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

Taylor NGL Limited Partnership

August 02, 2006 16:05 ET

Taylor NGL Limited Partnership Second Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 2, 2006) - Taylor NGL Limited Partnership (TSX:TAY.UN)(TSX:TAY.DB):

Q2 2006 HIGHLIGHTS

- Funds Provided by Operations were $11.7 million, or 27.5 cents per unit, of which $7.7 million, or 18 cents per unit, was distributed to unitholders.

- Net natural gas volumes processed by the Partnership averaged 461 MMscf per day, up 15 percent from Q2 2005.

- The Partnership's net natural gas liquids (NGL) sales averaged a record 20,617 barrels per day, up 34 percent from Q2 2005 and up 4 percent from Q1 2006.

- Monthly cash distributions will be increased by 0.25 cents, to 6.25 cents per unit, beginning with the August 15th payment to unitholders of record on August 10th, 2006.

The following tables highlight Taylor's operational and financial results for the second quarter and first half of 2006 compared to the results for the same periods in 2005:



------------------------------------------------------
------------------------------------------------------
Three Months ended June 30
------------------------------------------------------
(dollars in
thousands except
volume and unit
amounts) 2006 2005 Change
------------------------------------------------------
------------------------------------------------------
Natural gas processed
(MMscf per day) 461 401 15%
------------------------------------------------------
NGL sales
(barrels per day) 20,617 15,373 34%
------------------------------------------------------
Total revenue 62,386 49,030 27%
------------------------------------------------------
Feedstock cost 37,425 29,134 28%
------------------------------------------------------
Net income (1) 7,602 364 1988%
------------------------------------------------------
Basic per unit 0.18 0.01 1700%
------------------------------------------------------
Net Operating Income 14,905 7,200 107%
------------------------------------------------------
Distributions to
unitholders 7,658 7,222 6%
------------------------------------------------------
per unit 0.1800 0.1725 4%
------------------------------------------------------
Units outstanding at
end of period 42,553,490 42,531,490 0%
------------------------------------------------------
------------------------------------------------------


------------------------------------------------------
------------------------------------------------------
Six Months ended June 30
------------------------------------------------------
(dollars in
thousands except
volume and unit
amounts) 2006 2005 Change
------------------------------------------------------
------------------------------------------------------
Natural gas processed
(MMscf per day) 461 398 16%
------------------------------------------------------
NGL sales
(barrels per day) 20,192 15,922 27%
------------------------------------------------------
Total revenue 128,499 84,882 51%
------------------------------------------------------

Feedstock cost 79,581 51,950 53%
------------------------------------------------------

Net income (1) 13,649 4,610 196%
------------------------------------------------------
Basic per unit 0.32 0.13 146%
------------------------------------------------------
Net Operating Income 29,313 14,646 100%
------------------------------------------------------
Distributions to
unitholders 15,315 11,985 28%
------------------------------------------------------
per unit 0.3600 0.3375 7%
------------------------------------------------------
Units outstanding at
end of period 42,553,490 42,531,490 0%
------------------------------------------------------
(1) 2005 Net Income is before management
reorganization costs
------------------------------------------------------
------------------------------------------------------


CONFERENCE CALL

A conference call to discuss these results will be held on Thursday, August 3, 2006 at 9:30 a.m. MDT (11:30 a.m. EDT). To participate in the conference call, please dial 416-695-9712 in the Toronto area and 1-800-772-8997 from all other areas of Canada. A recording of the call will be available for replay until August 9, 2006 at 416-695-5275 or 1-800-509-0081 (passcode 627892) or by following the links on Taylor's website, www.taylorngl.com.

MANAGEMENT'S DISCUSSION AND ANALYSIS

As at August 2, 2006

The following should be read in conjunction with the consolidated financial statements and notes of Taylor NGL Limited Partnership (the Partnership) for the year ended December 31, 2005 and the six months ended June 30, 2006. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Additional information relating to the Partnership, including the Partnership's Annual Information Form, is available on SEDAR at www.sedar.com.

Volumetric information for each of the Partnership's facilities 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". Undue reliance should not be placed on these forward-looking statements, as 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. Examples of areas of risk and uncertainty include: volume of natural gas delivered for processing at the Partnership's facilities; ability of the facilities to process the natural gas delivered; cost of operating the facilities; cost of maintaining the facilities; and volume and value, net of feedstock costs, of the Partnership's proprietary products such as NGL, frac oil and CO2. 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.

The term "Cash Available for Distribution" refers 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 funds provided from operations before changes in non-cash working capital plus adjustments for one-time items and less "Sustaining Capital" and "Reserve for Future Commitments". One-time items are specifically described when they occur.

Sustaining Capital is defined as capital expenditures necessary to maintain the safe and efficient operation of Taylor's facilities for the long-term. Sustaining Capital items are not expensed due to the long-term nature of these investments.

Reserve for Future Commitments is defined as expenditures known by the Partnership with respect to prior periods, but not deducted from net income due to guidelines established by the CICA. An example of such an expenditure is the cost of the Restricted Share Units (RSUs) that have been granted under the Partnership's Long-term Incentive Plan (LTIP) that are based on the results for a specific fiscal period but vest in future periods. Under section 3870 of the CICA Handbook, RSUs are classified as stock appreciation rights and therefore are recorded as a compensation expense over the vesting period.

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 plus fee income, less shrinkage gas expense, operating costs and overhead recovery fees.

The terms Cash Available for Distribution, Sustaining Capital, Reserve for Future Commitments and Net Operating Income are not recognized under Canadian GAAP. Therefore, these terms have no standardized meaning and may not be comparable to similarly defined amounts presented by other issuers.

