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

Taylor NGL Limited Partnership

November 09, 2005 16:05 ET

Taylor NGL Limited Partnership Announces Third Quarter 2005 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2005) - Taylor NGL Limited Partnership (TSX:TAY.UN) (TSX:TAY.DB) today announced third quarter 2005 results.

HIGHLIGHTS

- Q3 2005 Cash Available for Distribution was $9.1 million, up 109 percent from the prior year quarter, up 88 percent from Q2 2005.

- On a per unit basis, Q3 2005 Cash Available for Distribution was 21.4 cents per unit of which 18 cents per unit was distributed to unitholders.

- Increased distributions to 6.0 cents per unit per month in August. Since January 2005, distributions per unit have increased 9.0 percent.

- Net natural gas volumes processed by the Partnership averaged a record 431 MMscf per day in Q3 2005, up 12 percent from the prior year quarter.

- Net natural gas liquids (NGL) sales averaged a record 17,315 barrels per day in Q3 2005, up 16 percent from the prior year quarter.

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



------------------------------------------------------------------------
Three Months ended Nine Months ended
(in thousands of dollars September 30 September 30
except unit amounts) 2005 2004 2005 2004
------------------------------------------------------------------------

Gas processed
(MMscf per day) 431 384 409 363
NGL sales
(barrels per day) 17,315 14,874 16,391 14,421
Total revenue 61,788 36,388 146,670 99,739
Feedstock cost 39,598 24,739 91,548 67,906
Net income before
management
reorganization costs 5,090 2,837 9,700 6,729
Basic per unit 0.12 0.12 0.25 0.32
Diluted per unit 0.12 0.12 0.25 0.32
Net Operating Income 12,397 4,858 27,043 12,179
Cash Available
for Distribution 9,122 4,358 20,719 10,887
Distributions to
unitholders 7,550 3,069 19,535 8,458
per unit 0.1800 0.1500 0.5175 0.4400
Units outstanding at
end of period 42,531,490 28,520,452 42,531,490 28,520,452

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


CONFERENCE CALL

A conference call to discuss these results will be held on Thursday, November 10, 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 from all other areas of Canada.

A recording of the call will be available for replay until November 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 October 31, 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. A breakdown of the Partnership's volumetric information by facility is available at www.taylorngl.com under Investor Info, Facts & Figures, Production.

This Management's Discussion and Analysis contains certain forward-looking statements that are based on the Partnership's current expectations, estimates, projections and assumptions in light of its experience and its view of historical trends. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expects", "projects", "plans", "anticipates", "targets" and similar expressions. These statements are not guarantees of future performance and are subject to a number of risks and uncertainties as detailed in the Partnership's Annual Information Form under the heading "Risk Factors", the Partnership's public disclosure documents and within the Management's Discussion and Analysis. Undue reliance should not be placed on these forward-looking statements as both known and unknown risks and uncertainties may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted. Such forward-looking statements are expressly qualified by the above statements.

Tabular amounts are expressed in thousands of dollars except per unit amounts. All figures are in Canadian dollars unless otherwise stated. All volumes are net to the Partnership 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 safe and efficient operation of Taylor's facilities for the long term. Prior to the acquisition of the Harmattan Complex, in the first quarter of 2005, Taylor did not identify these types of expenditures, as they were not significant. Cash Available for Distribution excludes cash funded management reorganization costs of $7.5 million incurred in the second quarter because of its singular occurrence.

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 Third Quarter 2005

Production and Operations Summary

Taylor's growth continues with significant increases in natural gas volumes processed and NGL sales in the third quarter of 2005 compared to both the second quarter of 2005 and the third quarter of 2004. The natural gas volumes processed net to Taylor during the quarter was 431 MMscf per day compared to 384 MMscf per day in the comparable quarter of 2004, an increase of 12 percent. The Harmattan Complex processed an average 123 MMscf per day in the third quarter while the RET Complex processed an average 56 MMscf per day. The Younger and Joffre extraction plants processed 191 MMscf per day and 61 MMscf per day on average during the quarter, respectively.

Taylor's NGL sales during the quarter were 17,315 barrels per day compared to 14,874 barrels per day in the comparable quarter of 2004, an increase of 16 percent. The Younger and Joffre extraction plants had NGL sales of 9,805 barrels per day and 3,088 barrels per day, respectively. NGL sales from the Harmattan Complex averaged 4,422 barrels per day during the quarter.

