resort and Conference Centre. The Casino is currently 21,000 square feet and hosts 342 slot machines and 10 table games. The facility includes limited food and beverage services, including liquor service that was added in the first quarter of 2006. Management believes that the Kelowna market can support a larger facility and is investigating alternatives to approximately double the size of the facility to increase the size of the gaming floor, as well as to provide for enhanced food and beverage services and live entertainment. Preliminary plans envision expanding the casino to approximately 40,000 square feet, which will allow for 600 slot machines and 16 table games, as well as a 6-table poker room, a small entertainment stage and a full service restaurant.

Management is working with the owners of the Grand Okanagan to develop the expansion plans. Once final agreements are in place, development and construction of the new space is expected to take 18 to 24 months.

Kamloops Casino

The Kamloops Casino is located within the Executive Inn in downtown Kamloops. The current facility is 14,400 square feet and hosts 300 slot machines and 8 table games. Our initial plans are to build a new 35,000-sq ft freestanding casino with up to 450 slot machines, 10 tables and a 6-table poker room on a 1.24 acre site immediately to the north of the hotel. In addition, we are looking to incorporate a small pub-style restaurant/lounge with stage area into the design. The plan also includes an underground parking garage with approximately 225 designated spaces for casino guests.

The land for the new casino was acquired in late September for $2.85 million.

The Fund is evaluating a number of design options for this project. The Executive Inn is currently under option to be purchased by Rocky Mountaineer Vacations, a luxury rail tour company that was recently voted the World's Leading Travel Experience by Train. Rocky Mountaineer runs tours from Vancouver to Calgary, Banff and Jasper, Alberta, all of which travel through and overnight in Kamloops. During the fourth quarter of 2006, the BCLC approached Gateway and Rocky Mountaineer to investigate the feasibility of a comprehensive joint development on the site. Timing of the development of the new casino is dependent on the outcome of these negotiations.

Vernon Casino

The Vernon Casino is currently located in 12,000 square feet at the Village Green Hotel. It was opened in 1998 and no longer reflects the populations' expectations. The Fund's plans envision relocating the facility to a newly developed 300,000 square foot neighborhood shopping center located on Highway 97 in the north end of Vernon. This is a high traffic location in the middle of a new large-scale retail and business park development, convenient to the city population and the North Okanagan trading areas.

The new casino is anticipated to be located in 25,000 sq. ft of leased space on the ground floor of a brand new three-story building. The Fund is contemplating a facility with up to 400 slot machines and electronic games, a pub-style restaurant/lounge with stage area to host entertainment and promotional events.

During the third quarter of 2006, the Fund finalized negotiations and entered into a long-term lease for the property. The lease has an initial term of ten years, commencing on the date that the building is complete, and provides for two renewal terms of five years each. Recently, Gateway has been informed that the project that the casino will be part of is under contract to be sold to another developer. Management has had discussions with the new developer and anticipates that the development will continue substantially in the same form as with the current developer; however it will be delayed somewhat by the sale. The casino project is expected to take between 16 and 18 months to complete.

Alberta Operations

Palace Casino Strike

On September 9, 2006, the employees of the Palace Casino, who are represented by Local 401 of the United Food & Commercial Workers Union (the "UFCW"), began a strike at the Palace. As discussed in the Operating Segments section, the Palace Casino has been operating on a reduced basis since that date. During the fourth quarter of 2006, Gateway participated in formal mediation in an attempt the come to an agreement with the union and end the strike.

In February 2007 management proposed a four-year agreement that included increases of 3%, 3.5%, 3.5%, 3.5%, as well as wage equity adjustments to a substantial number of employees in the first year of the agreement. The initial year's increase and the wage equity adjustments were retroactive to the expiry of the previous contract. The offer also contained a provision for substantial signing bonuses for both full and part-time employees, as well changes to the company's health and benefits plan. Management believed that this was a fair proposal that addressed the concerns of our employees. Despite these efforts, the offer was narrowly rejected by 57% of the employees that voted.

The main issues separating the parties are:

1. The union's proposal for union office located on the casino premises;

2. Gateway's proposed revised single axis wage schedule for new employees hired after the strike has ended; and

3. The union's desire for a greater number of sick days than what Gateway has set out in its proposed new sick day policy.

