Taylor NGL Limited Partnership
TSX : TAY.UN
TSX : TAY.DB

Taylor NGL Limited Partnership

August 03, 2005 16:16 ET

Taylor NGL Limited Partnership Announces Second Quarter 2005 Results and Conference Call

CALGARY, ALBERTA--(CCNMatthews - Aug. 3, 2005) - Taylor NGL Limited Partnership (TSX:TAY.UN) (TSX:TAY.DB) today announced its second quarter 2005 results.

HIGHLIGHTS

- Beginning August 2005, monthly distributions will be increased to $0.060 per unit.

- On June 29th, the Partnership acquired from Taylor Management Company Inc. interests and assets that related to the Partnership's businesses for $12 million.

- During the second quarter scheduled maintenance and inspection of the Partnership's facilities was conducted. In all cases, the turnarounds were completed within budget.

- Net natural gas volumes processed by the Partnership averaged 401 MMscf per day in the second quarter compared to 354 MMscf per day for the same period in 2004. Net natural gas liquids (NGL) sales averaged 15,373 barrels per day in the second quarter compared to 13,103 barrels per day for the same period in 2004. Increases in gas volume processed and NGL volume sold were a result of the addition of the Harmattan Complex, offset by offline periods associated with facility turnarounds.

The following table highlights Taylor's operational and financial results for the second quarter and first half of 2005 compared to the results for the same periods in 2004:



------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
(in thousands of dollars June 30 June 30
except unit amounts) 2005 2004 2005 2004
------------------------------------------------------------------------
Gas processed
(MMscf per day) 401 354 398 352
NGL sales (barrels per day) 15,373 13,103 15,922 14,192
Total revenue 49,030 31,352 84,882 63,351
Feedstock cost 29,134 21,067 51,950 43,167
Net income (loss)
before management
reorganization costs 364 2,051 4,610 3,892
Basic per unit 0.01 0.10 0.13 0.20
Diluted per unit 0.01 0.10 0.13 0.20
Net operating income 7,200 3,674 14,646 7,321
Cash available for
distribution 4,848 3,381 11,597 6,529
Distributions paid to
unitholders 7,222 2,865 11,985 5,389
per unit 0.1725 0.1400 0.3375 0.2800
Units outstanding at
end of period 42,531,490 20,463,102 42,531,490 20,463,102
------------------------------------------------------------------------
------------------------------------------------------------------------


CONFERENCE CALL

A conference call to discuss these results will be held on Thursday, August 4, 2005 at 9:30 a.m. MT / 11:30 a.m. ET. To participate in the conference call, please dial 416-695-9712 in the Toronto area and 1-888-280-8277 for all other areas of Canada.

A recording of the call will be available for replay until August 17, 2005 by dialing 416-695-5275 or 1-888-509-0081 (no passcode is required) or by following the links on Taylor's website, www.taylorngl.com.

MANAGEMENT'S DISCUSSION AND ANALYSIS

As at August 3, 2005

The following should be read in conjunction with the consolidated financial statements and notes of Taylor NGL Limited Partnership (the Partnership). The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Additional information relating to the Partnership, including the Partnership's Annual Information Form, is available on SEDAR at www.sedar.com.

Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or the underlying assumptions prove incorrect, actual results may vary significantly from those expected.

Tabular amounts are expressed in thousands of dollars except per unit amounts. All figures are in Canadian dollars unless otherwise stated.

Taylor uses the term "Cash Available for Distribution" to refer to the amount of cash that has been or is available for distribution to the Partnership's unitholders, prior to any withholdings or reserves that the Board of Directors may make pursuant to the terms of the Partnership's Limited Partnership Agreement. "Cash Available for Distribution" is defined as net income plus non-cash items such as depreciation, amortization, accretion, mark to market gain or loss and unrealized foreign exchange gain or loss, less "Sustaining Capital". "Sustaining Capital" is defined as capital expenditures necessary to maintain the long-term safe and efficient operation of Taylor's facilities. Prior to the Harmattan Complex acquisition, Taylor did not identify these types of expenditures, as they were not significant. Sustaining Capital is now material and included in the calculation of Cash Available for Distribution. As well, because of its singular occurrence, Cash Available for Distribution excludes cash funded management reorganization costs of $7.5 million incurred in the quarter.

Taylor uses the term "Net Operating Income" to assist in assessing the ability of the Partnership to generate cash from normal operations. "Net Operating Income" is defined as natural gas liquids sales and fee income less shrinkage gas expense, operating costs and overhead recovery fees.

The terms "Cash Available for Distribution", "Sustaining Capital" and "Net Operating Income" are not recognized by Canadian generally accepted accounting principles (GAAP) and therefore, these terms have no standardized meaning and may not be comparable to similarly defined amounts presented by other issuers.

Overview of Second Quarter 2005

Production and Operations Summary

The second quarter is traditionally when major inspections are completed at natural gas processing facilities. These turnarounds require that facilities be temporarily shut down, and therefore, natural gas volumes processed usually fall during the quarter. In April, Taylor took the Harmattan Complex down for a scheduled 20-day turnaround. The Harmattan Complex requires an outage of this magnitude approximately every three years. A scheduled five-day turnaround at the Joffre Extraction Plant was also completed in April. On June 20th, turnarounds upstream of the Younger Extraction Plant reduced natural gas flows. Management took advantage of the 17-day outage to complete inspections and capital projects.

Taylor's growth continues with significant increases in natural gas volumes processed and NGL sales in the second quarter of 2005 compared to the second quarter of 2004. Taylor's natural gas volume processed during the quarter was 401 MMscf per day compared to 354 MMscf per day in the comparable quarter of 2004, an increase of 13 percent. The Harmattan Complex processed an average 93 MMscf per day in the second quarter while the RET Complex processed an average 60 MMscf per day. The Younger and Joffre extraction plants processed 195 MMscf per day and 54 MMscf per day on average during the quarter, respectively. At second quarter end, with turnaround complete, Harmattan Complex was processing 124 MMscf per day.

Taylor's NGL sales during the quarter was 15,373 barrels per day compared to 13,103 barrels per day in the comparable quarter of 2004. The Younger and Joffre extraction plants had NGL sales of 9,391 barrels per day and 2,907 barrels per day, respectively. NGL sales from the Harmattan Complex averaged 4,748 barrels per day in the month of June, up from the quarterly average of 3,075 barrels per day.

The Joffre Extraction Plant extracts the natural gas liquids from the fuel gas that is supplied to the Joffre industrial complex that includes NOVA Chemicals Corporation's world-scale petrochemical facility. In the latter part of June, operations at the Joffre industrial complex were curtailed due to a shortage of feedstock as a result of weather-related damage to third-party ethane extraction plants. Therefore, the demand for fuel gas at the Joffre industrial complex was reduced and Joffre Extraction Plant gas volumes processed and NGL production fell. As of late July, fuel gas consumption at the Joffre industrial complex had returned to normal levels. Therefore, NGL production from the Joffre Extraction Plant had returned to normal levels as well.

Taylor sets production rates at both the Younger and Joffre extraction plants largely in response to prevailing NGL margins. The NGL margin is defined as the difference, on a per unit basis, between the sales price of NGL and the cost of the natural gas purchased for shrinkage make-up. Taylor reports a benchmark, or indicative margin, expressed in dollars per barrel of NGL, which is derived from Edmonton postings for propane, butane and condensate and the AECO natural gas price. In the second quarter of 2005, the benchmark NGL margin averaged $10.35 per barrel compared to $9.61 per barrel in the first quarter of 2005 and $4.68 per barrel in the second quarter of 2004.