Taylor also uses the industry standard term "Funds Provided by Operations", which has the same GAAP definition as "Cash provided by operations before changes in non-cash working capital".

Overview of Second Quarter 2006

Production and Operations Summary

Taylor's growth continued during the second quarter of 2006, with significant increases in natural gas volumes processed and NGL sales over the second quarter of 2005.

Net natural gas volumes processed by Taylor during the second quarter of 2006 were 461 MMscf per day, compared to 401 MMscf per day in the comparable quarter of 2005, an increase of 15 percent. Of Taylor's total volume, the Harmattan Complex processed an average 119 MMscf per day and the RET Complex averaged 52 MMscf per day. The Younger and Joffre extraction plants processed a combined average 290 MMscf per day. At quarter-end, Taylor was processing approximately 465 MMscf per day as a result of increased throughput at the Joffre Extraction Plant.

Taylor sets production rates at the Younger and Joffre extraction plants largely in response to prevailing NGL margins. If the NGL margin is less than the variable operating costs, then production is not economically justified. 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 an indicative margin, expressed in dollars per barrel of NGL, which is derived from Edmonton postings for propane, butane and condensate (C3+) and the daily AECO natural gas price. In the second quarter, this benchmark NGL margin averaged $23.04 per barrel, up significantly from $14.09 per barrel in the first quarter. The improvement in margin was a result of natural gas prices declining from first quarter levels.

During the second quarter, the Younger Extraction Plant processed an average 236 MMscf per day to produce 12,483 barrels per day of NGL, while the Joffre Extraction Plant processed an average 54 MMscf per day to produce 3,066 barrels per day of NGL. NGL sales from the Harmattan Complex averaged 5,069 barrels per day during the quarter, a quarterly record. NGL sales during the second quarter were 34 percent higher than the prior year's quarter and 4 percent higher than the first quarter of 2006.

Financial Summary

Taylor's second quarter 2006 Net Operating Income was $14.9 million, an increase of 107 percent from the prior year's quarter and an increase of 3 percent from last quarter. This was primarily the result of a full quarter's contribution from the Harmattan Complex. In the second quarter of 2005 the Harmattan Complex was shut down for a planned 20-day turnaround.




-------------------------------------------------------------------
Net Operating Income
-------------------------------------------------------------------
-------------------------------------------------------------------
Three Months Six Months
ended June 30 ended June 30
(in thousands of
dollars) 2006 2005 2006 2005
-------------------------------------------------------------------
-------------------------------------------------------------------
Natural gas liquids
sales $ 48,302 $ 36,781 $ 100,128 $ 65,062
-------------------------------------------------------------------
Fee income 14,050 12,242 28,290 19,795
-------------------------------------------------------------------
62,352 49,023 128,418 84,857
-------------------------------------------------------------------
Shrinkage gas 37,425 29,134 79,581 51,950
-------------------------------------------------------------------
Operating costs 10,022 12,126 19,524 17,296
-------------------------------------------------------------------
Overhead recovery
fees - 563 - 965
-------------------------------------------------------------------
47,447 41,823 99,105 70,211
-------------------------------------------------------------------
Net Operating Income $ 14,905 $ 7,200 $ 29,313 $ 14,646
-------------------------------------------------------------------
-------------------------------------------------------------------


The Younger Extraction Plant Marketing Pool, which is the profit-share component of the sales price received by Taylor for the NGL sold under the NGL Purchase Agreement, contributed $2.0 million to natural gas liquids sales during the second quarter.

Expenses in the second quarter of 2006 increased 13 percent from the same period in 2005. The increase is attributable to shrinkage gas, which is initially paid by Taylor and then recovered from the purchasers of Taylor's NGL. Operating costs in 2005 were abnormally high due to planned turnarounds at the Harmattan Complex and the Younger and Joffre extraction plants.

During the second quarter, $2.0 million in capital was invested in growth projects at the Partnership's existing assets, of which $0.8 million was expended on the Joffre Feedstock Pipeline. This investment will result in an increase to the fee charged to the user of the pipeline under the cost-of-service commercial arrangement with Taylor.

On July 28, 2006, Taylor entered into a series of financial swap arrangements that have the effect of fixing NGL margin at approximately $20.50 per barrel for the period September through December 2006 on 15,900 barrels of C3+ per month. The hedged volume is equal to approximately 70% of the Partnership's share of production from the Joffre Extraction Plant. The actual instruments are Mt. Belvieu priced propane and butane, WTI oil and AECO natural gas, all in U.S. dollars, with the entire package converted to Canadian dollars using a fixed rate swap. These swap arrangements fix commodity-based revenue, on a portion of the Partnership's production, at a level that is significantly above the long-term average. Details of the above arrangements are disclosed in the Partnership's notes to the financial statements.

Outlook

Consistent with the Partnership's mandate, management is focusing on growth through projects and acquisitions that will diversify Taylor's asset base and increase Net Operating Income and Cash Available for Distribution.

NGL margins remain high and volatile entering the third quarter of 2006. Natural gas prices are being influenced by the high level of natural gas in storage and weather. A significant premium is being added to oil prices due to global supply concerns.

The decline in natural gas prices since late 2005 has reduced natural gas exploration and development activities of producing companies. However, activity in the Harmattan Complex capture area has not followed the industry trend. Approximately 88 drilling licences were issued in the first half of 2006 compared to 46 licences for the same period in 2005.