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 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 third quarter of 2005, the benchmark NGL margin averaged $9.39 per barrel down from the $10.35 average of the second quarter 2005 as natural gas prices increased, but above long-term historical levels. With strong margins in the third quarter, both of Taylor's extraction plants were operated to maximize production of NGL.

Financial Summary

Taylor's third quarter 2005 Net Operating Income was $12.4 million, an increase of 155 percent from the prior year comparable quarter because 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. Net Operating Income for the quarter was 72 percent greater than the prior quarter.



------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30 September 30
(in thousands of dollars) 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue:
Natural gas
liquids sales $ 47,666 $ 29,426 $ 112,728 $ 81,666
Fee income 14,120 6,831 33,915 17,736

------------------------------------------------------------------------
61,786 36,257 146,643 99,402
------------------------------------------------------------------------

Expenses:
Shrinkage gas 39,598 24,739 91,548 67,906
Operating costs 9,791 6,110 27,087 17,547
Overhead recovery fees - 550 965 1,770

------------------------------------------------------------------------
49,389 31,399 119,600 87,223
------------------------------------------------------------------------

Net Operating Income $ 12,397 $ 4,858 $ 27,043 $ 12,179
------------------------------------------------------------------------
------------------------------------------------------------------------


During the third quarter of 2005, Taylor distributed $7.6 million to unitholders in three monthly payments of $0.06 per Partnership unit.

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.

In October, natural gas prices escalated to record levels causing the margin in NGL extraction to be reduced to near the limit of economic plant operations. With the volatile pricing in both natural gas and NGLs expected to continue through the fourth quarter, operating strategies at Taylor's extraction plants will be reviewed on a daily basis.

Production growth at the Younger Extraction Plant will depend on management's ability to increase the natural gas volumes processed. Taylor will continue to compete for natural gas by offering customers creative commercial arrangements and pricing options. Similarly, NGL production at the Joffre Extraction Plant will depend on the volumes 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 facilities that comprise the Joffre industrial complex.

Taylor's pipelines, JFP and EDS, generate revenues through cost-of-service arrangements that have minimal financial risk to the Partnership. Additional capital expenditures for JFP will be made during the fourth quarter that will result in an increase to the fee charged to the user of the pipeline. In the third quarter, $2.0 million was added to the JFP rate base.

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 can also 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 Complex 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 volumes processed supported by comparison to historical trends.

Harmattan Complex Inventory

Inventory is comprised primarily of NGL product for sale. Inventory is valued at the lower of cost and net realizable value. Cost is determined on a volume weighted-average basis, calculated monthly. At September 30, 2005, the Partnership had an inventory position at the Harmattan Complex of 4,232 barrels of NGL with a value of $0.30 million.

Cash Distributions

During the first nine months of 2005, $20.7 million of Cash Available for Distribution was generated from operations, excluding cash funded management reorganization costs of $7.5 million, plus $0.7 million of capitalized earnings from the Harmattan Complex for the first 21 days of March 2005, less $0.6 million for Sustaining Capital. Monthly cash distributions of $19.5 million were paid during the nine months ending September 30, 2005, for a total of $0.5175 per unit, an increase of 17.6 percent over the prior year period (2004 - $8.5 million; $0.4400 per unit). During 2004, the Partnership paid cash distributions on a quarterly basis.

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.



Cash Available for Distribution
------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30 September 30
(in thousands of dollars) 2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided by operations
before changes
in working capital 9,218 4,265 13,074 10,606
Management reorganization
costs - - 7,516 -
Capitalized operating
results - - 720 -
Recognition of deferred
performance fees - 93 - 281
Sustaining Capital (96) - (591) -

------------------------------------------------------------------------
Cash Available for
Distribution 9,122 4,358 20,719 10,887
------------------------------------------------------------------------
------------------------------------------------------------------------


Cash Distributed per Unit
------------------------------------------------------------------------
Three Months ended Nine Months ended
(in thousands of dollars September 30 September 30
except per unit amounts) 2005 2004 2005 2004
------------------------------------------------------------------------

Cash Available for
Distribution 9,122 4,358 20,719 10,887
Working capital
returned (withheld) (1,572) (1,289) (1,184) (2,429)

------------------------------------------------------------------------
Cash distributed 7,550 3,069 19,535 8,458
------------------------------------------------------------------------

Cash distributions
paid per unit 0.1800 0.1500 0.5175 0.4400
------------------------------------------------------------------------
------------------------------------------------------------------------


Results of Operations

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 September 30, 2005, NGL sales revenue was $47.7 million compared to $29.4 million for the same period in 2004. For the nine months ended September 30, 2005, NGL sales revenue was $112.7 million compared to $81.7 million for the same period in 2004.