Financial Summary

Taylor's second quarter 2005 Net Operating Income was $7.2 million, an increase of 96 percent from the prior year comparable quarter as a result of the addition of two pipelines, the Ethylene Delivery System (EDS) and the Joffre Feedstock Pipeline (JFP), the acquisition of the Harmattan Complex and improved performance at Taylor's other facilities.



------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
(in thousands of dollars) 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue:
Natural gas liquids sales $ 36,781 $ 25,396 $ 65,062 $ 52,240
Fee income 12,242 5,852 19,795 10,905

------------------------------------------------------------------------
49,023 31,248 84,857 63,145
------------------------------------------------------------------------

Expenses:
Shrinkage gas 29,134 21,067 51,950 43,167
Operating costs 12,126 5,870 17,296 11,437
Overhead recovery fees 563 637 965 1,220

------------------------------------------------------------------------
41,823 27,574 70,211 55,824
------------------------------------------------------------------------

Net Operating Income $ 7,200 $ 3,674 $ 14,646 $ 7,321
------------------------------------------------------------------------
------------------------------------------------------------------------


During the second quarter of 2005, Taylor distributed $7.2 million to unitholders in three monthly payments of $0.0575 per Partnership unit. Since January 2003, Taylor has made aggregate cash distributions of $30.8 million funded from $38.3 million of Cash Available for Distribution for a payout ratio of 80 percent. The $7.5 million of cash retained may be used to support monthly distributions, repay debt and fund the growth initiatives of the Partnership, as deemed necessary. Currently these funds have been applied to the Partnership's debt.

On June 29, 2005, the Partnership acquired interests and assets from Taylor Management Company Inc. (the "Manager") that related to the Partnership's businesses, including the 2001 Administration Agreement, for consideration of $12.0 million, comprised of $7.1 million cash and Partnership units valued at $4.9 million. The majority of the Partnership units issued to the Manager are escrowed until 2008. In addition, the Manager converted its holding of TGLLP Expansion Units into 97,789 Partnership units valued at $0.9 million. These transactions were effective January 1, 2005, which resulted in management fees and limited partner distributions being eliminated retroactive to January 1, 2005. The Manager has also relinquished the right to select one nominee to the Board of Directors of Taylor Gas Liquids Ltd., the general partner of the Partnership.

Outlook

The expectation of continued strong natural gas prices is driving active exploration and development of natural gas reserves by producing companies. The RET Complex and the Harmattan Complex are benefiting from the high level of producer activity in their capture areas.

With continued strong NGL prices, Taylor's extraction business is enjoying above average margins in the sale of NGL despite high natural gas prices. The robust NGL prices are related to the linkage between NGL and crude oil prices.

Since the Younger Extraction Plant is being operated to maximize the amount of NGL recovered from the natural gas that is being processed, future production growth depends on management's ability to increase the volumes processed. Taylor will continue to compete for natural gas feedstock by offering customers creative commercial arrangements and pricing options. Similarly, NGL production at the Joffre Extraction Plant will depend on the volume of natural gas that is processed at the plant. The natural gas volumes available to the Joffre Extraction Plant are a function of fuel gas demand at NOVA Chemicals Corporation's adjacent petrochemical facility and the other plants that comprise the Joffre industrial complex.

Taylor's pipelines, the JFP and the EDS, generate revenues through cost-of-service arrangements that result in minimal financial risk to the Partnership.

Management continues to pursue and evaluate projects and acquisitions that will further diversify the Partnership's asset base and increase Net Operating Income and Cash Available for Distribution. Management believes that growth also can be achieved through further enhancement and development of the Partnership's current facilities.

Critical Accounting Policies and Estimates

In the preparation of the Partnership's consolidated financial statements, management has made estimates that affect the recorded amounts of certain assets, liabilities, revenues and expenses. All estimates are adjusted for events that are known to have a significant effect on the current month's operations, such as scheduled or unscheduled plant shutdowns. Taylor's significant accounting policies and estimates, as disclosed in the Partnership's Annual Report for the year ended December 31, 2004, have not changed significantly, with the exception of those estimates associated with the business conducted at the Harmattan Complex.

Harmattan Complex Natural Gas Liquids Sales

Actual NGL sales are unknown at the end of each month. Accordingly, the financial statements contain an estimate of one month's revenue based upon expected volumes and expected NGL prices supported by comparison to historical trends.

Harmattan Fee Income

Actual fees earned are unknown at the end of each month. Accordingly, the financial statements contain an estimate of one month's revenue based upon expected volumes processed and fees charged supported by comparison to historical trends.

Harmattan Complex Shrinkage Gas, Feedstock and Operating Costs

The period in which invoices are rendered for the supply of shrinkage, feedstock, goods and services necessary for the operation of the facilities is generally later than the period in which the goods or services are provided. Accordingly, the financial statements contain an estimate of one month's expenses based upon a review of actual activity at each facility, including adjustments for events that are known to have had a significant effect on the month's operations. Such events could include maintenance activity or changes in volume processed supported by comparison to historical trends.

Cash Distributions

During the first six months of 2005, $11.6 million of Cash Available for Distribution was generated from operations. From the Cash Available for Distribution and historical working capital reserves, $12.0 million has been distributed through monthly distributions of $0.055 per Partnership unit during the first quarter and $0.0575 per Partnership unit during the second quarter. Contributing to Cash Available for Distribution was $11.4 million of cash provided by operations, excluding cash funded management reorganization costs of $7.5 million, $0.7 million of capitalized earnings from the Harmattan Complex for the first 21 days of March 2005, less $0.5 million for Sustaining Capital incurred during the second quarter of 2005.

Cash distributions paid in each period are derived from Cash Available for Distribution adjusted for discretionary additions or reductions of working capital. Discretionary additions to working capital provide reserves for future monthly distributions and funding for growth opportunities.

During 2004, the Partnership paid distributions on a quarterly basis. As a result, the distributions paid during the first and second quarter of 2004 were represented by two single payments of $0.14 per Partnership unit that were paid on February 15 and May 15, 2004.



CASH AVAILABLE FOR DISTRIBUTION
------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
(in thousands of dollars) 2005 2004 2005 2004
------------------------------------------------------------------------
Cash provided by operations (2,173) 3,287 3,856 6,341
Management reorganization
costs 7,516 - 7,516 -
Capitalized operating results - - 720 -
Recognition of deferred
performance fees - 94 - 188
Sustaining Capital (495) - (495) -

------------------------------------------------------------------------
Cash Available for
Distribution 4,848 3,381 11,597 6,529
------------------------------------------------------------------------
------------------------------------------------------------------------


CASH DISTRIBUTED
------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
(in thousands of dollars June 30 June 30
except per unit amounts) 2005 2004 2005 2004
------------------------------------------------------------------------

Cash Available for
Distribution 4,848 3,381 11,597 6,529
Working capital returned
(withheld) 2,374 (516) 388 (1,140)

------------------------------------------------------------------------
Cash distributed 7,222 2,865 11,985 5,389
------------------------------------------------------------------------
------------------------------------------------------------------------

Cash distributed per unit 0.1725 0.1400 0.3375 0.2800
------------------------------------------------------------------------
------------------------------------------------------------------------


Natural Gas Liquids Sales

NGL sales revenue is derived from the sale of production from the Younger and Joffre extraction plants and the Harmattan Complex. For the three months ended June 30, 2005, NGL sales revenue was $36.8 million compared to $25.4 million for the same period in 2004. For the six months ended June 30, 2005, NGL sales revenue was $65.1 million compared to $52.2 million for the same period in 2004.

