**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

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**Form 10-K**

**FOR ANNUAL ANDTRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

**(Mark One)**
| x                                                                                                                                                                                                                                          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                 |
| **For the fiscal year ended December 31, 2006**                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                 |
| **or**                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                       | ** **                                                                                    |
| o                                                                                                                                                                                                                                          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                 |
| **For the transition period from                 to                ** |

 

| Commission file  nos.: |   | **001-15843** |
|------------------------|--------|---------------|
|                   |   | **333-48279** |

 

**Universal Compression Holdings, Inc.Universal Compression, Inc.**

(Exact name of Registrants as Specified in TheirCharters)

| **Delaware**                                                      |   | **13-3989167**                         |
|-------------------------------------------------------------------|--------|----------------------------------------|
| **Texas**                                                         |   | **74-1282680**                         |
| (States or Other  Jurisdictions of Incorporation or Organization) |   | (I.R.S. Employer  Identification Nos.) |
|                                                              |   |                                   |
| **4444  Brittmoore Road, Houston, Texas**                         |   | **77041-8004**                         |
| (Address of  Principal Executive Offices)                         |   | (Zip Code)                             |

 

**(713) 335-7000**

(Registrants’ telephone number, including area code)

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Securities of Universal Compression Holdings, Inc.Registered Pursuant to Section 12(b) of the Act:

| Title of Each Class           | ** ** | **Name of Each Exchange on Which Registered** |
|-------------------------------|------------|-----------------------------------------------|
| Common Stock,  $.01 par value |       | New York Stock  Exchange, Inc                 |

 

Securities of Universal Compression Holdings, Inc.Registered Pursuant to Section 12(g) of the Act:

| Title of Each Class | ** ** | ** ** |
|---------------------|------------|------------|
| None                |       |       |

 

Securities of Universal Compression, Inc. RegisteredPursuant to Section 12(b) of the Act:

| Title of Each Class | ** ** | **Name of Each Exchange on Which Registered** |
|---------------------|------------|-----------------------------------------------|
| None                |       | N/A                                           |

 

Securities of Universal Compression, Inc. RegisteredPursuant to Section 12(g) of the Act:

| Title of Each Class | ** ** | ** ** |
|---------------------|------------|------------|
| None                |       |       |

 

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UNIVERSAL COMPRESSION, INC. MEETS THE CONDITIONS SETFORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFOREFILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.

Indicate by check mark if theregistrant is a well-known seasoned issuer (as defined in Rule 405 of theSecurities Act).

Yes x  No o  (Universal Compression Holdings, Inc.)

Yes o  No x  (Universal Compression, Inc.)

Indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15 (d) of the Securities ExchangeAct.

Yes o  No x  (Universal Compression Holdings,Inc.)

Yes o  No x  (Universal Compression, Inc.)

Indicate by check mark whethereach of the registrants (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrants were required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of each of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check mark whetherthe registrants are large accelerated filers, accelerated filers, ornon-accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer x  Accelerated filer o Non-accelerated filer o  (Universal Compression Holdings, Inc.)

Large accelerated filer o Accelerated filer o Non-accelerated filer x  (Universal Compression, Inc.)

Indicate by check mark whetherthe registrants are a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o  No x

The aggregate market value of theCommon Stock of Universal Compression Holdings, Inc. held by non-affiliates asof June 30, 2006, the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately $1.9 billion. For purposes ofthe above statements only, all directors, executive officers and 10%stockholders are assumed to be affiliates. This calculation does not reflect adetermination that such persons are affiliates for any other purpose.

The number of shares of theCommon Stock of Universal Compression Holdings, Inc. outstanding as of February23, 2007: 30,133,882 shares. All 4,910 outstanding shares of common stock ofUniversal Compression, Inc., par value $10.00 per share, are owned by UniversalCompression Holdings, Inc.

**DocumentsIncorporated by Reference**

Portions of Universal CompressionHoldings, Inc.’s Proxy Statement for the 2007 Annual Meeting of Stockholdersare incorporated by reference into Part III, as indicated herein.

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The Index to Exhibits is on page 47.

 

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**Table ofContents**
|               | ** **                                                                                                              | **Page** |
|---------------|-------------------------------------------------------------------------------------------------------------------------|----------|
| **Part  I**   |                                                                                                                    |     |
| Item 1.  | Business                                                                                                                | 2        |
| Item 1A.      | Risk Factors                                                                                                            | 13       |
| Item  1B.     | Unresolved  Staff Comments                                                                                              | 18       |
| Item 2.  | Properties                                                                                                              | 19       |
| Item 3.  | Legal  Proceedings                                                                                                      | 19       |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                                                    | 19       |
| ** **    |                                                                                                                    |     |
| **Part II**   |                                                                                                                    |     |
| Item 5.  | Market for  the Registrants’ Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 20       |
| Item 6.  | Selected Financial  Data                                                                                                | 22       |
| Item 7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 29       |
| Item 7A. | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 43       |
| Item 8.  | Financial  Statements and Supplementary Data                                                                            | 44       |
| Item 9.  | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                                   | 44       |
| Item 9A. | Controls and  Procedures                                                                                                | 44       |
| Item 9B. | Other Information                                                                                                       | 44       |
| ** **    |                                                                                                                    |     |
| **Part III**  |                                                                                                                    |     |
| Item 10. | Directors,  Executive Officers and Corporate Governance                                                                 | 46       |
| Item 11. | Executive  Compensation                                                                                                 | 46       |
| Item 12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | 46       |
| Item 13. | Certain  Relationships and Related Transactions, and Director Independence                                              | 46       |
| Item 14. | Principal  Accountant Fees and Services                                                                                 | 46       |
| ** **    |                                                                                                                    |     |
| **Part IV**   |                                                                                                                    |     |
| Item 15. | Exhibits and  Financial Statement Schedules                                                                             | 47       |
|          | Signatures                                                                                                              | II-I     |

 

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**PART I**

The terms “our,” “Company,” “we”and “us” when used in this report refer to Universal CompressionHoldings, Inc. (“Holdings”) and Universal Compression, Inc. (“Universal”)and their subsidiaries, except where otherwise indicated.

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

This report contains “forward-lookingstatements” intended to qualify for the safe harbors from liability establishedby the Private Securities Litigation Reform Act of 1995 and Section 21E ofthe Securities Exchange Act of 1934, as amended. All statements other thanstatements of historical fact contained in this report are forward-lookingstatements, including, without limitation, statements regarding futurefinancial position, business strategy, proposed acquisitions, budgets,litigation, projected costs and plans and objectives of management for futureoperations. You can identify many of these statements by looking for words suchas “believes,” “expects,” “will,” “intends,” “projects,” “anticipates,” “estimates,”“continues” or similar words or the negative thereof.

Such forward-looking statementsin this report include, without limitation:

·                  our business growth strategy and projectedcosts;

·                  our future financial position;

·                  the sufficiency of available cash flows tofund continuing operations;

·                  the expected timing and amount of our capitalexpenditures;

·                  anticipated cost savings, future revenue,gross margin, EBITDA, as adjusted, and other financial or operational measuresrelated to our business and our primary business segments;

·                  thefuture value of our equipment;

·                  plansand objectives of our management for our future operations; and

·                  the ability to successfully complete ouranticipated merger with Hanover Compressor Company (“Hanover”).

Suchforward-looking statements are subject to various risks and uncertainties thatcould cause actual results to differ materially from those anticipated as ofthe date of this report.  Although webelieve that the expectations reflected in these forward-looking statements arebased on reasonable assumptions, no assurance can be given that theseexpectations will prove to be correct. Important factors that could cause ouractual results to differ materially from the expectations reflected in theseforward-looking statements include, among other things, those set forth in PartI, Item 1A (“Risk Factors”) and Part II, Item 7 (“Management’s Discussion andAnalysis of Financial Condition and Results of Operations”) of this report andthose set forth time to time in our filings with the Securities and ExchangeCommission (“SEC”), which are available through our website at *www.universalcompression.com*and throughthe SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at *www.sec.gov*.

All forward-looking statementsincluded in this report are based on information available to us on the date ofthis report. We undertake no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise. All subsequent written and oral forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by the cautionary statements contained throughout this report.

**ITEM 1. *Business***

**General**

We are the second-largest naturalgas compression services company in the world in terms of compressor fleethorsepower, with a fleet as of December 31, 2006 of approximately 7,100compressor units comprising approximately 2.7 million horsepower. Weprovide a full range of natural gas compression services and products,including sales, operations, maintenance

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and fabrication to the natural gas industry, bothdomestically and internationally. These services and products are essential tothe natural gas industry, because gas must be compressed to be delivered fromthe wellhead to end users.

We operate in four primarybusiness segments: domestic contract compression, international contractcompression, fabrication and aftermarket services. Our core business, contractcompression, involves providing natural gas compression services to customersutilizing our compression equipment. By outsourcing their compression needs, webelieve our contract compression customers generally are able to increase theirrevenue by producing a higher volume of natural gas through decreasedcompression downtime and increased compression efficiency. Outsourcing allowsour customers to reduce their operating costs, maintenance costs and capitalinvestments and more efficiently meet their changing compression needs.

In addition to contractcompression, we provide a broad range of compression services and products tocustomers who own their compression equipment or use equipment provided by othercompanies. Our fabrication business involves the design, engineering andassembly of natural gas compressors for sale to third parties or for use in ourcontract compression fleet. Our ability to fabricate compressors ranging insize from under 100 horsepower to over 5,000 horsepower enables us to providecompressors that are used in all facets of natural gas production,transmission, storage and distribution. Our aftermarket services business sellsparts and components, and provides maintenance and operations services tocustomers who own their compression equipment or use equipment provided byother companies. Our ability to provide a full range of compression servicesand products broadens our customer relationships and helps us identifypotential new customers and cross-selling opportunities with existingcustomers. As the compression needs of our customers increase due to thegrowing demand for natural gas throughout the world, we believe our geographicscope and broad range of compression services and products will enable us toparticipate in that growth.

We maintain 18 field servicelocations throughout the United States at which we service and overhaulcompression equipment.  These locationsprovide a base from which we deploy operating personnel to service and overhaulour compression equipment and the equipment of customers who either own theirown compression equipment or use equipment provided by other companies.  We operate internationally in Argentina, Australia,Bolivia, Brazil, Canada, China, Indonesia, Mexico, Nigeria, Peru, Russia, Singapore,Switzerland, Thailand and Venezuela. Financial information about our businesssegments and the geographic locations in which we operate is provided inNote 13 to our consolidated financial statements included in Part II,Item 8 (“Financial Statements and Supplementary Data”) of this report. Ourprincipal corporate office is located at 4444 Brittmoore Road, Houston, Texas77041.

Holdings is a Delawarecorporation and a holding company that conducts operations through our wholly-ownedsubsidiary, Universal, a Texas corporation incorporated in 1954. Holdings wasformed on December 12, 1997 for the purpose of acquiring Universal’spredecessor, Tidewater Compression Service, Inc. (“TCS”) fromTidewater, Inc. Upon completion of the acquisition in February 1998,TCS became our wholly-owned subsidiary and changed its name to UniversalCompression, Inc. Through this subsidiary, our gas compression serviceoperations date back to 1954. Holdings completed an initial public offering ofshares of common stock in June 2000. Primarily during the two year period following Holdings’ initial publicoffering, we completed several acquisitions that contributed significantly toour growth. Our most significant completed acquisition, through merger, wasthat of Weatherford Global Compression Services, L.P. and certain relatedentities, which were subsidiaries of Weatherford International Ltd.,in 2001. This acquisition added approximately 950,000 horsepower to ourfleet, more than doubling our size at that time.

In October 2006, a subsidiary ofHoldings, Universal Compression Partners, L.P. (along with its subsidiaries,the “Partnership”), completed an initial public offering of 6,325,000 commonunits at a price of $21.00 per unit, representing a 49% limited partnerinterest in the Partnership. Holdings owns the remaining equity interests inthe Partnership.

The Partnership was formed toprovide natural gas contract compression services to customers throughout theUnited States. A subsidiary of Holdings is the general partner of thePartnership, and Holdings consolidates the financial position and results ofoperations of the Partnership.

In connection with the offering, Holdingscontributed to the Partnership contract compression services contracts withnine customers and a fleet of compressor units to service those customers,comprising approximately 330,000 horsepower, or approximately 17% (by availablehorsepower) of the Company’s domestic contract compression business at the timeof the offering.

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Additional information concerning the Partnership iscontained in Note 1 to our consolidated financial statements included in PartII, Item 8 (“Financial Statements and Supplementary Data”) of this report andin the Partnership’s current and periodic filings with the SEC.  See “– AvailableInformation”.

In December 2005, Holdings’ board of directorsapproved a change to our fiscal year end from March 31 to December 31,effective in 2005, which resulted in us preparing a transition report for thenine-month period ended December 31, 2005. Our fiscal year ended December 31, 2006 represents a twelve-monthperiod.

**Recent Developments**

In February 2007,we and Hanover Compressor Company entered into a merger agreement. Uponconsummation of the transactions set forth in the merger agreement, each commonshare of Hanover will be converted into 0.325 shares of common stock of a newlycreated holding company, and each common share of Holdings will be convertedinto one share of the holding company. Hanover will be treated as the acquirerfor accounting purposes.

The mergeragreement has been unanimously approved by both companies’ boards of directors.Completion of the merger is subject to a number of conditions, including theapproval of the stockholders of both companies and customary regulatoryapprovals, including the expiration or termination of the applicable waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Closing of thetransaction is currently anticipated in the third quarter of 2007. We believethat our expectation as to timing for the closing of the merger is reasonable,however, no assurances can be given as to the timing of the satisfaction of allclosing conditions or that all required approvals will be received.

The mergeragreement requires us and Hanover to continue to operate our businesses in theordinary course of business and to obtain the other party’s consent prior toengaging in certain specified activities, such as issuing or repurchasing securities,acquiring or disposing of businesses above specified thresholds, entering intonew debt above specified thresholds and issuing new common stock (other thanunder employee compensation arrangements). These agreements are subject to specified exceptions, including those(1) permitting us to repurchase up to an additional $75 million of our commonstock in accordance with our previously announced open-market stock repurchaseprogram, (2) permitting the Partnership to make cash distributions in accordancewith its partnership agreement, (3) permitting us to make contributions of ourdomestic compression assets to the Partnership and (4) permitting us to redeemour 7 1/4% senior notes due 2010.

Furtherinformation concerning the structure and details of the proposed merger is setforth in our Current Report on Form 8-K dated February 5, 2007, which includesas exhibits the merger agreement and a joint press release from us and Hanoverannouncing the execution of the merger agreement.

**Natural Gas Compression IndustryOverview**

Natural gas compression is a mechanical process whereby a volume of naturalgas at an existing pressure is increased to a desired higher pressure fortransportation from one point to another, and is essential to thetransportation and production of natural gas. Compression is typically requiredseveral times during the natural gas production and transportation cycle,including: (1) at the wellhead; (2) throughout gathering anddistribution systems; (3) into and out of processing and storage facilities;and (4) along intrastate and interstate pipelines.

·                  *Wellhead and Gathering Systems* - Compression at the wellhead is requiredbecause, at some point during the life of an oil or gas well, natural reservoirpressure typically declines as reserves are produced. As the natural reservoirpressure of the well declines below the line pressure of the gas gathering orpipeline system used to transport the gas to market, gas no longer naturallyflows into the pipeline. Compression equipment is applied in both field andgathering systems to boost the well’s pressure levels allowing gas to be transportedto market.  The continually droppingpressure levels in natural gas fields require periodic modification andvariation of on-site compression equipment. Natural gas compression that is used to transport gas from the wellheadthrough the gathering system is considered “field compression.”  Compression is also used to reinject naturalgas into producing oil wells to maintain reservoir pressure and help liftliquids to the surface, known as secondary oil recovery or gas lift operations.Typically, these applications require portable, low- to mid-range horsepowercompression equipment located at or near the wellhead.  Compression equipment is also used toincrease the efficiency of a low capacity gas field by providing a centralcompression point from which the gas can be produced and injected into apipeline for

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transmission to facilitiesfor further processing. In an effort to reduce costs for wellhead operators,operators of gathering systems tend to keep the pressure of the gatheringsystems low. As a result, more pressure is often needed to force the gas fromthe low pressure gathering systems into the higher pressure pipelines.

·                  *Pipeline Transportation Systems* - Natural gas compression that is usedduring the transportation of gas from the gathering systems to storage or theend user is considered “pipeline compression.” Compression equipment is alsoused to increase the efficiency of a low capacity gas field by providing acentral compression point from which the gas can be produced and injected intoa pipeline for transmission to facilities for further processing. As gas istransported through a pipeline, compressor units are applied all along the pipelineto allow the natural gas to continue to flow through the pipeline to itsdestination. These applications generally require larger horsepower compressionequipment (1,000 horsepower and higher).

·                  *Storage Facilities* - Natural gas compression is used in gas storage projects to injectgas into underground reservoirs during off-peak seasons to withdraw laterduring periods of high demand.

·                  *Processing Applications* - Compressors may also be used incombination with oil and gas production equipment to process and refine oil andgas into more marketable energy sources. In addition, compression services areused for compressing feedstocks in refineries and petrochemical plants, and forrefrigeration applications in natural gas processing plants.

Gas producers, transporters andprocessors historically owned and maintained most of the compression equipmentused in their operations. Many producers, transporters and processors haveincreasingly outsourced their compression services due to the benefits andflexibility of contract compression. Changing well and pipeline pressures andconditions over the life of a well often require producers to reconfigure orreplace their compressor units to optimize the well production or gatheringsystem efficiency.

