Form 10-Q for Period Ended June 30, 2008

10-Q 1 d10q.htm FORM 10-Q FOR PERIOD ENDED JUNE 30, 2008 Form 10-Q for Period Ended June 30, 2008

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33303

TARGA RESOURCES, INC.

(Exact name of registrant as specified in its charter)


Delaware		74-3117058
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1000 Louisiana, Suite 4300, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(713) 584-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ


PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	5

	Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	5

	Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	6

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2008 and 2007	7

	Consolidated Statement of Changes in Stockholder’s Equity for the six months ended June 30, 2008	8

	Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	9

	Notes to Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

Item 4T.	Controls and Procedures	52

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Submission of Matters to a Vote of Security Holders	53

Item 5.	Other Information	53

Item 6.	Exhibits	53

SIGNATURES		55

As generally used in the energy industry and in this Quarterly Report on Form 10-Q, the identified terms have the following meanings:


Bbl		Barrels
BBtu		Billion British thermal units, a measure of heating value
/d		Per day
gal		Gallons
MBbl		Thousand barrels
MMBtu		Million British thermal units, a measure of heating value
MMcf		Million cubic feet
NGL(s)		Natural gas liquid(s)

Price Index Definitions
GD-HH		Henry Hub Gas Daily average
IF-HH		Inside FERC Gas Market Report, Henry Hub
IF-HSC		Inside FERC Gas Market Report, Houston Ship Channel/Beaumont, Texas
IF-NGPL MC		Inside FERC Gas Market Report, Natural Gas Pipeline, Mid-Continent
IF-Waha		Inside FERC Gas Market Report, West Texas Waha
NY-HH		NYMEX, Henry Hub Natural Gas
NY-WTI		NYMEX, West Texas Intermediate Crude Oil
OPIS-MB		Oil Price Information Service, Mont Belvieu, Texas

As used in this Quarterly Report, unless the context otherwise requires, “Targa,” “our,” “we,” “us” and similar terms refer to Targa Resources, Inc., together with its consolidated subsidiaries, including our publicly traded master limited partnership, Targa Resources Partners LP, which we refer to in this Quarterly Report as the “Partnership.”

Cautionary Statement About Forward-Looking Statements

This Quarterly Report contains “forward-looking statements” as defined in Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Forward-looking statements include, without limitation, statements regarding our future financial position, business strategy, future capital and other expenditures, plans and objectives of management for future operations. You can typically identify forward-looking statements by the use of forward-looking words such as “may,” “potential,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or similar expressions or variations on such expressions. Each forward-looking statement reflects our current view of future events and is subject to risks, uncertainties and other factors, known and unknown, which could cause our actual results to differ materially from any results expressed or implied by our forward-looking statements. These risks and uncertainties, many of which are beyond our control, include, but are not limited to:

•

our ability to access the debt and equity markets, which will depend on general market conditions and the credit ratings for our debt obligations;

•

our success in risk management activities, including the use of derivative financial instruments to hedge commodity and interest rate risks;

•

the level of creditworthiness of counterparties to transactions;

•

the amount of collateral required to be posted from time to time in our transactions;

•

changes in laws and regulations, particularly with regard to taxes, safety and protection of the environment or the gathering and processing industry;

•

the timing and extent of changes in natural gas, NGL and commodity prices, interest rates and demand for our services;

•

weather and other natural phenomena;

•

industry changes, including the impact of consolidations and changes in competition;

•

our ability to obtain necessary licenses, permits and other approvals;

•

our ability to grow through acquisitions or internal growth projects, and the successful integration and future performance of such assets;

•

the level and success of natural gas drilling around our assets, and our success in connecting natural gas supplies to our gathering and processing systems;

•

general economic, market and business conditions; and

•

the risks described in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2007.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this Quarterly Report will prove to be accurate. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described in this Quarterly Report and under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007. Except as may be required by applicable law, we undertake no obligation to publicly update or advise of any change in any forward-looking statement, whether as a result of new information, future events or otherwise.

Forward-looking statements contained in this Quarterly Report and all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

TARGA RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS


	June 30, 2008			December 31, 2007
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	366,232		$	177,949
Trade receivables, net of allowances of $6,213 and $1,115		754,924			836,044
Inventory		107,555			143,185
Deferred income taxes		77,756			25,071
Assets from risk management activities		1,926			9,487
Other current assets		14,516			70,640

Total current assets		1,322,909			1,262,376

Property, plant and equipment, at cost		2,828,626			2,764,230
Accumulated depreciation		(410,875	)		(334,160	)

Property, plant and equipment, net		2,417,751			2,430,070
Unconsolidated investments		53,778			48,005
Long-term assets from risk management activities		3,864			4,279
Investment in debt obligations of Targa Resources Investments Inc.		14,622			—
Other assets		54,616			45,235

Total assets	$	3,867,540		$	3,789,965


LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	409,389		$	470,860
Accrued liabilities		469,425			379,245
Current maturities of debt		12,500			12,500
Liabilities from risk management activities		204,321			75,568

Total current liabilities		1,095,635			938,173

Long-term debt, less current maturities		1,340,925			1,398,475
Long-term liabilities from risk management activities		249,035			81,019
Deferred income taxes		58,358			29,501
Other long-term obligations		38,850			35,267
Minority interest		108,338			100,826
Non-controlling interest in Targa Resources Partners LP		581,404			714,300
Commitments and contingencies (see Note 12)
Stockholder’s equity:
Common stock ($0.001 par value, 1,000 shares authorized, issued, and outstanding at June 30, 2008 and December 31, 2007, collateral for Targa Resources Investments Inc. debt)		—			—
Additional paid-in capital		420,269			473,784
Retained earnings		139,350			74,736
Accumulated other comprehensive loss		(164,624	)		(56,116	)

Total stockholder’s equity		394,995			492,404

Total liabilities and stockholder’s equity	$	3,867,540		$	3,789,965

See notes to consolidated financial statements

TARGA RESOURCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
				(Unaudited)
				(In thousands)
Revenues	$	2,263,226		$	1,610,768		$	4,465,619		$	3,059,780

Costs and expenses:
Product purchases		2,023,089			1,438,307			4,024,530			2,708,586
Operating expenses		71,229			62,388			134,807			120,311
Depreciation and amortization expense		38,750			36,434			76,942			73,166
General and administrative expense		27,924			23,699			52,017			42,390
Gain on sale of assets		(2	)		(311	)		(4,445	)		(131	)

		2,160,990			1,560,517			4,283,851			2,944,322

Income from operations		102,236			50,251			181,768			115,458
Other income (expense):
Interest expense, net		(23,660	)		(34,021	)		(49,245	)		(78,003	)
Gain on insurance claims (see Note 10)		18,566			—			18,566			—
Equity in earnings of unconsolidated investments		7,196			3,163			10,655			5,647
Minority interest		(11,610	)		(7,207	)		(21,757	)		(12,818	)
Non-controlling interest in Targa Resources Partners LP		(18,626	)		(2,679	)		(35,597	)		(4,048	)

Income before income taxes		74,102			9,507			104,390			26,236
Income tax (expense) benefit
Current		(275	)		(693	)		(1,237	)		(693	)
Deferred		(27,629	)		4,686			(38,539	)		(2,503	)

		(27,904	)		3,993			(39,776	)		(3,196	)

Net income	$	46,198		$	13,500		$	64,614		$	23,040

See notes to consolidated financial statements

TARGA RESOURCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Unaudited)
	(In thousands)
Net income	$	46,198		$	13,500		$	64,614		$	23,040
Other comprehensive loss:
Commodity hedging contracts:
Change in non-controlling partners’ share of other comprehensive income of Targa Resources Partners LP		109,381			5,184			140,118			4,762
Change in fair value		(268,996	)		(18,669	)		(362,384	)		(88,075	)
Reclassification adjustment for settled periods		36,357			(836	)		52,401			(14,023	)
Related income taxes		46,948			4,550			62,637			38,477
Interest rate swaps:
Change in non-controlling partners’ share of other comprehensive income of Targa Resources Partners LP		(7,364	)		—			(255	)		—
Change in fair value		9,165			251			(270	)		521
Reclassification adjustment for settled periods		849			(524	)		616			(1,048	)
Related income taxes		(960	)		142			(35	)		237
Available for sale securities:
Change in fair value		(1,900	)		—			(1,900	)		—
Related income taxes		706			—			706			—
Foreign currency items:
Foreign currency translation adjustment		100			1,016			(242	)		1,001
Related income taxes		(51	)		(379	)		100			(377	)

Other comprehensive loss		(75,765	)		(9,265	)		(108,508	)		(58,525	)

Comprehensive income (loss)	$	(29,567	)	$	4,235		$	(43,894	)	$	(35,485	)

See notes to consolidated financial statements

TARGA RESOURCES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY


	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total
	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total
	(Unaudited)
	(In thousands)
Balance as of December 31, 2007	1	$	—	$	473,784		$	74,736	$	(56,116	)	$	492,404
Distribution to parent	—		—		(53,752	)		—		—			(53,752	)
Amortization of equity awards	—		—		763			—		—			763
Tax expense on vesting of common stock	—		—		(526	)		—		—			(526	)
Other comprehensive loss	—		—		—			—		(108,508	)		(108,508	)
Net income	—		—		—			64,614		—			64,614

Balance as of June 30, 2008	1	$	—	$	420,269		$	139,350	$	(164,624	)	$	394,995

See notes to consolidated financial statements

TARGA RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
	2008			2007
	(Unaudited)
	(In thousands)
Cash flows from operating activities
Net income	$	64,614		$	23,040
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization in interest expense		4,091			9,011
Amortization in general and administrative expense		883			1,127
Other depreciation and amortization expense		76,942			73,166
Accretion of asset retirement obligations		629			494
Deferred income tax expense		38,539			2,503
Equity in earnings of unconsolidated investments		(10,655	)		(5,647	)
Distributions from unconsolidated investments		775			2,325
Minority interest		21,757			12,818
Minority interest distributions		(14,245	)		(11,285	)
Non-controlling interest in Targa Resources Partners LP		35,597			4,048
Distributions to non-controlling interest in Targa Resources Partners LP		(28,235	)		(3,263	)
Risk management activities		(1,176	)		(10,325	)
Gain on sale of assets		(4,445	)		(131	)
Gain on property damage insurance settlement		(18,566	)		—
Changes in operating assets and liabilities:
Accounts receivable and other assets		100,841			(15,595	)
Inventory		35,630			34,699
Accounts payable and other liabilities		28,919			17,327

Net cash provided by operating activities		331,895			134,312

Cash flows from investing activities
Purchases of property, plant and equipment		(53,811	)		(68,405	)
Proceeds from property insurance		48,294			12,454
Investment in debt securities of Targa Investments Inc		(16,400	)		—
Investment in unconsolidated affiliate		—			(4,647	)
Other		(3,803	)		1,987

Net cash used in investing activities		(25,720	)		(58,611	)

Cash flows from financing activities
Senior secured credit facility:
Repayments		(6,250	)		(706,250	)
Senior secured credit facility of Targa Resources Partners LP:
Borrowings		—			342,500
Repayments		(301,300	)		(48,000	)
Proceeds from issuance of senior unsecured notes of Targa Resources Partners LP		250,000			—
Contribution from non-controlling interest in Targa Resources Partners LP		—			377,593
Distribution to parent		(53,752	)		(63	)
Costs incurred in connection with financing arrangements		(6,590	)		(4,145	)

Net cash used in financing activities		(117,892	)		(38,365	)

Net increase in cash and cash equivalents		188,283			37,336
Cash and cash equivalents, beginning of period		177,949			142,739

Cash and cash equivalents, end of period	$	366,232		$	180,075

See notes to consolidated financial statements

TARGA RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Operations

Targa Resources, Inc. is a Delaware corporation formed on February 26, 2004. Unless the context requires otherwise, references to “we,” “us,” “our,” “the Company” or “Targa” are intended to mean the consolidated business and operations of Targa Resources, Inc.

We are a second-tier, wholly owned subsidiary of our parent holding company, Targa Resources Investments Inc. (“Targa Investments”). The only significant asset of Targa Investments is its ownership of 100% of the outstanding capital stock of an intermediate holding company, whose sole asset is its ownership of 100% of our outstanding capital stock, which consists of one thousand shares of common stock.

Our business operations consist of natural gas gathering and processing, and the fractionating, storing, terminalling, transporting, distributing and marketing of NGLs. See Note 14—Segment Information for a description of our segments and segment operations.

Note 2—Basis of Presentation

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The unaudited consolidated financial statements for the three and six month periods ended June 30, 2008 and 2007 include all adjustments, both normal and recurring, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. All significant intercompany balances and transactions have been eliminated in consolidation. Our financial results for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008. These unaudited consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

We currently own approximately 26.5% of Targa Resources Partners LP (the “Partnership”), including our 2% general partner interest. Targa Resources GP LLC, the general partner of the Partnership, is wholly owned by us. The Partnership is consolidated within our Gas Gathering and Processing segment in accordance with Emerging Issues Task Force (“EITF”) Issue No. 04-5, “ Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights .”