The increase in NGL sales revenue for the quarter was primarily the result of higher NGL sale prices and additional NGL produced from the Harmattan Complex. During the second quarter of 2005, the Partnership averaged NGL sales of 15,373 barrels per day compared to 15,280 barrels per day in the comparable quarter of 2004. The Harmattan Complex, Younger Extraction Plant and Joffre Extraction Plant were offline during the quarter for a combined 35 days, due to scheduled turnarounds at each of these facilities.

NGL sales revenue at the Younger Extraction Plant, as per the NGL Purchase Agreement with EnCana Corporation, includes recovery of feedstock and operating costs, a return-on-capital derived fixed fee and a 50 percent profit share based on both an operating cost hurdle (Operating Pool) and NGL margin (Marketing Pool). The Marketing Pool is the Partnership's upside participation in NGL commodity prices. The Marketing Pool is the difference between the sales revenue received by EnCana upon the final sale of the NGL acquired from Taylor at the Younger Extraction Plant and all costs. A key feature of the Marketing Pool is that deficiencies are not charged to the Partnership, but are carried forward and recovered against future Marketing Pool revenue. During the second quarter of 2005, the Marketing Pool contributed $0.9 million to NGL sales with a closing balance of nil at June 30, 2005 (2004 - deficit $2.8 million). The Partnership began 2005 with a nil Marketing Pool balance (2004 - deficit $3.0 million). During the first six months of 2005, the Marketing Pool has contributed $1.6 million to NGL sales (2004 - nil).

NGL sales revenue at the Joffre Extraction Plant includes a return-on-capital-derived fixed fee and recovery of operating costs attributable to ethane production as defined by the Ethane Supply Agreement with NOVA Chemicals Corporations, plus the revenue received from the sale of propane, butane and condensate (collectively known as C3+).

NGL sales revenue at the Harmattan Complex includes the revenue from sale of the Partnership's ethane, frac oil and C3+ production.

The largest component of NGL sales revenue is the recovery of Younger Extraction Plant natural gas feedstock costs or shrinkage gas. The AECO daily natural gas price, which is an indication of the Partnership's actual natural gas purchase price, averaged $6.99 per gigajoule (GJ) during the three months ended June 30, 2005 versus $6.62 per GJ during the same period of 2004. AECO daily natural gas price averaged $6.74 per GJ during the six months ended June 30, 2005 compared to $6.35 per GJ for the same period in 2004.

Fee Income

Fee income consists of revenue received from processing natural gas at the RET Complex and Harmattan Complex, third-party processing at the Younger Extraction Plant, transportation fees from the use of EDS and JFP and overhead recoveries from the facilities.

Overhead recoveries are those charges applied to operating and capital expenditures pursuant to the operating agreements with the owners at each of the facilities that the Partnership operates.

Fee income for the quarter and six months ended June 30, 2005 were $12.2 million and $19.8 million, respectively (2004 - $5.9 million and $10.9 million, respectively). The increase in fee income arose primarily from the addition of transportation fee revenues from EDS and JFP, which began in August 2004 and March 2005, respectively. In addition, Harmattan contributed to fee income during the quarter, except for the 20-day turnaround period.

Shrinkage Gas Expense

The cost of natural gas feedstock, commonly known as shrinkage gas expense, was $29.1 million for the second quarter of 2005 compared to $21.1 million in 2004. Shrinkage gas expense was $52.0 million for the six months ended June 30, 2005 compared to $43.2 million. The increase was primarily the result of increased natural gas purchase prices, as discussed earlier, and the addition of the Harmattan Complex.

Operating Costs

Operating costs for the second quarter of 2005 were $12.1 million compared to $5.9 million in 2004. Operating costs for the six months ended June 30, 2005 were $17.3 million compared to $11.4 million in 2004. The increase was the result of the addition to operating costs for EDS, JFP and Harmattan Complex, including turnaround costs of $2.4 million, which were expensed during the quarter for the Harmattan Complex and the Younger and Joffre extraction plants.

Management reorganization costs

On June 29, 2005, the Partnership acquired interests and assets from the Manager that related to the Partnership's businesses for total consideration of $12.0 million, of which $7.7 million plus transaction costs of $0.4 million was expensed, for total management reorganization costs of $8.1 million.

Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expense for the second quarter and six months ending June 30, 2005 was $4.3 million and $6.0 million, respectively, compared to $1.3 million and $2.6 million for the same periods in 2004. The increase relates to depreciation and accretion for EDS, which was acquired in the third quarter of 2004 and for JFP and the Harmattan Complex, which were included commencing March 2005.

Interest Expense

Interest costs were $1.8 million for the second quarter of 2005 compared to $0.2 million in 2004. For the six months ended June 30, 2005 interest costs were $2.4 million compared to $0.5 million for the same period in 2004. The increase from 2004 was a result of higher bank debt levels, slightly higher comparative interest rates and the addition of $50.0 million of convertible debentures during the period. The average annual interest rate on the Partnership's bank debt for the six months ended June 30, 2005 was 4.8 percent unchanged from the corresponding period in 2004.

Included in interest expense, is the accrued interest payable on the Partnership's convertible debentures. On March 22, 2005, the Partnership issued $50 million of 5.85 percent convertible debentures maturing on September 10, 2010. At any time prior to maturity, the debentures may be converted with certain restrictions into Partnership units, at the option of the holder, at a conversion price of $10.35 per unit. During the second quarter of 2005, convertible debentures with a face value of $30,000 were converted into 2,898 Partnership units.

Convertible debentures were recorded as indebtedness at their principal amount less $2.3 million attributed to the conversion feature, which is included in unitholders' equity. The difference between the recorded amount and the principal amount of the convertible debentures is charged to income on an effective yield basis. The amount charged to income during the second quarter and the six months ended June 30, 2005 was $104,000 and $116,000, respectively (2004 - not applicable).

Administration Costs

Administration costs, net of revenues from overhead recoveries, for the second quarter of 2005 were $0.4 million compared to $0.1 million in 2004. For the six months ended June 30, 2005, administration costs were $1.1 million compared to $0.3 million in 2004. The increase over 2004 was a result of increased business development activities and higher public reporting costs.

Management Fees

On June 29, 2005, the Manager assigned the 2001 Administration Agreement to the Partnership, effective January 1, 2005. As a result, management fees paid during the first quarter of 2005 have been returned by the Manager to the Partnership during the second quarter of 2005. Management fees will no longer be paid by the Partnership.

Limited Partner Distributions and Minority Interest

On June 29, 2005, the Manager converted its Expansion Units of TGLLP into Partnership units, effective January 1, 2005. As a result, distributions paid by TGLLP during the first quarter of 2005 to the Manager have been returned to the Partnership during the second quarter of 2005. This conversion also provided the Partnership with future return-on-capital derived fixed fees paid by EnCana Corporation pursuant to the Natural Gas Liquids Purchase Agreement, associated with these Expansion Units. In addition, the Partnership has acquired the Manager's option to fund future capital expenditures incurred by TGLLP Partnership. As a result, the Partnership is the sole Expansion Unitholder of TGLLP. Capital contributed by the Manager, or refunded by TGLLP to the Manager, during 2005 has been transferred to the Partnership.

Mark-to-Market Gain on Financial Instruments

The Partnership uses derivative financial instruments such as collars and swaps to manage exposure to fluctuations in foreign currency exchange rates and interest rates. These derivative financial instruments and the method by which they are recorded are described in note 15 of the Partnership's 2004 audited consolidated financial statements.

The fair value of the interest rate swap as at December 31, 2004 was recognized as an unrealized interest expense of $0.4 million (2003 - not applicable) with an offsetting liability on the balance sheet. At December 31, 2004 the fair value of the foreign exchange costless collar was recognized as an unrealized foreign exchange loss of $29,000 (2003 - nil) with an offsetting liability on the balance sheet.