The increase in NGL sales revenue for the quarter was primarily the result of higher NGL sales prices and additional NGL produced from the Harmattan Complex. In addition, return-on-capital derived fixed fees increased as a result of the Manager converting its Expansion Units of TGLLP into Partnership units, effective January 1, 2005. During the third quarter of 2005, the Partnership averaged NGL sales of 17,315 barrels per day compared to 14,874 barrels per day in the comparable quarter of 2004.

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 third quarter of 2005, the Marketing Pool contributed $0.6 million to NGL sales with a closing balance of nil at September 30, 2005 (2004 - deficit $1.9 million). The Partnership began 2005 with a nil Marketing Pool balance (2004 - deficit $3.0 million). During the first nine months of 2005, the Marketing Pool has contributed $2.2 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 Corporation, 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 cost or shrinkage gas. The AECO daily natural gas price, which is an indication of the Partnership's actual natural gas purchase price, averaged $8.78 per gigajoule (GJ) during the three months ended September 30, 2005 versus $5.89 per GJ during the same period of 2004. AECO daily natural gas price averaged $7.42 per GJ during the nine months ended September 30, 2005 compared to $6.20 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 nine months ended September 30, 2005, were $14.1 million and $33.9 million, respectively (2004 - $6.8 million and $17.7 million, respectively). The increase in fee income was a result of additional transportation fee revenues from EDS and JFP, which began in August 2004 and March 2005, respectively. In addition, Harmattan contributed to fee income for the full quarter.

Shrinkage Gas Expense

The cost of natural gas feedstock, commonly known as shrinkage gas expense, was $39.6 million for the third quarter of 2005 compared to $24.7 million in 2004. Shrinkage gas expense was $91.5 million for the nine months ended September 30, 2005 compared to $67.9 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 third quarter of 2005 were $9.8 million compared to $6.1 million in 2004. Operating costs for the nine months ended September 30, 2005 were $27.1 million compared to $17.5 million in 2004. The increase was the result of the addition of EDS, JFP and the Harmattan Complex. Year-to-date, operating costs also include $2.4 million of turnaround costs incurred at the Harmattan Complex and the Younger and Joffre extraction plants, which were expensed during the second quarter.

Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expense for the third quarter and nine months ending September 30, 2005 was $4.3 million and $10.3 million, respectively, compared to $1.5 million and $4.2 million for the same periods in 2004. The increase relates to depreciation and accretion for EDS, which commenced in the third quarter of 2004 and for JFP and the Harmattan Complex, beginning in March 2005.

Interest Expense

Interest costs were $2.0 million for the third quarter of 2005 compared to $0.2 million in 2004. For the nine months ended September 30, 2005 interest costs were $4.4 million compared to $0.7 million for the same period in 2004. The increase from 2004 was a result of higher bank debt levels, higher comparative interest rates and the addition of $50.0 million of convertible debentures during the first quarter. The average annual interest rate on the Partnership's debt facilities and convertible debentures for the nine months ended September 30, 2005 was 5.05 percent compared to 4.05 percent 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. The debentures may be converted at any time prior to maturity, 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 third quarter and the nine months ended September 30, 2005 was $0.1 million and $0.2 million, respectively (2004 - not applicable).

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 were expensed during the second quarter, for total management reorganization costs of $8.1 million.

Administration Costs

Administration costs for the third quarter of 2005 were $1.3 million compared to $0.3 million in 2004. For the nine months ended September 30, 2005, administration costs were $2.4 million compared to $0.6 million in 2004. The increase over 2004 was largely the result of changes in the relationship between the general partner of the Operating Partnerships that occurred with the reorganization of management.

Prior to July 1, 2005, the Partnership reported the transfer of overhead recoveries to the Manager as an expense which were refunded by the Manager to the Partnership through reduced administration costs according to the terms of the 2001 Administration Agreement. With the assignment of the 2001 Administration Agreement from the Manager to the Partnership, the Partnership no longer reports an expense for overhead recovery fees and therefore administration expenses are no longer reported net of overhead recovery fees.