During the quarter, Taylor continued public consultation on a project that will bring rich, sweet natural gas from TransCanada's Alberta system to the Harmattan Complex for processing to recover ethane, propane, butane and condensate. Taylor anticipates being able to submit the project to regulatory authorities in early August 2006. If approved, construction could commence in the first half of 2007 with commissioning in the fourth quarter of 2007. The project, as currently envisioned, will cost in the range of $70 million to $90 million. For more information, please refer to the following page on Taylor's website: http://www.taylorngl.com/HarmattanCochranePipeline.htm.

Assuming that Taylor's financial performance in the second half of 2006 is similar to that achieved in the first half of the year, the Partnership estimates that up to one-half of cash distributed during 2006 could be deemed to be included in income for tax purposes. The remaining portion of the distribution would be return of capital. Unitholders will be advised of the final characterization of Taylor's 2006 distributions through Form T5013, Statement of Limited Partnership Income, which will be provided in late February 2007.

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 had a significant effect on the current month's operations, such as scheduled or unscheduled plant shutdowns. Given the amount of historical data available for the Partnership's NGL pipelines, the Younger Extraction Plant, the Joffre Extraction Plant, the RET Complex and the Harmattan Complex, management has been able to make these estimates with a high degree of accuracy. There are no known trends, events or uncertainties to indicate that actual results will vary significantly from the estimates used for the quarter ended June 30, 2006, nor would any expected variance have a material effect on the financial condition of the Partnership. Taylor's significant accounting policies and estimate methodologies, as disclosed in the Partnership's Annual Report for the year ended December 31, 2005, have not changed significantly.

Cash Distributions

During the first six months of 2006 Taylor generated $20.8 million of Cash Available for Distribution, an increase of 80 percent from the first half of 2005. On a weighted-average per unit basis, Cash Available for Distribution was $0.4899 per unit for the first six months of 2006 compared to $0.3210 per unit in the prior year's period. Consistent with Taylor's accounting treatment of the 2005 Long-term Incentive Plan (LTIP), a reserve accrual of $1.8 million was established for the 2006 LTIP award. This reserve is equal to the LTIP award earned for the period January 1, 2006 through June 30, 2006. According to the terms of the plan, the final amount of the 2006 LTIP award is derived from full-year 2006 results. Therefore, depending on second-half 2006 performance, the LTIP reserve at year-end may be larger or smaller than the current accrual and in any event is at the discretion of the Board of Directors. The above reserve accrual was offset by $0.2 million, which was released from the 2005 LTIP reserve.

Cash Available for Distribution was $9.9 million during the second quarter of 2006. Of this amount, Taylor distributed $7.7 million or $0.1800 per unit to unitholders compared to $7.2 million or $0.1725 per unit during the same period in 2005. Of the second quarter 2006 funds provided by operations, the Partnership invested $0.2 million in projects that sustain the Partnership's assets and withheld $3.8 million or 32.5 percent to fund the 2005 and 2006 LTIP awards, support future distributions, repay debt and fund growth initiatives.




Cash Available for
Distribution
-------------------------------------------------------------------
-------------------------------------------------------------------
Three Months Six Months
ended June 30 ended June 30
(in thousands of
dollars) 2006 2005 2006 2005
-------------------------------------------------------------------
-------------------------------------------------------------------
Funds Provided by
Operations $ 11,709 $ (2,173) $ 22,722 $ 3,856
-------------------------------------------------------------------
Management
reorganization
costs (2) - 7,516 - 7,516
-------------------------------------------------------------------
Capitalized
operating results
(3) - - - 720
-------------------------------------------------------------------
Reserve for Future
Commitments (4) (1,589) - (1,520) -
-------------------------------------------------------------------
Sustaining Capital
(5) (248) (495) (360) (495)
-------------------------------------------------------------------
Cash Available for
Distribution $ 9,872 $ 4,848 $ 20,842 $ 11,597
-------------------------------------------------------------------
-------------------------------------------------------------------
Cash Available for
Distribution per
unit $ 0.2320 $ 0.1157 $ 0.4899 $ 0.3210
-------------------------------------------------------------------
-------------------------------------------------------------------
Cash Distributed
-------------------------------------------------------------------
-------------------------------------------------------------------
Three Months Six Months
ended June 30 ended June 30
(in thousands of
dollars) 2006 2005 2006 2005
-------------------------------------------------------------------
Cash Available for
Distribution $ 9,872 $ 4,848 $ 20,842 $ 11,597
-------------------------------------------------------------------
Working capital
returned (withheld) (2,214) 2,374 (5,527) 388
-------------------------------------------------------------------
Cash distributed $ 7,658 $ 7,222 $ 15,315 $ 11,985
-------------------------------------------------------------------
-------------------------------------------------------------------
Cash distributions
paid per unit $ 0.1800 $ 0.1725 $ 0.3600 $ 0.3375
-------------------------------------------------------------------
-------------------------------------------------------------------


(1) As provided in the Consolidated Statement of Cash Flow.

(2) On June 29, 2005, the Partnership acquired the interests and assets from Taylor Management Company Inc. that related to the Partnership's businesses.

(3) In accordance with GAAP, the operating results of the Harmattan Complex from the effective date of the purchase, March 1, 2005, through March 21, 2005 were recorded as a $0.7 million reduction of the purchase price. This amount is a contribution to Cash Available for Distribution.