The non-controlling interest in the Partnership on our consolidated balance sheets represents the investment by partners other than Targa Resources, Inc., including those partners’ share of the net income, distributions and accumulated other comprehensive income (loss) of the Partnership. Non-controlling interest in net income of the Partnership on our consolidated statements of operations represents those partners’ share of the net income of the Partnership.

Note 3—Accounting Policies and Related Matters

Investments in Debt Securities. Investments in debt securities that we have the positive intent and ability to hold to maturity are classified as “held-to-maturity” and reported at cost, adjusted for amortization or accretion of

premiums or discounts. Securities not classified as held-to-maturity are classified as “available-for-sale” and are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as accumulated other comprehensive income or loss which is a separate component of consolidated stockholders’ equity, and the annual change in such gains and losses are reported as other comprehensive income. A transfer of securities between categories is recorded at fair value on the date of transfer.

Realized gains and losses on the sale of available-for-sale securities are recorded on the trade date and are determined using the specific identification method. Discounts or premiums are accreted or amortized to interest income using the effective interest method over the expected terms of the related security.

Investment securities are evaluated for impairment when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

The fair value of our available-for-sale securities is based on quoted market prices. In instances where quoted market prices are not available, fair values are based on indicative valuations provided by a bank.

Accounting Pronouncements Recently Adopted

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, “Fair Value Measurements.” SFAS 157 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The FASB partially deferred the effective date of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted SFAS 157 with respect to financial assets and liabilities that are recognized on a recurring basis on January 1, 2008. Although our adoption of SFAS 157 did not materially impact our financial condition, results of operations, or cash flows, we are now required to provide additional disclosures as part of our financial statements.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Our derivative instruments consist of financially settled commodity and interest rate swap and option contracts and fixed price commodity contracts with certain customers. We determine the value of our derivative contracts utilizing a discounted cash flow model for swaps and a standard option pricing model for options, based on inputs that are either readily available in public markets or are quoted by counterparties to these contracts. In situations where we obtain inputs via quotes from our counterparties, we verify the reasonableness of these quotes via similar quotes from another source for each date for which financial statements are presented. We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold. We have categorized the inputs for these contracts as Level 2 or Level 3. The price quotes for the Level 3 inputs are provided by a counterparty with whom we regularly transact business.

On June 10, 2008, we paid $16.4 million to acquire from a third party $20.0 million of Targa Investments’ debt (see Note 5). We have determined the fair value of our investment using an indicative valuation provided by a bank. The indicative valuation was provided for information purposes only, and did not constitute a bid or offer, or a solicitation of a bid or offer, to initiate or conclude any transaction at the stated indicative value. As such, we have categorized the indicative valuation as a Level 3 input.

The fair value of our financial instruments as of June 30, 2008 was:


	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets from commodity derivative contracts	$	4,259	$	—	$	1,940	$	2,319
Available-for-sale securities		14,500		—		—		14,500

Total assets	$	18,759	$	—	$	1,940	$	16,819

Liabilities from commodity derivative contracts	$	450,938	$	—	$	148,967	$	301,971
Liabilities from interest rate swaps		887		—		887		—

Total liabilities	$	451,825	$	—	$	149,854	$	301,971

The following table sets forth a reconciliation of changes in the fair value of our financial instruments classified as Level 3 in the fair value hierarchy:


	Commodity Derivative Contracts			Available For Sale Securities			Total
	(In thousands)
Balance as of January 1, 2008	$	(124,282	)	$	—		$	(124,282	)
Losses included in accumulated other comprehensive income (loss)		(119,185	)		(1,900	)		(121,085	)
Losses included in non-controlling interest in the Partnership		(108,957	)		—			(108,957	)
Settlements		49,055			—			49,055
Transfers in/out of Level 3		3,717			16,400			20,117

Balance as of June 30, 2008	$	(299,652	)	$	14,500		$	(285,152	)

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS 159 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. Our adoption of SFAS 159 on January 1, 2008 did not have a material impact on our consolidated financial statements.

Accounting Pronouncements Recently Issued

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is encouraged. Our adoption of SFAS 161 will not impact our consolidated financial position, results of operations or cash flows.

Note 4—Partnership Units and Related Matters

The following table shows Partnership distributions made during the six months ended June 30, 2008:


Quarter Ended	Distribution per Common Unit		Distribution per Subordinated Unit		Date Paid	Total Distribution		Distributed to Third Parties
						(In thousands)
March 31, 2008	$	0.4175	$	0.4175	May 15, 2008	$	19,886	$	14,467
December 31, 2007		0.3975		0.3975	February 14, 2008		18,793		13,768

See also Note 16 – Subsequent Events.

Customer Hedges

As of June 30, 2008, the Partnership had the following commodity derivative contracts directly related to short-term fixed price arrangements elected by certain customers in various natural gas purchase and sale agreements, which have been marked to market through earnings:

Customer Hedges

Period

Commodity

Instrument
Type

Daily Volume

Average Price

Index

(In thousands)
Fair Value

Purchases

Jul 2008 - Dec 2008

Natural gas

Swap

7,043

MMBtu

12.81

per MMBtu

NY-HH

453

Jan 2009 - Dec 2009

Natural gas

Swap

658

MMBtu

11.95

per MMBtu

NY-HH

123

Sales

Jul 2008 - Dec 2008

Natural gas

Fixed price sale

7,043

MMBtu

12.81

per MMBtu

NY-HH

(453

)

Jan 2009 - Dec 2009

Natural gas

Fixed price sale

658

MMBtu

11.95

per MMBtu

NY-HH

(123

)

—

The fair value of derivative instruments, depending on the type of instrument, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those underlying markets.

Interest Rate Swaps

As of June 30, 2008, the Partnership had the following interest rate swaps:


Effective Date	Expiration Date	Rate		Notional Amount
				(In thousands)
12/13/2007	01/24/2011	4.0775	%	$	50,000
12/18/2007	01/24/2011	4.2100	%		50,000
12/21/2007	01/24/2012	4.0750	%		50,000
12/21/2007	01/24/2012	4.0750	%		50,000
01/09/2008	01/24/2012	3.6990	%		50,000
01/11/2008	01/24/2012	3.6400	%		50,000

Each swap fixes the three month LIBOR Rate as indicated for the specified notional amount outstanding under the Partnership’s Amended Credit Agreement over the term of each swap agreement. As of June 30, 2008, the fair value of these interest rate swaps was a liability of $0.9 million.

Note 12—Commitments and Contingencies

Environmental

For environmental matters, we record liabilities when remedial efforts are probable and the costs can be reasonably estimated in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 96-1, “ Environmental Remediation Liabilities.” Environmental reserves do not reflect management’s assessment of the insurance coverage that may be applicable to the matters at issue. Management has assessed each of the matters based on current information and made a judgment concerning its potential outcome, considering the nature of the claim, the amount and nature of damages sought and the probability of success.

In August 2005, prior to Targa’s acquisition of Versado Gas Processors, L.L.C. (“Versado”), the State of New Mexico’s Environment Department (“NMED”) inspected Versado’s Eunice Gas Processing Plant and its books and records. Targa Midstream Services Limited Partnership (“TMSLP”) is the operator of Versado. In May 2007, the NMED sent Versado a draft compliance order relating to the 2005 inspection, alleging that Versado violated certain emissions standards and permit, monitoring and recordkeeping requirements. After TMSLP provided certain responses and information concerning the alleged violations, the NMED provided a revised draft compliance order and a settlement offer containing a proposed penalty of approximately $2.1 million to resolve the remaining alleged violations. More recently, however, we have discussed with the NMED an expansion of the proposed compliance order to include the resolution of other alleged violations associated with the Eunice, Monument and Saunders plants. We may be required to incur capital expenditures at the Eunice, Monument and Saunders plants and additional facility enhancements, and additional operating costs to resolve the alleged violations, the amount of which currently is not reasonably estimable. At this time, we cannot estimate the effect, if any, that this matter will have on our results of operations.

Our environmental liability as of June 30, 2008 was $4.4 million, consisting of $0.5 million for gathering system leaks, $1.8 million for ground water assessment and remediation, and $2.1 million for the gas processing plant environmental violations.

Legal Proceedings

We are a party to various legal proceedings and/or regulatory proceedings and certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against us. We believe all

such matters are without merit or involve amounts, which, if resolved unfavorably, would not have a material effect on our financial position, results of operations, or cash flows, except for the items more fully described below.

In May 2002, Apache Corporation (“Apache”) filed suit in Texas state court against Versado Gas Processors, LLC (“Versado”), as purchaser and processor of Apache’s gas, and Dynegy Midstream Services, Limited Partnership (now known as Targa Midstream Services Limited Partnership, a wholly-owned subsidiary of ours (“TMSLP”)), as operator of the Versado assets in New Mexico (“Versado Defendants”) alleging (i) excessive field losses of natural gas from wells owned by the plaintiff, (ii) that the Versado Defendants engaged in certain transactions with affiliates, resulting in the Versado Defendants not receiving fair market value when it sold gas and liquids, and (iii) that the formula for calculating the amount the Versado Defendants received from its buyers of gas and liquids is flawed since it is based on gas price indices that were allegedly manipulated. At trial, the jury found in favor of Apache on the lost gas claim, awarding approximately $1.6 million in damages. Apache’s claims with respect to the alleged “sham” transactions and index manipulation, among others, were severed by the trial court and abated for a future trial. The parties settled the severed lawsuit in May 2007.

In May 2004, the trial court granted the Versado Defendants’ motion to set aside the jury verdict on the lost gas claim and vacated the jury award to Apache. Apache filed its notice of appeal with the 14th Court of Appeals of Houston in October 2004. In 2006, the Court of Appeals reinstated the jury verdict in Apache’s favor on the issue of lost gas and also awarded Apache legal fees and interest, bringing the total award against the Versado Defendants to approximately $2.7 million. After rehearing, the Court of Appeals affirmed its decision reinstating the original jury verdict in Apache’s favor. With interest and attorneys fees that verdict stands at approximately $2.9 million.

In January 2007, the Versado Defendants filed their petition for review with the Supreme Court of Texas and in March 2007, Apache filed its conditional petition for review with the Supreme Court of Texas. On April 4, 2008, the Supreme Court of Texas granted review of the petitions, and the appeal is currently pending before the Supreme Court of Texas.

On December 8, 2005, WTG Gas Processing (“WTG”) filed suit in the 333rd District Court of Harris County, Texas against several defendants, including us, three other Targa entities and private equity funds affiliated with Warburg Pincus, seeking damages from the defendants. The suit alleges that we and private equity funds affiliated with Warburg Pincus, along with ConocoPhillips Company (“ConocoPhillips”) and Morgan Stanley, tortiously interfered with (i) a contract WTG claims to have had to purchase the SAOU System from ConocoPhillips, and (ii) prospective business relations of WTG. WTG claims the alleged interference resulted from our competition to purchase the ConocoPhillips’ assets and its successful acquisition of those assets in 2004. On October 2, 2007, the District Court granted defendants’ motions for summary judgment on all of WTG’s claims. We have agreed to indemnify the Partnership for any claim or liability arising out of the WTG suit. WTG’s motion to reconsider and for a new trial was overruled. On January 2, 2008, WTG filed a notice of appeal, and on May 6, 2008 filed its appellant’s brief with the 14^th Court of Appeals in Houston, Texas. Targa and Warburg Pincus filed their appellee’s brief on June 26, 2008. We will contest the appeal, but can give no assurances regarding the outcome of the proceeding.

Note 13—Related-Party Transactions

Hedging Arrangements

An affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) is an equity investor in Targa Investments. We have entered into various commodity derivative transactions with Merrill Lynch Commodities Inc. (“MLCI”), an affiliate of Merrill Lynch. Under the terms of these various commodity derivative transactions, MLCI has agreed to pay us specified fixed prices in relation to specified notional quantities of natural gas, NGL, and condensate over periods ending in 2010, and we have agreed to pay MLCI

floating prices based on published index prices of such commodities for delivery at specified locations. The following table shows our open commodity derivatives with MLCI as of June 30, 2008:

Period

Commodity

Instrument Type

Daily Volumes

Average Price

Index

Jul 2008—Dec 2008

Natural gas

Swap

21,918

MMBtu

6.96

per MMBtu

IF-Waha

Jan 2009—Dec 2009

Natural gas

Swap

21,918

MMBtu

6.62

per MMBtu

IF-Waha

Jul 2008—Dec 2008

NGL

Swap

3,047

Bbl

0.77

per gallon

OPIS-MB

Jan 2009—Dec 2009

NGL

Swap

2,847

Bbl

0.74

per gallon

OPIS-MB

As of June 30, 2008, the fair value of these open positions is a liability of $115.9 million. For the three and six months ended June 30, 2008 we paid MLCI $15.1 million and $23.1 million, respectively, for amounts due under settled commodity derivative transactions. For the three and six months ended June 30, 2007, we paid MLCI $2.5 million and $0.3 million, respectively, for amounts due under settled commodity derivative transactions.