We believe outsourcing contractcompression services offers customers:

·                  theability to efficiently meet their changing compression needs over time whilelimiting their capital investments in compression equipment and theunderutilization of their existing compression equipment;

·                  accessto the compression services provider’s specialized personnel and technicalskills, including engineers and field service and maintenance employees, whichgenerally leads to improved production rates and/or increased throughput;

·                  theability to increase their revenue by transporting or producing a higher volumeof natural gas through decreased compression downtime and reduced operating,maintenance and equipment costs by allowing the compression service provider toefficiently manage their changing compression needs; and

·                  theflexibility to deploy their capital on projects more directly related to theirprimary business by reducing their compression equipment and maintenancecapital requirements.

The international compressionmarket is comprised primarily of large horsepower compressors. A significantportion of this market involves comprehensive installation projects, whichinclude the design, fabrication, delivery, installation, operation andmaintenance of compressors and related gas treatment and processing equipmentby the contract compression service provider.

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**Key Operating and Financial Statistics**

The following table illustratesour key operating and financial statistics during the periods as indicated:
|                                           | ** ** | **Twelve Months  Ended December 31,**  | ** ** | **Nine Months  Ended December 31,** | ** ** | **Twelve Months  Ended March 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                              | ** ** | **2005**                                           | ** ** | **2005**                                          | ** ** |
| ** **                                | ** ** | **(In thousands, except percentages)** | ** ** |
| Domestic horsepower  (end of period)      |       | 2,069                                                 |       | 1,965                                              |       | 1,925                                             |       |
| International  horsepower (end of period) |       | 607                                                   |       | 584                                                |       | 544                                               |       |
| Total horsepower  (end of period)         |       | 2,676                                                 |       | 2,549                                              |       | 2,469                                             |       |
| Average horsepower  utilization rate      |       | 90.6                                                  | %          | 91.1                                               | %          | 88.8                                              | %          |
| Revenue                                   |       | $                                                     | 947,707    |                                               | $          | 613,647                                           |       | $ | 763,070 |   |
| Percentage of revenue  from:              |       |                                                  |       |                                               |       |                                              |       |
| Domestic  contract compression            |       | 42.0                                                  | %          | 40.5                                               | %          | 38.8                                              | %          |
| International  contract compression       |       | 15.0                                                  | %          | 15.5                                               | %          | 13.4                                              | %          |
| Fabrication                               |       | 22.8                                                  | %          | 23.4                                               | %          | 28.0                                              | %          |
| Aftermarket  services                     |       | 20.2                                                  | %          | 20.6                                               | %          | 19.8                                              | %          |
| Net income - Holdings                     |       | $                                                     | 87,656     |                                               | $          | 55,369                                            |       | $ | 33,610 |   |
| EBITDA, as adjusted (1)                   |       | $                                                     | 311,817    |                                               | $          | 205,850                                           |       | $ | 232,543 |   |

 

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(1)                                  EBITDA, as adjusted, is defined, reconciled to netincome and discussed within Part II, Item 6 (“Selected Financial Data– Non-GAAP Financial Measures”) of this report.

Financialinformation relating to the identifiable assets for each business segment isprovided in Note 13 to our consolidated financial statements included in PartII, Item 8 (“Financial Statements and Supplementary Data”) of this report.

**Operations**

*Contract Compression Fleet*

As of December 31, 2006, ourfleet consisted of 7,112 compressors, as reflected in the following table:
| ** **                | ** ** | **Total Horsepower As of** | ** ** | **% of Horsepower As of** | ** ** | **Number of Units As of** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **December 31,**                     | ** ** | **December 31,**                         | ** ** | **December 31,**                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **Horsepower Range** | ** ** | **2006**                                  | ** ** | **2005**                                      | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| 0-99                      |       | 166,087                                   |       | 167,982                                       |       | 6.2                                           | %          | 6.6 | % | 2,188 |   | 2,221 |   |
| 100-299                   |       | 435,449                                   |       | 436,510                                       |       | 16.3                                          |       | 17.1 |   | 2,478 |   | 2,486 |   |
| 300-599                   |       | 355,217                                   |       | 364,132                                       |       | 13.3                                          |       | 14.3 |   | 929 |   | 951 |   |
| 600-999                   |       | 437,877                                   |       | 431,329                                       |       | 16.4                                          |       | 16.9 |   | 603 |   | 592 |   |
| 1,000 and over            |       | 1,281,446                                 |       | 1,149,324                                     |       | 47.8                                          |       | 45.1 |   | 914 |   | 818 |   |
| Total                     |       | 2,676,076                                 |       | 2,549,277                                     |       | 100                                           | %          | 100 | % | 7,112 |   | 7,068 |   |

 

Over the last several years, wehave undertaken to standardize our compressor fleet around major components andkey suppliers. The standardization of our fleet:

·                  enablesus to minimize our fleet operating costs and maintenance capital requirements;

·                  enablesus to minimize inventory costs;

·                  facilitateslow-cost compressor resizing; and

·                  allowsus to develop improved technical proficiency in our maintenance and overhauloperations, which enables us to achieve high run-time rates while maintaininglow operating costs.

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*Contract Compression*

We provide comprehensive contractcompression services, which includes our provision at the customer’s locationof our personnel, equipment, tools, materials and supplies necessary to providethe amount of gas compression for which the customer has contracted.  Based on the operating specificationsat the customer’s location and the customer’s unique compression needs, theseservices include designing, sourcing, owning, installing, operating, servicing,repairing and maintaining equipment to provide compression to ourcustomers.  When providing contract compression services, we work closely with acustomer’s field service personnel so that the compression services can beadjusted to efficiently match changing characteristics of the reservoir and thegas produced. We routinely repackage or reconfigure a portion of our existingfleet to adapt to our customers’ compression services needs.  We utilize both slow and high speedreciprocating compressors driven either by internal combustion engines orelectric motors. We also utilize rotary screw compressors for specializedapplications.

Our compression equipment ismaintained in accordance with daily, weekly, monthly and annual maintenanceschedules. These maintenance procedures are updated as technology changes andas our operations group develops new techniques and procedures. In addition,because our field technicians provide maintenance on substantially all of ourcontract compression equipment, they are familiar with the condition of ourequipment and can readily identify potential problems. In our experience, theseprocedures maximize equipment life and unit availability and minimize avoidabledowntime. Generally, each of our compressor units undergoes a major overhaulonce every three to nine years, depending on the type and size of thecompressor unit. A major overhaul involves the rebuilding of the unit tomaterially extend its economic useful life or to enhance the unit’s ability tofulfill broader or different contract compression applications.

We believe that our fabricationand aftermarket services businesses, described below, provide us withopportunities to cross-sell our contract compression services.

We and our customers typicallycontract for our services on an application specific, or site-by-site, basis.We have standard contract compression contracts and fixed monthly rates. Theserates and contracts may be modified through negotiations.  At the end of the initial term, which istypically six months, contract compression services can continue on amonth-to-month basis at the option of the customer. Our contracts generally runfor an average duration of three years. Our customers generally are required to pay our monthly fee even duringperiods of limited or disrupted natural gas flows, which enhances the stabilityand predictability of our cash flows. Additionally, because we do not taketitle to the natural gas we compress, and because the natural gas we use asfuel for our compressors is supplied by our customers, we have limited exposureto commodity prices.

*DomesticContract Compression Operations.*  As of December 31, 2006, weoperated a domestic fleet of 6,384 compressors comprising approximately 2.1 millionhorsepower.  For the twelve months endedDecember 31, 2006, 42.0% of our total revenue was generated from domesticcontract compression operations.

We maintain 18 field servicelocations in the natural gas producing regions of the United States from whichwe can service and overhaul our own compressor fleet to provide contractcompression services to our customers. At certain of these locations, we also provide aftermarket services toour customers, as described in more detail below.

*InternationalContract Compression Operations.*  As of December 31, 2006, weoperated 728 units comprising approximately 607,000 horsepower in internationalmarkets.  We operate internationally inArgentina, Australia, Bolivia, Brazil, Canada, China, Indonesia, Mexico,Nigeria, Peru, Russia, Switzerland, Thailand and Venezuela.  We intend to continue to expand our presencein these markets and pursue opportunities in other strategic internationalareas. For the twelve months ended December 31, 2006, 15.0% of our totalrevenue was generated from international contract compression operations.

International contractcompression service projects usually generate higher gross margin percentagesthan domestic projects. Our international operations are focused on largehorsepower compressor markets and frequently involve longer-term and morecomprehensive service projects than our domestic projects.  International projects often require us toprovide complete engineering, design and installation services and more investmentin facilities and installation, and may involve larger amounts of horsepower,including larger horsepower equipment, more units, or both, at individualsites.  International service agreementscan and frequently do differ significantly from domestic service agreements, asindividual contracts are negotiated for each project which may include multiplecompression units.

Financial information bygeographic area for the twelve months ended December 31, 2006, nine monthsended December 31, 2005 and twelve months ended March 31, 2005 is provided inNote 13 to our consolidated financial statements, included inPart II, Item 8 (“Financial Statements and Supplementary Data”) ofthis report.

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*Fabrication*

As a complement to our contractcompression service operations, we design, engineer, fabricate and sell naturalgas compressors to engineering and construction firms, exploration andproduction companies, as well as pipeline and gas transmission companies, bothdomestically and internationally. We also fabricate compressor units for ourown fleet. Our primary fabrication facilities are located in Houston, Texas,Calgary, Alberta, Canada and, as of January 2007, in Singapore as a result ofour acquisition of B.T.I. Holdings Pte Ltd, as more fully described in Note 15to our consolidated financial statements included in Part II, Item 8 (“FinancialStatements and Supplementary Data”) of this report.

Generally, compressors sold tothird parties are assembled according to each customer’s specifications. Wepurchase components for these compressors from third party suppliers, for manyof which we are original equipment manufacturer representatives, includingseveral major engine, compressor and electric motor manufacturers in theindustry. We also sell prepackaged compressor units. For the twelve monthsended December 31, 2006, 22.8% of our total revenue was generated fromfabrication operations.

We do not incur material researchand development expenditures, as these activities are not a significant aspectof our industry. Any research and development costs are expensed as incurred.

*Aftermarket Services*

Our aftermarket services businesssells parts and components and provides operation, maintenance, overhaul andreconfiguration services  to customerswho own compression equipment or use equipment provided by other companies.

We sell parts to our aftermarketservices customers either on an over-the-counter basis through 18 servicelocations in the United States and five in Canada, on an individual call-inbasis, on a bid basis for larger orders or as part of our provision ofcompressor maintenance services. Our maintenance services are available,onshore and offshore, on an individual call-in basis, on a contract basis(which may cover a particular unit, a particular compression project or all ofthe customer’s compression projects) or as part of our comprehensive operationand maintenance service.  Outside NorthAmerica, these services are also available through 12 operating locationsaround the world.  For the twelve monthsended December 31, 2006, 20.2% of our total revenue was generated fromaftermarket services operations.

**Business Strategy**

Our business strategy is to meetthe evolving needs of our customers by providing consistent and dependableservices and products, and to take advantage of our size and broad geographicscope to expand our customer base. The key elements of our business strategyare described below:

·                  ***Provide a wide range of quality compression services andproducts.*** We plan tocontinue to leverage our field compression capabilities to provide services andproducts to customers in all segments of the natural gas compression market,including field and pipeline compression.

·                  ***Utilize the Partnership as our primary vehicle for thegrowth of our domestic contract compression business*****.** We intend for the Partnership to be theprimary growth vehicle for our domestic contract compression business.  As the Partnership has a lower cost ofcapital due to its partnership structure, we intend to offer the Partnershipthe opportunity to purchase the remainder of our domestic contract compressionfleet over time.  We believe that thePartnership’s lower cost of capital provides us a competitive advantage.

·                  ***Seek opportunities in select international markets.*** We plan to continue to expand our existinginternational operations and offer our services in other key markets. Webelieve that our experience in international markets and our reputation forproviding reliable contract compression services and fabricating high qualitycompressors provides us with a solid foundation from which to further expandour business internationally.

·                  ***Seek opportunities for preferred relationships.*** We intend to continue to enter intostrategic alliances, preferred vendor and similar long-term relationships toprovide our full range of services and products to our customers.  Such alliances typically give us preferentialconsideration from our alliance customers when they look to satisfy

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contract compression needs.  In exchange, we provide these customers with enhancedservice availability and  favorablepricing.

·                  ***Expand and leverage our fabrication and aftermarket servicesbusiness.*** We havesignificant fabrication and aftermarket services operations, and we intend toexpand these segments of our business. In addition to providing additionalsources of revenue, these segments also provide us with an opportunity tocross-sell our contract compression services. This cross-selling potentialstems from the natural evolution we typically experience as we enter newregions. Specifically, our fabrication sales frequently result in lateraftermarket service work in the form of parts sales and post-warrantyservices.  Relationships formed throughthe provision of fabrication sales and aftermarket services may then lead tolong-term contract compression service relationships.

·                  ***Maintain financial flexibility.*** We intend to maintain financial flexibilityto be able to take advantage of opportunities as we identify them.Historically, during periods of growth, we have utilized our cash flow fromoperations as well as borrowings under available debt facilities to fundcapital expenditures and acquisitions. This spending has allowed us tosignificantly grow our business and the amount of cash we generate while maintainingour debt at levels we believe are appropriate for our stable business. Webelieve our financial flexibility positions us to take advantage of futuregrowth opportunities without incurring debt beyond appropriate levels.

·                  ***Expand beyond field compression.*** In addition to our field compressionservices, we continue to expand our large horsepower compression capabilitiesin pipeline, processing, storage and offshore markets.

**Competitive Strengths**

We believe that we have thefollowing key competitive strengths:

·                  ***Comprehensive range of services and products.*** We provide a wide range of compressionservices and products to meet the changing compression needs of our customersin the diverse geographic markets that we serve, whether these customersoutsource compression services or operate their own compression equipment. Forthose customers who outsource, we believe our contract compression servicesgenerally allow our customers to achieve higher compression and productionrates than they would achieve with owned equipment, resulting in increasedrevenue for our customers. In addition, outsourcing allows our customersflexibility with regard to their changing compression needs while limitingtheir capital requirements. We continually expand, upgrade and reconfigure ourcontract compression fleet and provide our operations and maintenance personnelwith extensive training. We are able to fabricate compression units ranging insize from under 100 horsepower to over 5,000 horsepower that meet the varyingneeds of our customers. Additionally, we sell parts and components and providemaintenance and operations services to customers who own their compressionequipment or have agreements with other companies. This broad range ofcompression services and products allows us to expand our customer base andgives us the opportunity to cross-sell our services and products.

·                  ***Size and geographic scope.*** We operate in the primary onshore andoffshore natural gas producing regions of the United States and selectinternational markets. As the second largest provider of natural gascompression services, we believe we have sufficient fleet size, personnel,logistical capabilities, geographic scope, fabrication capabilities and rangeof compression service and product offerings to meet the full service needs ofour customers in the domestic and international markets we serve on a timelyand cost-effective basis. We believe our size, geographic scope and broad customerbase reduce our volatility and provide us with improved fleet utilizationopportunities. By increasing our fleet utilization, we are able to improve ouroperating leverage and increase returns. As a result, due to economies ofscale, we believe we have relatively lower operating costs and higher marginsthan most companies with smaller fleets.

·                  ***Experiencedmanagement team.*** Ourmanagement team has extensive experience in the compression services business.We believe our management team has successfully demonstrated its ability tomaintain our quality standards and commitment to customer service. Ourmanagement team has a substantial financial interest in our continued successthrough direct stock ownership and participation in our incentive stock optionand bonus programs which are linked to our performance.

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·                  ***Ability toleverage the Partnership.*** We believe that the Partnership provides us a lower cost of capitalthrough which we can pursue additional domestic contract compressionbusiness.  Through the Partnership, we willattempt to increase the amount of domestic compression that is outsourced.

**Oil and Gas Industry Cyclicality andVolatility**

Our financial performance isgenerally less affected by the short-term market cycles and oil and gas pricevolatility than the financial performance of companies operating in othersectors of the oilfield services industry because:

·                  ouroperations are tied primarily to natural gas production and consumption, whichare generally less cyclical in nature than exploration activities;

·                  compressionis necessary for gas to be delivered from the wellhead to end users; and

·                  outsourcingof compression is often economically advantageous for natural gas production,gathering and transportation companies.

Adding to this stability is thefact that we have a broad customer base, we operate in diverse geographicregions and while compressors often must be specifically engineered orreconfigured to meet the unique demands of our customers, the fundamentaltechnology of compression equipment has not experienced significanttechnological change.

**Seasonal Fluctuations**

Our results of operations havenot historically reflected any material seasonal tendencies, nor do wecurrently believe that seasonal fluctuations will have a material impact in theforeseeable future.

**Customers**

Our current customer base consistsof over 1,000 domestic and international companies engaged in all aspects ofthe oil and gas industry, including domestic and international oil and gascompanies, international state-owned oil and gas companies and natural gasproducers, processors, gatherers and pipelines. We have entered into strategicalliances with some of our customers. These alliances are essentially preferredvendor arrangements and give us preferential consideration for the compressionneeds of these customers. In exchange, we provide these customers with enhancedproduct availability, product support and favorable pricing.

In the twelve months endedDecember 31, 2006, no one customer accounted for more than 10% of ourtotal revenue.