At June 30, 2005, the fair value liability of the above instruments increased by $0.6 million and was recorded accordingly. This was largely the result of declining 5-year interest swap rates compared to the Partnership's fixed rate of 4.41 percent.

Net Income or Loss

Net loss was $7.8 million for the three months ended June 30, 2005, compared to the net income of $2.1 million for the same period in 2004. Net loss for the six months ended June 30, 2005 was $3.5 million compared to the net income of $3.9 million for the same period in 2004. The decrease was largely the result of the one-time costs associated with the June 29, 2005 management reorganization, turnaround at the Harmattan Complex and non-cash expenses such as depreciation, amortization, accretion and mark-to-market loss on financial instruments. These additional expenses were partially offset by income provided with the addition of EDS, JFP and the Harmattan Complex.

Acquisition and Capital Expenditures

On March 22, 2005, Taylor closed the acquisition of the Harmattan Complex with an effective date of March 1, 2005, for cash consideration of $177.3 million, after adjustments and $0.7 million of transactions costs. In accordance with generally accepted accounting principles, the operating results for the Harmattan Complex during the first 21 days of March were recorded as a reduction of the purchase price.

On June 29, 2005, Taylor acquired interests and assets from the Manager that related to the Partnership's businesses for consideration of $12.0 million, comprised of $7.1 million cash and Partnership units with a value on the closing date of $4.9 million. As described earlier, coincident with the acquisition, the Manager converted its holding of TGLLP Expansion Units into 97,789 Partnership units valued at $0.9 million. The management reorganization and minority interest conversion transactions increased unitholders' equity by $5.9 million, eliminated minority interest in the Partnership, reduced net income by $8.1 million and increased capital assets by $5.0 million.

In addition to the above acquisitions, the Partnership funded capital expenditures of $2.0 million during the second quarter of 2005, of which $0.5 million has been designated as Sustaining Capital. For the six months ended June 30, 2005, capital expenditures were $16.4 million of which $13.4 million related to the construction of JFP.

As a result of the acquisition of the Harmattan Complex and the refinancing of the Partnership's credit facilities, interest and financing fees of $1.3 million were capitalized during the six months ended June 30, 2005 (2004 - $0.1 million).

Equity

At June 30, 2005, Taylor had 42,531,490 Partnership units outstanding compared to 28,862,952 at year-end 2004. The increase was primarily the result of a public offering of 13,000,000 Partnership units which closed on March 22, 2005. The offering, which raised $113.9 million, net of costs, was used to partially fund the acquisition of the Harmattan Complex. In addition, 627,640 Partnership units were issued on June 29, 2005 as part of the management reorganization transaction and minority interest conversion.

At June 30, 2005, the Partnership had options outstanding to purchase 253,000 (December 31, 2004 - 181,500) Partnership units at prices ranging from $4.34 to $9.40 per unit. Of this amount, 85,000 options (December 31, 2004 - 100,750) were exercisable. During the second quarter and six months ended June 30, 2005, 109,500 options and 129,500 options were granted, respectively. For the options granted since January 1, 2005, the average exercise price was $9.04 per unit. During the second quarter of 2005, 31,000 options were exercised for proceeds of $148,000 (2004 - nil). For the six months ended June 30, 2005, 38,000 options were exercised for proceeds of $183,000 (2004 - 23,500 options for proceeds of $108,000).



Financial Position

The following table outlines significant changes in the consolidated
balance sheets that occurred between December 31, 2004 and June 30,
2005:

Increase
(in thousands of dollars) (Decrease) Explanation
------------------------------------------------------------------------
Cash (4,783) Refer to Consolidated
Statements of Cash Flow.

Accounts receivable 5,208 Increase a result of the
Harmattan Complex acquisition.

Capital assets 206,030 Includes property, plant,
equipment and intangible
assets acquired with the
Harmattan Complex, JFP
construction costs, further
ownership of TGLLP due to
minority interest conversion
and management reorganization,
capitalized refinancing costs,
plus additional capital
expenditures made at the RET
Complex and Younger Extraction
Plant, less depreciation and
amortization provided for all
facilities during the period.

Deferred financing costs 1,998 Financing costs associated
with the convertible debenture
offering, less amortization
thereof.

Accounts payable (7,442) Construction costs accrued for
$9.4 million for JFP at
December 31, 2004 subsequently
paid and partly offset by
increases as a result of the
Harmattan acquisition, accrued
turnaround costs and accrued
interest on convertible
debentures.

Long-term debt 59,100 Increase a result of the
partial funding of the
Harmattan Complex acquisition,
funding of JFP construction
and cash consideration paid on
management reorganization.

Convertible debentures 47,761 Issue of convertible
debentures for $50 million
less the amount attributed to
the conversion feature, which
is included as, part of
unitholders' equity, plus
accretion thereof.

Asset retirement obligation 2,148 Increase a result of the
additional obligations
associated with the
acquisition of the Harmattan
Complex plus accretion of
obligations from the
Partnership's facilities.

Unitholders' equity 105,984 Increase a result of the
Partnership units issued on
March 22, 2005 that raised net
proceeds of $113.9 million,
fair value of the conversion
feature of the convertible
debentures for $2.3 million,
units issued with a fair value
of $5.9 million as part of the
management reorganization and
minority interest conversion,
plus options exercised for
cash, less net loss for the
period and unitholders'
distributions declared during
the quarter.



Liquidity and Capital Resources

The following table summarizes the changes in cash flow for the six
months ended June 30, 2005 compared to same period ended June 30, 2004:

(in thousands
of dollars) 2005 2004 Explanation
------------------------------------------------------------------------
Cash, beginning
of period 5,409 4,231
Cash provided
by (used in):

Operating
activities 4,688 5,505 During the first six months of
2005, net cash was reduced by
$7.5 million in cash funded
management reorganization
costs, which was partly offset
by cash provided by EDS and
JFP. In addition, Harmattan
Complex operations have been
included since March 22, 2005.

During the first six months
of 2004, the RET Complex
contributed to operations as
it was acquired in September
2003.

Financing
activities 193,603 (5,546) During the first six months of
2005, net cash was primarily
provided by a unit offering
that raised $113.9 million net
of costs, a convertible
debentures offering that
raised $47.9 million net of
costs and long-term debt
drawings of $47.7 million.
These funds were used for the
Harmattan Complex acquisition,
redemption of the $4.0 million
debenture issued by the
previous owners of the
Harmattan Complex, JFP
construction expenditures and
management reorganization.
Distributions for the period
were $12.0 million.

During the first six months of
2004, the reduction in cash
was primarily from the
distribution payments of
February 15, 2004 and May 15,
2004, for $5.4 million,
combined.

Investing
activities (203,064) (2,793) During the first six months of
2005, the reduction in cash a
result of $177.3 million used
in the Harmattan Complex
acquisition, $16.4 million for
funding the construction of
JFP and other capital projects
at the RET Complex and Younger
Extraction Plant plus $9.4
million of non-cash working
capital used in the
construction of JFP.

During the first six months of
2004, the reduction in net
cash was the result of
expenditures on the sulphur
emissions reduction project
at the RET Complex plus
capital expenditures at the
Younger Extraction Plant,
after additions from non-cash
working capital used for these
capital projects.