(4) For the year ended December 31, 2005, the Partnership elected to reduce Cash Available for Distribution by charging $1.2 million to the Reserve for Future Commitments account. This amount was equal to the future cost of the Restricted Share Units (RSUs) awarded for the year ended December 31, 2005 according to the Partnership's Long-term Incentive Plan (LTIP). The Reserve for Future Commitments will be drawn down over the vesting period of the RSUs. This treatment results in 2005 Cash Available for Distribution being burdened with the cash cost of the 2005 RSUs awarded as at December 31, 2005. During the first six months of 2006, $0.3 million was released from the reserve as an offset to the charge taken in Administration expense equal to the GAAP treatment of the 2005 LTIP award. During the second quarter, an additional $1.8 million was added to Reserve for Future Commitments, which is an estimate of the value of the 2006 LTIP award based on results for the six months ended June 30, 2006. At June 30, 2006, the balance of the Reserve for Future Commitments was $2.7 million. No funds or separate banking arrangements have been established for this reserve.

(5) Sustaining Capital is defined as capital expenditures necessary to maintain the safe and efficient operation of Taylor's facilities for the long -term. Sustaining Capital items are not expensed due to the long-term nature of these investments.

Beginning with the August 15, 2006 cash distribution payment to unitholders of record on August 10, monthly distributions will be increased by 0.25 cents, to 6.25 cents per unit. The increase in distribution per unit is supported by the previously mentioned production growth and strong operational and financial performance.

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. NGL sales revenue was $48.3 million in the second quarter of 2006 compared to $36.8 million for the same period in 2005. For the six months ended June 30, 2006, NGL sales revenue was $100.1 million compared to $65.0 million for the same period in 2005. The increase in NGL sales was primarily the result of higher NGL sales prices and the full quarter's contribution of NGL sales from the Harmattan Complex. During the second quarter of 2006, the Partnership's NGL sales averaged a record 20,617 barrels per day compared to 15,373 barrels per day in the comparable quarter of 2005.

NGL sales revenue at the Younger Extraction Plant, as per the NGL Purchase Agreement with Provident Energy Trust (Provident), 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 exposure to NGL commodity prices. The Marketing Pool is the difference between the sales revenue received by Provident 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 from future Marketing Pool revenue. Strong NGL margins realized during the second quarter of 2006 generated Marketing Pool proceeds of $2.0 million.

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, plus the revenue received from the sale of C3+.

NGL sales revenue at the Harmattan Complex includes the revenue from the 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 and Harmattan Complex natural gas feedstock cost (or shrinkage gas). The AECO daily natural gas price, which is indicative of the Partnership's actual natural gas feedstock purchase price, averaged $5.71 per gigajoule (GJ) during the second quarter of 2006 versus $6.98 per GJ during the same period in 2005.

Fee Income

Fee income consists of revenue received from processing third-party natural gas at the RET Complex, Harmattan Complex and the Younger Extraction Plant, transportation fees from the use of the Ethylene Delivery System (EDS) and the Joffre Feedstock Pipeline (JFP) and overhead recoveries. 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 three months and six months ended June 30, 2006 was $14.1 million and $28.3 million, respectively (2005 - $12.2 million and $19.8 million, respectively). The significant increase in fee income was a result of contributions from the Harmattan Complex and additional JFP transportation fee revenues.

Shrinkage Gas Expense

The cost of natural gas feedstock, commonly known as shrinkage gas expense, was $37.4 million for the second quarter of 2006 compared to $29.1 million in the same period in 2005. For the six months ended June 30, 2006 shrinkage gas expense was $79.6 million compared to $52.0 million in the first half of 2005. The increase was primarily the result of increased natural gas processing volumes, specifically the additional volumes associated with the Harmattan Complex.

Operating Costs

Operating costs in the second quarter of 2006 were $10.0 million compared to $12.1 million in the same period in 2005. The decrease was the result of planned turnaround costs of $2.4 million expensed in the second quarter of 2005 for the Harmattan Complex and the Younger and Joffre extraction plants. Operating costs for the six months ended June 30, 2006 were $19.5 million compared to $17.3 million in 2005. The increase was the result of the addition of the Harmattan Complex and JFP in March 2005.

Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expense for the three and six months ended June 30, 2006 was $4.4 million and $8.8 million, respectively, compared to $4.3 million and $6.0 million for the same periods in 2005. The increases largely reflect depreciation, amortization and accretion related to JFP and the Harmattan Complex, which were first included in March 2005.

Interest Expense

Interest costs in the second quarter of 2006 were $2 million compared to $1.8 million in the same period in 2005. During the six months ended June 30, 2006 interest costs were $4.0 million compared to $2.4 million in the same period in 2005. The increases were a result of higher bank debt levels and higher comparative interest rates. The average annual interest rate on the Partnership's debt facilities and convertible debentures for the second quarter of 2006 was 5.5 percent, compared to 4.8 percent in the same period in 2005.

Administration Costs

Administration costs in the second quarter of 2006 were $1.4 million compared to $0.4 million in the same quarter of 2005. In the six months ended June 30, 2006, administration costs were $2.9 million compared to $1.1 million in the same period in 2005. The increases over 2005 were largely the result of changes in the relationship between Taylor Management Company Inc. (the Manager) and the Operating Partnerships that occurred following the management reorganization transaction of June 29, 2005.

Prior to June 29, 2005, according to the terms of the 2001 Administration Agreement, the Partnership recorded the payment of overhead recoveries to the Manager as an expense, which reduced administration costs charged by the Manager to the Partnership. With the assignment of the 2001 Administration Agreement from the Manager to the Partnership, the Partnership no longer pays overhead recovery fees to the Manager, therefore, administration expenses are no longer reported net of overhead recovery fees.