Management of the Fund will continue to make efforts towards ending this dispute.

In the interim, the casino will continue to operate on a reduced basis using management staff, those employees who have chosen to cross the picket line and replacement workers. All slot machines and electronic games will continue to be operational during the strike. During peak periods on Friday and Saturday, the casino is operating 15 table games, two poker tables, and approximately 626 slot machines and electronic games on both floors of the facility and providing full operation of the Booker's Steakhouse restaurant. During non-peak periods, the casino operates on the main floor only with its deli providing food and beverage and provides 411 slot machines and electronic games, up to 15 table games and two poker tables. The casino continues to offer live entertainment on weekends

Although the length of the strike and the financial impact to the Fund cannot be estimated with any certainty at this time, as the Palace Casino represents only 13% of consolidated revenue and 7% of consolidated EBITDA, management is confident that the strike will not have a significant impact on the Fund's EBITDA and net earnings, and does not anticipate any changes to its monthly distributions.

Market Developments

As discussed above, two new casinos were opened in the Edmonton area during 2006. Of these, only the River Cree Resort and Casino is likely to impact Gateway's operations at the Palace Casino. The Century Casino and Hotel will be located northeast of Edmonton's city centre, outside of the Palace Casino's primary market area.

The new River Cree Resort and Casino, which opened on October 26, 2006, includes a 255-room, four-star Marriott hotel, an ice sports complex, a convention centre and a 62,000 square foot casino with 600 slot machines, 40 table games and 12 poker tables. The resort is located on the Enoch Cree Nation reserve on the northwest outskirts of Edmonton, less than 10 kilometres from the Palace Casino. As the casino provides essentially the same gaming products as the Palace Casino, we believe that, all things being equal, our strategic location within the West Edmonton Mall, our high levels of customer service and our established reputation and position in the market would provide the Palace Casino with a strong competitive advantage that would mitigate or prevent any significant long term impact. However, the River Cree Resort and Casino is located on native land and is therefore not subject to the smoking ban implemented in the City of Edmonton. While the River Cree have agreed to restrict smoking to approximately 30% of their facility, under an agreement with the City that relates to the provision of services to the casino, they enjoy an advantage over other casinos in Edmonton. This could lead to a permanent loss of customers at the Palace Casino, which we estimate may be up to 15%. At this point, any impact of the River Cree Casino on the Palace Casino has been masked by the impact of the strike at the Palace Casino and management cannot provide an estimate of the impact of the new competition. This will be monitored closely once the strike is settled.

Proposed Tax on Income Trusts

On October 31, 2006 the Government of Canada (Department of Finance) announced a proposal to tax the distributions of income trusts, effectively treating income trusts as corporations for tax purposes. For the Fund, the proposed tax would be effective on January 1, 2011, providing a four-year transition period. Under the proposed rules, distributions would first be taxed at the Fund level, at a rate that is currently set at 31.5%. The net amount would then be paid to unitholders, where it would be treated as dividends and subject to the dividend tax rules. If this plan is implemented it may have an impact on the Fund's cash available for distribution. In addition, it may adversely impact the marketability of the Fund's units and, therefore, the ability of the Fund to undertake future financings and acquisitions.

Gateway supports the efforts of the Canadian Association of Income Funds (CAIF) to effect change to the proposed legislation. CAIF asked individual income fund holders to directly contact their local Members of Parliament to voice their concerns about the proposal to tax income trusts. Additional information and a link to email your MP can be found at www.caif.ca.

Management is currently considering the proposal and the potential impact it may have on the Fund and its unitholders. However, the proposed changes do not impact the Fund's business model or current growth plans. The Fund continues to generate strong cash flow and has sound business fundamentals. In addition, the Fund will experience growth from the expected increase in demand for gaming and from the redevelopment of the Burnaby Casino and expansions of three of the four Lake City Casinos. The proposed tax changes do not impact these plans, as debt facilities are in place to finance these projects and the Fund has no near-term need to obtain additional equity capital.

Until the final legislation is enacted we will be unable to determine what if any strategic changes would be optimal to the fund. In the short-term, we remain focused on executing our strategy of operating our current facilities to achieve operational excellence at all levels and the redevelopment of some of our casino facilities into first class gaming properties.