**Suppliers**

Our principal suppliers includeCaterpillar and Waukesha for engines, Air Xchangers for coolers and Ariel forcompressors. We also purchase Cooper parts and compressors in Canada for resaleto customers.  Although we rely primarilyon these suppliers, we believe alternative sources are generally available butat prices that may not be as economically advantageous to us as our existingsuppliers. We have not experienced any material supply problems to date, and webelieve our relations with our suppliers are good.

**Backlog**

As of December 31, 2006, wehad a compressor unit fabrication backlog for sale to third parties ofapproximately $289.3 million, compared to $144.5 million as ofDecember 31, 2005. As of February 22, 2007, our backlog was $300.0 million.A majority of the backlog is expected to be completed within a 270-day period.

**Insurance**

The natural gas serviceoperations business can be hazardous, involving unforeseen circumstances suchas uncontrollable flows of gas or well fluids and fires or explosions.  As is customary in the natural gas serviceoperations industry, we review our safety equipment and procedures and carryinsurance against some, but not all, risks of our business. Our insurancecoverage includes worldwide property damage, general and commercial automobileliability and other coverage we feel is

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appropriate. We have elected to fully self-insure ouroffshore assets.  We believe that theseinsurance coverages are customary for the industry and adequate for ourbusiness, however, losses and liabilities not covered by insurance wouldincrease our costs.

**Competition**

The natural gas contractcompression, fabrication and aftermarket services businesses are highlycompetitive. We face competition from large national and multinationalcompanies with greater financial resources and, on a regional basis, fromnumerous smaller companies.

Our main competitors in the contract compression business, based onhorsepower, are Hanover, J-W Operating Company, Compressor Systems, Inc.,USA Compression, Natural Gas Services Group, Inc., CDM Compression, TetraTechnologies, Inc., Enerflex Systems, Ltd. and Valerus Compression Services,LLC.  Inour fabrication activities, we currently compete primarily with Hanover,Enerflex Systems, Ltd., Toromont Industries Ltd. and Collicut EnergyServices Ltd.  Our aftermarketservices business faces competition from manufacturers (including Cooper EnergyServices and Dresser-Rand), from distributors of Caterpillar and Waukeshaengines, from a number of smaller companies and from Hanover, Enerflex Systems, Ltd.,Toromont Industries Ltd. and Collicut Energy Services Ltd.

We believe that we competeeffectively on the basis of price and customer service, including theavailability of our personnel in remote locations, technical expertise,flexibility in meeting customer needs and quality and reliability of ourcompressors and related services.

**Environmental and Other Regulations**

We are subject to stringent andcomplex foreign, federal, state and local laws and regulations governing thedischarge of materials into the environment or otherwise relating to protectionof human health and the environment. Compliance with these laws and regulationsmay affect the costs of our operations. Moreover, failure to comply with theseenvironmental laws and regulations may result in the assessment ofadministrative, civil, and criminal penalties, imposition of remedialobligations, and the issuance of injunctions delaying or prohibitingoperations. We believe that our operations are in substantial compliance withapplicable environmental requirements. As part of the regular evaluation of ouroperations, we update the environmental condition of our existing and acquiredproperties as necessary. We further believe that the phasing in of morestringent emission controls and other known regulatory requirements at the ratecurrently contemplated by environmental laws and regulations will not have amaterial adverse effect on our business, financial condition or results ofoperations.

Primary federal environmentallaws that our operations are subject to include the Clean Air Act andregulations thereunder, which regulate air emissions; the Clean Water Act andregulations thereunder, which regulate the discharge of pollutants inindustrial wastewater and storm water runoff; and the Resource Conservation andRecovery Act (“RCRA”) and regulations thereunder, which regulate the managementand disposal of solid and hazardous waste. In addition, we are also subject toregulation under the federal Comprehensive Environmental Response, Compensation,and Liability Act (“CERCLA”) and regulations thereunder, known more commonly as“Superfund,” which regulates the release of hazardous substances in theenvironment. We are also subject to regulation under the Occupational Safetyand Heath Act (“OSHA”) and regulations thereunder, which regulate theprotection of the health and safety of workers. Analogous state laws and regulations may also apply.

The Clean Air Act and relatedregulations establish limits on the levels of various substances which may beemitted into the atmosphere during the operation of our fleet of natural gascompressors. These substances are regulated in permits, which are applied forand obtained through the various regulatory agencies, either state or federaldepending on the level of emissions. While our standard contract typicallyprovides that the customer will assume the permitting responsibilities andenvironmental risks related to site operations, we have in some cases obtainedair permits as the owner and operator of the compressors. Under most of ourcontract compression service agreements, our customers must indemnify us forcertain losses or liabilities we may suffer as a result of the failure tocomply with applicable environmental laws, including permit conditions. Increasedobligations of operators to reduce air emissions of nitrogen oxides and otherpollutants from internal combustion engines in transmission service areanticipated. Any new regulations requiring the installation of moresophisticated emission control compression equipment potentially could have amaterial adverse impact. However, we believe that in most cases, theseobligations would be allocated to our clients under our contracts. In anyevent, we expect that such requirements would not have any more significanteffect on our operations or financial condition than on any similarly situatedcompany providing contract compression services.

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The Clean Water Act and relatedregulations prohibit the discharge of industrial wastewater without a permitand establish limits on the levels of pollutants contained in these discharges.In addition, the Clean Water Act regulates storm water discharges associatedwith industrial activities depending on a facility’s primary standardindustrial classification. Many of our facilities have applied for and obtainedindustrial wastewater discharge permits as well as sought coverage under localwastewater ordinances. In addition, many of our facilities have filed noticesof intent for coverage under statewide storm water general permits anddeveloped and implemented storm water pollution prevention plans, as required.

The RCRA and related regulationsregulate the management and disposal of solid and hazardous waste. These lawsand regulations govern the generation, storage, treatment, transfer anddisposal of wastes that we generate. These wastes include, but are not limitedto, used oil, antifreeze, filters, sludge, paint, solvents, and sandblastmaterials. The Environmental Protection Agency and various state agencies have limitedthe approved methods of disposal for these types of wastes.

Under CERCLA and comparable statelaws and regulations, strict and joint and several liability can be imposedwithout regard to fault or the legality of the original conduct on certain classesof persons that contributed to the release of a hazardous substance into theenvironment. These persons include the owner and operator of a contaminatedsite where a hazardous substance release occurred and any company thattransported, disposed of, or arranged for the transport or disposal ofhazardous substances released at the site. Under CERCLA, such persons may beliable for the costs of remediating the hazardous substances that have beenreleased into the environment and for damages to natural resources. Inaddition, where contamination may be present it is not uncommon for theneighboring landowners and other third parties to file claims for personalinjury, property damage and recovery of response costs.

We currently own or lease, andhave in the past owned or leased, a number of properties that have been used,some for many years and some by third parties over whom we have no control, insupport of natural gas compression services or other industrial operations. Wemay be subject to remediation costs and liability under CERCLA, RCRA or otherenvironmental laws for hazardous waste, asbestos or any other toxic orhazardous substance that may exist on or under any of our owned or leasedproperties, including waste disposed or groundwater contaminated by priorowners or operators. We have performed in the past, are currently performing,and may perform in the future certain remediation activities governed byenvironmental laws. The cost of this remediation has not been material to dateand we currently do not expect it to be material in the future. Former ownersand operators are currently undertaking groundwater monitoring activities atcertain of our facilities.  Certain ofour acquired properties may also warrant groundwater monitoring and other remedialactivities in the future. We believe that former owners and operators of manyof these properties may be wholly or partly responsible under environmentallaws and contractual agreements to pay for or perform remediation, or toindemnify us for our remedial costs. These other entities may fail to fulfilltheir legal or contractual obligations, which could result in the imposition ofresponse obligations and material costs on us.

We are subject to therequirements of OSHA and comparable state statutes.  These laws and the implementing regulationsstrictly govern the protection of the health and safety of employees.  In addition, the OSHA hazard communicationstandard, the EPA community right-to-know regulations under Title III of CERCLAand similar state statutes require that we organize and/or disclose informationabout hazardous materials used or produced in our operations.

Stricter standards inenvironmental or safety legislation or regulations that may affect us may beimposed in the future, such as proposals to make hazardous wastes subject tomore stringent and costly handling, disposal and remediation requirements.Accordingly, new environmental laws or regulations or amendments to existingenvironmental laws or regulations (including, but not limited to, regulationsconcerning ambient air quality standards, wastewater and storm waterdischarges, and global climate changes) could require us to undertakesignificant capital expenditures and could otherwise have a material adverseeffect on our business, results of operations and financial condition.

Our international operations arepotentially subject to similar governmental controls and restrictions relatingto the environment. We believe that we are in substantial compliance with anysuch foreign requirements pertaining to the environment.

Since 1992, there have beenvarious proposals to impose taxes with respect to the energy industry, none ofwhich have been enacted and all of which have received significant scrutinyfrom various industry lobbyists. At the present time, given the uncertaintiesregarding the proposed taxes, including the uncertainties regarding the termswhich the proposed taxes might ultimately contain and the industries andpersons who may ultimately be the subject of such taxes, it is not possible todetermine whether any such tax will have a material adverse effect on us.

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**Employees and Labor Relations**

As of December 31, 2006, wehad approximately 3,095 employees worldwide. We believe our relationship withour employees is good. Approximately 190 of our employees in Argentina, 140 ofour employees in Canada and 180 of our employees in Brazil are covered bycollective bargaining agreements.

**AvailableInformation**

Our websiteaddress is *www.universalcompression.com*.* *Our annual report onForm 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports are available on our website,without charge, as soon as reasonably practicable after they are filedelectronically with the SEC. Information contained on our website is notincorporated by reference in this report or any of our other securitiesfilings.  Paper copies of our filings arealso available, without charge, from Universal Compression Holdings, Inc.,4444 Brittmoore Road, Houston, Texas 77041, Attention: Investor Relations.  Alternatively, the public may read and copyany materials we file with the SEC at the SEC’s Public Reference Room at 100 FStreet, N.E., Washington, D.C. 20549. Information on the operation of thePublic Reference Room may be obtained by calling the SEC at1-800-SEC-0330.  The SEC also maintains awebsite that contains reports, proxy and information statements and otherinformation regarding issuers that file electronically with the SEC.  The SEC’s website address is *www.sec.gov*.

Additionally, wemake available free of charge on our website: 

·      our Code of Business Conduct and Ethics;

·      our Corporate Governance Guidelines; and

·      the charters of our audit, compensation,and nominating and corporate governance committees.

**ITEM 1A.*****Risk Factors***

*As described in“Part I. Disclosure Regarding Forward-Looking Statements,” this reportcontains forward-looking statements regarding us, our business and ourindustry. The risk factors described below, among others, could cause ouractual results to differ materially from the expectations reflected in theforward-looking statements. If any of the following risks actually occur, ourbusiness, financial condition and operating results could be negativelyimpacted.*

***We depend onstrong demand for natural gas, and a prolonged, substantial reduction in thisdemand would adversely affect the demand for our services and products.***

Natural gas contract compressionoperations are significantly dependent upon the demand for natural gas. Demandmay be affected by, among other factors, natural gas prices, weather, demandfor energy and availability of alternative energy sources. Any prolonged,substantial reduction in the demand for natural gas would, in all likelihood,depress the level of production, exploration and development activity andresult in a decline in the demand for our contract compression services andproducts. Similarly, a decrease in capital spending by our customers couldresult in reduced demand for our fabrication and aftermarket servicesbusinesses.  The reduced demand for ourservices as described above could adversely affect our business, financialcondition and operating results.

***Ourinternational operations subject us to risks that are difficult to predict.***

For the twelve months endedDecember 31, 2006, we derived 31.6% of our revenues from internationaloperations. We intend to continue to expand our business in our internationalmarkets. This may make it more difficult for us to manage our business. Reasonsfor this include, but are not limited to, the following:

·                  politicaland economic instability in foreign markets that could include risks ofnationalization of energy related assets, changed fiscal regime or reducedbusiness;

·                  foreigngovernments’ restrictive trade policies;

·                  inconsistentproduct regulation or sudden policy changes by foreign agencies or governments;

·                  theburden of complying with multiple and potentially conflicting laws;

·                  theimposition of duties, taxes or government royalties;

·                  foreignexchange rate risks;

·                  difficultyin collecting international accounts receivable;

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·                  potentiallylonger payment cycles;

·                  increasedcosts in maintaining international manufacturing and marketing efforts;

·                  theintroduction of non-tariff barriers and higher duty rates;

·                  difficultiesin enforcement of contractual obligations;

·                  restrictionson repatriation of earnings or expropriation of property; and

·                  thegeographic, time zone, language and cultural differences among personnel indifferent areas of the world.

Any of these factors may cause usto experience economic loss or negatively impact our earnings or net assets.

***We facesignificant competition that may cause us to lose market share and harm ourfinancial performance.***

The domesticcompression business is highly competitive and there are low barriers to entryfor individual projects. In addition, some of our competitors are largenational and multinational companies that provide contract compression,aftermarket services and support and fabrication services to third parties, andsome of these competitors have greater financial and other resources than wedo. Our ability to renew or replace existing contracts with our customers atrates sufficient to maintain current revenue and cash flows could be adverselyaffected by the activities of our competitors and our customers. If ourcompetitors substantially increase the resources they devote to the developmentand marketing of competitive services or substantially decrease the price atwhich they offer their services, we may not be able to compete effectively.Some of these competitors may expand or construct newer or more powerfulcompression systems that would create additional competition for the serviceswe provide to our customers. In addition, our customers that are significantproducers of natural gas may purchase their own compression systems in lieu ofusing our contract compression services. All of these competitive pressurescould have a material adverse effect on our business, results of operations,cash flows and financial condition.

***We depend onparticular suppliers and are vulnerable to product shortages and priceincreases.***

As a consequence of having ahighly standardized contract compression fleet, some of the components used inour products are obtained from a single source or a limited group of suppliers.Our reliance on these suppliers involves several risks, including priceincreases, inferior component quality and a potential inability to obtain anadequate supply of required components in a timely manner. The partial orcomplete loss of certain of these sources could have a negative impact on ourresults of operations and could damage our customer relationships. Further, asignificant increase in the price of one or more of these components could havea negative impact on our results of operations.

***We do notinsure against all potential losses and could be seriously harmed by unexpectedliabilities.***

Natural gas service operationsare subject to inherent risks such as equipment defects, malfunction andfailures, and natural disasters that can result in uncontrollable flows of gasor well fluids, fires and explosions. These risks could expose us tosubstantial liability for personal injury, death, property damage, pollutionand other environmental damages. We have obtained insurance against many ofthese risks, however, our insurance may be inadequate to cover our liabilities.We have elected to fully self-insure our offshore assets.  Further, insurance covering the risks we faceor in the amounts we desire may not be available in the future or, ifavailable, the premiums may not be commercially justifiable. If we were toincur substantial liability and such damages were not covered by insurance orwere in excess of policy limits, or if we were to incur liability at a timewhen we are not able to obtain liability insurance, our business, results ofoperations and financial condition could be negatively impacted.

***A substantialportion of our cash flow must be used to service our debt obligations, and weare vulnerable to interest rate increases.***

As of December 31, 2006, wehad approximately $830.2 million in outstanding debt obligations consistingprimarily of $171.5 million outstanding under our 7 1/4% senior notes, $186.7million outstanding under our asset-backed securitization facility (the “ABSfacility”) and $472.0 million outstanding under our revolving creditfacilities. These debt amounts exclude approximately $28.8 million ofstandby letters of credit issued on our behalf as of December 31, 2006.

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As of December 31, 2006,approximately $165.7 million of our outstanding debt was subject tointerest at floating rates. Changes in economic conditions could result inhigher interest rates, thereby increasing our interest expense and reducing ourfunds available to make payments of interest and principal on the notes and forcapital investment, operations or other purposes.

***Our creditfacilities impose restrictions on us that may affect our ability tosuccessfully operate our business.***

Our credit facilities includecertain covenants that, among other things, restrict our ability to:

·                  borrowmoney;

·                  createliens, other than liens securing our senior secured credit facilities, the ABSfacility or in connection with permitted acquisitions;

·                  makeinvestments, other than in any subsidiary or in connection with permittedacquisitions;

·                  declaredividends or make certain distributions;

·                  sellor dispose of property; and

·                  mergeinto or consolidate with any third party or sell or transfer all orsubstantially all of our property.

As of December 31, 2006, wewere also required by our credit facilities to maintain various financialratios, including a total leverage ratio of less than or equal to 5 to 1, aninterest coverage ratio of greater than or equal to 2.5 to 1 and a seniorsecured leverage ratio of less than or equal to 5 to 1.  For descriptions of the required ratios seeNote 5 to our consolidated financial statements included in Part II, Item 8 (“FinancialStatements and Supplementary Data”) of this report.  As of February 23, 2007, we were incompliance with all of these financial covenants. These covenants may restrictour ability to expand or to pursue our business strategies. Our ability tocomply with these and other provisions of the credit facilities may be affectedby changes in our operating and financial performance, changes in businessconditions or results of operations, adverse regulatory developments or otherevents beyond our control. The breach of any of these covenants could result ina default under our debt, which could cause those obligations to become due andpayable. If any of our indebtedness were to be accelerated, we may not be ableto repay or refinance it.