For comparative purposes, the sum of administration expenses and overhead recovery fees should be considered. In the three months ended June 30, 2006 this amount was $1.4 million and in the six months ended June 30, 2006 was $2.9 million (2005 - $1.0 million and $2.1 million, respectively). The increase from 2005 was a result of additional costs incurred in managing the Partnership's growing asset base and amortization of the 2005 LTIP award.

Mark-to-Market Gain on Financial Instruments

The Partnership uses derivative financial instruments such as collars and swaps to manage exposure to fluctuations in interest rates, electricity prices, natural gas prices and NGL margin.

The aggregate fair value of the interest rate swaps at June 30, 2006, based on the then current market price, was an unrealized asset of $0.5 million (December 31, 2005 --$0.3 million liability).

The Partnership also holds electricity swap agreements, which commenced January 1, 2006 and expire December 31, 2008, as disclosed in the Partnership's annual financial statements. The fair value of the electricity rate swaps at June 30, 2006, based on the then current market price, was an unrealized asset of $0.5 million (December 31, 2005 - $1.2 million asset).

The fair value of the natural gas price swap at June 30, 2006, based on the then current market price, was an unrealized liability of $50,000 (December 31, 2005 - not applicable).

On July 29, 2006, subsequent to the end of the second quarter, the Partnership entered into a series of swaps, which have the effect of fixing NGL margin at approximately $20.50 per barrel for 15,900 barrels of C3+ per month. The swap arrangements commence September 1, 2006 and expire on December 31, 2006. For each monthly settlement, the Partnership will apply the cash payment or receipt against income statement line item "natural gas liquids sales". Taylor will use the fair value method for reporting the NGL margin swap.

Management Fees

On June 29, 2005, the Manager assigned the 2001 Administration Agreement to the Partnership. As a result, management fees are no longer paid by the Partnership.

Limited Partner Distributions

On June 29, 2005, the Manager converted its Expansion Units of TGLLP into Partnership units. As a result, distributions are no longer paid by TGLLP to the Manager.

Net Income

Net income was $7.6 million in the three months ended June 30, 2006, compared to a net loss of $7.8 million in the same period in 2005. In the six months ended June 30, 2006 net income was $13.6 million, compared to a net loss of $3.5 million in the same period in 2005. The increase in net income was largely the result of the one-time management reorganization costs in June 2005 and the planned turnaround at the Harmattan Complex.

Capital Expenditures

The Partnership funded capital expenditures of $2.3 million during the second quarter of 2006, of which $0.8 million was invested in JFP, $1.2 million was expended on various other growth projects and $0.3 million was designated as Sustaining Capital.

Equity

At June 30, 2006, Taylor had 42,553,490 Partnership units outstanding (December 31, 2005 - 42,535,240). The increase was the result of 18,250 options being exercised during the first six months of 2006.

At June 30, 2006, the Partnership had options outstanding to purchase 383,500 Partnership units at prices ranging from $4.34 to $9.40 per unit (December 31, 2005 -419,250). Of the options outstanding at June 30, 2006, 150,750 were exercisable (December 31, 2005 - 130,125). During the six months ended June 30, 2006, no options were granted (2005 - 129,500 options granted), 18,250 options were exercised for proceeds of $118,000 (2005 - 38,000 options exercised for proceeds of $183,000) and 17,500 options were cancelled that had an exercise price ranging from $7.81 to $9.10 per option (2005 - 20,000 options cancelled at an exercise price of $4.65 per option).

Financial Position

The following table outlines significant changes in the consolidated balance sheets that occurred between December 31, 2005 and June 30, 2006:




Increase
($000s) (Decrease) Explanation
---------------------------------------------------------------------
Cash $ (2,604) Refer to Consolidated Statement of
Cash Flow

Accounts receivable 1,779 Increase a result of higher revenues.

Capital assets (1,851) Decrease a result of $5.1 million
in capital additions less depreciation
and amortization of $7.0 million
for all facilities since December 2005.

Intangible assets (1,464) Decrease a result of accumulated
amortization since December 2005.

Accounts payable (1,543) Decrease a result of lower payables
for shrinkage gas due to lower
natural gas prices since December 2005.

Unitholders' equity $ (1,465) Decrease a result of unitholders'
distributions declared during the six
months of $15.3 million offset by net
income earned of $13.6 million during
the six months ended June 30, 2006.
---------------------------------------------------------------------


Liquidity and Capital Resources

The following table summarizes the changes in cash flow for the six months ended June 30, 2006 compared to the six months ended June 30, 2005:



($000s) 2006 2005 Explanation
--------------------------------------------------------------------

Cash, beginning
of period $ 4,406 $ 5,409
Cash provided by
(used in):
Operating
activities 19,883 4,688 During the first six months of
2006, Funds Provided from
Operations was $22.7 million
compared to $3.8 million in
2005. The first half of 2006
includes a full period of
Harmattan Complex and JFP
operations.

During the first half of 2005,
cash was reduced by $7.5
million in one-time management
reorganization costs and
planned turnaround costs of
$2.4 million for the Harmattan
Complex and the Younger and
Joffre extraction plants.
Offsetting these amounts was
cash provided by EDS and JFP
and the addition of Harmattan
Complex operations
since March 22, 2005.

Financing
activities (17,197) 193,603 During the first six months
of 2006, cash distributions of
$15.3 million were paid and
long-term debt was reduced
by $2.0 million, offset
marginally by funds received on
exercise of options.

During the first six months
of 2005, cash was mainly
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 and JFP
construction expenditures.
Distributions paid during
the period were $12.0 million.