For comparative purposes, the sum of administration expenses and overhead recovery fees for the three months ended September 30, 2005 was $1.3 million (2004 - $0.8 million) and for the nine months ended September 30, 2005 was $3.4 million (2004 - $2.4 million). The increase over 2004 was a result of increased business development activities, additional costs incurred in managing the Partnership's increased asset base and higher public reporting costs.

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 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 with an offsetting liability on the balance sheet.

At September 30, 2005, the fair value liability of the above instruments increased by $0.2 million since December 31, 2004. This was largely the result of declining 5-year interest swap rates compared to the Partnership's fixed rate of 4.41 percent.

Management Fees

On June 29, 2005, the Manager assigned the 2001 Administration Agreement to the Partnership with an effective date of January 1, 2005. As a result, management fees are no longer 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 with an effective date of January 1, 2005. As a result, distributions are no longer paid by TGLLP to the Manager. This conversion of the Expansion Units has provided the Partnership with additional return-on-capital derived fixed fees paid by EnCana Corporation pursuant to the Natural Gas Liquids Purchase Agreement. In addition, the Partnership acquired the Manager's option to fund future capital expenditures incurred by TGLLP. As a result of the June 29, 2005 transaction, the Partnership is the sole Expansion Unitholder of TGLLP.

Net Income

Net income was $5.1 million for the three months ended September 30, 2005, compared to $2.8 million for the same period in 2004. The increase in net income was the result of JFP fully contributing beginning in March 2005 and operations at the Harmattan Complex. Net income for the nine months ended September 30, 2005 was $1.6 million compared to $6.7 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 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 the 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 $2.7 million during the third quarter of 2005, of which $2.0 million was for JFP construction costs. These funds will attract incremental transportation fees charged for the use of JFP. Also during the third quarter, capital expenditures of $0.1 million were designated as Sustaining Capital. For the nine months ended September 30, 2005, capital expenditures were $19.1 million of which $15.4 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 nine months ended September 30, 2005 (2004 - $0.1 million).

Equity

At September 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 September 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 options) were exercisable. During the nine months ended September 30, 2005, 129,500 options were granted. For the options granted since January 1, 2005, the average exercise price was $9.04 per unit. For the nine months ended September 30, 2005, 38,000 options were exercised for proceeds of $0.2 million (2004 - 23,500 options for proceeds of $0.1 million).



Financial Position

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

Increase
(in thousands of dollars) (Decrease) Explanation
------------------------------------------------------------------------

Cash (3,845) Refer to Consolidated
Statements of Cash Flow.

Accounts receivable 3,425 Increase a result of the
Harmattan Complex acquisition.

Capital assets 204,584 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 1,901 Financing costs associated with
the convertible debenture
offering, less amortization
thereof.

Accounts payable (7,496) 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 and
accrued interest on convertible
debentures.

Unitholders' distributions
payable 965 Increase a result of the
additional Partnership units
issued during the year.

Long-term debt 61,100 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 47,865 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 2,223 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 103,443 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
and net income for the period,
less unitholders' distributions
declared during the quarter.

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Liquidity and Capital Resources

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

(in thousands of dollars) 2005 2004 Explanation
-----------------------------------------------------------------------

Cash, beginning of period 5,409 4,231
Cash provided by (used in):

Operating activities 13,074 10,606 During the first nine months
of 2005, 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.

EDS and JFP contributed for
part of the third quarter
2004.

Financing activities 188,053 39,151 During the first nine months
of 2005, 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 $49.7 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 paid during
the period were $19.5
million.

During the first nine months
of 2004, cash was primarily
provided by the August 2004
public offering that raised
$50.5 million and the
exercise of options for $0.3
million. These funds were
used for the EDS
acquisition, JFP
construction costs and to
reduce long-term debt by
$3.1 million. Distributions
paid during this period were
$8.5 million cash.