***Our newenterprise resource planning (“ERP”) system implementation may encounterproblems that would negatively impact our business.***

We contracted with a third partyvendor to assist us with the design and implementation of a new ERP system,which will support substantially all of our operating and financial functions,including our business segment operations, fleet management, billing,estimating, customer management, vendor management, accounting and financialreporting systems. We plan to complete the implementation of this new ERPsystem in 2007 for our North America operations. A significant implementationproblem, if encountered, could negatively impact our business by disrupting ouroperations. There are inherent limitations in our ability to predict and planfor these risks and estimate the magnitude of their impact. Consequently, it ispossible that the occurrence of a significant implementation problem could bematerial.

***We are exposedto exchange rate fluctuations in the foreign markets in which we operate. Adecrease in the value of any of these currencies relative to the U.S. dollarcould reduce our profits from foreign operations and the value of our foreignnet assets.***

Our reporting currency is theU.S. dollar. The majority of the Company’s foreign operations have designatedthe local currency as their functional currency and, as such, gains and lossesresulting from financial statement translation of foreign operations areincluded as a separate component of accumulated other comprehensive loss withinstockholders’ equity. Gains and losses from balances that are receivable orpayable in currency other than functional currency are included in theconsolidated statements of operations. As a result, the U.S. dollar value ofour foreign operations has varied, and will continue to vary, with exchangerate fluctuations. In this respect, historically we have been primarily exposedto fluctuations in the exchange rate of the Brazilian real, Mexican peso,Australian dollar and Canadian dollar against the U.S. dollar.

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A fluctuation in the value of anyof these currencies relative to the U.S. dollar could reduce our profits fromforeign operations and the value of the net assets of our foreign operationswhen reported in U.S. dollars in our financial statements. This could have anegative impact on our business, financial condition or results of operationsas reported in U.S. dollars.

In addition, fluctuations incurrencies relative to currencies in which the earnings are generated may makeit more difficult to perform period-to-period comparisons of our reportedresults of operations. For purposes of accounting, the assets and liabilitiesof our foreign operations, where the local currency is the functional currency,are translated using period-end exchange rates, and the revenues and expensesof our foreign operations are translated using average exchange rates duringeach period.

We attempt to match costs andrevenues in local currencies, however, we anticipate that there may beinstances in which costs and revenues will not be matched with respect tocurrency denomination. As a result, to the extent we continue our expansion ona global basis, we expect that increasing portions of our revenues, costs,assets and liabilities will be subject to fluctuations in foreign currencyvaluations. We may experience economic loss and a negative impact on earningsor net assets solely as a result of foreign currency exchange ratefluctuations. Further, the markets in which we operate could restrict theremoval or conversion of the local or foreign currency, resulting in ourinability to hedge against these risks.

***Our ability tomanage our business effectively will be weakened if we lose key personnel orare unable to hire, train and retain a qualified labor force.***

We depend on the continuingefforts of our executive officers and senior management. The departure of anyof our key personnel could have a significant negative effect on our business,operating results, financial condition and on our ability to competeeffectively in the marketplace. We do not maintain key man life insurancecoverage with respect to our executive officers or key management personnel. Weare not aware of the upcoming retirement of any of our executive officers orsenior management personnel, other than upon completion of the anticipated mergerwith Hanover.

Additionally, we believe ourability to hire, train and retain qualified personnel will continue to be morechallenging and important as we continue to grow and if energy industry marketconditions continue to be positive. When general industry conditions are good,the supply of experienced operational, fabrication and field personnel, inparticular, decreases as other energy, oil field services and manufacturingcompanies’ needs for the same personnel increases.  Our ability to continue our growth andperhaps even to continue our current level of service to our current customerswill be adversely impacted if we are unable to successfully hire, train andretain these important personnel.

***We are subjectto substantial environmental regulation, and changes in these regulations couldincrease our costs or liabilities.***

We are subject to stringent andcomplex foreign, federal, state and local laws and regulatory standards,including laws and regulations regarding the discharge of materials into theenvironment, emission controls and other environmental protection andoccupational health and safety concerns. Environmental laws and regulationsmay, in certain circumstances, impose strict liability for environmentalcontamination, rendering us liable for remediation costs, natural resourcedamages and other damages as a result of our conduct that was lawful at thetime it occurred or the conduct of, or conditions caused by, prior owners oroperators or other third parties. In addition, where contamination may bepresent, it is not uncommon for neighboring land owners and other third partiesto file claims for personal injury, property damage and recovery of responsecosts. Remediation costs and other damages arising as a result of environmentallaws and regulations, and costs associated with new information, changes inexisting environmental laws and regulations or the adoption of newenvironmental laws and regulations could be substantial and could negativelyimpact our financial condition or results of operations. Moreover, failure tocomply with these environmental laws and regulations may result in theimposition of administrative, civil and/or criminal penalties.

We routinely deal with naturalgas, oil and other petroleum products. As a result of our fabrication andaftermarket services operations, we generate, manage and dispose of or recyclehazardous wastes and substances such as solvents, thinner, waste paint, wasteoil, washdown wastes and sandblast material. It is our policy to use generallyaccepted operating and disposal practices in accordance with applicableenvironmental laws and regulations, however, hydrocarbons or other hazardoussubstances or wastes may have been disposed or released on, under or fromproperties owned, leased or operated by us or on or under other locations wheresuch substances or wastes have been taken for disposal. These properties may besubject to investigatory, remediation and monitoring requirements underforeign, federal, state and local environmental laws and regulations.

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The modification orinterpretation of existing environmental laws or regulations, the more vigorousenforcement of existing environmental laws or regulations, or the adoption ofnew environmental laws or regulations may also negatively impact oil andnatural gas exploration and production companies, which in turn could have anegative impact on us and other similarly situated service companies.

***Our charter andbylaws contain provisions that may make it more difficult for a third party toacquire control of us, even if a change in control would result in the purchaseof your shares at a premium to the market price or would otherwise bebeneficial to you.***

There are provisions in ourrestated certificate of incorporation and bylaws that may make it moredifficult for a third party to acquire control of us, even if a change incontrol would result in the purchase of your shares at a premium to the marketprice or would otherwise be beneficial to you. For example, our restatedcertificate of incorporation authorizes our board of directors to issuepreferred stock without stockholder approval. If our board of directors electsto issue preferred stock, it could be more difficult for a third party toacquire us. In addition, provisions of our restated certificate ofincorporation, such as a staggered board of directors and limitations on theremoval of directors, stockholder actions by written consent, and onstockholder proposals at meetings of stockholders, could make it more difficultfor a third party to acquire control of us. Delaware corporation law may alsodiscourage takeover attempts that have not been approved by our board ofdirectors.

***Our proposed merger with Hanover is subject to the receiptof consents and approvals from various government entities that may imposeconditions on, jeopardize or delay completion of the merger or reduce theanticipated benefits of the merger.***

In February 2007, weannounced that we had entered into an agreement to merge with Hanover.  Completion of the merger is conditioned upon,among other things, the expiration or termination of the applicable waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, asamended, which we refer to as the HSR Act, and the expiration or termination ofany mandatory waiting period under applicable non-U.S. antitrust laws, wherethe failure to observe that waiting period would be reasonably likely to have amaterial adverse effect on the combined company after the merger.

Thereis no assurance that these required consents, orders, approvals and clearanceswill be obtained.  Even if they areobtained, they may not be obtained before each company’s stockholders vote onthe merger. Moreover, if they are obtained, they may impose conditions on, orrequire divestitures relating to, our divisions, operations or assets or thoseof Hanover. The merger agreement requires Hanover and us to satisfy anyconditions or divestiture requirements imposed upon them unless the conditionsor divestitures would be reasonably likely to have a material adverse effect onthe combined company after the merger. A substantial delay in obtaining anyrequired approvals or the imposition of any unfavorable conditions ordivestitures in connection with the receipt of any required approvals mayjeopardize or delay completion of the merger or reduce the anticipated benefitsof the merger.

***While the merger is pending, we will be subject to businessuncertainties and contractual restrictions that could adversely affect ourbusiness.***

Uncertainty about theeffect of the merger on employees, customers and suppliers may have an adverseeffect on us and, consequently, on the combined company. We intend to takesteps to reduce any adverse effects, however, these uncertainties may impairour ability to attract, retain and motivate key personnel until the merger isconsummated and for a period of time thereafter, and could cause customers,suppliers and others who deal with us to seek to change existing businessrelationships with us. Employee retention may be particularly challengingduring the pendency of the merger because employees may experience uncertaintyabout their future roles with the combined company. If, despite our retentionefforts, key employees depart because of issues relating to the uncertainty anddifficulty of integration or a desire not to remain with the combined company,the combined company’s business could be seriously harmed. In addition, themerger agreement restricts us, without Hanover’s consent and subject to certainexceptions, from making certain acquisitions and taking other specified actionsuntil the merger occurs or the merger agreement terminates. These restrictionsmay prevent us from pursuing otherwise attractive business opportunities andmaking other changes to our business that may arise prior to completion of themerger or termination of the merger agreement.

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***Failure to complete the merger could negatively impact ourstock price and our future business and financial results because of, amongother things, the disruption that would occur as a result of uncertaintiesrelating to a failure to complete the merger.***

We and Hanover haveagreed to use our reasonable best efforts to obtain stockholder approval of themerger, however, our stockholders and Hanover’s stockholders may not approvethe merger. In addition, we and Hanover may not receive the required consents,orders, approvals and clearances to complete the merger or satisfy the otherconditions to the completion of the merger. If the merger is not completed forany reason, we could be subject to several risks, including the following:

·                  beingrequired to pay Hanover a termination fee of up to $70 million in certaincircumstances, as described further in the next risk factor; and

·                  havinghad the focus of our management directed toward the merger and integrationplanning instead of on our core business and other opportunities that couldhave been beneficial to us.

In addition, wewould not realize any of the expected benefits of having completed the merger.We have incurred and will continue to incur substantial financial advisory,legal and other expenses associated with the merger even if it does not close.

If the merger isnot completed, the price of our common stock may decline to the extent that thecurrent market price of our stock reflects a market assumption that the mergerwill be completed and that the related benefits and synergies will be realized,or as a result of the market’s perceptions that the merger was not consummateddue to an adverse change in our business. In addition, our business may beharmed, and the price of our common stock may decline as a result, to theextent that customers, suppliers and others believe that we cannot compete inthe marketplace as effectively without the merger or otherwise remain uncertainabout our future prospects in the absence of the merger.  Similarly, current and prospective employeesmay experience uncertainty about their future roles with the resulting companyand choose to pursue other opportunities that could adversely affect us if themerger is not completed.  During thependency of the merger agreement, we may not be able to attract and retain keymanagement, marketing and technical personnel due to this uncertainty, which couldharm our businesses and results.  Therealization of any of these risks may materially adversely affect our business,financial results, financial condition and stock price.

***The merger agreement limits our ability to pursue analternative acquisition proposal and may require us to pay a termination fee ofup to $70 million if we do.***

The merger agreementprohibits the parties from soliciting, initiating or encouraging alternativemerger or acquisition proposals with any third party.  The merger agreement also provides for thepayment by us or Hanover of a termination fee of up to $70 million if themerger agreement is terminated in certain circumstances in connection with acompeting acquisition proposal or the withdrawal by the board of directors ofone of the companies of its recommendation that the stockholders of thatcompany vote for the merger.

These provisions limitour ability to pursue offers from third parties that could result in greatervalue to our stockholders. The obligation to make the termination fee paymentalso may discourage a third party from pursuing an alternative acquisitionproposal.

**ITEM 1B. *UnresolvedStaff Comments***

None.

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**ITEM 2. *Properties***

The following table describes ourmaterial facilities owned or leased as of December 31, 2006:
| **Location**             | ** ** | **Square  Feet** | ** ** | **Acreage** | ** ** | **Status** | ** ** | **Uses**                                                                            |
|--------------------------|------------|------------------|------------|-------------|------------|------------|------------|-------------------------------------------------------------------------------------|
| Houston, Texas           |       | 244,000          |       | 35.4        |       | Owned      |       | Corporate headquarters, fabrication, contract  compression and aftermarket services |
| Calgary, Alberta, Canada |       | 105,760          |       | 9.2         |       | Owned      |       | Fabrication, contract compression and aftermarket  services                         |
| Yukon, Oklahoma          |       | 72,000           |       | 14.7        |       | Owned      |       | Contract compression and aftermarket services                                       |
| Houma, Louisiana         |       | 60,000           |       | 91.0        |       | Owned      |       | Aftermarket services                                                                |
| Belle Chase, Louisiana   |       | 35,000           |       | 4.0         |       | Owned      |       | Contract compression and aftermarket services                                       |
| Schulenberg, Texas       |       | 23,000           |       | 13.3        |       | Owned      |       | Fabrication, contract compression and aftermarket  services                         |
| Broussard, Louisiana     |       | 24,700           |       | 10.0        |       | Leased     |       | Contract compression and aftermarket services                                       |

 

We believe our facilities aresuitable for their intended purposes and are adequate for our current andanticipated level of operations.

None of these facilities ispledged as collateral, except for our Houston, Texas corporate headquarters,which has been pledged as collateral to secure our $500 million senior securedcredit facility.

**ITEM 3. *Legal Proceedings***

 In the ordinary course of business, weare involved in various pending or threatened legal actions. In the opinion ofmanagement, the amount of ultimate liability, if any, with respect to theseactions will not have a material adverse effect on our financial position,results of operations or cash flows; however, because of the inherentuncertainty of litigation, we cannot provide assurance that the resolution ofany particular claim or proceeding to which we are a party will not have amaterial adverse effect on our financial position, results of operations orcash flows for the period in which that resolution occurs.

**ITEM 4. *Submission of Matters to a Vote of Security Holders***

There were no matters submittedto a vote of security holders during the quarter ended December 31, 2006.

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**PART II**

**ITEM 5. *Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities***

Holdings’ common stock is tradedon the New York Stock Exchange under the symbol “UCO.” The following table setsforth the range of high and low sale prices for Holdings’ common stock for theperiods indicated.
|                    | ** ** | **Price Range** | ** ** |
|--------------------|------------|----------------------|------------|
| ** **         | ** ** | **High**             | ** ** | **Low** | ** ** |
| Quarter Ended:     |       |                 |       |   |   |
| June 30, 2005      |       | $                    | 39.40      |   | $ | 33.12 |   |
| September 30, 2005 |       | 41.97                |       | 35.54 |   |
| December 31, 2005  |       | 43.84                |       | 34.18 |   |
|               |       |                 |       |   |   |
| March 31, 2006     |       | 51.22                |       | 40.51 |   |
| June 30, 2006      |       | 63.70                |       | 49.83 |   |
| September 30, 2006 |       | 65.21                |       | 49.04 |   |
| December 31,  2006 |       | 65.39                |       | 50.00 |   |
|                    |            |                      |            |  |  |  |  |

 

On February 23, 2007, the closingprice of Holdings’ common stock was $69.14 per share. As of February 23, 2007,there were approximately 410 holders of record of its common stock.

Holdings has never declared orpaid any cash dividends to its stockholders and does not plan to pay any cashdividends in the foreseeable future.

OnNovember 6, 2006, Holdings’ board of directors authorized the repurchaseof up to $200 million of its common stock through November 6, 2008. Underthe stock repurchase program, we may repurchase shares in open market purchasesor in privately negotiated transactions in accordance with applicable insidertrading and other securities laws and regulations.  We may also implement all or part of therepurchases under a Rule 10b5-1 trading plan, so as to provide the flexibilityto extend share repurchases beyond the quarterly purchasing window set forth inour insider trading policy.  The timingand extent to which we repurchase shares will depend upon market conditions andother corporate considerations, and will be in management’s discretion.  Repurchases under the program may commence orbe suspended at any time without prior notice. The stock repurchase program maybe funded through cash provided by operating activities or borrowings.  Under the terms of the merger agreementbetween us and Hanover, we may repurchase up to an additional $75 million of ourcommon stock pursuant to the stock repurchase program prior to the consummationof the merger or termination of the merger agreement.

The following table containsinformation about our purchases of our equity securities during the quarterended December 31, 2006.
| Period        | ** ** | **Total Number of Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|---------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 2006  |       | —                                               |       | $                                                | —     |                                                                                                                     | —     |                                                                                                                                                                              | $          | — |   |
| November 2006 |       | 106,700                                              |       | 62.37                                            |       | 106,700                                                                                                                  |       | 193,345,627                                                                                                                                                                       |       |
| December 2006 |       | 462,799                                              |       | 63.52                                            |       | 462,799                                                                                                                  |       | 163,948,514                                                                                                                                                                       |       |
| Total         |       | 569,499                                              |       | $                                                | 63.30      |                                                                                                                     | 569,499    |                                                                                                                                                                              | $          | 163,948,514 |   |

 

The equitycompensation plan information is included in Part III, Item 12 (“SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters”) of this report.

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**PERFORMANCEGRAPH**

The graph depictedbelow shows a comparison of cumulative total shareholder returns for Holdings’common stock to the Standard & Poor’s 500 Stock Index and Standard &Poor’s 500 Energy Equipment & Services Index.  The graph assumes that the value of theinvestment in our common stock, the S&P 500 Stock Index and the S&P 500Energy Equipment & Services Index was $100 at March 31, 2001 and that alldividends were reinvested quarterly.

The information contained in the Performance Graphwill not be deemed to be “soliciting material” or to be “filed” with the SEC,nor will such information be incorporated by reference into any future filingsof the Securities Act of 1933, as amended (the “Securities Act”), or theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), except to theextent that we specifically incorporate it by reference into any such filing.