Liquidity

Distributable Cash

Distributable cash is not a defined term under Canadian GAAP, nor does it have a standard, agreed upon meaning. As such, the Fund's distributable cash may not be directly comparable to distributable cash reported by other income funds or similar issuers. Distributable cash is presented because the Fund's policy is to pay distributable cash to unitholders on a monthly basis to the maximum extent possible. Management believes that distributable cash is a useful measure as it provides investors with an indication of cash available for distribution. This non--GAAP measure is intended to provide additional information on the Fund's performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Distributable cash is defined as the Fund's cash flow from operating activities net of non-cash working capital items, less required principal payments on debt, less maintenance capital expenditures, net of recoveries from the FDC, plus proceeds from sales of assets, less any reserves determined by the Trustees to be reasonable and necessary for the operations of the Fund.

On August 4, 2006, the Canadian Securities Administrators ("CSA") issued Staff Notice 52-306, which clarified the CSA's expectations about the presentation of distributable cash of income trusts. The Fund's calculation was generally consistent with the CSA's position, with one minor exception. The CSA recommended that the calculation of distributable cash be reconciled to the most comparable GAAP measure, which they determined to be cash flow from operations after changes in net working capital items. The Fund's calculation has historically been reconciled to cash flow from operations before changes in non-cash working capital items. During the third quarter the Fund modified its definition of distributable cash to be consistent with the CSA's recommendations. This change does not impact the calculation of the Fund's distributable cash, as changes in non-cash working capital items are now added back or subtracted, as appropriate, in determining distributable cash.

Consistent with previous periods, costs incurred for the redevelopment of the Burnaby Casino and the potential Lake City redevelopment have been excluded from the calculation of distributable cash, as they will be funded solely from debt and/or recoveries from the Facility Development Fund. Debt financing and any associated FDC received is also be excluded in the calculation.

Distributable cash for the years ended December 31, 2006 and December 31, 2005 was as follows:



C$ in thousands Year ended
December 31
2006 2005

Cash flows from operating activities 48,833 41,742

Changes in non-cash working capital items (1,095) (2,197)
Funding of prior year's long term
incentive plan contribution 1,492 1,202
Maintenance capital expenditures(1) (2,128) (601)
FDC reimbursement received for property
and equipment purchases 818 182
Sale of property and equipment 95 212
Payments on long-term debt, net 0 (7,713)
Proceeds from issuance of long term debt 0 7,500
Current year's long term incentive
plan contribution (2,342) (1,492)
-----------------------

Distributable cash generated by
Operations for the period 45,673 38,835
-----------------------
-----------------------
Per unit 1.5569 1.4700
-----------------------
-----------------------
(1)Maintenance capital expenditures include only those costs related to
ongoing operation of existing casinos and exclude costs associated with
expansions and new developments that are funded by debt.


Distributions were made on a monthly basis as follows:

Distribution
per unit Payment Date
---------------------------------------------
January 2006 $0.115 February 28, 2006
February 2006 $0.115 March 31, 2006
March 2006 $0.115 April 28, 2006
April 2006 $0.115 May 31, 2006
May 2006 $0.115 June 30, 2006
June 2006 $0.1195 July 31, 2006
July 2006 $0.1195 August 31, 2006
August 2006 $0.1195 September 29, 2006
September 2006 $0.1195 October 31, 2006
October 2006 $0.1250 November 30, 2006
November 2006 $0.1250 December 29, 2006
December 2006 $0.1550(1) January 31, 2007
------------
$1.4580
------------
------------

(1)The December distribution included a regular monthly distribution
of $0.1250 per unit plus a special, year-end distribution of
$0.03 per unit


The increases to our monthly distribution during 2006 extends our lengthy track record of strong cash distribution performance, which has seen our monthly distribution target rise steadily from $0.10 per unit per month at our inception to $0.105 cents in September 2003, $0.11 in November 2004, $0.115 per unit in September 2005 distribution, $0.1195 per unit in June 2006, and $0.1250 in October 2006.

To view the graph please click on the following link: http://www.ccnmatthews.com/docs/gci0315d.pdf

We have also made special year-end distributions in each of the last four years. The special year-end distribution reflects our conservative approach to managing the Fund. Management regularly reviews the underlying fundamentals of the casino operations and makes recommendations to the Board of Trustees about the level of monthly distributions. It is our policy to increase the amount of regular distributions only when there has been a sustainable increase in Gateway's operations. To this end, we want to be reasonably certain that the increases in our results recorded through the year are sustainable prior to increasing distributions.