Effect of
exchange rate
Changes on cash (10) - Change is a result of
unrealized foreign exchange
loss on U.S.-dollar
denominated cash balances.
------------------------------------------------------------------------
Cash, end of
period 626 1,397
------------------------------------------------------------------------


Working Capital and Cash Requirements

At June 30, 2005, the Partnership had positive working capital of $2.0 million compared to a working capital deficit of $4.6 million at December 31, 2004. The working capital deficit as at December 31, 2004 was primarily the result of a JFP construction cash call for $9.4 million, which was paid in January 2005.

As a result of the terms of the Partnership's commercial contracts, the majority of cash collection occurs simultaneously with cash payments, thereby minimizing the Partnership's requirement to maintain a significant working capital position. Any timing differences, whether short or long-term, are managed using working capital or existing debt facilities.

With the exception of those items disclosed, there are no known trends, events or uncertainties to indicate any impairment in the sources or uses of cash that would have a material effect on the financial condition of the Partnership.

Commitments and Guarantees

The Partnership has assumed various commitments, guarantees and contractual obligations in the normal course of its operations.

At June 30, 2005, obligations representing known future cash payments that are required under existing contractual arrangements are:



------------------------------------------------------------------------
------------------------------------------------------------------------
(in thousands Less than 1 to 3 4 to 5 After 5
of dollars) 1 year years years years Total
------------------------------------------------------------------------
Office and vehicle
leases 220 781 378 167 1,546
Land leases 31 127 77 478 713
------------------------------------------------------------------------
Total commitments 251 908 455 645 2,259
------------------------------------------------------------------------
------------------------------------------------------------------------


The Partnership has issued a guarantee to indemnify the vendor of the RET Complex with respect to potential third-party claims, such as environmental and tax. The Partnership has provided for estimated environmental claims in its calculation of the RET Complex's asset retirement obligation. Because of the nature of the indemnifications, the maximum exposure under the agreement cannot be estimated. At June 30, 2005, management had not been notified of any claims.

Debt Facilities

As detailed below, at June 30, 2005, the Partnership had available debt facilities totaling $130.0 million, of which $87.0 million had been drawn and $0.7 million had been used to support letters of credit.

On March 22, 2005, the Partnership's credit facilities were refinanced into a $120 million revolving facility (the "New Revolving Facility") with an extendible 364-day revolving period and a $10.0 million operating facility. The New Revolving Facility bears interest at bankers' acceptance rates plus stamping fees plus applicable margins. The margins and stamping fees vary depending on financial statement ratios and can range from 1.15 percent to 1.65 percent. The New Revolving Facility is subject to renewal on March 21, 2006 at which time it can be extended at the lenders' option for 364 days. If the New Revolving Facility is not extended, the amount drawn is fully repayable on March 20, 2007.

The $10.0 million operating facility also bears interest at bankers' acceptance rates plus stamping fees plus applicable margins that vary depending on financial statement ratios and can range from 1.15 percent to 1.65 percent. As at June 30, 2005, the amount available under this facility was reduced by $0.7 million to support outstanding letters of credit.

The New Revolving Facility and operating facility are secured by a first ranking floating charge debenture on all of the Partnership's assets.

Financing Activities

On March 22, 2005, the Partnership closed an equity offering of 13,000,000 Partnership units at a price of $9.25 per Partnership unit. The offering raised net proceeds of $113.9 million after offering expenses and underwriters' commission of $6.4 million.

Also on March 22, 2005, the Partnership issued $50 million of 5.85 percent convertible debentures maturing on September 10, 2010, with interest payable semi-annually on September 10 and March 10 in each year. The proceeds of the issue were $47.9 million after underwriters' commission and costs of $2.1 million. Prior to maturity, the debentures may be converted into Partnership units at the option of the holder at a price of $10.35 per unit. The convertible debentures carry specific redemption features that can be exercised by the Partnership after September 10, 2008. The Partnership can elect to settle interest due on the debentures with Partnership units.

The proceeds of these two offerings were used to fund the acquisition of the Harmattan Complex.

On June 29, 2005, the Partnership acquired interests and assets from the Manager as part of the management reorganization transaction for consideration of $12.0 million, comprised of $7.1 million cash and the remaining $4.9 million was paid in the form of 529,851 Partnership units. In addition, the Manager converted its Expansion Units of TGLLP into 97,789 Partnership units, which were valued on the closing date at $0.9 million.

Pension

The Partnership assumed a defined benefit pension plan covering certain employees at the Harmattan Complex, which had an unfunded actuarial liability of $0.5 million as at June 30, 2005. The Partnership has accrued this pension obligation, which has been included in accounts payable and accrued liabilities. The accrued pension obligation was deducted from the purchase price of the Harmattan Complex as detailed in note 4 of the consolidated financial statements.

Off-balance sheet arrangements

As at June 30, 2005, the Partnership did not have any off-balance sheet arrangements.

Risk Factors and Risk Management

Readers should carefully consider the risks described under the heading ''Risk Factors'' in the Partnership's Annual Information Form and as disclosed in the Partnership's Annual Report for the year ended December 31, 2004. The Partnership's business and commodity price risks remain substantially unchanged from December 31, 2004, with the exception of the risks disclosed below as a result of the acquisition of the Harmattan Complex:

Custom NGL Processing Risks

The Harmattan Complex has truck unloading facilities to receive NGLs for fractionation and terminalling. Harmattan Complex customers can fractionate and terminal their NGLs at alternative facilities. As such, the Partnership encounters competition when securing NGL volumes for fractionation and terminalling at the Harmattan Complex. The contracts entered into between the Partnership and customers normally are for a 12-month period. At the end of the term, customers may discontinue or reduce the volume of NGLs delivered to the facilities. Reduced NGL volumes delivered to the Harmattan Complex would reduce fee revenue received for NGL fractionation and terminalling.

Variations in Fee-for-Service Payments

Approximately 45 percent of fee-for-service revenues for raw gas processing are received under the "Rep Agreements". The "Rep Agreements" are the Representation, Management and Processing Agreements dated June 1, 2002 between each of the original 21 owners of the Harmattan Complex and the Partnership. Under the Rep Agreements, fees are fixed with annual adjustments based on the CPI. The remaining fee-for-service contracts for raw gas processing are with producers who pay fees which are negotiated on an individual basis. In general, these negotiations are not subject to regulatory scrutiny. Market conditions could reduce the fee that the Partnership can charge for services provided at the Harmattan Complex. Such a reduction could reduce the revenues of the Harmattan Complex.

Value of Product-in-kind

As partial payment for services provided at the Harmattan Complex, the Partnership acquires title to a portion of the NGL produced at the facility. The Partnership cannot predict future economic conditions, fuel conservation measures, alternative fuel requirements, governmental regulation or technological advances in fuel economy and energy generation devices, all of which could reduce the value of NGLs.

NGL production from the Harmattan Complex competes with NGLs from other producers such as extraction plants, other field plants, and refineries, some of which may have a lower cost of production than the Partnership and are closer to end-markets. The NGL industry also competes with other industries in supplying energy, fuel, petrochemical feedstock and refinery feedstock to consumers.

Operating and Capital Costs

Operating and capital costs of the Harmattan Complex may vary considerably from current and forecast values. In general, as equipment ages, operating, maintenance and capital expenses with respect to such equipment will increase. Distributions may be affected if the Partnership incurs significant increases in operating, maintenance or capital costs.

Requirements under the terms of the Rep Agreements

The Rep Agreements require that the Harmattan Complex recover certain minimum percentages, on a monthly basis, of the NGL from the inlet gas from certain dedicated lands. These required percentages are consistent with the liquids recovery performance of a modern deep-cut natural gas processing facility. The penalty for not achieving these recoveries is a payment by the Partnership to the producers of the value upgrade lost as a result of not recovering the NGL. This lost value is the difference in revenue between the NGL sale and the equivalent natural gas sale.