Investing
activities (5,260) (203,064) During the first six months
of 2006, the reduction in cash
was a result of $5.1 million
used for funding capital
expenditures in JFP and
other capital projects at
the Harmattan Complex, RET
Complex and Younger
Extraction Plant and $0.1
million of non-cash working
capital for the above
capital projects.

During the first six months
of 2005, the reduction in
cash was 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 for the
construction of JFP.

Effect of
exchange rate
changes on cash (30) (10) Change is a result of
unrealized foreign exchange
loss (gain) on U.S.-dollar
denominated cash balances.
---------------------------------------------------------------------
Cash, end of
Period $ 1,802 $ 626
---------------------------------------------------------------------


Working Capital and Cash Requirements

The Partnership had working capital of $5.7 million at June 30, 2006 compared to $5.4 million at December 31, 2005.

As a result of the terms of the Partnership's commercial contracts, a significant portion of cash collections occur 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 with 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.

Debt Facilities

At June 30, 2006, the Partnership had available debt facilities of $130.0 million. At that time, $89.0 million had been drawn on Taylor's $120.0 million revolving credit facility and $0.8 million had been used to support letters of credit against the Partnership's $10.0 million operating facility.

On June 16, 2006, the Partnership received approval from all credit syndicate members to extend the revolving facility renewal date from June 30, 2006 to June 29, 2007, at which time it can be extended at the lenders' option for another 364 days. If the revolving facility is not extended, the amount drawn is fully repayable on June 29, 2008.

Proposed GST Reassessment Update

On February 1, 2006, the Partnership received a letter from the Canada Revenue Agency (CRA) outlining a proposed reassessment related to Goods and Services Tax (GST) as disclosed in note 17 of the 2005 annual consolidated financial statements and notes. The Partnership provided a written response to the CRA on February 16, 2006 supporting the Partnership's position that GST returns have been filed in accordance with the law. On April 6, 2006, after reviewing Taylor's response, the CRA requested further information. On April 30, 2006, the Partnership provided the requested information to the CRA. The Partnership has not recorded the proposed reassessment in its financial statements and continues to take the position that the $1.2 million of Input Tax Credits claimed are in accordance with the law.

Risk Factors and Risk Management

Readers of the Partnership's interim report should carefully consider the risks described under ''Risk Factors'' in the Partnership's Annual Information Form and as disclosed in the Partnership's Annual Report for the year ended December 31, 2005. The Partnership's business and commodity price risks remain substantially unchanged from December 31, 2005.

On July 28, 2006, the Partnership entered into a series of financial swaps to fix the NGL margin on a portion of the Partnership's C3+ production. As a result, a portion of the Partnership's exposure to commodity-based price volatility has been mitigated.

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 NGL pipelines, 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 NGL 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 natural gas producers.

The Partnership is organized in accordance with the terms and conditions of a limited partnership agreement which provides that no Partnership units may be transferred to, among other things, a person who is a "non-resident" of Canada or a partnership which is not a "Canadian partnership" for purposes of the Income Tax Act (Canada).

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




TAYLOR NGL LIMITED PARTNERSHIP
Consolidated Balance Sheets
(Stated in thousands of dollars)

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30 December 31
2006 2005
------------------------------------------------------------------------
(unaudited) (audited)
Assets

Current assets:
Cash and cash equivalents $ 1,802 $ 4,406
Accounts receivable 19,419 17,640
Prepaid expenses and interest 1,053 1,414
-----------------------------------------------------------------------
22,274 23,460

Market value of financial instruments (note 10) 998 941
Capital assets (note 2) 395,211 397,062
Intangible assets (note 2) 20,560 22,024
Deferred financing costs 1,609 1,804
------------------------------------------------------------------------
$ 440,652 $ 445,291
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Unitholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 13,972 $ 15,515
Unitholders' distributions payable 2,553 2,552
-----------------------------------------------------------------------
16,525 18,067

Long-term debt (note 3) 89,000 91,000
Convertible debentures (note 4) 48,178 47,970
Asset retirement obligations (note 5) 3,801 3,641
------------------------------------------------------------------------
157,504 160,678

Unitholders' equity (note 6):
Unitholders' capital 314,462 314,344
Convertible debentures 2,325 2,325
Contributed surplus 216 132
Deficit (33,855) (32,188)
-----------------------------------------------------------------------
283,148 284,613
------------------------------------------------------------------------
$ 440,652 $ 445,291
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



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

------------------------------------------------------------------------
------------------------------------------------------------------------
Three Months ended Six Months ended
June 30 June 30
(unaudited) 2006 2005 2006 2005
------------------------------------------------------------------------

Revenue:
Natural gas liquids
sales $ 48,302 $ 36,781 $ 100,128 $ 65,062
Fee income 14,050 12,242 28,290 19,795
Other 34 7 81 25
-----------------------------------------------------------------------
62,386 49,030 128,499 84,882
-----------------------------------------------------------------------

Expenses:
Shrinkage gas 37,425 29,134 79,581 51,950
Operating costs 10,022 12,126 19,524 17,296
Depreciation,
amortization and
accretion 4,417 4,264 8,808 5,992
Interest 2,003 1,804 4,039 2,406
Administration 1,370 412 2,924 1,092
Mark-to-market loss
(gain) on financial
instruments (note 10) (482) 582 (57) 574
Foreign exchange loss 29 (10) 31 (3)
Overhead recovery fees - 563 - 965
Management fees - (191) - -
Management reorganization
costs - 8,132 - 8,132
Limited partner
distributions - (18) - -
-----------------------------------------------------------------------
54,784 56,798 114,850 88,404
-----------------------------------------------------------------------