Investing activities (205,797)(50,744) During the first nine months
of 2005, the reduction in
cash was a result of $177.3
million used in the
Harmattan Complex
acquisition, $19.1 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 nine months
of 2004, the reduction in
cash was primarily the
result of the $25.0 million
EDS acquisition, $20.6
million for funding the
construction of JFP,
expenditures on the sulphur
emissions reduction project
at the RET Complex plus
capital expenditures at the
Younger Extraction Plant,
after reductions from non-
cash working capital used
for these capital projects.
Effect of exchange rate
Changes on cash (29) 16 Change is a result of
unrealized foreign exchange
loss (gain) on U.S.-dollar
denominated cash balances.
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Cash, end of period 1,564 2,016
-----------------------------------------------------------------------


Working Capital and Cash Requirements

At September 30, 2005, the Partnership had positive working capital of $3.1 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 at September 30, 2005, working capital includes $0.3 million of NGL inventory from the Harmattan Complex.

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



------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
(in thousands of dollars) 1 year years years years Total
------------------------------------------------------------------------

Office and vehicle leases 380 548 415 152 1,495
Land leases 64 198 175 1,269 1,706
------------------------------------------------------------------------
Total commitments 444 746 590 1,421 3,201
------------------------------------------------------------------------
------------------------------------------------------------------------


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 September 30, 2005, management had not been notified of any claims.

Debt Facilities

As detailed below, at September 30, 2005, the Partnership had available debt facilities totaling $130.0 million, of which $89.0 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 September 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 a cash payment of $7.1 million and the issuance of 529,851 Partnership units that had a fair value of $4.9 million. 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 $0.4 million as at September 30, 2005. The Partnership has accrued a pension obligation of $0.5 million, 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 September 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 changes in 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 fees 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, 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)
------------------------------------------------------------------------
September 30 December 31
2005 2004
------------------------------------------------------------------------
(unaudited) (audited)
Assets

Current assets:
Cash and cash equivalents $ 1,564 $ 5,409
Accounts receivable 14,116 10,691
Inventory 304 -
Prepaid expenses and interest 1,416 298
-----------------------------------------------------------------------
17,400 16,398

Capital assets (note 6) 419,893 215,309

Deferred financing costs (note 8) 1,901 -
------------------------------------------------------------------------
$ 439,194 $ 231,707
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Unitholders' Equity

Current liabilities:
Accounts payable and accrued
liabilities $ 11,100 $ 18,596
Unitholders' distributions
payable 2,552 1,587
Due to Manager (note 5) - 457
Market value of financial instruments 608 405
-----------------------------------------------------------------------
14,260 21,045

Long-term debt (note 7) 89,000 27,900
Convertible debentures (note 8) 47,865 -
Asset retirement obligations (note 9) 3,563 1,340
Minority interest in Partnership (note 5) - 359
------------------------------------------------------------------------
154,688 50,644

Unitholders' equity (note 10) 284,506 181,063
Commitments (note 13)
------------------------------------------------------------------------
$ 439,194 $ 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 Nine Months ended
September 30 September 30
(unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Revenue:
Natural gas liquids
sales $ 47,666 $ 29,426 $ 112,728 $ 81,666
Fee income 14,120 6,831 33,915 17,736
Other 2 131 27 337
-----------------------------------------------------------------------
61,788 36,388 146,670 99,739
-----------------------------------------------------------------------

Expenses:
Shrinkage gas 39,598 24,739 91,548 67,906
Operating costs 9,791 6,110 27,087 17,547
Depreciation,
amortization and
accretion 4,351 1,537 10,343 4,174
Interest 1,954 181 4,360 661
Administration 1,336 280 2,428 628
Foreign exchange loss 39 24 36 5
Mark to market loss (gain)
on financial instruments (371) - 203 -
Overhead recovery fees - 550 965 1,770
Management fees (note 5) - 122 - 307
Management reorganization
costs (note 5) - - 8,132
Limited partner distributions
(note 5) - 8 - 12
-----------------------------------------------------------------------
56,698 33,551 145,102 93,010
-----------------------------------------------------------------------

Net income 5,090 2,837 1,568 6,729

Unitholders' equity,
beginning of period 287,047 126,579 181,063 112,088

Units issued (note 10) - 50,652 119,955 67,189
Convertible debentures
(note 8) - - 2,325 -
Contributed surplus
(note 10) 25 - 95 -

Unitholders'
distributions declared (7,656) (4,278) (20,500) (10,216)
------------------------------------------------------------------------
Unitholders' equity,
end of period $ 284,506 $ 175,790 $ 284,506 $ 175,790
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