Management anticipates that the Fund will generate sufficient distributable cash in 2007 to maintain its current monthly distribution level.

Contractual Obligations

The following contractual obligations were outstanding at December 31, 2006:



C$ in thousands
Less than 1 1 - 3 4 - 5 After 5
Total year years Years years

Long-term debt
Promissory note(1) 900 90 180 180 450
Long term notes 72,988 - - 40,000 32,988
Lease obligations(2) 13,542 2,925 5,085 1,844 3,688
-----------------------------------------------
87,430 3,015 5,265 42,024 37,126
-----------------------------------------------

(1)repayable in 120 equal monthly payments of $7,500 beginning January 1,
2006
(2)for the Partnership's casino locations, as well as certain office
equipment and office space


Bank Credit Facilities

On May 1, 2006, the Partnership entered into an agreement with a syndicate of Canadian chartered banks to provide total debt financing of $220 million. Funds will be used to provide construction financing for the Burnaby redevelopment and the potential expansion/relocation of the Lake City Casinos in Kamloops, Kelowna and Vernon. The total financing comprises a $30 million revolving credit facility, a $175 million committed construction facility and $15 million committed contingency facility.

Interest on all facilities will be paid monthly in arrears and is based on the Partnership's ratio of debt to EBITDA for the period. The Fund's debt to Last Twelve Months (LTM) EBITDA ratio must not exceed certain thresholds. These thresholds start at a maximum of 3.75:1 and step down in increments of 0.25, reaching 2.5:1 by the end of the fourth quarter of 2010. The Fund must also maintain a fixed charge coverage ratio of not less than one to one, on a rolling four quarter basis. Additionally, the agreement requires that the amounts outstanding under the construction and contingency facilities be reduced by $70 million at substantial completion.

The revolving credit facility has a term of three years and requires interest only payments, while the committed construction and contingency facilities have three year terms commencing at the end of an estimated two-year construction period. During the construction period the Partnership is required to make interest-only payments, which will be capitalized as part of the construction loan, after which principal becomes payable in monthly instalments equal to the amount of funds received from the FDC. Mandatory principal payments will cease once the Fund's debt to EBITDA ratio falls below 2.5:1.

Issue of Convertible Debentures

On April 25, 2006 the Fund issued $35 million of extendible convertible debentures. The debentures mature on June 30, 2011 and bear interest at 5.35% payable semi-annually in arrears on June 30 and December 31, in each year. The debentures are convertible into units of the Fund at the option of the holders at a price of $19.10 per unit, representing 52.3560 units per $1,000 principal amount. The debentures are not redeemable by the Fund prior to June 30, 2009. Subsequent to this date, the debentures may be redeemed in whole or in part at the option of the Fund, at a price equal to their principal amount plus accrued and unpaid interest, provided that the market price preceding the date on which the notice of redemption is given is at least 125% of the conversion price.

Interest Rate Risk

The Partnership is subject to interest rate risk on its Credit Facilities, as the interest payable is based on a floating rate of interest. The Fund manages exposure to this risk through the use of interest rate swaps with approved creditworthy counterparties. The Fund does not hold or issue derivative financial instruments for trading or speculative purposes.

As at December 31, 2006, the Fund had one interest rate swap contract outstanding, as follows:



Notional
C$ in thousands amount Maturity date Fair value

Interest rate swap contract 63,485,000 September 1, 2011 (901)


The term of the interest rate swap began on February 1, 2005 and the notional amount increases on a monthly basis to match the expected draws on Facility B of the Credit Facility at the time of the contract. Under the terms of the swap contract, the Fund pays interest to the counterparty equal to a fixed rate of 5.17% per annum on the notional amount, payable monthly in arrears, and receives interest equal to a floating rate on the notional amount. Management will attempt to match the term of the floating rate payment to that of the floating rate on the Credit Facility. The net effect of this contract is to fix the rate of interest on the Credit Facility over the term of the swap contract at a rate approximating 5.17% per annum, plus the applicable rate premium in accordance with the terms of the Credit Facility.