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**ITEM 6. *Selected Financial Data***

**SELECTEDHISTORICAL FINANCIAL DATAUNIVERSAL COMPRESSION HOLDINGS, INC.**

The following selected historicalconsolidated financial data should be read in conjunction with “Management’s Discussionand Analysis of Financial Condition and Results of Operations” and the audited consolidatedfinancial statements and related notes included elsewhere in this report. Theselected historical financial and operating data for the twelve months endedDecember 31, 2006, the nine months ended December 31, 2005 and each of the threeyears in the period ended March 31, 2005 have been derived from therespective audited financial statements. The consolidated audited financialstatements and report thereon, as of December 31, 2006 and December 31,2005 and for the twelve months ended December 31, 2006, the nine months endedDecember 31, 2005, and the twelve months ended March 31, 2005 are includedelsewhere in this report.
| ** **                                    | ** ** | **Twelve Months  Ended December 31,**               | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                           | ** ** | **2005**                                           | ** ** | **2005**                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**             |       |                                                               |       |                                               |       |                                                  |       |   |   |   |   |
| Revenue                                       |       | $                                                                  | 947,707    |                                               | $          | 613,647                                               |       | $ | 763,070 |   | $ | 688,786 |   | $ | 625,218 |   |
| Gross margin(1)                               |       | 428,651                                                            |       | 271,335                                            |       | 310,254                                               |       | 289,481 |   | 267,968 |   |
| Depreciation and  amortization                |       | 122,701                                                            |       | 79,899                                             |       | 93,797                                                |       | 85,650 |   | 63,706 |   |
| Selling, general and  administrative expenses |       | 118,762                                                            |       | 65,269                                             |       | 75,756                                                |       | 67,516 |   | 67,944 |   |
| Interest expense, net(2)                      |       | 57,349                                                             |       | 40,221                                             |       | 64,188                                                |       | 73,475 |   | 36,421 |   |
| Operating lease  expense(2)                   |       | —                                                             |       | —                                             |       | —                                                |       | — |   | 46,071 |   |
| Debt extinguishment  costs                    |       | 1,125                                                              |       | —                                             |       | 26,543                                                |       | 14,903 |   | — |   |
| Facility consolidation  costs                 |       | —                                                             |       | —                                             |       | —                                                |       | 1,821 |   | — |   |
| Asset impairment expense                      |       | —                                                             |       | —                                             |       | 3,080                                                 |       | — |   | — |   |
| Income tax expense                            |       | 42,277                                                             |       | 31,053                                             |       | 17,213                                                |       | 17,741 |   | 20,975 |   |
| Net income                                    |       | 87,656                                                             |       | 55,369                                             |       | 33,610                                                |       | 30,787 |   | 33,518 |   |
| Earnings per share                            |       |                                                               |       |                                               |       |                                                  |       |   |   |   |   |
| Basic                                         |       | $                                                                  | 2.93       |                                               | $          | 1.74                                                  |       | $ | 1.07 |   | $ | 1.00 |   | $ | 1.09 |   |
| Diluted                                       |       | $                                                                  | 2.82       |                                               | $          | 1.69                                                  |       | $ | 1.04 |   | $ | 0.98 |   | $ | 1.08 |   |
| Weighted average common  stock outstanding    |       |                                                               |       |                                               |       |                                                  |       |   |   |   |   |
| Basic                                         |       | 29,911                                                             |       | 31,773                                             |       | 31,392                                                |       | 30,848 |   | 30,665 |   |
| Diluted                                       |       | 31,032                                                             |       | 32,758                                             |       | 32,224                                                |       | 31,283 |   | 30,928 |   |
| **Other Financial Data:**                     |       |                                                               |       |                                               |       |                                                  |       |   |   |   |   |
| EBITDA, as adjusted(3)                        |       | $                                                                  | 311,817    |                                               | $          | 205,850                                               |       | $ | 232,543 |   | $ | 223,848 |   | $ | 201,150 |   |
| Capital expenditures:                         |       |                                                               |       |                                               |       |                                                  |       |   |   |   |   |
| Expansion                                     |       | $                                                                  | 141,941    |                                               | $          | 60,435                                                |       | $ | 80,477 |   | $ | 47,629 |   | $ | 67,289 |   |
| Overhauls                                     |       | 46,042                                                             |       | 33,458                                             |       | 41,845                                                |       | 27,866 |   | 29,198 |   |
| Other                                         |       | 31,326                                                             |       | 24,192                                             |       | 21,343                                                |       | 11,062 |   | 24,264 |   |
| Cash flows provided by  (used in):            |       |                                                               |       |                                               |       |                                                  |       |   |   |   |   |
| Operating  activities                         |       | $                                                                  | 212,211    |                                               | $          | 144,873                                               |       | $ | 134,056 |   | $ | 165,248 |   | $ | 188,591 |   |
| Investing  activities                         |       | (213,187                                                           | )          | (110,464                                           | )          | (181,476                                              | )          | (46,850 | ) | (107,704 | ) |
| Financing activities                          |       | 8,380                                                              |       | (34,734                                            | )          | (35,589                                               | )          | (69,732 | ) | (13,849 | ) |

 
| ** **                | ** ** | **As of December 31,** | ** ** | **As of March 31,** | ** ** |
|---------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                | ** ** | **2006**               | ** ** | **2005**            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(In thousands)**     | ** ** |
| **Balance Sheet Data:**   |       |                   |       |                |       |   |   |   |   |   |   |
| Cash                      |       | $                      | 46,997     |                | $          | 39,262 |   | $ | 38,723 |   | $ | 121,189 |   | $ | 71,693 |   |
| Working capital(4)        |       | 184,979                |       | 144,714             |       | 115,836 |   | 174,599 |   | 158,405 |   |
| Total assets              |       | 2,342,031              |       | 2,095,295           |       | 2,022,758 |   | 1,972,451 |   | 1,953,887 |   |
| Total debt(5)             |       | 830,554                |       | 923,341             |       | 858,096 |   | 884,442 |   | 945,155 |   |
| Stockholders’ equity |       | 916,430                |       | 831,312             |       | 861,672 |   | 799,235 |   | 744,451 |   |
|                           |            |                        |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) | Gross margin is defined, reconciled to net income  and discussed further in Part II, Item 6 (“Selected Financial Data  – Non-GAAP Financial Measures”) of this report.         |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Operating lease expense related to the operating  lease facilities has been recognized as interest expense subsequent to  consolidation of the operating lease facilities on December 31, 2002.    |
| (3) | EBITDA, as adjusted, is defined, reconciled to net  income and discussed further in Part II, Item 6 (“Selected  Financial Data – Non GAAP Financial Measures”) of this report. |
| (4) | Working capital is defined as current assets minus  current liabilities.                                                                                                                                |
| (5) | Includes capital lease obligations.                                                                                                                                                                     |

 

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**NON-GAAPFINANCIAL MEASURES**

*Ourdefinition and use of EBITDA, as adjusted*

EBITDA, as adjusted, is definedas net income plus income taxes, interest expense (including debtextinguishment costs and gain on the termination of interest rate swapagreements), operating lease expense, depreciation and amortization, foreigncurrency gains or losses, minority interest, excluding non-recurring items(including facility consolidation costs).

EBITDA, as adjusted, represents ameasure upon which management assesses performance and, as such, we believethat the generally accepted accounting principle (“GAAP”) measure most directlycomparable to it is net income or net loss. The manner in which management usesEBITDA, as adjusted, to evaluate our business follows.

*EBITDA, asadjusted, as a supplemental measure to review current period operatingperformance.*  Management uses EBITDA, as adjusted, as asupplemental measure to evaluate the current period operating performance ofour business. We believe that EBITDA, as adjusted, when viewed with our GAAPresults and the accompanying reconciliations and other financial andnon-financial measures, provides a useful additional perspective on, and a morecomplete understanding of, our performance than our GAAP results alone.

·                  Managementuses EBITDA, as adjusted, to evaluate current operating performance andmanagement decisions made during the reporting period, excluding certainexpenses that are driven less by current period operating performance andmanagement decisions than by our capital structure and asset base. Theseexcluded expenses, which are primarily financial costs, include depreciation,interest, taxes and foreign currency exchange costs and more reflect priorperiod transactions and decisions. The operational factors highlighted in theevaluation using EBITDA, as adjusted, include pricing, marketing, utilizationrates, maintenance and repair costs and staffing. EBITDA, as adjusted, presentsan assessment of the performance and changes in the profitability driven bythese operational factors irrespective of changes in the other factors noted,namely interest, taxes and foreign currency exchange costs. See below forfurther discussion of each of the items excluded from our calculation ofEBITDA, as adjusted.

·                  EBITDA,as adjusted is not the only measure used by management to evaluate performance,but rather a supplemental one used in conjunction with other measures.Management uses several measures to evaluate performance, including bothfinancial and non-financial measures, as well as GAAP and non-GAAP measures,including utilization rates, maintenance and growth capital expenditures, grossmargin and return on invested capital.

·                  Managementuses EBITDA, as adjusted, as well as certain other measures, as an intermediateperformance measure, similar to the manner in which management uses gross margin,not as an ultimate performance measure, such as net income. Management does notview or use EBITDA, as adjusted, or any other intermediate measure or item in ourfinancial statements, including revenue, gross profit, gross margin or net cashprovided by operating activities, as a measure of our full results ofoperations or as a substitute for net income. Rather, analyzing an intermediatemeasure such as EBITDA, as adjusted, allows management to evaluate better thereasons underlying net income results. We urge users of our reports andfinancial statements to read such reports and financial statements in theirentirety and not to use any one measure in isolation to evaluate our results oran investment in us.

*EBITDA, asadjusted, as a comparability measure.*  Management uses EBITDA, asadjusted, to compare the Company’s performance with that of other companies.Although other companies may calculate EBITDA differently, the measure willusually present operating performance on a basis that is meaningful forcomparative purposes. We urge the readers of our reports and financialstatements, including our disclosure of EBITDA, as adjusted, to reviewcarefully the reconciliation of the non-GAAP measure to net income or loss setforth in the table below.

·                  Despitedefinitional differences, management believes that EBITDA, as adjusted, is ameaningful measure to evaluate and compare the performance of one companyagainst another because of the impact of management estimates on the items thatare excluded from EBITDA, as adjusted. For example, depreciation expense isdependent upon, among other things, the estimated depreciable lives of acompany’s assets, which may vary from company to company depending onmanagement’s maintenance practices and operating philosophies, as we have notedthrough our prior acquisition activity. EBITDA, as adjusted, provides a measureto review operating performance independent of this management estimate.

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·                  Managementbelieves that EBITDA, as adjusted, is a meaningful measure to evaluateperformance because the amount of depreciation expense in a company’s financialstatements may not accurately reflect the costs required to maintain andreplenish a company’s operational usage of its assets. Rather, depreciationexpense reflects the systematic allocation of the historical fixed asset valuesover the estimated useful lives of those assets. For example, for the twelve monthsended December 31, 2006, we recorded depreciation and amortization expenseof $122.7 million, substantially all of which was depreciation expense, and hadcapital expenditures of $219.3 million for compressor overhauls, ourprimary maintenance capital expenditure. By excluding depreciation and certainrelated or consequential costs, including amortization and taxes, EBITDA, asadjusted, provides a measure with which to evaluate the performance independentof, and in a manner that allows one to assess, whether depreciation accuratelycaptures the costs to maintain and replenish our operational usage of ourassets.

·                  Wehave observed that both equity and debt analysts utilize EBITDA to evaluate theon-going performance of and valuation metrics for a company both over time andrelative to its peers. We have observed that several of the analysts who reviewour company utilize EBITDA as one of the primary valuation metrics. Byproviding EBITDA, as adjusted, we believe we are providing information andcalculations to aid these analysts in more accurately understanding ourperformance for the benefit of our investors.

*EBITDA, asadjusted, as a performance measure for period to period comparisons.*  Managementuses EBITDA, as adjusted, as a measure of the performance of our business overtime and as a tool in identifying key trends.

·                  EBITDA,as adjusted, by excluding items that are infrequent or uncommon in nature,assists management in identifying and understanding changes in performance fromperiod to period that may not be apparent from solely viewing GAAP measures.

·                  Byexcluding infrequent or uncommon items, management believes EBITDA, asadjusted, enhances the transparency of the disclosure regarding ourperformance. As such, the measure allows management to be more accountable toinvestors’ expectations by providing the market with additional informationwith which to assess our performance and make investment decisions.

*EBITDA, asadjusted, as a valuation measure.*  Just as investors monitor andreview a variety of financial and performance indicators, such as the marketstock price to earnings ratio and the enterprise value to EBITDA ratio,management monitors these ratios to better understand the value of our companyand how to increase that value for our investors. For example, management hasroutinely utilized an EBITDA measure as a method to value companies whenconsidering potential acquisition targets. This measure is utilized for thereasons discussed above; it allows for an evaluation of the target independentof its historical capital structure, depreciation estimates, tax position, andincurrence of infrequent or more uncommon items. Moreover, management believesinvestors that desire to evaluate us as a potential target will also utilize ourEBITDA, as adjusted, as part of their evaluation.

Below are the items excluded fromnet income in the calculation of EBITDA, as adjusted, and the reasons for theexclusion:

·                  Interestexpense is excluded from the calculation of EBITDA, as adjusted. Althoughinterest expense is a material expense for us and it reflects an importantcomponent of our overall performance, as it reflects costs incurred to financeour operations, interest expense also reflects the performance of our financialarrangements in ways that are unrelated to the shorter-term performance of ouroperations. For example, the amount of interest expense incurred in any periodreflects, among other things, market availability of funds at separate andhistorical points in time, the overall historical cost of debt and the resultsof how management, at a past point in time, decided to capitalize the businessthrough the issuance of debt or equity. EBITDA, as adjusted, removes the effectof the performance of these past historical financial transactions, whetherbeneficial or detrimental to our GAAP results, both in the current period andfrom period-to-period, so that the performance of the core operations can bemore transparently evaluated. For example, despite how management decided tocapitalize us either through debt or equity in the past, the measure of EBITDA,as adjusted, would not be impacted and would continue to reflect a consistentmeasure of the operational performance of the business.

·                  Incometax expense is excluded from the calculation of EBITDA, as adjusted. Managementdoes not consider tax expense, which is materially impacted by other itemsexcluded from the measure (such as interest expense and

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depreciation andamortization expense) as well as numerous tax regulations and our tax planning,to be a part of the core operations and are not considered directly within thecontrol of operational management and is therefore excluded from the measure.

·                  Depreciationand amortization is excluded from the calculation of EBITDA, as adjusted.Although, we are a capital-intensive business and depreciation expense is amaterial expense for us, this expense may not accurately reflect the costsrequired to maintain and replenish the operational usage of our assets andtherefore may not portray the costs from current operational transactionactivity. Rather, depreciation expense reflects the systematic allocation ofthe historical fixed asset values over the estimated useful lives of thoseassets.

·                  Operatinglease expense is related to the operating lease facilities that, untilDecember 31, 2002, were not included in our consolidated balance sheet andsubstantively reflected the cost of debt (interest expense) related to thesefinancing arrangements. We excluded the lease expense from EBITDA, as adjusted,as it represents the equivalent of interest expense.  It would potentially be misleading to excludeinterest expense from EBITDA, as adjusted, but include lease expense as theyboth reflect a financial arrangement, not an operational one.

·                  Gainon termination of interest rate swap agreements relate to the reducing of thenotional amount of interest rate swap agreements in connection with a principalreduction related to our ABS facility in June 2004. We do not considerthis gain to be part of our core operations. Rather, this gain is a function ofour capital structure, which, like interest expense, reflects past capitalstructure decisions and changes in the cost of debt. Accordingly, this gain isexcluded from the calculation of EBITDA, as adjusted.

·                  Foreigncurrency gains and losses are primarily attributable to foreign currencyexchange rate fluctuations relating to our international operations and areimpacted by foreign currency risk mitigation strategies the business may or maynot undertake. Although these gains or losses have not been significant, theyare not viewed by management as part of the core operations and are notconsidered directly within the control of operational management. Accordingly,these gains or losses are excluded from the measure for these reasons.

·                  Facilityconsolidation costs relate to the transfer of the Tulsa, Oklahoma fabricationactivity to the Houston, Texas fabrication facility. These costs were primarilyfor severance, personnel and relocation costs. We do not consider these coststo be part of our core operations and the consolidation was disclosed in thefootnotes to our consolidated financial statements related to the period inwhich they were incurred.

·                  Debtextinguishment costs relate primarily to the early extinguishment of debt. Debtextinguishment costs incurred during the twelve month period ended December 31,2006 related to the early extinguishment of the senior secured credit facilitywe entered into in January 2005.  Debtextinguishment costs incurred during the nine months ended December 31, 2005related to the early extinguishment of our seven-year term loan.  Debt extinguishment costs incurred during thetwelve months ended March 31, 2005 primarily relate to the early extinguishmentof the $82.2 million term loan due 2008 and $440.0 million 8 7/8%senior notes due 2008. Debt extinguishment costs incurred during the twelvemonths ended March 31, 2004 relate primarily to the early extinguishment of ouroutstanding $229.8 million 9 7/8% senior discount notes due 2008.  We do not consider these costs to be part ofour core operations. Rather, these costs are a function of our capitalstructure, which, like interest expense, reflects past capital structuredecisions and changes in the cost of debt. Accordingly, these costs areexcluded from the calculation of EBITDA, as adjusted.