TAYLOR NGL LIMITED PARTNERSHIP
Consolidated Statement of Cash Flow
(Stated in thousands of dollars)
------------------------------------------------------------------------
Three Months ended Nine Months ended
September 30 September 30
(unaudited) 2005 2004 2005 2004
------------------------------------------------------------------------

Cash provided (used in):

Operations:
Net income $ 5,090 $ 2,837 $ 1,568 $ 6,729
Depreciation,
amortization
and accretion 4,351 1,537 10,343 4,174
Accretion of
convertible
debentures discount 104 - 220 -
Partnership unit-based
compensation (note 10) 25 - 95 -
Unrealized foreign
exchange loss (gain) 19 (16) 29 (16)
Mark to market loss
(gain) on financial
instruments (371) - 203 -
Deferred performance-based
revenue amortization - (93) - (281)
Non-cash management
reorganization costs
(note 5) - - 616 -
-----------------------------------------------------------------------
9,218 4,265 13,074 10,606

Change in non-cash
working capital 22 (408) 854 (1,244)
------------------------------------------------------------------------
9,240 3,857 13,928 9,362
------------------------------------------------------------------------

Financing:
Long-term debt 2,000 (3,000) 49,680 (3,100)
Unitholders'
distributions paid (7,550) (3,069) (19,535) (8,458)
Units issued for
cash, net of issue
costs - 50,651 114,038 50,760
Convertible debentures,
net of issue costs - - 47,870 -
Debenture paid on
Acquisition - - (4,000) -
Limited partner
contributions - 115 - 231
Due to limited partners - - - (282)
------------------------------------------------------------------------
(5,550) 44,697 188,053 39,151
------------------------------------------------------------------------

Investments:
Capital expenditures (2,733) (22,033) (19,116) (25,497)
Acquisition (note 4) - (25,001) (177,281) (25,001)
Change in non-cash
investing working
capital - (917) (9,400) (246)
------------------------------------------------------------------------
(2,733) (47,951) (205,797) (50,744)
------------------------------------------------------------------------

Effect of exchange rate
changes on cash (19) 16 (29) 16
------------------------------------------------------------------------

Change in cash and cash
equivalents 938 619 (3,845) (2,215)
Cash and cash equivalents,
beginning of period 626 1,397 5,409 4,231
------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 1,564 $ 2,016 $ 1,564 $ 2,016
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest paid on a cash basis during the three months and nine months
ended September 30, 2005 was $0.3 million and $1.7 million (2004 - $0.2
million and $0.6 million), respectively.

See accompanying notes to consolidated financial statements.


TAYLOR NGL LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
Nine months ended September 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, except as provided below (note 3). 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

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

(c) Inventory

Inventory is comprised primarily of NGL product held for sale. Inventory is valued at the lower of cost and net realizable value. Cost is determined on a weighted-average cost basis, calculated monthly.

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

------------------------------------------------------------------------
------------------------------------------------------------------------
September 30, 2005 December 31, 2004
------------------------------------------------------------------------

Property, plant and equipment $ 427,982 $ 197,789
Accumulated depreciation (33,059) (24,644)
------------------------------------------------------------------------
394,923 173,145
------------------------------------------------------------------------

Intangible assets 26,975 1,000
Accumulated amortization (2,005) (461)
------------------------------------------------------------------------
24,970 539
------------------------------------------------------------------------

JFP construction in progress costs - 41,625
------------------------------------------------------------------------

$ 419,893 $ 215,309
------------------------------------------------------------------------
------------------------------------------------------------------------

7. Long-term debt

------------------------------------------------------------------------
------------------------------------------------------------------------
September 30, 2005 December 31, 2004
------------------------------------------------------------------------

New Revolving Facility $ 89,000 $ -
Revolving credit facility - 25,938
Reducing term facility - 1,962
------------------------------------------------------------------------
$ 89,000 $ 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 September 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.

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 September 30, 2005 220
Conversions to September 30, 2005 (30)
------------------------------------------------------------------------
Balance, September 30, 2005 $ 47,865
------------------------------------------------------------------------
------------------------------------------------------------------------

At September 30, 2005, the convertible debentures had an estimated fair
value of $51.8 million.