Net income 7,602 (7,768) 13,649 (3,522)

Deficit, beginning
of period (33,798) (14,638) (32,188) (13,301)

Unitholders' distributions
declared (7,659) (7,261) (15,316) (12,844)
------------------------------------------------------------------------
Deficit, end of period $ (33,855) $ (29,667) $ (33,855) $ (29,667)
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income per Partnership
unit (note 8):
Basic $ 0.18 $ (0.19) $ 0.32 $ (0.10)
Diluted $ 0.18 $ (0.19) $ 0.32 $ (0.10)
------------------------------------------------------------------------
------------------------------------------------------------------------

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) 2006 2005 2006 2005
------------------------------------------------------------------------
Cash provided (used in):

Operations:
Net income $ 7,602 $ (7,768) $ 13,649 $ (3,522)
Depreciation,
amortization
and accretion 4,417 4,264 8,808 5,992
Mark-to-market loss
(gain) on financial
instruments (482) 582 (57) 574
Non-cash management
reorganization costs - 616 - 616
Accretion of convertible
debentures discount 104 104 208 116
Partnership unit-based
compensation 38 40 84 70
Unrealized foreign
exchange loss 30 (11) 30 10
-----------------------------------------------------------------------
11,709 (2,173) 22,722 3,856

Change in non-cash
working capital 156 (2,740) (2,839) 832
-----------------------------------------------------------------------
11,865 (4,913) 19,883 4,688
-----------------------------------------------------------------------

Financing:
Unitholders' distributions
paid (7,658) (7,222) (15,315) (11,985)
Units issued for cash,
net of issue costs 79 111 118 114,038
Long-term debt (2,000) 4,500 (2,000) 47,680
Convertible debentures,
net of issue costs - - - 47,870
Debenture paid on
Acquisition - - - (4,000)
Limited partner
contributions - 76 - -
-----------------------------------------------------------------------
(9,579) (2,535) (17,197) 193,603
-----------------------------------------------------------------------

Investments:
Capital expenditures (2,305) (1,963) (5,138) (16,383)
Change in non-cash
investing working capital 188 (6,410) (122) (9,400)
Acquisition - - - (177,281)
Restricted cash - 8,600 - -
-----------------------------------------------------------------------
(2,117) 227 (5,260) (203,064)
-----------------------------------------------------------------------

Effect of exchange rate
changes on cash (30) 11 (30) (10)
------------------------------------------------------------------------
Change in cash and cash
equivalents 139 (7,210) (2,604) (4,783)
Cash and cash equivalents,
beginning of period 1,663 7,836 4,406 5,409
------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 1,802 $ 626 $ 1,802 $ 626
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest paid on a cash basis during the three months and six months
ended June 30, 2006 was $1.6 million and $4.2 million, respectively
(2005 - $0.9 million and $1.4 million, respectively).

See accompanying notes to consolidated financial statements.

TAYLOR NGL LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
Six months ended June 30, 2006 and 2005 (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, 2005. 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, 2005.



2. Capital assets

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30 December 31
2006 2005
------------------------------------------------------------------------

Property, plant and equipment $ 351,280 $ 348,446
Pipelines 87,424 85,123
Accumulated depreciation (43,493) (36,507)
------------------------------------------------------------------------
395,211 397,062
------------------------------------------------------------------------

Intangible assets 24,761 24,761
Accumulated amortization (4,201) (2,737)
------------------------------------------------------------------------
20,560 22,024
------------------------------------------------------------------------
$ 415,771 $ 419,086
------------------------------------------------------------------------
------------------------------------------------------------------------


3. Long-term debt

At June 30, 2006, the Partnership's $120 million revolving credit facility ("Revolving Facility") was drawn by $89 million (December 31, 2005 - $91 million). During the second quarter of 2006, the Revolving Facility was extended for a further 364-day period commencing June 30, 2006 and expiring on June 29, 2007, at which time it can be extended at the lenders' option for another 364 days. If the Revolving Facility is not extended, the amount drawn is fully repayable on June 29, 2008.

The Partnership also has a $10 million operating facility. As at June 30, 2006, the amount available under this facility was reduced by $0.8 million to support outstanding letters of credit.



4. Convertible debentures

------------------------------------------------------------------------
------------------------------------------------------------------------
Balance, December 31, 2005 $ 47,970

Accretion of discount to June 30, 2006 208
------------------------------------------------------------------------
Balance, June 30, 2006 $ 48,178
------------------------------------------------------------------------
------------------------------------------------------------------------

At June 30, 2006, the convertible debentures had an estimated fair
value of $50.1 million.

5. Asset retirement obligations

------------------------------------------------------------------------
------------------------------------------------------------------------
Six months ended Year ended
June 30, 2006 December 31, 2005
------------------------------------------------------------------------
Asset retirement obligations,
beginning of period $ 3,641 $ 1,340
Additions due to acquisitions
during the period - 2,044
Accretion expense 160 257
------------------------------------------------------------------------
Asset retirement obligations,
end of period $ 3,801 $ 3,641
------------------------------------------------------------------------
------------------------------------------------------------------------


6. Unitholders' equity

------------------------------------------------------------------------
------------------------------------------------------------------------
June 30 December 31
2006 2005
------------------------------------------------------------------------

Unitholders' capital $ 314,462 $ 314,344
Accumulated earnings 69,474 55,825
Convertible debentures 2,325 2,325
Contributed surplus 216 132
Accumulated distributions (103,329) (88,013)
------------------------------------------------------------------------
$ 283,148 $ 284,613
------------------------------------------------------------------------
------------------------------------------------------------------------

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

Balance, December 31, 2005 42,535,240 $ 284,613

Net income for the six months ended
June 30, 2006 13,649
Unitholders' distributions declared (15,316)
Units issued on exercise of options 18,250 118
Contributed surplus 84
------------------------------------------------------------------------
Balance, June 30, 2006 42,553,490 $ 283,148
------------------------------------------------------------------------
------------------------------------------------------------------------

Partnership unit-based compensation of $84,000 was expensed during the
six months ended June 30, 2006 with a corresponding increase in
contributed surplus.