We believe disclosure of thisnon-GAAP measure provides useful information to investors because, when viewedwith our GAAP results and accompanying reconciliations, it provides a morecomplete understanding of our performance than GAAP results alone. This is thecase because this non-GAAP financial measure excludes from earnings financialand other items that have less bearing on operating performance. When usingthis measure to compare to other companies, which we believe can be a usefultool to evaluate us, please note that an EBITDA measure may be calculateddifferently between companies, as it is a non-GAAP measure. We cannot ensurethat EBITDA, as adjusted, is directly comparable to other companies’ similarlytitled measures. We urge the readers of financial statements to review thereconciliation of the non-GAAP measure to the most comparable GAAP measure tounderstand any differences that may exist between companies. Nonetheless, wehave shown EBITDA, as adjusted, its definition and its calculation in order todisclose how management uses it, to present the exclusions made and thelimitations of it as a measure.

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EBITDA, as adjusted, has certainmaterial limitations associated with its use as compared to net income. Theselimitations are primarily due to the exclusion of certain amounts that arematerial to our consolidated results of operations, as follows:

·                  EBITDA,as adjusted, does not include interest expense or operating lease expense (includingdebt extinguishment costs and gain on the termination of interest rate swapagreements). Because we have borrowed money in order to finance our operations,interest expense and operating lease expense are necessary elements of ourcosts and our ability to generate revenue. Therefore, any measure that excludesinterest expense or operating lease expense has this material limitation.

·                  EBITDA,as adjusted, does not include income tax expense. Because the payment of taxesis a necessary element of our operations, any measure that excludes income taxexpense has this material limitation.

·                  EBITDA,as adjusted, does not include depreciation and amortization expense. Because weuse capital assets, depreciation is a necessary element of our costs and ourability to generate revenue. Therefore, any measure that excludes depreciationand amortization expense has this material limitation.

·                  EBITDA,as adjusted, excludes the impact of foreign currency gains and losses. Becausewe operate in an international environment, foreign currency gains and losseshave a real economic impact on our operations. Therefore, any measure thatexcludes these effects has this material limitation.

·                  EBITDA,as adjusted, excludes other costs and expenses, such as non-recurring charges,as discussed above. These costs were excluded primarily because we do notconsider these costs to be part of our core operations. Because we will incurcosts from time to time that are not part of our core operations, any measurethat excludes these costs has this material limitation.

Use of EBITDA, as adjusted, byitself and without consideration of other measures, is not an adequate measureof our performance because this measure excludes certain material items, asnoted above. Further, the measure has a limitation in that many users offinancial statements believe that EBITDA is a measure of liquidity or of cashflows. We do not use EBITDA, as adjusted, in this way because it excludesinterest payments and changes in working capital accounts and therefore, weurge the readers of our financial statements to not use the measure in this wayeither. Management compensates for these limitations by using EBITDA, asadjusted, as a supplemental measure to other GAAP results to provide a morecomplete understanding of our performance without considering financial andother items that have less bearing on operating performance. The measure has alimitation, as it does not consider the amount of required reinvestment tomaintain similar going forward results. Management mitigates this limitation byreviewing and disclosing our capital and maintenance capital expenditures on aregular basis as yet another supplemental tool to evaluate us.

EBITDA, as adjusted, is not ameasure of financial performance under GAAP and should not be considered analternative to operating income or net income as an indicator of our operatingperformance or to net cash provided by operating activities as a measure of ourliquidity.

*Our definition and use of grossmargin*

We define gross marginas total revenue less cost of sales (excluding depreciation and amortizationexpense).  Gross margin is included as asupplemental disclosure because it is a primary measure used by our managementas it represents the results of revenue and cost of sales (excludingdepreciation and amortization expense), which are key components of ouroperations.  Gross margin differs fromgross profit which includes depreciation expense.  We believe gross margin is important becauseit focuses on the current operating performance of our operations and excludesthe impact of the prior historical costs of the assets acquired or constructedthat are utilized in those operations, the indirect costs associated with ourselling, general and administrative activities, the impact of our financingmethods and income taxes.  As describedabove, depreciation expense may not accurately reflect the costs required tomaintain and replenish the operational usage of our assets and therefore maynot portray the costs from current operating activity.  Rather, depreciation expense reflects thesystematic allocation of historical fixed asset values over the estimateduseful lives.

Gross margin hascertain material limitations associated with its use as compared to netincome.  These limitations are primarilydue to the exclusion of certain expenses. Each of these excluded expenses is material to our consolidated resultsof operations.  Because we use capital assets,depreciation expense is a necessary element of our costs and our ability to

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generate revenue andselling, general and administrative expense is a necessary cost to support ouroperations and required corporate activities. In order to compensate for these limitations, management uses thisnon-GAAP measure as a supplemental measure to other GAAP results to provide amore complete understanding of our performance.

As an indicator ofour operating performance, gross margin should not be considered an alternativeto, or more meaningful than, net income as determined in accordance withGAAP.  Our gross margin may not becomparable to a similarly titled measure of another company because otherentities may not calculate gross margin in the same manner.

*Reconciliation*

The following tablereconciles Holdings’ net income to EBITDA, as adjusted; and gross margin:
| ** **                                            | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | ** **                                           | ** ** | ** **                                         | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income**                                        |       | $                                                    | 87,656     |                                               | $          | 50,879                                                |       | $ | 55,369 |   | $ | 38,100 |   | $ | 33,610 |   | $ | 30,787 |   | $ | 33,518 |   |
| Interest  expense, net                                |       | 57,349                                               |       | 54,617                                             |       | 40,221                                                |       | 49,792 |   | 64,188 |   | 73,475 |   | 36,421 |   |
| Income tax  expense                                   |       | 42,277                                               |       | 27,483                                             |       | 31,053                                                |       | 20,783 |   | 17,213 |   | 17,741 |   | 20,975 |   |
| Depreciation and  amortization                        |       | 122,701                                              |       | 104,289                                            |       | 79,899                                                |       | 69,407 |   | 93,797 |   | 85,650 |   | 63,706 |   |
|  Foreign currency (gain) loss                    |       | (645                                                 | )          | (589                                               | )          | (692                                                  | )          | 286 |   | 389 |   | (529 | ) | 459 |   |
| Debt  extinguishment costs                            |       | 1,125                                                |       | 26,068                                             |       | —                                                |       | 475 |   | 26,543 |   | 14,903 |   | — |   |
| Minority  interest                                    |       | 1,354                                                |       | —                                             |       | —                                                |       | — |   | — |   | — |   | — |   |
| Operating lease  expense                              |       | —                                               |       | —                                             |       | —                                                |       | — |   | — |   | — |   | 46,071 |   |
| Facility  consolidation costs                         |       | —                                               |       | —                                             |       | —                                                |       | — |   | — |   | 1,821 |   | — |   |
| Gain on  termination of interest rate swap agreements |       | —                                               |       | —                                             |       | —                                                |       | (3,197 | ) | (3,197 | ) | — |   | — |   |
| **EBITDA, as adjusted**                               |       | 311,817                                              |       | 262,747                                            |       | 205,850                                               |       | 175,646 |   | 232,543 |   | 223,848 |   | 201,150 |   |
| Asset impairment  expense                             |       | —                                               |       | 3,080                                              |       | —                                                |       | — |   | 3,080 |   | — |   | — |   |
| Other (income)  loss, net                             |       | (1,928                                               | )          | (681                                               | )          | 216                                                   |       | (228 | ) | (1,125 | ) | (1,883 | ) | (1,126 | ) |
| Selling, general  and administrative                  |       | 118,762                                              |       | 85,341                                             |       | 65,269                                                |       | 55,684 |   | 75,756 |   | 67,516 |   | 67,944 |   |
| **Gross margin**                                      |       | $                                                    | 428,651    |                                               | $          | 350,487                                               |       | $ | 271,335 |   | $ | 231,102 |   | $ | 310,254 |   | $ | 289,481 |   | $ | 267,968 |   |

 

Data for thetwelve months ended December 31, 2005 is derived from our audited consolidatedfinancial statements for the nine-month transition period ended December 31,2005 and our unaudited consolidated financial statements for the three-monthperiod ended March 31, 2005.  Data forthe nine months ended December 31, 2004 is derived from our unauditedconsolidated financial statements, which were presented in our Form 10-Q forthe nine months ended December 31, 2004.

Amounts for the twelvemonths ended December 31, 2006 are for both Holdings and Universal with thefollowing exceptions:  Universal hadinterest expense, net of $57.2 million, interest income from an affiliate of $5.7million, income tax expense of $44.4 million and net income of $91.5million.  Amounts for the twelve monthsended December 31, 2005 are for both Holdings and Universal with the followingexceptions:  Universal had interestincome from an affiliate of $0.3 million, income tax expense of $27.6 millionand net income of $51.1 million.  Amountsfor the nine months ended December 31, 2005 are for both Holdings and Universalwith the following exceptions:  Universalhad interest income from an affiliate of $0.3 million, income tax expense of $31.2million and net income of $55.5 million. The results of operations for Holdings

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and Universal were identical for the nine monthsended December 31, 2004 and the twelve months ended March 31, 2005, 2004, and2003.

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**ITEM 7. *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

*The followingdiscussion and analysis of financial condition and results of operations shouldbe read in conjunction with our financial statements, and the notes thereto,and the other financial information appearing elsewhere in this report. Thefollowing discussion includes forward-looking statements that involve certainrisks and uncertainties. See “Part I. Disclosure Regarding Forward-LookingStatements” and “Part 1. Item 1A. Risk Factors.”*

The terms “our,” “Company,” “we” and “us” when used inthis report refer to Universal Compression Holdings, Inc. (“Holdings”) andUniversal Compression, Inc. (“Universal”) and their subsidiaries, exceptwhere otherwise indicated.

**Overview**

*General*

We provide a full range ofnatural gas compression services and products, including sales, operations,maintenance and fabrication to the natural gas industry, both domestically andinternationally. Through our core business, contract compression, and our fleetas of December 31, 2006 of approximately 7,100 compressor units comprisingapproximately 2.7 million horsepower, we provide natural gas compression servicesto domestic and international customers. Through our equipment fabricationbusiness we design, engineer and assemble natural gas compressors for sale tothird parties and for use in our contract compression fleet. Through ouraftermarket services business, we sell parts and components and providemaintenance and operations services to customers who own their compressionequipment or use equipment provided by other companies. These services andproducts are essential to the natural gas industry because gas must becompressed to be delivered from the wellhead to end users and, sometimes in thecase of declining reservoir pressure, in order to get to the wellhead itself.Our customers consist primarily of domestic and international oil and gascompanies, international state-owned oil and gas companies and natural gasproducers, processors, gatherers and pipelines.

Generally, our overall businessactivity and revenue increase as the demand for natural gas increases. In theUnited States, increases in the demand for compression services and productsare driven by growth in the production of natural gas, by declining reservoirpressure in maturing natural gas producing fields and, more recently, byincreased demand for compression equipment for growing non-conventional naturalgas production, from places such as coal bed methane, tight sands and shalegas. In international markets, increases in the demand for compression servicesand products are driven by growth in natural gas industry infrastructure,environmental initiatives encouraging the production and consumption of naturalgas and the growth in the worldwide transportation and use of natural gas. Thedemand for compression services is also driven by general increases in thedemand for energy fuel stocks, including natural gas, which is generally drivenby economic growth, and by increases in the outsourcing of compression needs.

*Pending Merger with Hanover C**ompressor Company*

In February 2007, we andHanover entered into a merger agreement. Upon consummation of the transactionsset forth in the merger agreement, each common share of Hanover will beconverted into 0.325 shares of common stock of a newly created holding company,and each common share of Holdings will be converted into one share of theholding company.   Closing of thetransaction is subject to a number of customary conditions and is currentlyanticipated in the third quarter of 2007.

The mergeragreement requires us and Hanover to continue to operate our businesses in theordinary course of business and to obtain the other party’s consent prior toengaging in certain specified activities, such as issuing or repurchasingsecurities, acquiring or disposing of businesses above specified thresholds,incurring new debt other than below specified thresholds or for specifiedpurposes, paying dividends or granting awards with respect to our common stock(other than under employee compensation arrangements). These agreements aresubject to specified exceptions, including those (1) permitting us torepurchase up to an additional $75 million of our common stock in accordancewith our previously announced open-market stock repurchase program, (2)permitting the Partnership to make cash distributions in accordance with itspartnership agreement, (3) permitting us to make contributions of our domesticcompression assets to the Partnership and (4) permitting us to redeem our 71/4% senior notes due 2010.

Furtherinformation concerning the structure and details of the proposed merger is setforth above in Part 1, Item 1

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(“Business”) of thisreport, and in our Current Report on Form 8-K dated February 5, 2007, whichincludes as exhibits the merger agreement and a joint press release from us andHanover announcing the execution of the merger agreement.  The information in this report does notreflect the consummation of the merger or the anticipated business, operationsor results of the combined company.

*Initial Public Offering ofSubsidiary Company*

In October 2006, asubsidiary of ours, Universal Compression Partners, L.P. (along with itssubsidiaries, “the Partnership”), completed an initial public offering of6,325,000 common units at a price of $21.00 per unit, representing limitedpartner interests in the Partnership, including 825,000 common units soldpursuant to the exercise of the underwriters’ overallotment option. All of theunits were issued by the Partnership. The Partnership was formed to provide natural gas contract compressionservices to customers throughout the United States. A subsidiary of ours is thegeneral partner of the Partnership.

The net proceedsof the offering were $120.7 million after deducting underwriting discounts andcommissions and expenses associated with the offering.  In connection with the offering, wecontributed to the Partnership contract compression services contracts withnine customers and a fleet of compressor units to service those customers,comprising approximately 330,000 horsepower, or approximately 17% (by availablehorsepower) of our domestic contract compression business at that time.  The Partnership assumed $228.4 million indebt from us and we received 825,000 common units and 6,325,000 subordinatedunits representing limited partner interests in the Partnership.  The Partnership used the aggregate netproceeds from the offering to repay a portion of the debt it assumed from usand to redeem the 825,000 common units it issued to us.

The common unitssold to the public represent a 49% limited partner interest in the Partnership.We own the remaining equity interests in the Partnership.  We consolidate the financial position andresults of operations of the Partnership.

We and thePartnership entered into an omnibus agreement, the terms of which include,among other things, our agreement to provide to the Partnership operationalstaff, corporate staff and support services, the terms under which we may sellto the Partnership newly-fabricated equipment and under which we may transferto and receive from the Partnership idle compression equipment and an agreementby us to provide caps on the amount of cost of sales and selling, general andadministrative costs that the Partnership must pay.  The caps are determined on a quarterly basisand expire on December 31, 2008.

*Stock Repurchase Program*

OnNovember 6, 2006, Holdings’ board of directors authorized the repurchaseof up to $200 million of its common stock through November 6, 2008. Underthe stock repurchase program, we may repurchase shares in open market purchasesor in privately negotiated transactions in accordance with applicable insidertrading and other securities laws and regulations.  We may also implement all or part of therepurchases under a Rule 10b5-1 trading plan, so as to provide the flexibilityto extend share repurchases beyond the quarterly purchasing window.  The timing and extent to which we repurchaseshares will depend upon market conditions and other corporate considerations,and will be in management’s discretion. Repurchases under the program may commence or be suspended at any timewithout prior notice. The stock repurchase program may be funded through cashprovided by operating activities or borrowings. Under the terms of the merger agreement between us and Hanover, we mayrepurchase up to an additional $75 million of our common stock pursuant to the stockrepurchase program prior to the consummation of the merger or the terminationof the merger agreement.

During the quarterended December 31, 2006, we repurchased 569,499 shares of our common stock at anaggregate cost of $36.1 million.

*Industry Conditions and Trends*

*Natural GasIndustry.*  Worldwide consumption of natural gasincreased from approximately 53 trillion cubic feet in 1980 to approximately 95trillion cubic feet in 2003, although consumption levels in the United Statesdeclined in the early 2000s primarily due to an economic slowdown and continueto be relatively flat today. Industry sources expect the long-term growth trendof worldwide gas consumption to continue. We believe the growing demand inelectrical power generation is a contributing factor in the worldwide growth ofnatural gas consumption as natural gas tends to be the fuel of choice for newpower plants.

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The United States accounted foran estimated annual production of approximately 19 trillion cubic feet ofnatural gas in calendar year 2003, or 20% of the worldwide total, compared toan estimated annual production of approximately 76 trillion cubic feet in therest of the world.  Industry sourcesestimate that the United States’ natural gas production level will beapproximately 21 trillion cubic feet in calendar year 2025, or 13% of theworldwide total, compared to an estimated annual production of approximately144 trillion cubic feet in the rest of the world.  As of January 1, 2006, the United Statesnatural gas reserves were estimated at 193 trillion cubic feet, or 3.1% of theworldwide total.

*Natural GasCompression Services Industry.*  The natural gas compressionservices industry has experienced a significant increase in the demand for itsproducts and services from the early 1990s. A high level of compressionindustry capital expenditures and reduced demand due to lackluster economicactivity resulted in reduced contract compression fleet utilization beginningin late calendar 2001, continuing into calendar 2002. Industry utilizationstabilized in the second half of calendar 2002 and began to increase duringcalendar 2003 as a result of reduced capital expenditures and increasing demanddue to improving economic activity. During calendar 2003 the industry did notmaterially increase the supply of contract compression units in the UnitedStates due to an emphasis on the redeployment of idle units while growth ininternational markets continued. During calendar years 2004 through 2006, theindustry began to increase capital expenditure levels in the United States asincreasing utilization levels caused a shortage in the supply of available,large horsepower units, while international growth continued.