9. Asset retirement obligations

The Partnership has estimated the net present value of its total asset retirement obligations to be $3.6 million as at September 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:



------------------------------------------------------------------------
------------------------------------------------------------------------
Nine months ended Year ended
September 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 179 104
------------------------------------------------------------------------
Asset retirement obligations,
end of period $ 3,563 $ 1,340
------------------------------------------------------------------------
------------------------------------------------------------------------


10. Unitholders' equity and Partnership unit option plan

------------------------------------------------------------------------
------------------------------------------------------------------------
September 30, 2005 December 31, 2004
------------------------------------------------------------------------

Unitholders' capital $ 314,319 $ 194,364
Accumulated earnings 48,124 46,556
Convertible debentures 2,325 -
Contributed surplus 95 -
Accumulated distributions (80,357) (59,857)
------------------------------------------------------------------------
$ 284,506 $ 181,063
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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

Net income for the nine months
ended September 30, 2005 1,568
Unitholders' distributions declared (20,500)
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 95
------------------------------------------------------------------------
Balance, September 30, 2005 42,531,490 $ 284,506
------------------------------------------------------------------------
------------------------------------------------------------------------


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 eight 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 eight 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 eight percent, a five-year maturity and a volatility rate of 26 percent.

In accordance with the Partnership's accounting policy, $95,000 was expensed during the nine months ended September 30, 2005 with a corresponding increase in contributed surplus.

11. Income per Partnership unit

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



------------------------------------------------------------------------
Three Months ended Nine Months ended
Sept. 30 Sept. 30
2005 2004 2005 2004
------------------------------------------------------------------------
Numerator:
Numerator for basic
income per unit $ 5,090 $ 2,837 $ 1,568 $ 6,729
Convertible debentures
interest 719 - 1,528 -
Accretion of convertible
debentures discount 104 - 220 -
------------------------------------------------------------------------
Numerator for diluted
income per unit $ 5,913 $ 2,837 $ 3,316 $ 6,729
------------------------------------------------------------------------

Denominator:
Weighted-average
denominator for
basic units 42,531,490 24,200,160 38,288,926 21,031,060
Convertible debentures 4,828,019 - 3,398,107 -
Dilutive unit options 44,868 145,044 52,272 132,720
------------------------------------------------------------------------
Denominator for diluted
income per unit 47,404,377 24,345,204 41,739,305 21,163,780
------------------------------------------------------------------------

Basic income per unit $ 0.12 $ 0.12 $ 0.04 $ 0.32
Diluted income per unit $ 0.12 $ 0.12 $ 0.04 $ 0.32
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months and nine months ended September 30, 2005, the effect of convertible debentures 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 September 30, 2005 are as follows:



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

Market value of plan assets $ 4,019 $ 1,870
Estimated actuarial present
value of liabilities (4,436) (1,863)
------------------------------------------------------------------------
Estimated surplus (unfunded)
plan balance $ (417) $ 7
------------------------------------------------------------------------

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.

13. Commitments

The Partnership is committed to various lease payments for land, office space, vehicles and office equipment. Under the terms of the leases, the following future payments are required:



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

Balance of 2005 $ 124
2006 $ 422
2007 $ 371
2008 $ 330
2009 $ 289
2010 $ 287
------------------------------------------------------------------------
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14. Financial instruments

On October 11, 2005, the Partnership entered into electricity rate swaps for 3.5 MW, whereby the Partnership receives a floating rate and pays a fixed rate. For the three-year period starting January 1, 2006, the Partnership will pay an average fixed rate of $57.00 per MWh. Changes in the fair value of the swaps will be recognized in income as an addition to or reduction of operating costs, with an offsetting increase or decrease in the market value of financial instruments recorded on the balance sheet. The Partnership and the provider of the electricity rate swap have early settlement options, in whole or in part, of the principal amount, which are currently in effect and exist until the maturity date. If either party exercises this option, the derivative financial instrument will be settled at the then current market price.

CORPORATE INFORMATION

The Partnership owns and operates the RET Complex, the Harmattan Complex and the Joffre Extraction Plant, all in Alberta, and the Younger Extraction Plant in British Columbia. The Partnership also owns two natural gas liquids pipelines in Alberta, the Ethylene Delivery System and the Joffre Feedstock Pipeline, both of which move products between Joffre, Alberta and Fort Saskatchewan, Alberta. The Joffre and Younger plants are natural gas liquids extraction facilities that produce ethane, propane, butane and condensate. The RET Complex and the Harmattan Complex are natural gas processing facilities that provide services to oil and gas producers.

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

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