The following table shows the Partnership’s open commodity derivatives with MLCI as of June 30, 2008:

Period

Commodity

Instrument Type

Daily Volumes

Average Price

Index

Jul 2008—Dec 2008

Natural gas

Swap

3,847

MMBtu

8.76

per MMBtu

IF-Waha

Jan 2009—Dec 2009

Natural gas

Swap

3,556

MMBtu

8.07

per MMBtu

IF-Waha

Jan 2010—Dec 2010

Natural gas

Swap

3,289

MMBtu

7.39

per MMBtu

IF-Waha

Jul 2008—Dec 2008

NGL

Swap

3,175

Bbl

1.06

per gallon

OPIS-MB

Jan 2009—Dec 2009

NGL

Swap

3,000

Bbl

0.98

per gallon

OPIS-MB

Jul 2008—Dec 2008

Condensate

Swap

264

Bbl

72.66

per barrel

NY-WTI

Jan 2009—Dec 2009

Condensate

Swap

202

Bbl

70.60

per barrel

NY-WTI

Jan 2010—Dec 2010

Condensate

Swap

181

Bbl

69.28

per barrel

NY-WTI

As of June 30, 2008, the fair value of these Partnership open positions is a liability of $70.4 million. For the six months ended June 30, 2008 and 2007, the Partnership paid MLCI $11.7 million and $1.8 million, respectively, for amounts due under settled commodity derivative transactions.

Other

For the periods indicated, related-party transactions included in our statements of operations were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
	(In thousands)				(In thousands)
*Included in Revenues*
GCF	$	35	$	147	$	366	$	3,245
VESCO		665		4,546		666		4,771
MLCI		28,029		13,642		60,349		29,100

	$	28,729	$	18,335	$	61,381	$	37,116

*Included in Costs and Expenses*
GCF	$	1,341	$	770	$	2,145	$	1,775
VESCO		47,231		32,172		100,081		65,657
MLCI		1,574		3,246		2,873		3,641

	$	50,146	$	36,188	$	105,099	$	71,073

Note 14—Segment Information

We categorize the midstream natural gas industry into, and describe our business in, two divisions: (i) Natural Gas Gathering and Processing (also a segment) and (ii) NGL Logistics and Marketing. Our NGL

Logistics and Marketing division consists of three segments: (a) Logistics Assets, (b) NGL Distribution and Marketing and (c) Wholesale Marketing.

Our Natural Gas Gathering and Processing segment includes assets used in the gathering of natural gas produced from oil and gas wells and processing this raw natural gas into merchantable natural gas by extracting natural gas liquids and removing impurities. These assets are located in North Texas, Louisiana and the Permian Basin of West Texas and Southeast New Mexico. We are also party to natural gas processing agreements with third party plants.

Our Logistics Assets segment is involved with gathering and storing mixed NGLs and fractionating, storing, and transporting finished NGLs. These assets are generally connected to and supplied, in part, by our Natural Gas Gathering and Processing segment and are predominantly located in Mont Belvieu, Texas and Western Louisiana.

Our NGL Distribution and Marketing segment markets our own natural gas liquids production and purchased natural gas liquids products in selected United States markets.

Our Wholesale Marketing segment includes our refinery services business and wholesale propane marketing operations. In our refinery services business, we provide LPG (liquefied petroleum gas) balancing services, purchase natural gas liquids products from refinery customers and sell natural gas liquids products to various customers. Our wholesale propane marketing operations include the sale of propane and related logistics services to multi-state retailers, independent retailers and other end-users. Wholesale Marketing operates principally in the United States, and has a small marketing presence in Canada.

The “Eliminations and Other” column in the tables below includes amounts related to general and administrative expenses not allocated to segment operations, corporate development, interest expense, income tax expense, and the depreciation and cost of equipment used in our headquarters office. “Eliminations and Other” also includes the elimination of intersegment revenues and expenses.

Our reportable segment information is shown in the following tables:


	Three Months Ended June 30, 2008
	Natural Gas Gathering and Processing		Logistics Assets			NGL Distribution and Marketing Services		Wholesale Marketing		Eliminations and Other			Total
	(In thousands)
Revenues	$	543,267	$	27,630		$	1,383,963	$	308,366	$	—		$	2,263,226
Intersegment revenues		516,204		38,054			116,969		8,960		(680,187	)		—

Revenues		1,059,471		65,684			1,500,932		317,326		(680,187	)		2,263,226

Product purchases		904,590		(33	)		916,550		201,982		—			2,023,089
Intersegment product purchases		3,550		33			551,969		106,513		(662,065	)		—

Product purchases		908,140		—			1,468,519		308,495		(662,065	)		2,023,089

Operating expenses		34,323		36,373			517		16		—			71,229
Intersegment operating expenses		385		17,737			—		—		(18,122	)		—

Operating expenses		34,708		54,110			517		16		(18,122	)		71,229

Operating margin	$	116,623	$	11,574		$	31,896	$	8,815	$	—		$	168,908

Equity in earnings of unconsolidated investments	$	6,354	$	842		$	—	$	—	$	—		$	7,196

Unconsolidated investments	$	33,389	$	20,389		$	—	$	—	$	—		$	53,778
Capital expenditures	$	22,125	$	15,774		$	—	$	—	$	1,163		$	39,062


	Three Months Ended June 30, 2007
	Natural Gas Gathering and Processing		Logistics Assets			NGL Distribution and Marketing Services		Wholesale Marketing		Eliminations and Other			Total
	(In thousands)
Revenues	$	391,887	$	20,058		$	987,231	$	211,592	$	—		$	1,610,768
Intersegment revenues		338,445		29,897			62,368		5,172		(435,882	)		—

Revenues		730,332		49,955			1,049,599		216,764		(435,882	)		1,610,768

Product purchases		604,767		(1	)		680,070		153,471		—			1,438,307
Intersegment product purchases		—		1			362,977		61,059		(424,037	)		—

Product purchases		604,767		—			1,043,047		214,530		(424,037	)		1,438,307

Operating expenses		28,459		33,311			615		3		—			62,388
Intersegment operating expenses		94		11,751			—		—		(11,845	)		—

Operating expenses		28,553		45,062			615		3		(11,845	)		62,388

Operating margin	$	97,012	$	4,893		$	5,937	$	2,231	$	—		$	110,073

Equity in earnings of unconsolidated investments	$	2,296	$	867		$	—	$	—	$	—		$	3,163

Unconsolidated investments	$	25,670	$	19,424		$	—	$	—	$	—		$	45,094
Capital expenditures	$	20,836	$	9,371		$	—	$	—	$	492		$	30,699


	Six Months Ended June 30, 2008
	Natural Gas Gathering and Processing		Logistics Assets			NGL Distribution and Marketing Services		Wholesale Marketing		Eliminations and Other			Total
	(In thousands)
Revenues	$	982,468	$	48,448		$	2,603,076	$	831,627	$	—		$	4,465,619
Intersegment revenues		950,237		68,390			317,473		29,046		(1,365,146	)		—

Revenues		1,932,705		116,838			2,920,549		860,673		(1,365,146	)		4,465,619

Product purchases		1,628,635		(33	)		1,860,936		534,992					4,024,530
Intersegment product purchases		9,969		33			1,018,398		307,245		(1,335,645	)		—

Product purchases		1,638,604		—			2,879,334		842,237		(1,335,645	)		4,024,530

Operating expenses		64,343		69,421			1,016		27		—			134,807
Intersegment operating expenses		533		28,968			—		—		(29,501	)		—

Operating expenses		64,876		98,389			1,016		27		(29,501	)		134,807

Operating margin	$	229,225	$	18,449		$	40,199	$	18,409	$	—		$	306,282

Equity in earnings of unconsolidated investments	$	8,729	$	1,926		$	—	$	—	$	—		$	10,655

Unconsolidated investments	$	33,389	$	20,389		$	—	$	—	$	—		$	53,778
Capital expenditures	$	34,248	$	21,694		$	—	$	—	$	2,222		$	58,164


	Six Months Ended June 30, 2007
	Natural Gas Gathering and Processing		Logistics Assets		NGL Distribution and Marketing Services			Wholesale Marketing		Eliminations and Other			Total
	(In thousands)
Revenues	$	749,833	$	36,910	$	1,728,091		$	544,946	$	—		$	3,059,780
Intersegment revenues		603,340		55,802		203,806			13,909		(876,857	)		—

Revenues		1,353,173		92,712		1,931,897			558,855		(876,857	)		3,059,780

Product purchases		1,107,322		—		1,265,994			335,270		—			2,708,586
Intersegment product purchases		8		—		647,019			214,837		(861,864	)		—

Product purchases		1,107,330		—		1,913,013			550,107		(861,864	)		2,708,586

Operating expenses		57,513		61,558		1,236			4		—			120,311
Intersegment operating expenses		140		14,876		(23	)		—		(14,993	)		—

Operating expenses		57,653		76,434		1,213			4		(14,993	)		120,311

Operating margin	$	188,190	$	16,278	$	17,671		$	8,744	$	—		$	230,883

Equity in earnings of unconsolidated investments	$	3,500	$	2,147	$	—		$	—	$	—		$	5,647

Unconsolidated investments	$	25,670	$	19,424	$	—		$	—	$	—		$	45,094
Capital expenditures	$	43,774	$	22,824	$	—		$	—	$	1,182		$	67,780

The following table is a reconciliation of operating margin to net income for each of the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(in thousands)
Operating margin	$	168,908		$	110,073		$	306,282		$	230,883
Adjustments to reconcile operating margin to net income:
Depreciation and amortization		(38,750	)		(36,434	)		(76,942	)		(73,166	)
Gain on sales of assets		2			311			4,445			131
General and administrative		(27,924	)		(23,699	)		(52,017	)		(42,390	)
Interest expense, net		(23,660	)		(34,021	)		(49,245	)		(78,003	)
Gain on insurance claims		18,566			—			18,566			—
Equity in earnings of unconsolidated investments		7,196			3,163			10,655			5,647
Minority interest		(11,610	)		(7,207	)		(21,757	)		(12,818	)
Non-controlling interest in net income of the Partnership		(18,626	)		(2,679	)		(35,597	)		(4,048	)
Income tax (expense) / benefit		(27,904	)		3,993			(39,776	)		(3,196	)

Net income	$	46,198		$	13,500		$	64,614		$	23,040

Note 15—Allowance for Doubtful Accounts

On July 18, 2008, SemGroup LP (“Semgroup”) filed for bankruptcy protection. We had business relationships with SemGroup in our Natural Gas Gathering and Processing, NGL Distribution and Marketing Services and Logistics Assets segments. As of June 30, 2008, we recognized a reserve of $4.6 million for product delivered and subject to the bankruptcy. During the third quarter, we will record an additional reserve of $2.4 million for product delivered subsequent to June 30, 2008.

Note 16—Subsequent Events

During July 2008, the Partnership borrowed $87.4 million under its senior secured credit facility to terminate certain out-of-the-money natural gas and NGL commodity swaps. Prior to the terminations, the swaps were designated as hedges in accordance with SFAS 133, “Derivative Instruments and Hedging Activities.” Approximately $20.8 million, $38.2 million and $27.9 million will be reclassified from OCI to revenues during 2008, 2009 and 2010, respectively, when the hedged forecasted sales transactions are expected to occur. The Partnership also entered into new natural gas and NGL commodity swaps at then current market prices that match the production volumes of the terminated swaps through 2010.

On July 23, 2008, the general partner of the Partnership announced a quarterly distribution of available cash of $0.5125 per common and subordinated unit for the quarter ended June 30, 2008. The cash distribution of approximately $25.9 million (including distributions to us for our subordinated units, our general partner interest and as the holder of the incentive distribution rights) is payable on August 14, 2008 to unitholders of record as of the close of business on August 4, 2008.

On July 31, 2008, we acquired an approximate 54% ownership interest in VESCO from subsidiaries of Chevron U.S.A. Inc.

Note 17—Consolidating Financial Statements

We are the issuer of the notes discussed in Note 7 to the financial statements of our Annual Report on Form 10-K for the year ended December 31, 2007. The notes are jointly and severally, irrevocably and unconditionally guaranteed by our wholly-owned subsidiaries (referred to as “Guarantor Subsidiaries”).

The following financial information presents condensed consolidating financial statements, which include:

•

The Parent company only (“Parent”);

•

The Guarantor Subsidiaries on a consolidated basis;

•

Non-wholly owned and foreign subsidiaries (referred to as “Non-Guarantor Subsidiaries”);

•

Elimination entries necessary to consolidate the Parent, the Guarantor Subsidiaries, and the Non-Guarantor Subsidiaries; and

•

The Company on a consolidated basis.

Targa Resources, Inc.