We have chosen not to apply hedge accounting under CICA Accounting Guideline AcG - 13 - "Hedging Relationships" to the interest rate swap. Accordingly it is being accounted for based on the accounting treatment for derivatives. Under this treatment, the contract is "marked-to-market" at each balance sheet date and any changes in the fair value are reported as a gain or loss on the income statement. The fair value of the interest rate swap is reported on the balance sheet as a long-term liability. Monthly payments on the interest rate swap are recorded as a reduction in the long-term liability. Under this method the interest expense reported on the income statement will reflect only the amounts paid under the terms of the Credit Facility, and not the net cash amount at the effective fixed rate.

The fair value of the interest rate swap reflects the estimated amount the Fund would have to pay if it were to unwind the contract at the reporting date.

As the swap contract was entered into to hedge the interest rate risk for the construction financing for Burnaby, the net interest payments under the contract are capitalized as a cost of the project.

Issue of Long-Term Notes and Shelf Facility

On August 4, 2004, the Partnership and its general partner, Gateway Casinos G.P. Inc. ("Gateway GP") completed a private placement of long-term notes payable. Under the terms of the agreement, Gateway GP issued $40 million of notes, which bear interest at 6.565%, payable quarterly in arrears, and mature on August 4, 2011. Proceeds from the offering were used to repay $37,460,000 outstanding under the Partnership's credit facility and for certain costs incurred on the redevelopment of the Burnaby Casino.

In addition to the long-term notes issued on August 4, 2004, Gateway arranged an uncommitted shelf facility of up to US$45.6 million (or the Canadian dollar equivalent) whereby the Partnership and/or Gateway GP can, subject to acceptance by the lender, issue additional notes with terms of between five years and seven years, bearing interest at rates to be determined at the time of issue based on then-current market factors.

On October 31, 2005, Gateway GP drew $7,500,000 of notes from the shelf facility, which bear interest at 5.39%, payable quarterly in arrears, and mature on October 31, 2012. Funds were used primarily to repay the mortgages due on October 31, 2005 and December 1, 2005.

During December 2006, Gateway entered into an agreement in principle to increase the amount of its shelf facility to US$65 million (or the Canadian dollar equivalent). The increase is designed to provide for the required reduction of Facility B of the bank credit facilities discussed above. Formal documentation of the new shelf facility has not been finalized.

In addition to the increase in the shelf facility, Gateway was able to negotiate a forward rate lock to take advantage of the flat yield curve, and committed to issue C$70 million of new seven-year notes on June 30, 2008 at a rate of 5.71% .

Full details of the long-term notes are provided in note 11(b) to the Audited Financial Statements.

Capital Resources

Capital Expenditures

Capital expenditures for the year totaled $4,982,000. Of this, $2.9 million was incurred to acquire the land for the Kamloops redevelopment, which was funded from the credit facilities. The remaining $2.1 million was incurred as follows:



Burnaby Casino 133,000
Lake City Casinos 962,000
Cascades 421,000
Palace Casino 250,000
Corporate office 362,000
---------
2,128,000
---------
---------


The Burnaby and Palace Casinos expenditures represent regular maintenance capex, while the Lake City and Cascades expenditures were primarily incurred for changes to the facilities. Of the expenditures at the Lake City Casinos, approximately $92,000 was related to the take-over of the food and beverage operations at the Penticton Casino and the introduction of bar service at the Kamloops and Kelowna casinos. A further $303,000 was associated with the upgrade of the surveillance rooms to digital technology at the Kelowna and Kamloops Casinos. The expenditures at the Cascades Casino were primarily incurred in the reconfiguration of the high-limit gaming area and installation of additional slot machines, as well as for improvements in the kitchen and convention centre facilities to improve the efficiency of the food and beverage operations.

Additionally the Fund incurred $21.4 million on the redevelopment of the Burnaby Casino, which was funded from the credit facilities.

Facility Development Commission

Gateway's agreements with the BCLC include a provision for additional compensation equal to eligible capital and operating expenses from a Facility Development Compensation ("FDC") equal to 3% of the total net win generated at the six B.C. casinos. This additional compensation is in addition to the fee paid for operating the casinos. Accumulated funds are held in trust in accounts managed by Gateway and additional compensation is issued from these accounts.