The Partnership has agreed to process a certain minimum percentage of raw gas provided to the Harmattan Complex, averaged over a three-year period, subject to force majeure, adjustments for turnarounds and certain exceptions for interruptible gas or off-specification gas. This required percentage is consistent with the online performance of a modern natural gas processing facility. In the event that this online guarantee is not met, the Partnership is required to process the volume of producers' raw gas that would have been processed if the Harmattan Complex was running at the prescribed capacity for a fee of one-half the normal processing fee. This online guarantee allows for a 22-day turnaround every three years.

Value-added Processing Risks

The Harmattan Complex generates marketing revenues from the sale of frac oil and CO2.

The price of frac oil is dependent, in part, on the level of demand for frac oil for use in the servicing and maintenance of oil wells and natural gas wells. The Partnership cannot predict the impact of future economic conditions, demands for servicing and maintenance of oil and natural gas wells, alternative servicing products, governmental regulation or technological advances, all of which could impact the value of frac oil.

Liquid CO2 is sold under a take-or-pay contract which has a remaining term of nine years. After this time, the market or pricing for liquid CO2 cannot be determined by the Partnership.



TAYLOR NGL LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Stated in thousands of dollars except unit amounts)
------------------------------------------------------------------------
------------------------------------------------------------------------
June 30 December 31
2005 2004
------------------------------------------------------------------------
(unaudited) (audited)
Assets

Current assets:
Cash and cash equivalents $ 626 $ 5,409
Accounts receivable 15,899 10,691
Prepaid expenses and interest 448 298
------------------------------------------------------------------------

16,973 16,398

Capital assets (notes 3 and 6) 421,339 215,309

Deferred financing costs (note 8) 1,998 -
------------------------------------------------------------------------
$ 440,310 $ 231,707

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

Liabilities and Unitholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 11,154 $ 18,596
Unitholders' distributions payable 2,446 1,587
Due to Manager (note 5) 435 457
Market value of financial instruments 979 405
------------------------------------------------------------------------
15,014 21,045

Long-term debt (note 7) 87,000 27,900
Convertible debentures (note 8) 47,761 -
Asset retirement obligations (note 9) 3,488 1,340
Minority interest in Partnership (note 5) - 359
------------------------------------------------------------------------
153,263 50,644

Unitholders' equity (note 10) 287,047 181,063

------------------------------------------------------------------------
$ 440,310 $ 231,707

------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.



TAYLOR NGL LIMITED PARTNERSHIP
Consolidated Statement of Income and Unitholders' Equity
(Stated in thousands of dollars except unit and per unit amounts)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
(unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue:
Natural gas liquids
sales $ 36,781 $ 25,396 $ 65,062 $ 52,240
Fee income 12,242 5,852 19,795 10,905
Other 7 104 25 206

------------------------------------------------------------------------
49,030 31,352 84,882 63,351
------------------------------------------------------------------------

Expenses:
Shrinkage gas 29,134 21,067 51,950 43,167
Operating costs 12,126 5,870 17,296 11,437
Management reorganization
costs (note 5) 8,132 - 8,132 -
Depreciation, amortization
and accretion 4,264 1,333 5,992 2,637
Interest 1,804 193 2,406 480
Overhead recovery fees 563 637 965 1,220
Administration 412 109 1,092 348
Management fees (note 5) (191) 96 - 185
Limited partner
distributions (note 5) (18) 3 - 4
Foreign exchange gain (10) (7) (3) (19)
Mark to market loss
on financial instruments 582 - 574 -

------------------------------------------------------------------------
56,798 29,301 88,404 59,459
------------------------------------------------------------------------

Net income (loss) (7,768) 2,051 (3,522) 3,892

Unitholders' equity,
beginning of period 296,008 127,597 181,063 112,088

Units issued (note 10) 6,028 - 119,955 16,537
Convertible debentures
(note 8) - - 2,325 -
Contributed surplus (note 10) 40 - 70 -

Unitholders' distributions
declared (7,261) (3,069) (12,844) (5,938)

------------------------------------------------------------------------
Unitholders' equity,
end of period $ 287,047 $ 126,579 $ 287,047 $ 126,579

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

Net income (loss) per
Partnership unit (note 11):
Basic $ (0.19) $ 0.10 $ (0.10) $ 0.20
Diluted $ (0.19) $ 0.10 $ (0.10) $ 0.20

------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.



TAYLOR NGL LIMITED PARTNERSHIP
Consolidated Statement of Cash Flow
(Stated in thousands of dollars)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
(unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided (used in):

Operations:
Net income $ (7,768) $ 2,051 $ (3,522) $ 3,892
Depreciation,
amortization and accretion 4,264 1,333 5,992 2,637
Non-cash management
reorganization
costs (note 5) 616 616
Mark to market loss on
financial instruments 582 - 574 -
Accretion of convertible
debentures discount 104 - 116 -
Partnership unit-based
compensation (note 10) 40 - 70 -
Unrealized foreign
exchange loss (gain) (11) (3) 10 -
Deferred performance-based
revenue amortization - (94) - (188)
------------------------------------------------------------------------
(2,173) 3,287 3,856 6,341

Change in non-cash
working capital (2,740) (550) 832 (836)

------------------------------------------------------------------------
(4,913) 2,737 4,688 5,505
------------------------------------------------------------------------

Financing:
Units issued for cash,
net of issue costs 111 - 114,038 109
Long-term debt 4,500 - 47,680 (100)
Convertible debentures,
net of issue costs - - 47,870 -
Unitholders'
distributions paid (7,222) (2,865) (11,985) (5,389)
Debenture paid on
Acquisition - - (4,000) -
Limited partner contributions 76 49 - 116

------------------------------------------------------------------------
(2,535) (2,816) 193,603 (5,546)
------------------------------------------------------------------------

Investments:
Restricted cash (note 7) 8,600 - - -
Change in non-cash investing
working capital (6,410) (71) (9,400) 671
Capital expenditures (1,963) (1,921) (16,383) (3,464)
Acquisition (note 2) - - (177,281) -

------------------------------------------------------------------------
227 (1,992) (203,064) (2,793)
------------------------------------------------------------------------

Effect of exchange rate
changes on cash 11 3 (10) -
------------------------------------------------------------------------

Change in cash and
cash equivalents (7,210) (2,068) (4,783) (2,834)
Cash and cash equivalents,
beginning of period 7,836 3,465 5,409 4,231

------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 626 $ 1,397 $ 626 $ 1,397

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

Interest paid on a cash basis during the three months and six months
ended June 30, 2005 was $0.9 million and $1.4 million (2004 -
$0.2 million and $0.5 million).

See accompanying notes to consolidated financial statements.


TAYLOR NGL LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
Six months ended June 30, 2005 and 2004 (unaudited)
(all tabular amounts are stated in thousands of dollars except
unit amounts)


1. Basis of presentation

The interim consolidated financial statements of Taylor NGL Limited Partnership (the "Partnership") have been prepared by management in accordance with Canadian generally accepted accounting principles. The interim consolidated financial statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the fiscal year ended December 31, 2004. The disclosure provided below is incremental to the annual consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Partnership's annual report for the year ended December 31, 2004.