Condensed Consolidating Balance Sheet

June 30, 2008

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	267,541		$	98,691		$	—		$	366,232
Accounts receivable and other current assets		78,149			756,303			122,225			—			956,677

Total current assets		78,149			1,023,844			220,916			—			1,322,909
Property, plant, and equipment, at cost		—			776,038			2,052,588			—			2,828,626
Accumulated depreciation		—			68,906			(479,781	)		—			(410,875	)

Property, plant, and equipment, net		—			844,944			1,572,807			—			2,417,751
Unconsolidated investments		—			53,778			—			—			53,778
Investment in subsidiaries		872,986			54,688			—			(927,674	)		—
Advances to (from) subsidiaries		122,008			(250,002	)		127,994			—			—
Other assets		148,765			(94,627	)		18,964			—			73,102

Total assets	$	1,221,908		$	1,632,625		$	1,940,681		$	(927,674	)	$	3,867,540

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities	$	(5,166	)	$	700,217		$	388,084		$	—		$	1,083,135
Current maturities of debt		12,500			—			—			—			12,500

Total current liabilities		7,334			700,217			388,084			—			1,095,635
Long-term liabilities:
Long-term debt, net of current maturities		765,925			—			575,000			—			1,340,925
Other long-term obligations		53,654			130,735			161,854			—			346,243

Total long-term liabilities		819,579			130,735			736,854			—			1,687,168
Minority interest		—			—			—			108,338			108,338
Noncontrolling interest in the Partnership		—			—			—			581,404			581,404
Stockholder’s equity:
Stockholder’s equity		559,619			993,243			1,079,407			(2,072,650	)		559,619
Accumulated other comprehensive loss		(164,624	)		(191,570	)		(263,664	)		455,234			(164,624	)

Total stockholder’s equity		394,995			801,673			815,743			(1,617,416	)		394,995

Total liabilities and stockholders’ equity	$	1,221,908		$	1,632,625		$	1,940,681		$	(927,674	)	$	3,867,540

Targa Resources, Inc.

Condensed Consolidating Balance Sheet

December 31, 2007

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	88,303		$	89,646		$	—		$	177,949
Accounts receivable and other current assets		25,130			954,910			104,387			—			1,084,427

Total current assets		25,130			1,043,213			194,033			—			1,262,376
Property, plant, and equipment, at cost		—			743,652			2,020,578			—			2,764,230
Accumulated depreciation		—			94,265			(428,425	)		—			(334,160	)

Property, plant, and equipment, net		—			837,917			1,592,153			—			2,430,070
Unconsolidated investments		—			48,005			—			—			48,005
Investment in subsidiaries		1,087,322			109,411			—			(1,196,733	)		—
Advances to (from) subsidiaries		66,953			(172,735	)		105,782			—			—
Other assets		134,215			(97,599	)		12,898			—			49,514

Total assets	$	1,313,620		$	1,768,212		$	1,904,866		$	(1,196,733	)	$	3,789,965

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities	$	11,043		$	657,736		$	256,894		$	—		$	925,673
Current maturities of debt		12,500			—			—			—			12,500

Total current liabilities		23,543			657,736			256,894			—			938,173
Long-term liabilities:
Long-term debt, net of current maturities		772,175			—			626,300			—			1,398,475
Other long-term obligations		25,498			100,516			19,773			—			145,787

Total long-term liabilities		797,673			100,516			646,073			—			1,544,262
Minority interest		—			—			—			100,826			100,826
Noncontrolling interest in the Partnership		—			—			—			714,300			714,300
Stockholder’s equity:
Stockholder’s equity		548,520			1,082,065			1,075,149			(2,157,214	)		548,520
Accumulated other comprehensive loss		(56,116	)		(72,105	)		(73,250	)		145,355			(56,116	)

Total stockholder’s equity		492,404			1,009,960			1,001,899			(2,011,859	)		492,404

Total liabilities and stockholders’ equity	$	1,313,620		$	1,768,212		$	1,904,866		$	(1,196,733	)	$	3,789,965

Targa Resources, Inc.

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2008

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Revenues	$	—		$	2,038,653		$	833,414		$	(608,841	)	$	2,263,226

Operating costs and expenses:
Product purchases		—			1,931,771			681,093			(589,775	)		2,023,089
Operating expenses		—			39,263			51,032			(19,066	)		71,229
Depreciation and amortization		—			12,804			25,946			—			38,750
General and administrative and other		87			21,204			6,631			—			27,922

		87			2,005,042			764,702			(608,841	)		2,160,990

Income (loss) from operations		(87	)		33,611			68,712			—			102,236

Other income (expense):
Interest expense, net		(15,841	)		—			(7,819	)		—			(23,660	)
Other income		18,566			—			—			—			18,566
Equity in earnings of unconsolidated investments		—			7,196			—			—			7,196
Equity in earnings of subsidiaries		71,192			30,575			—			(101,767	)		—
Minority interest/Non-controlling interest		—			—			—			(30,236	)		(30,236	)

Income before income taxes		73,830			71,382			60,893			(132,003	)		74,102
Income tax expense		(27,632	)		(190	)		(363	)		281			(27,904	)

Net income	$	46,198		$	71,192		$	60,530		$	(131,722	)	$	46,198

Targa Resources, Inc.

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2007

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Intercompany Eliminations			Consolidated
Revenues	$	—		$	1,457,542		$	577,805		$	(424,579	)	$	1,610,768

Operating costs and expenses:
Product purchases		—			1,385,230			463,051			(409,974	)		1,438,307
Operating expenses		—			35,481			41,512			(14,605	)		62,388
Depreciation and amortization		—			12,374			24,060			—			36,434
General and administrative and other		16			18,967			4,405			—			23,388

		16			1,452,052			533,028			(424,579	)		1,560,517

Income (loss) from operations		(16	)		5,490			44,777			—			50,251

Other income (expense):
Interest income, net		(19,371	)		—			(14,650	)		—			(34,021	)
Equity in earnings of unconsolidated investments		—			3,163			—			—			3,163
Equity in earnings of subsidiaries		28,768			20,136			—			(48,904	)		—
Minority interest/Non-controlling interest		—			—			—			(9,886	)		(9,886	)

Income before income taxes		9,381			28,789			30,127			(58,790	)		9,507
Income tax (expense) benefit		4,119			(21	)		(513	)		408			3,993

Net income	$	13,500		$	28,768		$	29,614		$	(58,382	)	$	13,500

Targa Resources, Inc.

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2008

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Revenues	$	—		$	4,057,163	$	1,538,175		$	(1,129,719	)	$	4,465,619

Operating costs and expenses:
Product purchases		—			3,868,273		1,252,986			(1,096,729	)		4,024,530
Operating expenses		—			74,225		93,572			(32,990	)		134,807
Depreciation and amortization		—			25,362		51,580			—			76,942
General and administrative and other		87			35,966		11,519			—			47,572

		87			4,003,826		1,409,657			(1,129,719	)		4,283,851

Income (loss) from operations		(87	)		53,337		128,518			—			181,768

Other income (expense):
Interest expense, net		(32,954	)		—		(16,291	)		—			(49,245	)
Other income		18,566			—		—			—			18,566
Equity in earnings of unconsolidated investments		—			10,655		—			—			10,655
Equity in earnings of subsidiaries		118,680			54,688		—			(173,368	)		—
Minority interest/Non-controlling interest		—			—		—			(57,354	)		(57,354	)

Income before income taxes		104,205			118,680		112,227			(230,722	)		104,390
Income tax expense		(39,591	)		—		(700	)		515			(39,776	)

Net income	$	64,614		$	118,680	$	111,527		$	(230,207	)	$	64,614

Targa Resources, Inc.

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2007

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiary			Intercompany Eliminations			Consolidated
Revenues	$	—		$	2,766,672	$	1,055,995		$	(762,887	)	$	3,059,780

Operating costs and expenses:
Product purchases		—			2,608,085		843,934			(743,433	)		2,708,586
Operating expenses		—			66,586		73,179			(19,454	)		120,311
Depreciation and amortization		—			24,025		49,141			—			73,166
General and administrative and other		32			34,415		7,812			—			42,259

		32			2,733,111		974,066			(762,887	)		2,944,322

Income (loss) from operations		(32	)		33,561		81,929			—			115,458

Other income (expense):
Interest income, net		(60,868	)		—		(17,135	)		—			(78,003	)
Equity in earnings of unconsolidated investments		—			5,647		—			—			5,647
Equity in earnings of subsidiaries		86,879			47,671		—			(134,550	)		—
Minority interest/Non-controlling interest		—			—		—			(16,866	)		(16,866	)

Income before income taxes		25,979			86,879		64,794			(151,416	)		26,236
Income tax expense		(2,939	)		—		(665	)		408			(3,196	)

Net income	$	23,040		$	86,879	$	64,129		$	(151,008	)	$	23,040

Targa Resources, Inc.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2008

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Cash flows from operating activities
Net income	$	64,614		$	118,680		$	111,527		$	(230,207	)	$	64,614
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation, amortization and accretion		3,264			25,772			52,656			—			81,692
Deferred income taxes		38,354			—			700			(515	)		38,539
Earnings from unconsolidated investments		—			(10,655	)		—			—			(10,655	)
Equity in earnings of subsidiaries		(118,680	)		(54,688	)		—			173,368			—
Other		(17,833	)		(2,899	)		(44,307	)		57,354			(7,685	)
Changes in operating assets and liabilities:
Accounts receivable and other assets		14,949			112,107			(26,215	)		—			100,841
Inventory		—			35,566			64			—			35,630
Accounts payable and other liabilities		(16,211	)		(46,291	)		91,421			—			28,919

Net cash provided by (used in) operating activities		(31,543	)		177,592			185,846			—			331,895

Cash flows from investing activities
Purchases of property and equipment		—			(25,574	)		(28,237	)		—			(53,811	)
Other		(16,400	)		48,306			(3,815	)		—			28,091

Net cash provided by (used in) investing activities		(16,400	)		22,732			(32,052	)		—			(25,720	)

Cash flows from financing activities
Repayments under senior secured credit facility		(6,250	)		—			(301,300	)		—			(307,550	)
Other		—			—			243,410			—			243,410
Receipts from (payments to) subsidiaries		54,193			(21,086	)		(86,859	)		—			(53,752	)

Net cash provided by (used in) financing activities		47,943			(21,086	)		(144,749	)		—			(117,892	)

Net increase (decrease) in cash and cash equivalents		—			179,238			9,045			—			188,283
Cash and cash equivalents, beginning of period		—			88,303			89,646			—			177,949

Cash and cash equivalents, end of period	$	—		$	267,541		$	98,691		$	—		$	366,232

Targa Resources, Inc.

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2007

(Unaudited)

(In thousands)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Cash flows from operating activities
Net income	$	23,040		$	86,879		$	64,129		$	(151,008	)	$	23,040
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion		8,705			24,519			49,447			—			82,671
Deferred income taxes		2,246			—			665			(408	)		2,503
Earnings from unconsolidated investments		—			(5,647	)		—			—			(5,647	)
Equity in earnings of subsidiaries		(86,879	)		(47,671	)		—			134,550			—
Other		1,050			(27,287	)		4,685			16,866			(4,686	)
Changes in operating assets and liabilities:		—			—			—			—			—
Accounts receivable and other assets		(479	)		(6,529	)		(8,587	)		—			(15,595	)
Inventory		—			33,482			1,217			—			34,699
Accounts payable and other liabilities		(16,575	)		54,725			(20,823	)		—			17,327

Net cash provided by (used in) operating activities		(68,892	)		112,471			90,733			—			134,312

Cash flows from investing activities
Purchases of property and equipment		—			(33,915	)		(34,490	)		—			(68,405	)
Other		—			14,106			(4,312	)		—			9,794

Net cash used in investing activities		—			(19,809	)		(38,802	)		—			(58,611	)

Cash flows from financing activities
Senior secured credit facility:
Borrowings		—			—			342,500			—			342,500
Repayments		(706,250	)		—			(48,000	)		—			(754,250	)
Non-controlling interest in the Partnership		—			—			—			—			—
Other		775,142			(67,813	)		(333,944	)		—			373,385
Receipts from subsidiaries		—			—			—			—			—

Net cash provided by (used in) financing activities		68,892			(67,813	)		(39,444	)		—			(38,365	)

Net increase in cash and cash equivalents		—			24,849			12,487			—			37,336
Cash and cash equivalents, beginning of period		—			117,661			25,078			—			142,739

Cash and cash equivalents, end of period	$	—		$	142,510		$	37,565		$	—		$	180,075

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion analyzes our financial condition and results of operations. You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q and in our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Overview

We are a Delaware corporation formed in 2004 by our management team and Warburg Pincus LLC to acquire, own and operate assets in the midstream natural gas business.

Our gathering and processing assets are located primarily in the Permian Basin in West Texas and Southeast New Mexico, the Louisiana Gulf Coast primarily accessing the offshore region of Louisiana, and, through the Partnership, the Fort Worth Basin in North Texas, the Permian Basin in West Texas and the onshore region of the Louisiana Gulf Coast. Our NGL logistics and marketing assets are located primarily at Mont Belvieu and Galena Park near Houston, Texas and in Lake Charles, Louisiana, with terminals and transportation assets across the United States.