Of the total capital expenditures for the year, approximately $1.2 million was determined to be eligible for reimbursement from the FDC funds. Those capital expenditures that were not eligible for reimbursement primarily represent costs incurred at the Fund's corporate office and at the Palace Casino in Alberta.

During the year ended December 31, 2006, the Partnership received a total of $818,000 for recovery of maintenance capital expenditures at the Lake City Casinos.

In addition to the FDC reimbursements for capital expenditures, the Fund received approximately $3.5 million in reimbursement of prior years' operating costs at the Lake City Casinos.



Year ended Year ended
December December 31,
C$ in thousands 31, 2006 2005
------------
Total FDC funds generated during the year 8,950 8,231
-----------------------
-----------------------

------------
------------
Reimbursements:
Capital 818 1,414
Operating 3,267 3,542
-----------------------
4,085 4,956
-----------------------
-----------------------


Full details of the FDC balances can be found in note 6 to the Audited Financial Statements.

During the fourth quarter of 2006, Gateway submitted the detailed project budget for the Burnaby redevelopment, allocated amongst the various components, to BCLC for approval. This is the first step on being able to begin to collect FDC against the costs of the project. The purpose is for BCLC to approve the allocation bases used to allocate the costs amongst the various components, not to approve the budget itself. Once these allocation bases are approved, they are applied to actual costs incurred to determine the amount eligible for recovery.

During the first quarter of 2007, Gateway received preliminary approval of the allocation bases used, and drew the full $11.0 million cash balance from the Burnaby FDC account to recover against costs incurred on the Burnaby project to date. The only remaining approval left is the basis for allocating the cost of the acquisition of land to the various components. Once this has been finalized, the percentage of the budget eligible for FDC recovery will be determined.

Accelerated Facility Development Commission

During the fourth quarter of 2006, the BCLC unveiled an initiative to improve the economic model of casino redevelopment in the province, which was developed in consultation with casino service providers to recognize the recent significant increases in development costs. The Accelerated Facility Development Commission ("AFDC") provides for an additional amount equal to 2% of the gross win (in addition to the 3% FDC) to recover the capital costs of the redeveloped casino property, and is applicable to projects approved by the BCLC after July 1, 2006. AFDC payments will be payable weekly beginning on the later of April 1, 2007 or the opening of the redeveloped property. The AFDC is a one-time initiative that is limited to the initial redevelopment of a property. Once the approved eligible costs of the redevelopment are recovered through the existing FDC and the AFDC, the service provider is no longer eligible for AFDC on the project and recovery will revert back to the 3% FDC only.

Although the AFDC applies only to projects approved by the BCLC after July 1, 2006, Gateway has received written confirmation from the BCLC that the program will apply to the Burnaby Casino.

Transactions with Related Parties

The Fund had the following transactions with related parties during the current year:

1. The Partnership and GCI incurred costs on behalf of each other in the normal course of business. During the year ended December 31, 2006, net total costs of $178,000 were incurred by the Partnership on behalf of GCI (2005 - $1,712,000). The net balance due from related parties as a December 31, 2006 includes $210,000 (2005 - $274,000) of operating costs incurred by the Partnership on the related party's behalf.

2. The Fund provides management and administrative services to GCI with respect to its casino operations. Pursuant to the terms of the management agreement, the Fund charges a fee to GCI equivalent to GCI's proportionate share of management and administrative expenses incurred by the fund. The proportionate share is determined annually, based upon a combination of factors including revenue, with consideration given to time spent by senior executives of the Fund on GCI matters relating to sourcing and developing opportunities in the gaming industry. The Fund charged a fee of $1,358,000 (2005 - $2,607,000) to GCI for the year ended December 31, 2006, which is recorded in the Audited Financial Statements as a reduction of administration expenses.

3. The Partnership has entered into a contract with a subsidiary of GCI for Automated Teller Machine ("ATM") services at the Burnaby Casino. The Partnership manages the vault cash and provides first line service, and receives a flat fee of $750,000 per annum, payable in equal monthly installments. During the year ended December 31, 2006 the Partnership earned a fee of $750,000 (2005 - $750,000) which is included in other revenue.

4. Effective November 5, 2003, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Palace Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the year ended December 31, 2006, the Partnership earned a fee of $433,000 (2004 - $455,000), which is included in other revenue.