We believe the contractcompression services industry, particularly in the United States, will continueto have significant growth opportunity due to the following factors:

·                  agingproducing natural gas fields which will require more compression to continueproducing the same volume of natural gas; and

·                  increasing production fromunconventional sources, which include tight sands, shale and coal bed methane,which generally require more compression than production from conventionalsources to produce the same volume of natural gas.

While the international contract compressionservices market is currently smaller than the domestic market, we believe thereare growth opportunities in international demand for compression services andproducts due to the following factors:

·                  implementationof international environmental and conservation laws preventing the practice offlaring natural gas and recognition of natural gas as a clean air fuel;

·                  adesire by a number of oil exporting nations to replace oil with natural gas asa fuel source in local markets to allow greater export of oil;

·                  increasingdevelopment of pipeline infrastructure, particularly in Latin America and Asia,necessary to transport natural gas to local markets;

·                  growingdemand for electrical power generation, for which the fuel of choice tends tobe natural gas; and

·                  privatizationof state-owned energy producers, resulting in increased outsourcing due to thefocus on reducing capital expenditures and enhancing cash flow andprofitability.

*Company Performance Trends and Outlook*

The outlook we discussin this section does not reflect the consummation of our proposed merger withHanover or the anticipated business, operations or results of the combinedcompany.

For the twelvemonths ending December 31, 2007, we continue to expect strong demand in thecontract compression segment and expect to add a similar amount of horsepowerto our existing fleet as we did during 2006. We expect to spend between $225 million and $250 million during 2007 oncapital expenditures, including approximately $50 million to $55 million onmaintenance capital expenditures.  Withinthe domestic contract compression segment, we expect that operating costs willmoderate during 2007 and, partially as a result of lesser cost increases, weexpect only modest price increases during 2007. We expect fabrication revenue for 2007 to be in excess of $300 millionwith approximately 60% of segment revenues to be generated in the second andthird quarters of the year.

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We are investingin key initiatives to help support the future growth of our company.  These initiatives include an increasedmarketing and business development commitment targeted at internationalexpansion and the implementation of our new company-wide enterprise resourceplanning (“ERP”) system.

We currently intend for thePartnership to be our primary growth vehicle for our domestic contractcompression business.  To this end, wemay contribute additional domestic contract compression customers to thePartnership in 2007 in exchange for cash and/or additional interests in thePartnership.  Such transactions woulddepend on, among other things, reaching agreement with the Partnershipregarding the terms of the purchase, which will require approval of theconflicts committee of the board of directors of the general partner of the Partnership,and the Partnership’s ability to finance any such purchase.

*Certain Key Challenges andUncertainties*

Market conditions in the naturalgas industry, competition in the natural gas compression industry and the risksinherent in our on-going international expansion continue to represent keychallenges and uncertainties.  Inaddition to those, we believe the following represent some of the keychallenges and uncertainties we will face in the near future.

*Proposed Merger with Hanover*.  Although weand Hanover have entered a merger agreement, uncertainty remains as to whether the merger will be consummated and, ifso, whether it will do so subject to certain restrictions or limitations.  Consummation of the merger is subjectto customary conditions, including, among others, the following, some of whichour outside our control:

·                  theapproval of our stockholders and Hanover’s stockholders;

·                  thereceipt of required regulatory approvals, including the approval of antitrustauthorities;

·                  thereceipt of consents under the parties’ respective bank credit facilities andthe arrangement of financings to provide sufficient funds to repay orrepurchase any indebtedness required to be repaid upon consummation of themerger; and

·                  theabsence of any material adverse effect with respect to Hanover’s and ourbusiness.

We have no assurance that the necessary approvals willbe obtained or that there will not be any adverse consequences to our businessresulting from conditions that could be imposed in connection with obtainingthese approvals, including divestitures or operating restrictions.  Thisuncertainty could harm our relationships with our current customers,employees and suppliers.

If the merger iscompleted, the combined company will face a number of other importantchallenges and uncertainties, including the risks that the anticipated benefitsof combining us and Hanover may not be realized, integration of the twocompanies may be more difficult than anticipated and required refinancings maynot be made on favorable terms.

If the merger is not completed, we have incurred, andwill continue to incur, substantial legal, financial advisory and otherexpenses associated with it.  Inaddition, the provision in the merger agreement under which we have agreed tooperate our business  in the “ordinarycourse” pending the closing of the merger may constrain certain decisions wewould make were we not so bound.

*Supply of Components*.  As wecontinue to grow and in light of the currently favorable energy industry marketconditions, our ability to timely and cost-effectively obtain componentsnecessary to provide comprehensive compression services through each of ourbusiness segments has become more challenging and important.  This issue is compounded by the fact thatsome of the components used in our products are obtained from a single sourceor a limited group of suppliers. Our reliance on these suppliers involvesseveral risks, including price increases that could have a negative impact onour results of operations,

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inferior component quality that could increase ourwarranty costs and a potential inability to obtain an adequate supply to timelysatisfy customer demand.  We attempt tominimize our exposure to these risks through, among other things, strategicalliances with key vendors, maintaining adequate inventories of long-lead timecomponents and seeking out competitive, quality alternatives to our existingcomponent sources.

*Labor*.  As wecontinue to grow both domestically and internationally and in light of thecurrently favorable energy industry market conditions, we believe our abilityto hire, train and retain qualified personnel has become more challenging andimportant.  In particular, the supply ofexperienced operational, fabrication and field personnel continues to be tightand our demand for such personnel continues to grow.  Although we have been able to satisfy ourpersonnel needs in these positions thus far, retaining these employees has beena challenge.  To increase retention of qualifiedoperating personnel, we have instituted programs that enhance skills andprovide on-going training.    Our abilityto continue our growth will depend in part on our success in hiring, trainingand retaining these employees.

*ERP*.  Theon-going implementation of our enterprise resource planning (“ERP”) system isanticipated to have a continuing impact on our selling, general andadministrative expenses until implementation is completed, which we anticipatewill be in 2007 for our North America operations.  We expect to see continuing ERP-relatedexpense at current levels through the remainder of 2007.  Moreover, implementation problems, ifencountered, could negatively impact our business by disrupting ouroperations.  Although we currently haveno reason to believe that any such significant implementation problems willoccur, there are inherent limitations in our ability to predict and plan forthese risks and estimate the magnitude of their impact.  Consequently, it is possible that theoccurrence of a significant implementation problem could be material to ourbusiness operations.

*Change in Fiscal Year End*

In December 2005,our board of directors approved a change to our fiscal year end from March 31to December 31, effective in 2005, which resulted in us preparing a transitionreport for the nine-month period ended December 31, 2005.  Our fiscal year ended December 31, 2006represents a twelve-month period. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (“MD&A”) compares financial information as of and for thetwelve months ended December 31, 2006 with financial information as of and forthe twelve months ended December 31, 2005 and compares the nine months endedDecember 31, 2005 with financial information as of and for the nine monthsended December 31, 2004.  Note thatalthough consolidated financial statements are not presented as of and for thetwelve months ended December 31, 2005 and the nine months ended December 31,2004, we have included summary information in MD&A for these periods forcomparability purposes.

In MD&A, financial information for all periods exceptas of and for the twelve months ended December 31, 2005 and the nine monthsended December 31, 2004 are derived from our audited consolidated financialstatements, included elsewhere in this report. Data as of and for the twelvemonths ended December 31, 2005 is derived from our audited consolidatedfinancial statements for the nine-month transition period ended December 31,2005 and our unaudited consolidated financial statements for the three-monthperiod ended March 31, 2005.  Data as ofand for the nine months ended December 31, 2004 is derived from our unauditedconsolidated financial statements, which were presented in our Form 10-Q forthe nine months ended December 31, 2004.

**Financial Highlights**

Some of the more significantfinancial items for the twelve months ended December 31, 2006 compared to thesame period in the prior year, which are discussed below in “Financial Resultsof Operations,” were as follows:

·                  *Net Income.* Net income for the twelve months ended December 31, 2006increased by $36.8 million, or 72.3%, for Holdings, and $40.4 million, or 79.1 %,for Universal.  A primary driverof the increase in net income for the twelve months ended December 31, 2006 ascompared to the prior year period was debt extinguishment cost incurred during theprior year period which reduced net income by $17.2 million.

·                  *Higher Revenue*. Total revenue was higher by $140.4 million, or 17.4%, for the twelvemonths ended December 31, 2006.

·                  *Higher Depreciation and Amortization Expense*. Depreciation and amortization expenseincreased by $18.4 million, or 17.7%, for the twelve months ended December31, 2006.

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·                  *Higher Selling, General and Administrative Expense.* Selling, general and administrative expense(“SG&A”) increased by $33.4 million, or 39.2%, for the twelve monthsended December 31, 2006.

**Operating Highlights**

The following table summarizestotal available horsepower, average contracted horsepower, horsepowerutilization percentages and fabrication backlog.
|                                              | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(Horsepower in thousands)**              | ** ** |
| Total available  horsepower (at period end): |       |                                                 |       |                                               |       |   |   |   |   |
| Domestic contract compression                |       | 2,069                                                |       | 1,965                                              |       | 1,965 |   | 1,908 |   |
| International contract compression           |       | 607                                                  |       | 584                                                |       | 584 |   | 518 |   |
| Total                                        |       | 2,676                                                |       | 2,549                                              |       | 2,549 |   | 2,426 |   |
| Average  contracted horsepower:              |       |                                                 |       |                                               |       |   |   |   |   |
| Domestic contract compression                |       | 1,802                                                |       | 1,748                                              |       | 1,760 |   | 1,662 |   |
| International contract compression           |       | 546                                                  |       | 515                                                |       | 525 |   | 412 |   |
| Total                                        |       | 2,348                                                |       | 2,263                                              |       | 2,285 |   | 2,074 |   |
| Horsepower  utilization:                     |       |                                                 |       |                                               |       |   |   |   |   |
| Spot (at period end)                         |       | 88.9                                                 | %          | 92.3                                               | %          | 92.3 | % | 89.9 | % |
| Average                                      |       | 90.6                                                 | %          | 90.9                                               | %          | 91.1 | % | 88.4 | % |

 
|                      | ** ** | **As of December 31,** | ** ** |
|----------------------|------------|---------------------------------------|------------|
| ** **           | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | **(In millions)**                | ** ** |
| Fabrication  backlog |       | $                                     | 289.3      |   | $ | 144.5 |   | $ | 91.6 |   |
|                      |            |                                       |            |  |  |  |  |  |  |  |

 

The increase in domesticavailable horsepower as of December 31, 2006 compared to December 31, 2005 wasprimarily attributable to large horsepower units added to our fleet to meet theincremental demand by our customers.   The increase in international horsepower duringthe same period was primarily attributable to horsepower that was added inLatin America in response to new projects.

Domestic average contracted horsepower increased by 3.1% for the twelvemonths ended December 31, 2006 compared to the twelve months endedDecember 31, 2005. International average contracted horsepower increased by 6.0%for the twelve months ended December 31, 2006 compared to the twelve monthsended December 31, 2005.  These increaseswere primarily attributable to higher customer demand as well as largerhorsepower units added to the fleet.

Fabrication backlog fluctuatesperiod to period due to, among other things, the timing of receipt of ordersplaced by customers and the timing of revenue recognition. The backlog offabrication projects at February 22, 2007 was approximately $300.0 million. Amajority of the backlog is expected to be completed within a 270-day period.

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**Financial Results of Operations**

*Twelve Months Ended December 31,2006 Compared to Twelve Months Ended December 31, 2005*

The following table summarizes ourrevenue, gross margin, gross margin percentage, expenses and net income:
| ** **                           | ** ** | **Twelve Months Ended**    | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **December 31,**                | ** ** |
| ** **                           | ** ** | **2006 (1)**                    | ** ** | **2005 (1)** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| **Revenue:**                         |       |                                 |       |   |   |
| Domestic  contract compression       |       | $                                    | 398,189    |   | $ | 325,332 |   |
| % of revenue                         |       | 42.0                                 | %          | 40.3 | % |
| International  contract compression  |       | $                                    | 142,448    |   | $ | 123,570 |   |
| % of revenue                         |       | 15.0                                 | %          | 15.3 | % |
| Fabrication                          |       | $                                    | 215,825    |   | $ | 191,747 |   |
| % of revenue                         |       | 22.8                                 | %          | 23.8 | % |
| Aftermarket  services                |       | $                                    | 191,245    |   | $ | 166,634 |   |
| % of revenue                         |       | 20.2                                 | %          | 20.6 | % |
| Total revenue                        |       | $                                    | 947,707    |   | $ | 807,283 |   |
| **Gross margin (2):**                |       |                                 |       |   |   |
| Domestic  contract compression       |       | $                                    | 254,318    |   | $ | 207,934 |   |
| International  contract compression  |       | 106,052                              |       | 92,847 |   |
| Fabrication                          |       | 29,361                               |       | 17,232 |   |
| Aftermarket  services                |       | 38,920                               |       | 32,474 |   |
| Total gross  margin                  |       | $                                    | 428,651    |   | $ | 350,487 |   |
| **Gross margin percentage:**         |       |                                 |       |   |   |
| Domestic  contract compression       |       | 63.9                                 | %          | 63.9 | % |
| International  contract compression  |       | 74.4                                 | %          | 75.1 | % |
| Fabrication                          |       | 13.6                                 | %          | 9.0 | % |
| Aftermarket  services                |       | 20.4                                 | %          | 19.5 | % |
| Total gross  margin percentage       |       | 45.2                                 | %          | 43.4 | % |
| **Expenses:**                        |       |                                 |       |   |   |
| Depreciation and  amortization       |       | $                                    | 122,701    |   | $ | 104,289 |   |
| Selling, general  and administrative |       | 118,762                              |       | 85,341 |   |
| Interest  expense, net               |       | 57,349                               |       | 54,617 |   |
| Debt  extinguishment costs           |       | 1,125                                |       | 26,068 |   |
| Foreign currency  gain               |       | (645                                 | )          | (589 | ) |
| Other income,  net                   |       | (1,928                               | )          | (681 | ) |
| Asset impairment  expense            |       | —                               |       | 3,080 |   |
| Minority  interest                   |       | 1,354                                |       | — |   |
| Income tax  expense                  |       | 42,277                               |       | 27,483 |   |
| **Net income**                       |       | $                                    | 87,656     |   | $ | 50,879 |   |

 

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(1)          Amountsfor the twelve months ended December 31, 2006 are for both Holdings andUniversal with the following exceptions: Universal had interest expense, net of $57.2 million, interest incomefrom affiliate of $5.7 million, income taxes of $44.4 million and net income of$91.5 million.  Amounts for the twelvemonths ended December 31, 2005 are for both Holdings and Universal with thefollowing exceptions:  Universal hadinterest income from affiliate of $0.3 million, income taxes of $27.6 millionand net income of $51.1 million.

(2)          Fora reconciliation of gross margin to its most directly comparable financialmeasure calculated and presented in accordance with GAAP, please read Part II,Item 6 (“Selected Historical Financial and Operating Data — Non-GAAP FinancialMeasures”) of this report.

*Revenue.*  Domestic contract compression revenueincreased due to higher average contract prices and increased operatinghorsepower in the twelve months ended December 31, 2006.  Revenue per average operating horsepowerincreased to $18.41 per month in the twelve months ended December 31,2006.  This was an 18.8% increase fromthe prior year period amount of $15.50 per horsepower per month.  Average operating horsepower increased to 1,802,085for the twelve months ended

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December 31, 2006. This represented a 3.0% increase from the prior year period.  International contract compression revenueincreased primarily as a result of additional business in Argentina and Boliviaof $11.0 million and $6.0 million, respectively.  Fabrication revenue increased in thecurrent year period due primarily to increased pricing to customers. Aftermarket services revenue was higher due primarily to acquisitions inEurope and Africa that contributed $16.6 million of additional revenue for thetwelve months ended December 31, 2006 and an increase in our Canadianoperations of $5.1 million.

*GrossMargin.*  The higherdomestic contract compression gross margin (defined as total revenue less costof sales, excluding depreciation and amortization expense) was primarilyattributable to the revenue increases in the current year period and highercurrent year period contracted horsepower, each of which is discussed above,partially offset by higher expenses in the current year period including laborand benefits cost, parts cost, lubricant cost, field supply cost, vehicle fuelcost and remote monitoring cost due to additional installation.  International contract compression grossmargin was higher due primarily to the increased business in Argentina andBolivia discussed above.  The higherfabrication gross margin was attributable primarily to the revenue increasesdiscussed above and the implementation of process improvements in the currentyear period.  Aftermarket services grossmargin was higher due to the Europe and Africa acquisitions completed in2006.  Gross margin is reconciled to net income within Part II, Item 6,(“Selected Financial Data – Non GAAP Financial Measures”) of this report.

*GrossMargin Percentage.*  Grossmargin percentage (defined as gross margin as a percentage of revenue) for domesticand international contact compression and aftermarket services were relativelystable for the twelve months ended December 31, 2006 as compared to the prioryear period.  The higher fabrication grossmargin percentage primarily resulted from the revenue increases and processimprovements discussed above.

*Depreciation and Amortization.*  Theincrease in depreciation and amortization expense for the twelve months ended December31, 2006 compared to the prior year primarily resulted from on-going capitalexpenditures, consisting primarily of additions to our contract compressionfleet and compressor overhauls.