We conduct our business operations through two divisions and report our results of operations under four segments: Our Natural Gas Gathering and Processing division, which includes the Partnership, is a single segment consisting of our natural gas gathering and processing facilities, as well as certain fractionation capability integrated within those facilities; and the NGL Logistics and Marketing division, which consists of three segments: Logistics Assets, NGL Distribution and Marketing and Wholesale Marketing.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies since December 31, 2007. For a more complete description of our critical accounting polices and estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Recent Accounting Pronouncements

On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 157. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. See Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report for information regarding fair value disclosures pertaining to our financial assets and liabilities.

The accounting standard-setting bodies have recently issued the following accounting standard that has the potential to affect our future financial statements:

•

SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.”

For additional information regarding this recent accounting development and others that may affect our future financial statements, see Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report.

Results of Operations

The following table and discussion relate to the three and six months ended June 30, 2008 and 2007 and is a summary of our results of operations for the periods then ended:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In millions, except operating and price data)
Revenues (1)	$	2,263.2		$	1,610.8		$	4,465.6		$	3,059.8
Product purchases		2,023.1			1,438.3			4,024.5			2,708.6
Operating expenses		71.2			62.4			134.8			120.3
Depreciation and amortization expense		38.8			36.4			76.9			73.2
General and administrative expense		27.9			23.7			52.0			42.4
Gain on sales of assets		—			(0.3	)		(4.4	)		(0.1	)

Income from operations		102.2			50.3			181.8			115.4
Interest expense, net		(23.7	)		(34.0	)		(49.2	)		(78.0	)
Gain on insurance claims		18.6			—			18.6			—
Equity in earnings of unconsolidated investments (2)		7.2			3.1			10.7			5.7
Minority interest / non-controlling interest		(30.2	)		(9.9	)		(57.5	)		(16.9	)
Income tax (expense) benefit		(27.9	)		4.0			(39.8	)		(3.2	)

Net income	$	46.2		$	13.5		$	64.6		$	23.0

Financial data:
Operating margin (3)	$	168.9		$	110.1		$	306.3		$	230.9
Adjusted EBITDA (3)		137.6			76.3			229.3			167.1

Operating data:
Gathering throughput MMcf/d (4)		2,072.3			1,999.0			2,128.5			1,987.9
Plant natural gas inlet, MMcf/d (4)		2,020.7			1,954.5			2,081.9			1,946.2
Gross NGL production, MBbl/d		104.8			106.0			104.3			105.1
Natural gas sales, BBtu/d (4)		526.6			533.9			529.8			520.8
NGL sales, MBbl/d		285.9			296.4			301.7			298.6
Condensate sales, MBbl/d		3.7			4.1			3.7			3.7

Average realized prices:
Natural Gas, $/MMBtu
Average realized sales price		10.25			6.93			9.01			6.76
Impact of hedging		(0.14	)		0.12			(0.01	)		0.11

Average realized price		10.11			7.05			9.00			6.87

NGL, $/gal
Average realized sales price		1.57			1.08			1.52			1.02
Impact of hedging		(0.03	)		—			(0.02	)		—

Average realized price		1.54			1.08			1.50			1.02

Condensate, $/Bbl
Average realized sales price		119.20			61.65			107.38			58.77
Impact of hedging		(5.05	)		0.83			(3.49	)		1.32

Average realized price		114.15			62.48			103.89			60.09

(1)	Includes business interruption insurance revenue of $17.5 million for the three and six months ended June 30, 2008, and $5.2 million and $5.6 million for the three and six months ended June 30, 2007.

(2)	Includes business interruption insurance revenue of $4.1 million for the three and six months ended June 30, 2008, and $2.2 million for the three and six months ended June 30, 2007.

(3)	Operating margin is total operating revenues less product purchases and operating expense. Adjusted EBITDA is net income before interest, income taxes, depreciation and amortization and non-cash income or loss related to derivative instruments. See “—Non-GAAP Financial Measures.”

(4)

Gathering throughput represents the volume of natural gas gathered and passed through natural gas gathering pipelines from connections to producing wells and central delivery points. Plant natural gas inlet represents the volume of natural gas passing through the meter located at the inlet of a natural gas processing plant. Plant natural gas inlet volumes include producer take-in-kind volumes, while natural gas sales exclude producer take-in-kind volumes.

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Revenues increased by $652.4 million, or 41%, to $2,263.2 million for the three months ended June 30, 2008 compared to $1,610.8 million for the three months ended June 30, 2007. Revenues from the sale of natural gas increased by $142.3 million, consisting of an increase of $147.0 million due to higher realized prices, partially offset by a decrease of $4.7 million due to lower sales volumes. Revenues from the sale of NGLs increased by $472.1 million, consisting of an increase of $515.3 million due to higher realized prices, partially offset by a decrease of $43.2 million due to lower sales volumes. Revenues from the sale of condensate increased by $15.8 million, consisting of an increase of $17.6 million due to higher realized prices, partially offset by a decrease of $1.8 million due to lower sales volumes. Other revenues, which includes business interruption insurance revenue and revenues principally derived from fee-based services, increased by $22.2 million. The increase comprised $12.3 million in higher business interruption insurance revenue and $9.9 million in higher revenues for fee-based services.

Our average realized prices for natural gas increased by $3.06 per MMBtu (net of a $0.26 decrease due to hedging), or 43%, to $10.11 per MMBtu for the three months ended June 30, 2008 compared to $7.05 per MMBtu for the three months ended June 30, 2007. Average realized prices for NGLs increased by $0.46 per gallon (net of a $0.03 decrease due to hedging), or 43%, to $1.54 per gallon for the three months ended June 30, 2008 compared to $1.08 per gallon for the three months ended June 30, 2007. Our average realized price for condensate increased by $51.67 per Bbl (net of a $5.88 decrease due to hedging), or 83%, to $114.15 per Bbl for the three months ended June 30, 2008 compared to $62.48 per Bbl for the three months ended June 30, 2007.

Our natural gas sales volumes decreased by 7.3 BBtu/d, or 1%, to 526.6 BBtu/d for the three months ended June 30, 2008 compared to 533.9 BBtu/d for the three months ended June 30, 2007. NGL sales volumes decreased by 10.5 MBbl/d, or 4%, to 285.9 MBbl/d for the three months ended June 30, 2008 compared to 296.4 MBbl/d for the three months ended June 30, 2007. Condensate sales volumes decreased by 0.4 MBbl/d, or 10%, to 3.7 MBbl/d for the three months ended June 30, 2008 compared to 4.1 MBbl/d for the three months ended June 30, 2007. For information regarding the period to period changes in our commodity sales volumes, see “—Results of Operations—By Segment.”

Product purchases increased by $584.8 million, or 41%, to $2,023.1 million for the three months ended June 30, 2008 compared to $1,438.3 million for the three months ended June 30, 2007. See “—Results of Operations—By Segment” for an explanation of the components of the increase.

Operating expenses increased by $8.8 million, or 14%, to $71.2 million for the three months ended June 30, 2008 compared to $62.4 million for the three months ended June 30, 2007. See “Results of Operations—By Segment” for a detailed explanation of the components of the increase.

Depreciation and amortization expense increased by $2.4 million, or 7%, to $38.8 million for the three months ended June 30, 2008 compared to $36.4 million for the three months ended June 30, 2007. The increase is due to the addition of property, plant and equipment.

General and administrative expense increased by $4.2 million, or 18%, to $27.9 million for the three months ended June 30, 2008 compared to $23.7 million for the three months ended June 30, 2007. The increase primarily consisted of increases of $5.4 million in compensation related expenses and $0.4 million in miscellaneous expenses, partially offset by a decrease of $1.6 million in professional services fees.

Interest expense decreased by $10.3 million, or 30%, to $23.7 million for the three months ended June 30, 2008 compared to $34.0 million for the three months ended June 31, 2007. The decrease is primarily from lower outstanding debt during 2008.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Revenues increased by $1,405.8 million, or 46%, to $4,465.6 million for the six months ended June 30, 2008 compared to $3,059.8 million for the six months ended June 30, 2007. Revenues from the sale of natural gas increased by $220.2 million, consisting of a $205.3 million increase due to higher realized prices, and a $14.9 million increase due to higher sales volumes. Revenues from the sale of NGLs increased by $1,127.7 million, consisting of increases of $1,091.1 million due to higher realized prices and $36.6 million due to higher sales volumes. Revenues from the sale of condensate increased by $29.5 million, consisting of an increase of $29.4 million due to higher realized prices and an increase of $0.1 million due to higher sales volumes. Other revenues, which includes business interruption insurance revenue and revenues principally derived from fee-based services, increased by $28.4 million. The increase comprised $11.9 million in higher business interruption insurance revenue and $16.5 million in higher revenues from fee-based services.

Our average realized price for natural gas increased by $2.13 per MMBtu (net of a $0.12 decrease due to hedging) , or 31%, to $9.00 per MMBtu for the six months ended June 30, 2008 compared to $6.87 per MMBtu for the six months ended June 30, 2007. Our average realized price for NGLs increased by $0.48 per gallon (net of a $0.02 decrease due to hedging), or 47%, to $1.50 per gallon for the six months ended June 30, 2008 compared to $1.02 per gallon for the six months ended June 30, 2007. Our average realized price for condensate increased by $43.80 per barrel (net of a $4.81 decrease due to hedging), or 73%, to $103.89 per Bbl for the six months ended June 30, 2008 compared to $60.09 per Bbl for the six months ended June 30, 2007.

Our natural gas sales volumes increased by 9.0 BBtu/d, or 2%, to 529.8 BBtu/d for the six months ended June 30, 2008 compared to 520.8 BBtu/d for the six months ended June 30, 2007. Our NGL sales volumes increased by 3.1 MBbl/d, or 1%, to 301.7 MBbl/d for the six months ended June 30, 2008 compared to 298.6 MBbl/d for the six months ended June 30, 2007. Our condensate sales volumes were flat for the six months ended June 30, 2008 compared to 3.7 MBbl/d for the six months ended June 30, 2007. For information regarding the period to period changes in our commodity sales volumes, see “Results of Operations—By Segment.”

Our product purchases increased by $1,315.9 million, or 49%, to $4,024.5 million for the six months ended June 30, 2008 compared to $2,708.6 million for the six months ended June 30, 2007. The increase is primarily due to higher product purchases and prices in the Natural Gas Gathering and Processing, NGL Distribution and Marketing, and Wholesale Marketing segments.

Our operating expenses increased by $14.5 million, or 12%, to $134.8 million for the six months ended June 30, 2008 compared to $120.3 million for the six months ended June 30, 2007. See “—Results of Operations—By Segment” for a more detailed explanation of the components of the increase.

Depreciation and amortization expense increased by $3.7 million, or 5%, to $76.9 million for the six months ended June 30, 2008 compared to $73.2 million for the six months ended June 30, 2007. The increase is due to the addition of property, plant and equipment.

General and administrative expense increased by $9.6 million, or 23%, to $52.0 million for the six months ended June 30, 2008 compared to $42.4 million for the six months ended June 30, 2007. The increase primarily consisted of increases of $8.2 million in compensation related expenses and $1.6 million in professional services fees, partially offset by a decrease of $0.2 million in miscellaneous expenses.

Interest expense decreased by $28.8 million, or 37%, to $49.2 million for the six months ended June 30, 2008 compared to $78.0 million for the six months ended June 31, 2007. The decrease is primarily from lower outstanding debt during 2008.

Results of Operations—By Segment

Natural Gas Gathering and Processing Segment

The following table provides summary financial data regarding results of operations in our Natural Gas Gathering and Processing segment for the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In millions, except operating and price data)
Operating statistics: (1)
Gathering throughput, MMcf/d		2,072.3			1,999.0			2,128.5			1,987.9
Plant natural gas inlet, MMcf/d		2,020.7			1,954.5			2,081.9			1,946.2
Gross NGL production, MBbl/d		104.8			106.0			104.3			105.1
Natural gas sales, BBtu/d		546.2			552.7			548.2			537.1
NGL sales, MBbl/d		91.5			91.0			90.5			90.1
Condensate sales, MBbl/d		5.0			5.4			5.0			5.1

Natural gas, $/MMBtu
Average realized sales price		10.27			6.95			9.03			6.75
Impact of hedging		(0.13	)		0.11			(0.01	)		0.13

Average realized price		10.14			7.06			9.02			6.88


NGLs, $/gal
Average realized sales price		1.50			1.00			1.41			0.91
Impact of hedging		(0.08	)		(0.01	)		(0.07	)		—

Average realized price		1.42			0.99			1.34			0.91


Condensate, $/Bbl
Average realized sales price		109.99			59.17			98.72			55.52
Impact of hedging		(3.75	)		0.62			(2.58	)		0.96

Average realized price		106.24			59.79			96.14			56.48


Revenues (2)	$	1,059.5		$	730.3		$	1,932.7		$	1,353.1
Product purchases		(908.2	)		(604.7	)		(1,638.6	)		(1,107.3	)
Operating expenses		(34.7	)		(28.6	)		(64.9	)		(57.6	)

Operating margin (3)	$	116.6		$	97.0		$	229.2		$	188.2

Equity in earnings of VESCO (4)	$	6.4		$	2.3		$	8.7		$	3.5

(1)	Segment operating statistics include the effect of intersegment sales, which have been eliminated from the consolidated presentation. For all volume statistics presented, the numerator is the total volume sold during the period and the denominator is the number of calendar days during the period.