2. Organization

As a result of the acquisition of interests and assets that relate to the Partnership's businesses from Taylor Management Company Inc. (the "Manager") on June 29, 2005 as described in note 5, the Partnership's organization structure has changed with an effective date of January 1, 2005 as follows:

Taylor Gas Liquids Limited Partnership ("TGLLP"), Joffre Gas Liquids Limited Partnership ("JGLLP), Taylor Gas Processing Limited Partnership ("TGPLP") and Harmattan Gas Processing Limited Partnership ("HGPLP"), collectively the "Operating Partnerships", are wholly owned by the Partnership. Prior to June 29, 2005, the Manager owned the general partner interest in the Operating Partnerships, other than HGPLP, which was held by the Partnership since its acquisition of March 22, 2005.

Prior to January 1, 2005, the limited partners of TGLLP other the Partnership (the "Expansion Unitholders"), had the option to contribute 26.75 percent of any future capital expenditures incurred by TGLLP in return for TGLLP Units ("Expansion Units"). Effective January 1, 2005, the Partnership is the only Expansion Unitholder of TGLLP and the Expansion Units of TGLLP are wholly owned by the Partnership.

The 2001 Administration Agreement was assigned by the Manager to the Partnership. Therefore, the Manager is no longer entitled to management fees, the annual performance compensation fee and the overhead charges collected by the Operating Partnerships. In addition, the Manager has relinquished the right to select one nominee to the Board of Directors of Taylor Gas Liquids Ltd., the general partner of the Partnership.

3. Significant accounting policies

(a) Capital assets

On March 15, 2005, Joffre Feedstock Pipeline ("JFP") construction was completed and commercial operations commenced. JFP is being depreciated over a 40-year period, using the straight-line method of depreciation.

On March 22, 2005, the Partnership acquired the Harmattan Complex, as described in note 4. The Harmattan Complex is being depreciated over a 30-year period using the straight-line method of depreciation. Amortization of the intangible assets that were acquired along with the Harmattan Complex is provided for on a straight-line basis over nine years.

Amortization of the intangible assets that were acquired from the Manager on June 29, 2005, as described in note 5, is provided for on a straight-line basis over 13 years.

(b) Convertible debentures

Convertible debentures are recorded at the amount of proceeds received less the amount attributed to the conversion feature which is included as part of unitholders' equity. The difference between the recorded amount and the face value of the convertible debentures is charged to income on an effective yield basis. Costs associated with the issuance of the convertible debentures are included in deferred financing costs and are amortized into income using the straight-line method over the life of the convertible debentures.

4. Acquisition

On March 22, 2005, the Partnership acquired the Harmattan Complex through the purchase of all the outstanding shares of two private companies for $185.0 million, prior to working capital and other adjustments and the repayment of a $4.0 million debenture held by one of the private companies. The Harmattan Complex includes a gas processing facility and associated gas gathering systems, a deep cut NGL extraction facility, and NGL fractionation and terminalling facilities. Results from the operations of the Harmattan Complex have been included in the financial statements beginning March 22, 2005.

The net assets were acquired for cash consideration of $177.3 million, including transaction costs of approximately $0.7 million. The Harmattan Complex acquisition is summarized as follows:



Capital assets $ 166,729
Intangible assets 23,761
Current assets 9,095
Long-term debt (11,419)
Current liabilities (4,036)
Debenture (4,000)
Asset retirement obligations (2,044)
Pension obligation (805)
------------------------------------------------------------------------
$ 177,281
------------------------------------------------------------------------
------------------------------------------------------------------------


Immediately following the March 22, 2005 closing, the $4.0 million debenture was redeemed in cash by the Partnership. The purchase price has not been finalized as it will be subject to working capital adjustments. In addition, the former owners of the Harmattan Complex are required to reimburse the Partnership for certain obligations, if any, of the private companies that were acquired to a maximum of $2.2 million, should they arise prior to December 2008.

5. Management reorganization and minority interest conversion

On June 29, 2005, the Partnership acquired certain interests and assets from the Manager that related to the Partnership's businesses for consideration of $12.0 million, comprised of cash for $7.1 million and Partnership units valued at $4.9 million. In addition, the Manager converted its holding of TGLLP Expansion Units into 97,789 Partnership units valued at $0.9 million. The management reorganization and Expansion Unit conversion transactions are summarized as follows:



Consideration:
Units issued on management reorganization
(529,851 Partnership units) $ 4,970
Units issued on conversion of Expansion Units
(97,789 Partnership units) 917
Cash paid on management reorganization, including
transaction costs of $440,000 7,516
------------------------------------------------------------------------
$ 13,403
------------------------------------------------------------------------
------------------------------------------------------------------------

Allocation:
Capital assets $ 3,166
Intangible assets 2,105
Management reorganization costs, including
transaction costs of $440,000 8,132
------------------------------------------------------------------------
$ 13,403
------------------------------------------------------------------------
------------------------------------------------------------------------


These transactions have an effective date of January 1, 2005, which resulted in management fees and limited partner distributions being eliminated retroactive to January 1, 2005. The above transactions increased unitholders' equity by $5.9 million, eliminated minority interest in the Partnership of $0.4 million, reduced net income by $8.1 million and increased capital assets by $5.0 million.



6. Capital assets

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, 2005 December 31, 2004
------------------------------------------------------------------------

Property, plant and equipment $ 425,249 $ 197,789
Accumulated depreciation (29,612) (24,644)
------------------------------------------------------------------------
395,637 173,145
------------------------------------------------------------------------

Intangible assets 26,975 1,000
Accumulated amortization (1,273) (461)
------------------------------------------------------------------------
25,702 539
------------------------------------------------------------------------

JFP construction in progress costs - 41,625
------------------------------------------------------------------------
$ 421,339 $ 215,309
------------------------------------------------------------------------
------------------------------------------------------------------------

7. Long-term debt

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, 2005 December 31, 2004
------------------------------------------------------------------------

New Revolving Facility $ 87,000 $ -
Revolving credit facility - 25,938
Reducing term facility - 1,962
------------------------------------------------------------------------
$ 87,000 $ 27,900
------------------------------------------------------------------------
------------------------------------------------------------------------


On March 22, 2005, the Partnership's credit facilities were refinanced into a $120 million revolving facility (the "New Revolving Facility") with an extendible 364-day revolving period. The New Revolving Facility bears interest at bankers' acceptance rates plus stamping fees plus applicable margins. The margins and stamping fees vary depending on financial statement ratios and can range from 1.15 percent to 1.65 percent.

The New Revolving Facility is subject to renewal on March 21, 2006 at which time it can be extended at the lenders' option for 364 days. If the New Revolving Facility is not extended, the amount drawn is fully repayable on March 20, 2007.

On March 22, 2005, the Partnership also refinanced its existing operating facility into a new $10.0 million operating facility that bears interest at bankers' acceptance rates plus stamping fees plus applicable margins that vary depending on financial statement ratios and can range from 1.15 percent to 1.65 percent. As at June 30, 2005, the amount available under this facility was reduced by $0.7 million to support outstanding letters of credit.

The New Revolving Facility and the new operating facility are secured by a first ranking floating charge debenture on all of the Partnership's assets.

When the above facilities were refinanced, $8.6 million of the Partnership's debt remained outstanding with a former lender. The Partnership established a restricted cash account with this former lender as collateral against the bank loan. The Partnership paid the loan on April 29, 2005 using the restricted cash held by the lender.

8. Convertible debentures

On March 22, 2005, the Partnership issued $50 million of 5.85% convertible debentures maturing on September 10, 2010, with interest payable semi-annually in arrears on September 10 and March 10 in each year. The proceeds of the issue, net of underwriters' fees and costs, were $47.9 million. Prior to maturity the debentures may be converted into Partnership units, at the option of the holder, at a conversion price of $10.35 per Partnership unit. Underwriters' fees and costs of $2.1 million are being amortized over the life of the convertible debentures.