7. Long-term Incentive Plan

------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Restricted
Share Units (RSUs)
------------------------------------------------------------------------

Balance, December 31, 2005 -

Awarded during the six months ended June 30, 2006 135,397
Cash distribution equivalent RSUs earned during
the six months ended June 30, 2006 4,746
Cancelled during the six months ended June 30, 2006 (351)
------------------------------------------------------------------------
Balance, June 30, 2006 139,792
------------------------------------------------------------------------
------------------------------------------------------------------------

The compensation cost recorded for Restricted Share Units for the six
months ended June 30, 2006 was $0.5 million (2004 - nil) based on the
closing market price of a Partnership unit on June 30, 2006.

8. 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
2006 2005 2006 2005
------------------------------------------------------------------------

Numerator:
Numerator for basic
income per unit $ 7,602 $ (7,768) $ 13,649 $ (3,522)
Convertible
debentures
interest 729 729 1,454 809
Accretion of
convertible
debentures
discount 104 104 208 116
-----------------------------------------------------------------------
Numerator for diluted
income per unit $ 8,435 $ (6,935) $ 15,311 $ (2,597)
------------------------------------------------------------------------
------------------------------------------------------------------------

Denominator:
Weighted-average
denominator for
basic units 42,547,074 41,888,664 42,542,413 36,132,484
Convertible
debentures 4,828,019 4,829,533 4,828,019 2,683,151
Dilutive unit
options 82,367 52,143 88,356 55,974
-----------------------------------------------------------------------
Denominator for
diluted income
per unit 47,457,460 46,770,340 47,458,788 38,871,609
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic income
per unit $ 0.18 $ (0.19) $ 0.32 $ (0.10)
Diluted income
per unit $ 0.18 $ (0.19) $ 0.32 $ (0.10)
------------------------------------------------------------------------
------------------------------------------------------------------------


9. Pension Plan

The Partnership maintains pension plans with defined benefit provisions.
The expenses associated with these plans are as follows:

------------------------------------------------------------------------
------------------------------------------------------------------------
Younger Harmattan
For the six months ended June 30, 2006 Plan Plan
------------------------------------------------------------------------
Current service cost $ 95 $ 95
Interest cost on accrued benefit obligation 55 140
Less expected return on plan assets (60) (129)
Amortization of transitional (asset) obligation 1 (1)
Amortization of net actuarial (gain) loss - 1
------------------------------------------------------------------------
Pension cost recognized during period $ 91 $ 106
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 30, 2006, the Partnership had an accrued pension obligation of $0.4 million which has been included in accounts payable and accrued liabilities.

10. Financial instruments

Interest rates

On February 22, 2006, the Partnership entered into an interest rate swap on a principal amount of $20 million, whereby the Partnership receives a floating rate and pays a fixed rate of 4.34%. The swap commenced on February 22, 2006 and matures March 1, 2010.

Also on February 22, 2006, the Partnership entered into an interest rate swap on a principal amount of $10 million, whereby the Partnership receives a floating rate and pays a fixed rate of 4.13%. The swap commenced on February 22, 2006 and matures January 31, 2007.

The interest rate swaps have early settlement options, in whole or in part, of the principal amounts, which are currently in effect and exist until their respective maturity date. If either party exercises this option, the derivative financial instrument will be settled at the then current market price.

Fuel gas rates

On March 6, 2006, the Partnership entered into a natural gas rate swap for 500 GJ per day based on the monthly AECO spot price, whereby the Partnership receives a floating rate and pays a fixed rate of $6.84 per GJ. The swap commenced on April 1, 2006 and expires on December 31, 2006.

The natural gas rate swap has an early settlement option, in whole or in part, which are currently in effect and exist until their respective maturity date. If either party exercises this option, the derivative financial instrument will be settled at the then current market price.

NGL margin

On July 28, 2006, subsequent to the end of the second quarter, the Partnership entered into a series of financial swap arrangements, which have fixed the NGL margin at an effective rate of approximately $20.50 per barrel on 15,900 barrels of propane-plus per month. The swap arrangements commence September 1, 2006 and expire on December 31, 2006.



The NGL margin swap is comprised of:

------------------------------------------------------------------------
------------------------------------------------------------------------
Quantity
Price per month
------------------------------------------------------------------------
Sell:
Propane (Mt. Belvieu) US$1.1495 per US gallon 12,000 barrels
Normal butane (Mt. Belvieu) US$1.3295 per US gallon 2,000 barrels
Iso-butane (Mt. Belvieu) US$1.3320 per US gallon 900 barrels
Condensate (WTI) US$75.09 per barrel 1,000 barrels
US-dollars CAD 1.1265 per USD US$365,000

Buy:
Natural gas (AECO) US$7.16 per MMBTU 63,400 MMBTU
------------------------------------------------------------------------
------------------------------------------------------------------------


The NGL margin swap has early settlement options, in whole or in part, which are currently in effect and exist until their respective maturity date. If either party exercises this option, the derivative financial instrument will be settled at the then current market price.

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