(2)	Includes business interruption insurance revenue of $2.6 million for the three and six months ended June 30, 2008, and $0.8 million and $0.9 for the three and six months ended June 30, 2007.

(3)	See “—Non-GAAP Financial Measures.”

(4)	Includes business interruption insurance revenue of $4.1 million for the three and six months ended June 30, 2008, and $2.2 million for the three and six months ended June 30, 2007.

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Revenues increased by $329.2 million, or 45%, to $1,059.5 million for the three months ended June 30, 2008 compared to $730.3 million for the three months ended June 30, 2007. The increase was primarily due to:

•

an increase in realized commodity prices that increased revenues by $328.6 million, consisting of increases in natural gas, NGL and condensate revenues of $153.1 million, $154.2 million and $21.3 million, respectively;

•

a decrease attributable to volumes of $4.6 million, consisting of decreases due to lower natural gas and condensate volumes of $4.2 million and $2.0 million, respectively, offset by an increase due to higher NGL volumes of $1.6 million; and

•

an increase in other revenues of $5.2 million.

Our average realized price for natural gas increased by $3.08 per MMBtu (net of a $0.24 decrease due to hedging), or 44%, to $10.14 per MMBtu for the three months ended June 30, 2008 compared to $7.06 per MMBtu for the three months ended June 30, 2007. Our average realized price for NGL increased by $0.43 per gallon (net of a $0.07 decrease due to hedging), or 43%, to $1.42 per gallon for the three months ended June 30, 2008 compared to $0.99 per gallon for the three months ended June 30, 2007. Our average realized price for condensate increased by $46.45 per Bbl (net of a $4.37 decrease due to hedging), or 78%, to $106.24 per Bbl for the three months ended June 30, 2008 compared to $59.79 per barrel for the three months ended June 30, 2007.

Our natural gas sales volumes decreased by 6.5 BBtu/d, or 1%, to 546.2 BBtu/d for the three months ended June 30, 2008 compared to 552.7 BBtu/d for the three months ended June 30, 2007. Our NGL sales volumes increased by 0.5 MBbl/d, or 1%, to 91.5 MBbl/d for the three months ended June 30, 2008 compared to 91.0 MBbl/d for the three months ended June 30, 2007. Our condensate sales volumes decreased by 0.4 MBbl/d, or 7%, to 5.0 MBbl/d for the three months ended June 30, 2008 compared to 5.4 MBbl/d for the three months ended June 30, 2007.

Product purchases increased by $303.5 million, or 50%, to $908.2 million for the three months ended June 30, 2008 compared to $604.7 million for the three months ended June 30, 2007. The increase was due primarily to higher commodity prices, including higher spot price purchases for industrial sales.

Operating expenses increased $6.1 million, or 21%, to $34.7 million for the three months ended June 30, 2008 compared to $28.6 million for the three months ended June 30, 2007. The increase was primarily from:

•

increased compensation costs of $1.5 million;

•

a $2.0 million increase in costs for chemicals, lube oils and utilities; and

•

increased maintenance expenses of $1.9 million.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Revenues increased by $579.6 million, or 43%, to $1,932.7 million for the six months ended June 30, 2008 compared to $1,353.1 million for the six months ended June 30, 2007. This increase was primarily due to:

•

an increase in realized commodity prices that increased revenues by $548.3 million, consisting of increases in natural gas, NGL and condensate revenues of $213.4 million, $298.9 million and $36.0 million, respectively;

•

an increase attributable to volumes of $23.3 million, consisting of increases due to higher natural gas and NGL volumes of $17.5 million and $6.3 million, respectively; and a decrease of $0.5 million for condensate; and

•

an increase in other revenues of $8.0 million.

Our average realized price for natural gas increased by $2.14 per MMBtu (net of a $0.14 decrease due to hedging), or 31%, to $9.02 per MMBtu for the six months ended June 30, 2008 compared to $6.88 per MMBtu for the six months ended June 30, 2007. Our average realized price for NGLs increased by $0.43 per gallon (net of a $0.07 decrease due to hedging), or 47%, to $1.34 per gallon for the six months ended June 30, 2008 compared to $0.91 per gallon for the six months ended June 30, 2007. Our average realized price for condensate increased by $39.66 per Bbl (net of a $3.54 decrease due to hedging), or 70%, to $96.14 per Bbl for the six months ended June 30, 2008 compared to $56.48 per barrel for the six months ended June 30, 2007.

Our natural gas sales volumes increased by 11.1 BBtu/d, or 2%, to 548.2 BBtu/d for the six months ended June 30, 2008 compared to 537.1 BBtu/d for the six months ended June 30, 2007. Our NGL sales volumes increased by 0.4 MBbl/d, or less than 1%, to 90.5 MBbl/d for the six months ended June 30, 2008 compared to 90.1 MBbl/d for the six months ended June 30, 2007. Our condensate sales volumes decreased by 0.1 MBbl/d, or 2%, to 5.0 MBbl/d for the six months ended June 30, 2008 compared to the $5.1 MBbl/d for the six months ended June 30, 2007.

Product purchases increased by $531.3 million, or 48%, to $1,638.6 million for the six months ended June 30, 2008 compared to $1,107.3 million for the six months ended June 30, 2007. The increase in product purchases for the six months ended June 30, 2008 was due primarily to higher commodity prices, including higher spot price purchases for industrial sales.

Operating expenses increased by $7.3 million, or 13%, to $64.9 million for the six months ended June 30, 2008 compared to $57.6 million for the six months ended June 30, 2007. The increase was primarily from:

•

increased compensation costs of $2.4 million;

•

a $1.9 million increase in costs for chemicals, lube oils and utilities; and

•

increased maintenance expenses of $1.6 million.

Logistics Assets Segment

The following table provides summary financial data regarding results of operations of our Logistics Assets segment for the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In millions, except operating data)
Fractionation volumes, MBbl/d		235.2			226.3			225.6			194.7
Treating volumes, MBbl/d (1)		21.4			2.6			18.2			1.3
Revenues from services	$	64.6		$	49.4		$	115.3		$	91.8
Other revenues (2)		1.1			0.6			1.5			0.9

		65.7			50.0			116.8			92.7
Operating expenses		(54.1	)		(45.1	)		(98.4	)		(76.4	)

Operating margin (3)	$	11.6		$	4.9		$	18.4		$	16.3

Equity in earnings of GCF	$	0.8		$	0.9		$	1.9		$	2.1

(1)	Consists of the volumes treated in our low sulfur natural gasoline unit, which began commercial operations in June 2007.

(2)	Includes business interruption insurance revenue of $0.4 million for the three and six months ended June 30, 2008.

(3)	See “—Non-GAAP Financial Measures.”

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Revenues from services (fractionation, terminalling and storage, transportation and treating) increased by $15.2 million, or 31%, to $64.6 million for the three months ended June 30, 2008 compared to $49.4 million for the three months ended June 30, 2007. The increase was primarily from:

•

higher fractionation rates and volumes;

•

an increase in revenues from our low sulfur natural gasoline (“LSNG”) plant, which commenced commercial operations in June 2007; and

•

an increase in commercial transportation revenues due to increased trucking activity as a result of pipeline allocations.

Operating expenses increased by $9.0 million, or 20%, to $54.1 million for the three months ended June 30, 2008 compared to $45.1 million for the three months ended June 30, 2007. The increase was primarily due to:

•

increased fuel and electricity expense due to higher natural gas prices and higher fractionation volumes;

•

an increase in operating expense at our LSNG plant, which operated for only one month during the three months ended June 30, 2007; and

•

increased commercial transportation expenses primarily due to increased truck activity.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Revenues from services (fractionation, terminalling and storage, transportation and treating) increased by $23.5 million, or 26%, to $115.3 million for the six months ended June 30, 2008 compared to $91.8 million for the six months ended June 30, 2007. The increase was primarily from:

•

higher fractionation rates and volumes; and

•

an increase in revenues from our LSNG plant, which commenced commercial operations in June 2007.

Operating expenses increased by $22.0 million, or 29%, to $98.4 million for the six months ended June 30, 2008 compared to $76.4 million for the six months ended June 30, 2007. The increase was primarily due to:

•

increased fuel and electricity expenses primarily due to higher natural gas prices and higher fractionation volumes;

•

an increase in operating expenses at our LSNG plant, which operated for only one month during the six months ended June 30, 2007;

•

a net decrease in storage cavern emptying gains; and

•

third-party fractionation and operating expenses due to the first quarter 2008 scheduled maintenance at our Cedar Bayou Fractionator.

NGL Distribution and Marketing Services Segment

The following table provides summary financial data regarding results of operations of our NGL Distribution and Marketing Services segment for the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In millions, except operating and price data)
NGL sales, MBbl/d		252.3			257.4			257.3			254.9
NGL realized price, $/gal		1.55			1.06			1.48			0.99
NGL sales revenues	$	1,491.6		$	1,045.2		$	2,910.4		$	1,926.5
Other revenues (1)		9.3			4.4			10.1			5.5

		1,500.9			1,049.6			2,920.5			1,932.0
Product purchases		(1,468.5	)		(1,043.0	)		(2,879.3	)		(1,913.0	)
Operating expenses		(0.5	)		(0.6	)		(1.0	)		(1.3	)

Operating margin (2)	$	31.9		$	6.0		$	40.2		$	17.7

(1)	Includes business interruption insurance revenue of $8.6 million and $3.7 million for the three months ended June 30, 2008 and 2007, and $8.6 million and $3.9 million for the six months ended June 30, 2008 and 2007.

(2)	See “—Non-GAAP Financial Measures.”

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Our NGL sales revenues increased by $446.4 million, or 43%, to $1,491.6 million for the three months ended June 30, 2008 compared to $1,045.2 million for the three months ended June 30, 2007. The increase comprised a $467.0 million increase from higher average sales prices, partially offset by a $20.6 million decrease from lower sales volumes.

Other revenues, which consists primarily of business interruption insurance revenue, increased by $4.9 million.

Product purchases increased by $425.5 million, or 41%, to $1,468.5 for the three months ended June 30, 2008 compared to $1,043.0 million for the three months ended June 30, 2007. The increase consisted of a $446.1 million increase due to higher commodity prices, partially offset by a $20.6 million decrease from lower purchased volumes.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Our NGL sales revenues increased by $983.9 million, or 51%, to $2,910.4 million for the six months ended June 30, 2008 compared to $1,926.5 million for the six months ended June 30, 2007. The increase comprised a $955.0 million increase from higher average sales prices and a $28.9 million increase from higher sales volumes.

Other revenues, which consists primarily of business interruption insurance revenue, increased by $4.6 million.

Product purchases increased by $966.3 million, or 51%, to $2,879.3 million for the six months ended June 30, 2008 compared to $1,913.0 million for the six months ended June 30, 2007. The increase comprised a $937.6 million increase due to higher commodity prices and a $28.7 million increase from higher purchased volumes.

Wholesale Marketing Segment

The following table provides summary financial data regarding results of operations of our Wholesale Marketing segment for the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In millions, except operating and price data)
NGL sales, MBbl/d		46.5			47.4			66.7			63.8
NGL realized price, $/gal		1.75			1.19			1.68			1.15

NGL sales revenues	$	311.4		$	215.9		$	854.7		$	557.8
Other revenues (1)		5.9			0.9			6.0			1.1

		317.3			216.8			860.7			558.9
Product purchases		(308.5	)		(214.6	)		(842.2	)		(550.2	)
Operating expenses		—			—			—			—

Operating margin (2)	$	8.8		$	2.2		$	18.5		$	8.7

(1)	Includes business interruption insurance revenue of $5.9 million and $0.7 million for the three months ended June 30, 2008 and 2007, and $5.9 million and $0.8 million for the six months ended June 30, 2008 and 2007.

(2)	See “—Non-GAAP Financial Measures.”

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

NGL sales revenue increased by $95.5 million, or 44%, to $311.4 million for the three months ended June 30, 2008 compared to $215.9 million for the three months ended June 30, 2007. The increase comprised a $99.3 million increase due to higher average sales prices, partially offset by a $3.8 million decrease due to lower sales volumes. The decrease in sales volumes was primarily attributable to a contract expiration and a supply disruption to a customer’s refinery.

Other revenues, which consisted primarily of business interruption insurance revenue, increased by $5.0 million.

Product purchases increased by $93.9 million, or 44%, to $308.5 million for the three months ended June 30, 2008 compared to $214.6 million for the three months ended June 30, 2007. The increase comprised a $97.6 million increase due to higher average commodity prices, partially offset by a $3.7 million decrease due to lower purchased volumes.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

NGL sales revenues increased by $296.9 million, or 53%, to $854.7 million for the six months ended June 30, 2008 compared to $557.8 million for the six months ended June 30, 2007. Higher average sales prices and volumes increased revenue by $268.5 million and $28.4 million, respectively.