The Partnership may redeem the convertible debentures after September 10, 2008 and prior to September 10, 2009, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest, if any, provided the current market price on the date notice is given is not less than 125% of the conversion price, subject to adjustment in certain events. Subsequent to September 10, 2009 and prior to the convertible debentures' maturity, the Partnership may redeem the convertible debentures at a price equal to their principal amount plus accrued and unpaid interest, if any. The Partnership can elect to pay interest on the debentures by issuing Partnership units.



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

Balance, December 31, 2004 $ -
March 22, 2005 issue 50,000
Conversion discount (2,325)
Accretion of discount to June 30, 2005 116
Conversions to June 30, 2005 (30)
------------------------------------------------------------------------

Balance, June 30, 2005 $ 47,761
------------------------------------------------------------------------
------------------------------------------------------------------------


9. Asset retirement obligations

The Partnership has estimated the net present value of its total asset retirement obligations to be $3.5 million as at June 30, 2005 based on a total future liability of $100.8 million excluding salvage values, an increase of $64.2 million from December 31, 2004. The earliest of these payments is not expected before 2029, with the majority not expected to begin until 2043. The Partnership's credit adjusted risk free rate of 9 percent and an inflation rate of 1.5 percent were used to calculate the present value of the asset retirement obligation. The following table reconciles the Partnership's total asset retirement obligation:



------------------------------------------------------------------------
------------------------------------------------------------------------
Six months ended Year ended
June 30, 2005 December 31, 2004
------------------------------------------------------------------------

Asset retirement obligations,
beginning of period $ 1,340 $ 1,111
Additions due to acquisitions
during the period 2,044 125
Accretion expense 104 104
------------------------------------------------------------------------

Asset retirement obligations, end
of period $ 3,488 $ 1,340
------------------------------------------------------------------------
------------------------------------------------------------------------

10. Unitholders' equity and Partnership unit option plan


------------------------------------------------------------------------
------------------------------------------------------------------------
June 30, 2005 December 31, 2004
------------------------------------------------------------------------

Unitholders' capital $ 314,319 $ 194,364
Accumulated earnings 43,034 46,556
Convertible debentures 2,325 -
Contributed surplus 70 -
Accumulated distributions (72,701) (59,857)
------------------------------------------------------------------------
$ 287,047 $ 181,063
------------------------------------------------------------------------
------------------------------------------------------------------------



------------------------------------------------------------------------
------------------------------------------------------------------------
Number of
units Amount
------------------------------------------------------------------------

Balance, December 31, 2004 28,862,952 $ 181,063

Net loss for the six months ended
June 30, 2005 (3,522)
Unitholders' distributions declared (12,844)
Units issued on exercise of options 38,000 183
Units issued on offering of March
22, 2005 13,000,000 120,250
Issue expenses (6,395)
Units issued on management
reorganization and minority
interest conversion 627,640 5,887
Units issued on conversion of
convertible debentures 2,898 30
Convertible debentures 2,325
Contributed surplus 70
------------------------------------------------------------------------

Balance, June 30, 2005 42,531,490 $ 287,047
------------------------------------------------------------------------
------------------------------------------------------------------------


On March 22, 2005, the Partnership closed an equity offering of 13,000,000 Partnership units at a price of $9.25 per unit, for gross proceeds of $120.3 million or net proceeds of $113.9 million after offering expenses and underwriters' commission of $6.4 million.

On January 3, 2005, the Partnership granted 20,000 options to a director of the Partnership with an exercise price of $8.43 per option. These options vested upon grant and expire in five years. The fair value of these options was estimated to be $0.92 per option based on the Black-Scholes option pricing methodology using an expected risk-free interest rate of 4.25 percent, a yield of 8 percent, a five-year maturity and a volatility rate of 26 percent.

On May 26, 2005, the Partnership granted 89,500 options to the employees of the Harmattan Complex and Younger Extraction Plant with an exercise price of $9.10 per option. These options vest over two years and expire in five years. The fair value of these options was estimated to be $0.98 per option based on the Black-Scholes option pricing methodology using an expected risk-free interest rate of 4.25 percent, a yield of 8 percent, a five-year maturity and a volatility rate of 26 percent.

On June 27, 2005, the Partnership granted 20,000 options to a director of the Partnership with an exercise price of $9.40 per option. These options vested upon grant and expire in five years. The fair value of these options was estimated to be $1.00 per option based on the Black-Scholes option pricing methodology using an expected risk-free interest rate of 4.25 percent, a yield of 8 percent, a five-year maturity and a volatility rate of 26 percent.

In accordance with the Partnership's accounting policy, $70,000 was expensed during the six months ended June 30, 2005 with a corresponding increase in contributed surplus. This amount represents the estimated fair value of the options that vested during the period.

11. Income per Partnership unit

The following table summarizes the computation of net income per Partnership unit:



------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
2005 2004 2005 2004
------------------------------------------------------------------------

Numerator:
Numerator for basic
income (loss) per unit $ (7,768) 2,051 $ (3,522) 3,892
Convertible debentures
interest 729 - 809 -
Accretion of convertible
debentures discount 104 - 116 -
------------------------------------------------------------------------

Numerator for diluted
income (loss) per unit $ (6,935) 2,051 $ (2,597) 3,892
------------------------------------------------------------------------
------------------------------------------------------------------------

Denominator:
Weighted-average
denominator for basic
units 41,888,664 20,463,102 36,132,484 19,429,097
Convertible
debentures 4,829,533 - 2,683,151 -
Dilutive unit options 52,143 117,404 55,974 126,558
------------------------------------------------------------------------

Denominator for
diluted income
(loss) per unit 46,770,340 20,580,506 38,871,609 19,555,655
------------------------------------------------------------------------
------------------------------------------------------------------------

Basic income (loss)
per unit $ (0.19) 0.10 $ (0.10) 0.20
Diluted income (loss)
per unit $ (0.19) 0.10 $ (0.10) 0.20
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months and six months ended June 30, 2005, the effect upon the conversion of convertible debentures and unit options is anti-dilutive.

12. Pension Plan

The Partnership assumed a defined benefit pension plan covering certain employees at the Harmattan Complex (the "Harmattan Defined Benefit Pension Plan"). The plan provides employee pensions based on length of service and the highest consecutive three years' average earnings.

Details of the Harmattan Defined Benefit Pension Plan and the Partnership's existing pension plan at the Younger Extraction Plant at June 30, 2005 are as follows:



------------------------------------------------------------------------
Harmattan Younger
Defined Benefit Defined Benefit
Pension Plan Pension Plan
------------------------------------------------------------------------

Market value of plan assets $ 3,877 $ 1,785
Estimated actuarial present
value of liabilities (4,341) (1,804)
------------------------------------------------------------------------

Unfunded estimated plan deficiency $ (464) $ (19)
------------------------------------------------------------------------
------------------------------------------------------------------------

Discount rate 6.00% 6.00%
Long-term rate of return on plan
assets, per annum 6.00% 6.00%
Rate of compensation increase, per annum 2.75% 2.75%
------------------------------------------------------------------------
------------------------------------------------------------------------


The Partnership has accrued a pension obligation of $0.5 million which has been included in accounts payable and accrued liabilities.

The Partnership revalues the defined benefit pension plans on an annual basis and the next valuation will be performed as at December 31, 2005.

This press release contains forward-looking statements, which are subject to certain assumptions, risks and uncertainties that could cause actual results to differ materially from those contemplated in the forward-looking statements.

Taylor NGL Limited Partnership (www.taylorngl.com) units and convertible debentures trade on the Toronto Stock Exchange under the symbols TAY.UN and TAY.DB, respectively.



Contact Information