5. Effective February 17, 2004, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Kamloops Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the year ended December 31, 2006, the Partnership earned a fee of $255,000 (2005 - $325,000), which is included in other revenue.

6. Effective May 19, 2006, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Cascades Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the year ended December 31, 2006, the Partnership earned a fee of $600,000, which is included in other revenue.

7. On May 1, 2005, a company controlled by the Chairman and former Chief Executive Officer of Gateway Casinos G.P. Inc, signed a lease for office space from the Fund with a monthly rent of $3,500 inclusive of all operating costs and taxes. The lease was terminated on March 31, 2006 and the space was vacated by the company and is now being used by the Fund. The Fund received leasing income of $10,500 during the first quarter of 2005, which is recorded as a reduction of occupancy costs.

In connection with the acquisition of Cascades, GCI agreed to fund the completion of the construction of a 500-stall parkade at Cascades. As at December 31, 2006, GCI had reimbursed the Partnership for costs incurred and provided an advance for estimated future costs.

Right of First Offer and Pre-emptive Right

In connection with the acquisition of the operations of the Burnaby Casino, the Lake City Casinos and the Palace Casinos on November 28, 2002, the Partnership entered into an agreement with GCI where the Partnership acquired a right of first offer on all of GCI's then existing and future operations pertaining or relating to the gaming industry. GCI is at various stages of redevelopment on a number of the projects, including the Starlight Casino in Queensborough, New Westminster, British Columbia and the Baccarat Casino in downtown Edmonton, Alberta and has stated that it intends to offer the redeveloped operations to the Fund once they are completed and have reached a level of maturity in earnings. Management of the Fund estimates that this will be twelve to eighteen months from opening of each facility.

The agreement also provides the Partnership with a pre-emptive right over any acquisition opportunities pertaining or relating to the gaming industry identified by GCI.

Critical Accounting Estimates

Fair Value of Net Assets Acquired in Business Acquisitions

As part of the accounting for acquisitions made during the year, management estimates the fair market value of assets acquired for the purpose of allocating the purchase price. Where necessary, management supplements its estimates with opinions of independent third party advisors.

Goodwill Impairment Test

Goodwill is tested for impairment at least on an annual basis, normally at year-end, or when other conditions exist that may indicate that impairment could exist in the carrying value of goodwill. To identify whether goodwill impairment exists, the Fund compares the fair value of the reporting unit to which the goodwill relates to its carrying amount. When the carrying amount of the reporting unit exceeds its fair value, the carrying value is reduced to the fair value. Any excess of the carrying value of the goodwill over its fair value is charged to operations in the period the impairment occurred.

Disclosure Controls and Procedures

The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining a system of controls and procedures over the public disclosure of financial and non-financial information regarding the Fund. These controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be made regarding public disclosure. The Fund regularly reviews its disclosure controls and procedures; however, it cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud.

The Fund has created a Disclosure Policy and a Disclosure Committee whose mandate is to mitigate the risks that are associated with the disclosure of inaccurate or incomplete information, or failure to disclose required information.

- The Disclosure Policy sets out accountabilities, authorized spokespersons as well as our approach to the determination, preparation and dissemination of material information. The policy also defines restrictions on insider trading and the handling of confidential information.

- The Disclosure Committee, or its delegates, reviews all financial information prepared for communication to the public to ensure it meets all regulatory requirements and is responsible for raising all outstanding issues it believes require the attention of the Audit Committee prior to recommending disclosure for that Committee's approval.

As required by Multilateral Instrument 52-109, "Certification of Disclosure in Issuers' Annual and Interim Filings" issued by the Canadian Securities regulatory authorities, an evaluation of the effectiveness of the design and operation of the Fund's disclosure controls and procedures was conducted as of December 31 2006, by and under the supervision of management, including the CEO and CFO. The evaluation included documentation review, enquiries and other procedures considered by management to be appropriate in the circumstances.

Based on that evaluation, the CEO and CFO have concluded that the Fund's disclosure controls were effective as of December 31, 2006.

Internal Control Over Financial Reporting

Management have ensured that internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. There have been no changes in internal control over financial reporting in the most recent quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Additional Information

Additional information relating to the Fund is available on SEDAR (www.sedar.com) and on the Fund's website (www.gatewaycasinosincomefund.com), including its Annual Information Form dated March 31, 2006 and all public filings.

Contact Information