Other revenues, which consisted primarily of business interruption insurance revenue, increased by $4.9 million.

Product purchases increased by $292.0 million, or 53%, to $842.2 million for the three months ended June 30, 2008 compared to $550.2 million for the three months ended June 30, 2007. The increase consisted of a $264.0 million increase due to higher average commodity prices and a $28.0 million increase from higher purchased volumes.

Hurricane Update

Certain of our Louisiana and Texas facilities sustained damage during the 2005 hurricane season from two Gulf Coast hurricanes—Katrina and Rita. All repairs at our plant facilities have been completed, other than at VESCO, which will be completed in the third quarter of 2008.

We have submitted all business interruption claims for our losses caused by the hurricanes, and continue to work through the adjustment process to bring these claims to a final resolution. We recognize income from business interruption insurance claims in our consolidated statements of operations and comprehensive income in the period that a proof of loss is executed and submitted to the insurers for payment. This income recognition criterion has resulted in and will likely continue to result in business interruption insurance recoveries being recorded in periods subsequent to the periods that we experience lost income from the affected property, resulting in fluctuations in our net income that may reduce the comparability of reported quarterly and annual results for some periods into the future.

During 2008, we received $47.9 million and $21.6 million related to property damage and business interruption insurance claims, respectively, most of which was in connection with the final resolution of our claims related to Katrina under the onshore property insurance program.

Liquidity and Capital Resources

Our ability to finance our operations, including funding capital expenditures and acquisitions, to meet our indebtedness obligations, to refinance our indebtedness or to meet our collateral requirements will depend on our ability to generate cash in the future. Our ability to generate cash is subject to a number of factors, some of which are beyond our control, including weather, commodity prices, particularly for natural gas and NGLs, and our ongoing efforts to manage operating costs and maintenance capital expenditures, as well as general economic, financial, competitive, legislative, regulatory and other factors. See “Item 1A. Risk Factors” in this Quarterly Report and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Historically, our cash generated from operations has been sufficient to finance our operating expenditures and non-acquisition related capital expenditures. Based on our anticipated levels of operations and absent any disruptive events, we believe that internally generated cash flow and borrowings available under our senior secured credit facilities should provide sufficient resources to finance our operations, non-acquisition related capital expenditures, hurricane-related repair expenditures, long-term indebtedness obligations and collateral requirements for at least the next year.

A significant portion of our capital resources are utilized in the form of cash and letters of credit to satisfy counterparty collateral demands. These counterparty collateral demands reflect our non-investment grade status and counterparties’ views of our financial condition and ability to satisfy our performance obligations, as well as commodity prices and other factors. As of June 30, 2008, total outstanding letter of credit postings by us and the Partnership were $261.7 million and $41.3 million, respectively.

Our derivative contracts do not have margin requirements or collateral provisions that could require posting of margin prior to the scheduled cash settlement date. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2007.

Contractual Obligations. In June 2008, the Partnership issued $250 million aggregate principal amount of senior unsecured notes. The proceeds from the offering were used to reduce outstanding indebtedness under the Partnership’s senior secured credit facility. The interest rate on the senior unsecured notes is fixed at 8.25% with interest to be paid on January 1 and July 1 of each year and the senior unsecured notes mature on July 1, 2016.

Available Credit. As of June 30, 2008, we had $250.0 million in availability under our senior secured revolving credit facility and $38.3 million in availability under our senior secured synthetic letter of credit facility. In addition, the Partnership had $483.7 million in availability under its senior secured credit facility, after giving effect to outstanding borrowings of $325.0 million, and the issuance of $41.3 million of letters of credit.

Capital Requirements. The midstream energy business can be capital intensive, requiring significant investment to maintain and upgrade existing operations. A significant portion of the cost of constructing new gathering lines to connect to our gathering system is generally paid for by the natural gas producer. However, we expect to continue to incur significant expenditures throughout 2008 related to the expansion of our natural gas gathering and processing infrastructure.

We estimate that our total capital expenditures for 2008 will be approximately $184 million. Given our objective of growth through acquisitions, expansions of existing assets and other internal growth projects, we anticipate that we will invest significant amounts of capital to grow and acquire assets. Expansion capital expenditures may vary significantly based on investment opportunities.

We expect to fund future capital expenditures with funds generated from our operations, borrowings under our senior secured credit facility, the issuance of additional units by the Partnership and debt offerings.

Cash Flow

Net cash provided by or used in operating activities, investing activities and financing activities for the periods presented were as follows:


	Six Months Ended June 30,
	2008			2007
	(In millions)
Net cash provided by (used in):
Operating activities	$	331.9		$	134.3
Investing activities		(25.7	)		(58.6	)
Financing activities		(117.9	)		(38.4	)

Operating Activities. Net cash provided by operating activities was $331.9 million for the six months ended June 30, 2008 compared to $134.3 million for the six months ended June 30, 2007. Changes in operating assets and liabilities provided $165.4 million in cash during the six months ended June 30, 2008, compared to providing $36.4 million in cash during the six months ended June 30, 2007. The increase is primarily from cash receipts related to property damage insurance claims and the timing of accounts receivable collections.

Investing Activities. Net cash used in investing activities was $25.7 million for the six months ended June 30, 2008 compared to $58.6 million for the six months ended June 30, 2007. The $32.9 million decrease was primarily due to the timing of property damage insurance receipts, which were $48.3 million and $12.5 million during the six months ended June 30, 2008 and 2007, respectively.

Financing Activities. Net cash used in financing activities was $117.9 million for the six months ended June 30, 2008 compared to $38.4 million for the six months ended June 30, 2007. During the six months ended June 30, 2008, we distributed $53.8 million in cash to Targa Investments. In addition, the Partnership reduced its outstanding indebtedness by $51.3 million.

Non-GAAP Financial Measures

For a complete discussion of the measures that management uses to evaluate our operations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Evaluate our Operations” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Our operating margin by segment and in total is as follows for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
	(In millions)
Natural Gas Gathering and Processing	$	116.6	$	97.0	$	229.2	$	188.2
Logistics Assets		11.6		4.9		18.4		16.3
NGL Distribution and Marketing Services		31.9		6.0		40.2		17.7
Wholesale Marketing		8.8		2.2		18.5		8.7

	$	168.9	$	110.1	$	306.3	$	230.9

The following tables reconcile the non-GAAP financial measures used by management to their most directly comparable GAAP measures for the periods indicated:


	Three Months Ended June 30,					Six Months Ended June 30,
	2008		2007			2008		2007
	(In millions)
Reconciliation of Operating Margin to net income:
Net income	$	46.2	$	13.5		$	64.6	$	23.0
Add:
Depreciation and amortization expense		38.8		36.4			76.9		73.2
Income tax expense (benefit)		27.9		(4.0	)		39.8		3.2
Other, net		4.4		6.5			23.8		11.1
Interest expense, net		23.7		34.0			49.2		78.0
General and administrative		27.9		23.7			52.0		42.4

Operating Margin	$	168.9	$	110.1		$	306.3	$	230.9


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(In millions)
Reconciliation of Adjusted EBITDA to net cash provided by operating activities:
Net cash provided by operating activities	$	109.9		$	13.3		$	331.9		$	134.3
Interest expense, net (excluding amortization)		21.6			32.2			45.1			69.0
Current income tax expense		0.3			0.7			1.2			0.7
Changes in operating working capital which used (provided) cash:
Accounts receivable and other assets		108.9			57.7			(100.8	)		15.6
Inventory		27.5			18.5			(35.6	)		(34.7	)
Accounts payable and other liabilities		(150.1	)		(45.9	)		(28.9	)		(17.3	)
Other, net		19.5			(0.2	)		16.4			(0.5	)

Adjusted EBITDA	$	137.6		$	76.3		$	229.3		$	167.1

Reconciliation of Adjusted EBITDA to net income:
Net income	$	46.2		$	13.5		$	64.6		$	23.0
Add:
Interest expense, net		23.7			34.0			49.2			78.0
Income tax expense (benefit)		27.9			(4.0	)		39.8			3.2
Depreciation and amortization		38.8			36.4			76.9			73.2
Non-cash loss (gain) related to derivative instruments		1.0			(3.6	)		(1.2	)		(10.3	)

Adjusted EBITDA	$	137.6		$	76.3		$	229.3		$	167.1

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

For an in-depth discussion of market risks, see “Item 7A. Quantitative and Qualitative Disclosure about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Our principal market risks are our exposure to changes in commodity prices, particularly to the prices of natural gas and NGLs, changes in interest rates, as well as nonperformance by our customers. We do not use risk sensitive instruments for trading purposes.

Commodity Price Risk

A significant portion of our revenues is derived from percent-of-proceeds contracts under which we receive either an agreed upon percentage of the actual proceeds that we receive from our sales of the residue natural gas and NGLs or an agreed upon percentage based on index related prices for the natural gas and NGLs. The prices of natural gas and NGLs are subject to fluctuations in response to changes in supply, demand, market uncertainty and a variety of additional factors beyond our control. We monitor these risks and enter into hedging transactions designed to mitigate the impact of commodity price fluctuations on our business. Cash flows from a derivative instrument designated as a hedge are classified in the same category as the cash flows from the item being hedged. For an in-depth discussion of our hedging strategies, see Item “7A. Quantitative and Qualitative Disclosure about Market Risk—Commodity Price Risk” in our Annual Report on Form 10-K for the year ended December 31, 2007.

Our payment obligations in connection with substantially all of these hedging transactions, and any additional credit exposure due to a rise in natural gas and NGL prices relative to the fixed prices set forth in the hedges, are secured by a first priority lien in the collateral securing our senior secured indebtedness that ranks equal in right of payment with liens granted in favor of our senior secured lenders. As long as this first priority lien is in effect, we expect to have no obligation to post cash, letters of credit or other additional collateral to secure these hedges at any time even if our counterparty’s exposure to our credit increases over the term of the hedge as a result of higher commodity prices or because there has been a change in our creditworthiness. A purchased put (or floor) transaction does not create credit exposure to us for our counterparties.

For the three and six months ended June 30, 2008, our hedging activities decreased operating revenues by $36.4 million and $52.4 million, respectively. For the same periods in 2007, our hedging activities increased operating revenues by $0.8 million and $14.0 million.

Natural Gas


Instrument Type	Index	Avg. Price $/MMBtu	MMBtu per day					(In thousands) Fair Value
Instrument Type	Index	Avg. Price $/MMBtu	2008	2009	2010	2011	2012	(In thousands) Fair Value
*Natural Gas Sales*
Swap	IF-Waha	6.96	21,918	—	—	—	—	$	(20,100	)
Swap	IF-Waha	6.62	—	21,918	—	—	—		(37,156	)
Swap	IF-Waha	7.40	—	—	9,300	—	—		(9,204	)
Swap	IF-Waha	7.36	—	—	—	5,500	—		(4,715	)
Swap	IF-Waha	7.18	—	—	—	—	5,500		(4,949	)

			21,918	21,918	9,300	5,500	5,500	$	(76,124	)

NGLs


Instrument Type	Index	Avg. Price $/gal	Barrels per day					(In thousands) Fair Value
Instrument Type	Index	Avg. Price $/gal	2008	2009	2010	2011	2012	(In thousands) Fair Value
*NGL Sales*
Swap	OPIS-MB	0.81	3,547	—	—	—	—	$	(26,986	)
Swap	OPIS-MB	0.79	—	3,347	—	—	—		(38,682	)
Swap	OPIS-MB	0.87	—	—	2,750	—	—		(22,625	)
Swap	OPIS-MB	0.91	—	—	—	1,550	—		(11,395	)
Swap	OPIS-MB	0.92	—	—	—	—	1,250		(8,555	)

Total Swaps			3,547	3,347	2,750	1,550	1,250		(108,243	)


Floors	OPIS-MB	1.76	—	—	—	107	—		213
Floors	OPIS-MB	1.75	—	—	—	—	125		289

Total Floors			—	—	—	107	125		502

								$	(107,741	)

Natural Gas


	Index	Avg. Price $/MMBtu	MMBtu per day					(In thousands) Fair Value
Instrument Type	Index	Avg. Price $/MMBtu	2008	2009	2010	2011	2012	(In thousands) Fair Value
*Natural Gas Purchases*
Swap	NY-HH	8.43	1,350	—	—	—	—	$	1,258

			1,350	—	—	—	—		1,258

*Natural Gas Sales*
Swap	IF-HSC	8.09	2,328	—	—	—	—		(2,143	)
Swap	IF-HSC	7.39	—	1,966	—	—	—		(3,236	)

			2,328	1,966	—	—	—		(5,379	)

Swap	IF-NGPL MC	8.43	6,964	—	—	—	—		(4,088	)
Swap	IF-NGPL MC	8.02	—	6,256	—	—	—		(7,016	)
Swap	IF-NGPL MC	7.43	—	—	5,685	—	—		(5,536	)
Swap	IF-NGPL MC	7.34	—	—	—	2,750	—		(2,316	)
Swap	IF-NGPL MC	7.18	—	—	—	—	2,750		(2,310	)

			6,964	6,256	5,685	2,750	2,750		(21,265	)

Swap	IF-Waha	8.20	7,389	—	—	—	—		(5,101	)
Swap	IF-Waha	7.61	—	6,936	—	—	—		(9,380	)
Swap	IF-Waha	7.38	—	—	5,709	—	—		(5,699	)
Swap	IF-Waha	7.36	—	—	—	3,250	—		(2,786	)
Swap	IF-Waha	7.18	—	—	—	—	3,250		(2,924	)

			7,389	6,936	5,709	3,250	3,250		(25,890	)

Total Swaps			16,681	15,158	11,394	6,000	6,000		(51,276	)

Floor	IF-NGPL MC	6.55	1,000	—	—	—	—		1
Floor	IF-NGPL MC	6.55	—	850	—	—	—		29

			1,000	850	—	—	—		30

Floor	IF-Waha	6.85	670	—	—	—	—		1
Floor	IF-Waha	6.55	—	565	—	—	—		17

			670	565	—	—	—		18

Total Floors			1,670	1,415	—	—	—		48

								$	(51,227	)

NGLs


Instrument Type	Index	Avg. Price $/gal	Barrels per day					(in thousands) Fair Value
Instrument Type	Index	Avg. Price $/gal	2008	2009	2010	2011	2012	(in thousands) Fair Value

*NGL Sales*
Swap	OPIS-MB	1.01	7,095	—	—	—	—	$	(45,341	)
Swap	OPIS-MB	0.96	—	6,248	—	—	—		(62,001	)
Swap	OPIS-MB	0.91	—	—	4,809	—	—		(40,124	)
Swap	OPIS-MB	0.92	—	—	—	3,400	—		(26,650	)
Swap	OPIS-MB	0.92	—	—	—	—	2,700		(19,612	)

Total Swaps			7,095	6,248	4,809	3,400	2,700		(193,728	)

Floors	OPIS-MB	1.73	—	—	—	365	—		860
Floors	OPIS-MB	1.72	—	—	—	—	422		957

Total Floors			—	—	—	365	422		1,817

								$	(191,911	)

Condensate


Instrument Type	Index	Avg. Price $/Bbl	Barrels per day					(in thousands) Fair Value
Instrument Type	Index	Avg. Price $/Bbl	2008	2009	2010	2011	2012	(in thousands) Fair Value

*Condensate Sales*
Swap	NY-WTI	67.19	384	—	—	—	—	$	(4,922	)
Swap	NY-WTI	69.00	—	322	—	—	—		(7,937	)
Swap	NY-WTI	68.10	—	—	301	—	—		(6,821	)

Total Swaps			384	322	301	—	—		(19,680	)

Floor	NY-WTI	60.50	55	—	—	—	—		0
Floor	NY-WTI	60.00	—	50	—	—	—		3

Total Floors			55	50	—	—	—		3

								$	(19,677	)

These contracts may expose us to the risk of financial loss in certain circumstances. Our hedging arrangements provide us protection on the hedged volumes if prices decline below the prices at which these hedges are set. If prices rise above the prices at which we have hedged, we will receive less revenue on the hedged volumes than we would receive in the absence of hedges.

Interest Rate Risk

We are exposed to changes in interest rates primarily as a result of variable rate debt under our senior secured credit facilities. To the extent that interest rates increase, interest expense on our revolving debt will also increase. As of June 30, 2008, we had approximately $1,353 million of indebtedness, of which $500 million was at fixed interest rates and $853 million was at variable interest rates. Because of the interest rate risk, the Partnership had the following open interest rate swaps as of June 30, 2008:


Effective Date	Expiration Date	Rate		Notional Amount
				(In thousands)
12/13/2007	01/24/2011	4.0775	%	$	50,000
12/18/2007	01/24/2011	4.2100	%		50,000
12/21/2007	01/24/2012	4.0750	%		50,000
12/21/2007	01/24/2012	4.0750	%		50,000
01/09/2008	01/24/2012	3.6990	%		50,000
01/11/2008	01/24/2012	3.6400	%		50,000

Each swap fixes the three month LIBOR rate, as indicated for the specified notional amounts outstanding over the term of each swap agreement. The fair value of the Partnership’s outstanding interest rate swaps was a liability of $0.9 million as of June 30, 2008. We have designated all interest rate swaps as cash flow hedges. Accordingly, unrealized gains and losses relating to the interest rate swaps are recorded in OCI until the interest expense on the related debt is recognized in earnings. A hypothetical increase of 100 basis points in the underlying interest rate, after taking into account these interest rate swaps, would increase our annual interest expense by $5.5 million.

Credit Risk

We are subject to risk of losses resulting from nonpayment or nonperformance by our customers. We monitor the creditworthiness of customers to whom we grant credit and establish credit limits in accordance with our credit policy. On July 18, 2008, SemGroup LP filed for bankruptcy protection. As of June 30, 2008, we recognized a reserve of $4.6 million for product delivered and subject to the bankruptcy. During the third quarter, we will record an additional reserve of $2.4 million for product delivered subsequent to June 30, 2008.

Item 4T.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective at a reasonable assurance level to provide reasonable assurance that all material information relating to us required to be included in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There has been no change in our internal control over financial reporting during the three and six months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

The information required for this item is provided in Note 12, Commitments and Contingencies included in the notes to the consolidated financial statements included under Part I, Item 1, which is incorporated by reference into this item.

Item 1A.

Risk Factors

For an in-depth discussion of our risk factors, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to the risk factors included therein.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits


Exhibit Number		Description
3.1	—	Amended and Restated Certificate of Incorporation of Targa Resources, Inc. (incorporated by reference to Exhibit 3.1 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.2	—	Amended and Restated Bylaws of Targa Resources, Inc. (incorporated by reference to Exhibit 3.2 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.3	—	Certificate of Incorporation of Targa Resources Finance Corporation (incorporated by reference to Exhibit 3.3 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.4	—	Certificate of Amendment of the Certificate of Incorporation of Targa Resources Finance Corporation (incorporated by reference to Exhibit 3.4 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.5	—	Bylaws of Targa Resources Finance Corporation (incorporated by reference to Exhibit 3.5 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

4.1*	—	Indenture dated June 18, 2008, among Targa Resources Partners LP, Targa Resources Partners Finance Corporation, the Guarantors named therein and U.S. Bank National Association.


Exhibit Number		Description
4.2*	—	Registration Rights Agreement dated June 18, 2008, among Targa Resources Partners LP, Targa Resources Partners Finance Corporation, the Guarantors named therein and the initial purchasers named therein.

10.1*	—	Commitment Increase Supplement, dated June 18, 2008, by and among Targa Resources Partners LP, Bank of America, N.A. and the other parties signatory thereto.

31.1*	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	—	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*	—	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				Targa Resources, Inc. (Registrant)

				By:		/s/ JOHN ROBERT SPARGER
						John Robert Sparger
						Senior Vice President and Chief Accounting Officer
						(Authorized signatory and Principal Accounting Officer)

Date: August 11, 2008

Exhibit Index


Exhibit Number		Description
3.1	—	Amended and Restated Certificate of Incorporation of Targa Resources, Inc. (incorporated by reference to Exhibit 3.1 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.2	—	Amended and Restated Bylaws of Targa Resources, Inc. (incorporated by reference to Exhibit 3.2 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.3	—	Certificate of Incorporation of Targa Resources Finance Corporation (incorporated by reference to Exhibit 3.3 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.4	—	Certificate of Amendment of the Certificate of Incorporation of Targa Resources Finance Corporation (incorporated by reference to Exhibit 3.4 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

3.5	—	Bylaws of Targa Resources Finance Corporation (incorporated by reference to Exhibit 3.5 to Targa Resources, Inc.’s Registration Statement on Form S-4 filed October 31, 2007 (File No. 333-147066)).

4.1*	—	Indenture dated June 18, 2008, among Targa Resources Partners LP, Targa Resources Partners Finance Corporation, the Guarantors named therein and U.S. Bank National Association.

4.2*	—	Registration Rights Agreement dated June 18, 2008, among Targa Resources Partners LP, Targa Resources Partners Finance Corporation, the Guarantors named therein and the initial purchasers named therein.

10.1*	—	Commitment Increase Supplement, dated June 18, 2008, by and among Targa Resources Partners LP, Bank of America, N.A. and the other parties signatory thereto.

31.1*	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	—	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*	—	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith


	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	GCF		VESCO		GCF		VESCO		GCF		VESCO		GCF		VESCO
	(In thousands)
Revenues	$	16,193	$	58,868	$	13,537	$	38,141	$	28,963	$	111,254	$	24,791	$	72,950
Cost of sales and operations		13,558		27,938		11,840		37,005		23,272		76,243		20,064		69,699
Income from operations		2,635		9,403		1,697		1,136		5,691		13,484		4,727		3,251
Net income		2,701		9,497		1,822		1,136		5,855		13,711		4,979		3,251


	As of June 30, 2008				As of December 31, 2007
	GCF		VESCO		GCF		VESCO
	(In thousands)
Current assets	$	17,061	$	47,503	$	15,497	$	54,311
Property, plant and equipment, net		48,287		190,393		50,034		139,893
Other assets		—		1,543		—		328

Total assets	$	65,348	$	239,439	$	65,531	$	194,532

Current liabilities	$	5,152	$	42,883	$	4,189	$	25,533
Long-term liabilities		—		22,652		—		8,805
Owners’ equity		60,196		173,904		61,342		160,194

Total liabilities and owners’ equity	$	65,348	$	239,439	$	65,531	$	194,532


	June 30, 2008			December 31, 2007
	(In thousands)
Long-term debt:
Obligations of Targa:
Senior secured term loan facility, variable rate, due October 2012	$	528,425		$	534,675
Senior unsecured notes, 8¹/2% fixed rate, due November 2013		250,000			250,000
Senior secured revolving credit facility, variable rate, due October 2011 (1)		—			—
Obligations of the Partnership (2)
Senior secured revolving credit facility, variable rate, due February 2012 (3)		325,000			626,300
Senior unsecured notes, 8¹/4% fixed rate, due July 2016		250,000			—

Total debt		1,353,425			1,410,975
Current maturities of debt		(12,500	)		(12,500	)

Long-term debt	$	1,340,925		$	1,398,475

Irrevocable standby letters of credit:
Letters of credit outstanding under synthetic letter of credit facility (4)	$	261,685		$	272,409
Letters of credit outstanding under senior secured revolving credit facility of the Partnership		41,250			25,900

	$	302,935		$	298,309


	Range of interest rates paid	Weighted average interest rate paid
Senior secured term loan facility	4.6% to 6.9%	6.5	%
Senior secured revolving credit facility of the Partnership	3.9% to 6.4%	5.0	%


Year	Percentage
2012	104.125	%
2013	102.063	%
2014 and thereafter	100.000	%


	Six Months Ended June 30, 2008
	(In thousands)
Beginning of period	$	12,608
Change in cash flow estimate (1)		2,732
Accretion expense		629
Liabilities settled		(229	)

End of period	$	15,740


	Index	Avg. Price $/gal	Barrels per day					(In thousands) Fair Value
Instrument Type	Index	Avg. Price $/gal	2008	2009	2010	2011	2012	(In thousands) Fair Value
*NGL Sales*
Swap	OPIS-MB	1.01	7,095	—	—	—	—	$	(45,341	)
Swap	OPIS-MB	0.96	—	6,248	—	—	—		(62,001	)
Swap	OPIS-MB	0.91	—	—	4,809	—	—		(40,124	)
Swap	OPIS-MB	0.92	—	—	—	3,400	—		(26,650	)
Swap	OPIS-MB	0.92	—	—	—	—	2,700		(19,612	)

Total Swaps			7,095	6,248	4,809	3,400	2,700		(193,728	)

Floors	OPIS-MB	1.73	—	—	—	365	—		860
Floors	OPIS-MB	1.72	—	—	—	—	422		957

Total Floors			—	—	—	365	422		1,817

								$	(191,911	)


	Index	Avg. Price $/Bbl	Barrels per day					(In thousands) Fair Value
Instrument Type	Index	Avg. Price $/Bbl	2008	2009	2010	2011	2012	(In thousands) Fair Value
*Condensate Sales*
Swap	NY-WTI	67.19	384	—	—	—	—	$	(4,922	)
Swap	NY-WTI	69.00	—	322	—	—	—		(7,937	)
Swap	NY-WTI	68.10	—	—	301	—	—		(6,821	)

Total Swaps			384	322	301	—	—		(19,680	)

Floor	NY-WTI	60.50	55	—	—	—	—		0
Floor	NY-WTI	60.00	—	50	—	—	—		3

Total Floors			55	50	—	—	—		3

								$	(19,677	)