*SG&A Expenses. *The increase inSG&A expenses for the twelve months ended December 31, 2006 was dueprimarily to the inclusion of reimbursable property taxes that are offset inrevenue, the on-going implementation of our ERP system and the adoption ofStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment,” relating to stock-based compensation. SG&A expenses represented 12.5%and 10.6% of revenues for the twelve months ended December 31, 2006 and 2005,respectively.

*Interest Expense, net*.  Theincrease in interest expense, net, for the twelve months ended December 31, 2006relates to higher total debt levels partly related to a $100 million sharerepurchase completed in December 2005, and increased interest rates in thecurrent year period.

*Debt Extinguishment Costs.*  For the twelve months ended December 31, 2006, debt extinguishmentcosts were primarily due to the early extinguishment of amounts outstandingunder the senior secured credit facility we entered into in January 2005. Debt extinguishment costs for the twelve months ended December 31, 2005 relateprimarily to the early extinguishment of our term loan due 2008 and 87/8% senior notes due 2008.  As a resultof the early extinguishment of debt in 2005, a charge of $26.1 million wasrecognized resulting from the call premium of $19.5 million and write-off ofunamortized debt issuance costs of $6.6 million.

*Asset Impairment.*  During the twelve month period endedDecember 31, 2005 we recorded a $3.1 million loss on the impairment of our136,000 square foot Tulsa, Oklahoma fabrication facility. With the fabricationdifficulties experienced during the period, including cost overruns on certaincomplex fabrication jobs, we undertook a significant analysis of ourfabrication assets and business, and made a decision to permanently discontinueoperations and dispose of our Tulsa fabrication facility. The carrying value ofthis facility was written down to its estimated market value, which wasdetermined by us based upon recent appraisals.

*Minority Interest. *Minority interest reflects the portion of the Partnership’s earnings whichare applicable to the 49% limited partnership interest not owned by the Company.

*Income Tax Expense. *The increase in income tax expense for the twelve months ended December31, 2006 primarily relates to increased income before taxes as compared to the prioryear due to the items mentioned above. The effective tax rate for the twelve months ended December 31, 2006 and2005 was 32.5% and 35.1%, respectively. This decrease in the effective tax rate was primarily due to recordingthe effect of the passage by the State of Texas of its Margin Tax ($0.8 milliontax benefit), a

36

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reduction in Subpart F income from applying the newlook-through rule included in the Tax Increase Prevention and ReconciliationAct of 2005 ($1.6 million tax benefit) and the enactment of reductions inAlberta, Canada and Canadian federal income tax rates ($1.6 million taxbenefit).

*Nine Months Ended December 31,2005 Compared to Nine Months Ended December 31, 2004*

The following table summarizesour revenue, gross margin, gross margin percentage, expenses and net income:
| ** **                                           | ** ** | **Nine Months Ended**      | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **December 31,**                | ** ** |
| ** **                                           | ** ** | **2005 (1)**                    | ** ** | **2004 (1)** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)** | ** ** |
| **Revenue:**                                         |       |                                 |       |   |   |
| Domestic contract compression                        |       | $                                    | 248,414    |   | $ | 219,321 |   |
| % of revenue                                         |       | 40.5                                 | %          | 38.5 | % |
| International contract compression                   |       | $                                    | 94,831     |   | $ | 73,428 |   |
| % of revenue                                         |       | 15.5                                 | %          | 12.9 | % |
| Fabrication                                          |       | $                                    | 143,710    |   | $ | 165,957 |   |
| % of revenue                                         |       | 23.4                                 | %          | 29.1 | % |
| Aftermarket services                                 |       | $                                    | 126,692    |   | $ | 110,728 |   |
| % of revenue                                         |       | 20.6                                 | %          | 19.5 | % |
| Total revenue                                        |       | $                                    | 613,647    |   | $ | 569,434 |   |
| **Gross  margin(2):**                                |       |                                 |       |   |   |
| Domestic contract compression                        |       | $                                    | 160,256    |   | $ | 139,187 |   |
| International contract compression                   |       | 71,075                               |       | 56,676 |   |
| Fabrication                                          |       | 14,191                               |       | 12,244 |   |
| Aftermarket services                                 |       | 25,813                               |       | 22,995 |   |
| Total gross margin                                   |       | $                                    | 271,335    |   | $ | 231,102 |   |
| **Gross  margin percentage:**                        |       |                                 |       |   |   |
| Domestic contract compression                        |       | 64.5                                 | %          | 63.5 | % |
| International contract compression                   |       | 74.9                                 | %          | 77.2 | % |
| Fabrication                                          |       | 9.9                                  | %          | 7.4 | % |
| Aftermarket services                                 |       | 20.4                                 | %          | 20.8 | % |
| Total gross margin percentage                        |       | 44.2                                 | %          | 40.6 | % |
| **Expenses:**                                        |       |                                 |       |   |   |
| Depreciation and amortization                        |       | $                                    | 79,899     |   | $ | 69,407 |   |
| Selling, general and administrative                  |       | 65,269                               |       | 55,684 |   |
| Interest expense, net                                |       | 40,221                               |       | 49,792 |   |
| Debt extinguishment costs                            |       | —                               |       | 475 |   |
| Foreign currency (gain) loss                         |       | (692                                 | )          | 286 |   |
| Other (income) loss, net                             |       | 216                                  |       | (228 | ) |
| Gain on termination of interest rate swap agreements |       | —                               |       | (3,197 | ) |
| Income tax expense                                   |       | 31,053                               |       | 20,783 |   |
| **Net income**                                       |       | $                                    | 55,369     |   | $ | 38,100 |   |

 

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(1)          Amounts forthe nine months ended December 31, 2005 are for both Holdings and Universalwith the following exceptions:  Universalhad interest income from affiliate of $0.3 million, income taxes of $31.2million and net income of $55.5 million. The results of operations for Holdings and Universal were identical forthe nine months ended December 31, 2004.

(2)          Fora reconciliation of gross margin to its most directly comparable financialmeasure calculated and presented in accordance with GAAP, please read Part II,Item 6 (“Selected Historical Financial and Operating Data — Non-GAAP FinancialMeasures”) of this report.

*Revenue.*  Domesticcontract compression revenue increased due to higher average contractprices and higher operating horsepower in the nine months ended December 31,2005. Revenue per average operating horsepower increased to $15.68 per month inthe nine months ended December 31, 2005. This was a 7.0% increase from theprior year period amount of $14.66 per horsepower per month. Average operatinghorsepower increased to 1,759,949 for the nine months ended

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December31, 2005. This represented a 5.9% increase from the prior year period.  Internationalcontract compression revenue increased primarily as a result of the acquisitionof the contract compression fleet in Canada in November 2004 and additionalcompression business in Argentina and Mexico, which contributed to increases of$7.5 million, $7.6 million and $2.8 million, respectively.Fabrication revenue decreased $19.5 million in the Asia Pacific region, $10.8million in Canada and $3.6 million in the United States as we maintainedgreater pricing discipline and focused on more standard compression packages inthe nine months ended December 31, 2005.  This decrease was partially offset by anincrease of $11.6 million in Latin America related to installationprojects.  Aftermarket services revenuewas higher primarily due to increases within the United States and LatinAmerica of $11.1 million and $4.9 million, respectively.

*Gross Margin.*  Thechanges in contract compression gross margin (defined as total revenue less costof sales excluding depreciation and amortization) for the nine months endedDecember 31, 2005 compared to the same period in the prior year were primarilyattributable to the revenue increases discussed above for domestic contractcompression and international contract compression, which offset the somewhathigher expenses, including lubricant cost, fleet automation cost due toadditional installations, vehicle fuel cost and labor cost. The higher gross marginexperienced in fabrication, despite the decreased revenues, primarily reflectsthe higher warranty costs and cost overruns experienced on certain relativelycomplex projects in the prior year period. Aftermarket services gross marginwas higher due to revenue increases discussed above.  Gross margin is reconciled to net income  within Part II, Item 6 (“Selected FinancialData – Non-GAAP Financial Measures”) of this report.

*Gross MarginPercentage.*  Gross margin percentage for domestic contractcompression and aftermarket services for the nine months endedDecember 31, 2005 remained relatively stable compared to the same periodin the prior year. Gross margin percentage for fabrication was higher due tothe above-mentioned higher direct costs in the prior year period.  Gross margin percentage for internationalcontract compression was lower due to the above-mentioned increases in costs,primarily in Argentina, during the nine months ended December 31, 2005.

*Depreciationand Amortization.*  The increase in depreciation and amortizationexpense for the nine months ended December 31, 2005 compared to the prioryear period primarily resulted from on-going capital expenditures, consistingprimarily of additions to our contract compression fleet and compressoroverhauls, and the acquisition of thecontract compression fleet in Canada in November 2004.

*SG&AExpenses.*  The increase in SG&A expenses for thenine months ended December 31, 2005 relates to the increased expenseswithin the United States of $7.7 million due primarily to the on-goingimplementation of our new ERP system and increased marketing and businessdevelopment activities.  SG&Aexpenses in Latin America increased $1.9 million due to our on-goinginvestment in our international infrastructure and growing internationalrevenue taxes.  SG&A expenses represented 10.6% and 9.8%of revenues for the nine months ended December 31, 2005 and 2004, respectively.

*InterestExpense, net.*  The decrease in interest expense forthe nine months ended December 31, 2005 is primarily related to our debtrefinancing and restructuring activities. This decrease was partially offset by an increase in interest expensedue to higher total debt levels outstanding during the nine months endedDecember 31, 2005, largely due to the acquisition of the contract compressionfleet in Canada in November 2004.

*Gain onTermination of Interest Rate Swap Agreements.* A $3.2 million gain on the termination ofinterest rate swap agreements was recognized for the nine months endedDecember 31, 2004. This gain was the result of reducing the notionalamount of interest rate swap agreements by $84.8 million on our assetbacked securitization facility (“ABS facility”) in connection with a principalreduction of $80.0 million in June 2004.

*Income TaxExpense. *The increase in income tax expense for the ninemonths ended December 31, 2005 primarily relates to increased income beforetaxes as compared to the nine months ended December 31, 2004 due to the itemsmentioned above.

**Effects of Inflation**

In recent years, inflation hasbeen modest and has not had a material impact upon the results of ouroperations, nor do we currently have reason to believe it will have a materialimpact in the foreseeable future.

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**Liquidity and Capital Resources**

Universal meets the conditions set forth in GeneralInstruction I(1) of Form 10-K and as a result is not required to include a discussionof its liquidity and capital resources in this Form 10-K.  The discussion below of liquidity and capitalresources relates to Holdings only and all references to “our,” “we” and “us”when used in this discussion refer to Holdings and its subsidiaries.

Our primary sources of cash areoperating activities and financing activities. Our primary uses of cash areoperating expenditures, capital expenditures, long-term debt repayments andpurchases of our common stock. The following table summarizes our sources anduses of cash for the twelve months ended December 31, 2006 and 2005, and ourcash and working capital as of the end of such periods (in thousands):
|                                  | ** ** | **Twelve Months Ended  December 31,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash provided  by (used in): |       |                                                 |       |   |   |
| Operating activities             |       | $                                                    | 212,211    |   | $ | 166,706 |   |
| Investing activities             |       | (213,187                                             | )          | (144,666 | ) |
| Financing  activities            |       | 8,380                                                |       | (37,250 | ) |
|                                  |            |                                                      |            |  |  |  |  |

 
|                                                   | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Cash                                              |       | $                                     | 46,997     |   | $ | 39,262 |   |
| Working capital, net of  cash and restricted cash |       | 133,681                               |       | 101,265 |   |
|                                                   |            |                                       |            |  |  |  |  |

 

*Operations.*  Net cashprovided by operating activities increased $45.5 million, or  27.3%, for the twelve months ended December 31,2006 compared to the same period in the prior year primarily as a result of increasedearnings.

*CapitalExpenditures.*  Capital expenditures for the twelve monthsended December 31, 2006 were $219.3 million, consisting of $141.9 millionfor fleet additions, $46.0 million for compressor overhauls, $14.9 millionfor service trucks and $16.5 million for machinery, equipment, informationtechnology equipment and other items. Based on current market conditions, weexpect to continue to invest in fleet additions, compressor overhauls andmaintenance and other capital requirements. We expect net capital expenditures(defined as capital expenditures less proceeds from asset sales) ofapproximately $225 million to $250 million for the twelve months ending December 31,2007, including approximately $50 million to $55 million for compressionfleet maintenance capital.

*StockRepurchase Program.*  OnNovember 6, 2006, Holdings’ board of directors authorized the repurchaseof up to $200 million of its common stock through November 6, 2008. Duringthe quarter ended December 31, 2006, we repurchased 569,499 shares of ourcommon stock at an aggregate cost of $36.1 million.  Under the terms of the merger agreementbetween us and Hanover, we may repurchase up to an additional $75 million ofour common stock pursuant to the stock repurchase plan prior to theconsummation of the merger or the termination of the merger agreement.

*Long-term Debt.*  As ofDecember 31, 2006, we had approximately $830.2 million in outstandingdebt obligations consisting primarily of $171.5 million outstanding under our 71/4% senior notes, $186.7 million outstanding under our ABS facility,$347.0 million outstanding under our $500 million revolving credit facility and$125 million outstanding under the Partnership’s revolving credit facility.

Historically, we have financedcapital expenditures with net cash provided by operating and financingactivities. Based on current market conditions, we expect that net cashprovided by operating activities will be sufficient to finance our operatingexpenditures, capital expenditures and scheduled interest and debt repaymentsthrough the 2007 calendar year. To the extent that net cash provided byoperating activities is not sufficient to finance our operating expenditures,capital expenditures and scheduled interest and debt repayments through the 2007calendar year, we may borrow additional funds under our revolving creditfacility or we may obtain additional debt or equity financing.

*DebtCovenants and Availability. *Asof December 31, 2006, covenants in our credit facilities required that wemaintain various financial ratios, including a total leverage ratio of lessthan or equal to 5 to 1, an interest coverage ratio

39

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of greater than or equalto 2.5 to 1 and a senior secured leverage ratio of less than or equal to 5.0 to1.  Fordescriptions of the required ratios see Note 5 to our consolidated financialstatements included in Part II, Item 8 (“Financial Statements and SupplementaryData”) of this report.  As ofDecember 31, 2006, we were in compliance with all financial covenants.

As of December 31, 2006, dueto restrictive covenants and after givingeffect to $28.8 million of outstanding letters of credit under our financingagreements, we had an aggregate unused credit availability of approximately$124.2 million under our $500 million revolving credit facility and $100million under the Partnership’s $225 million revolving credit facility.

*Partnership Distributions to Unitholders. *The Partnership’spartnership agreement requires it to distribute all of its “available cash”quarterly. Under the partnership agreement, available cash is defined togenerally mean, for each fiscal quarter, (1) cash on hand at the Partnership atthe end of the quarter in excess of the amount of reserves its general partnerdetermines is necessary or appropriate to provide for the conduct of itsbusiness, to comply with applicable law, any of its debt instruments or otheragreements or to provide for future distributions to its unitholders for anyone or more of the upcoming four quarters, plus, (2) if the Partnership’sgeneral partner so determines, all or a portion of the Partnership’s cash onhand on the date of determination of available cash for the quarter.

Under the terms ofthe Partnership’s partnership agreement, there is no guarantee that unitholderswill receive quarterly distributions from the Partnership. The Partnership’s distributionpolicy is subject to certain restrictions and may be changed at any time,including restrictions contained in (1) the Partnership’s $225 millionrevolving credit facility, (2) the general partner of the Partnership’sestablishment of reserves to fund future operations or cash distributions tothe Partnership’s unitholders, (3) restrictions contained in the DelawareRevised Uniform Limited Partnership Act or (4) the Partnership’s lack ofsufficient cash to pay distributions.

The generalpartner of the Partnership has adopted a cash distribution policy that willrequire the Partnership to pay distributions at an initial distribution rate of$0.35 per unit per fiscal quarter, or $1.40 per unit per year, no later than 45days after the end of each fiscal quarter through the quarter ending September30, 2007 to the extent that the Partnership has sufficient cash from operationsafter establishment of cash reserves and payment of fees and expenses,including payments to its general partner and affiliates. This equates to anaggregate cash distribution of $4.5 million per quarter or $18.1 million peryear, in each case based on the number of common units, subordinated units andgeneral partner units that were outstanding immediately after completion of theinitial public offering.

Through ourownership of all 6,325,000 of the subordinated units and all of the equityinterests in the general partner of the Partnership, we expect to receive cashdistributions from the Partnership.   Ourrights to receive distributions of cash from the Partnership as holder ofsubordinated units are subordinated to the rights of the common unitholders toreceive such distributions.  Based on thenumber of units outstanding as of December 31, 2006, if the quarterlydistribution from the Partnership equals the initial distribution rate, theCompany will receive $2.3 million of the $4.5 million distributed by thePartnership.

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*Contractual Obligations.*  Thefollowing table summarizes our cash contractual obligations as of December 31,2006 (in thousands):
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less Than 1  Year** | ** ** | **2—3 Years** | ** ** | **4—5 Years** | ** ** | **After 5  Years** | ** ** |
| Total debt (1)                      |       | $                                         | 833,666    |   | $ | 14,545 |   | $ | 29,090 |   | $ | 676,090 |   | $ | 113,941 |   |
| Estimated  interest payments (2)    |       | 259,423                                   |       | 55,070 |   | 107,662 |   | 82,921 |   | 13,770 |   |
| Capital leases  (3)                 |       | 292                                       |       | 292 |   | — |   | — |   | — |   |
| Purchase  obligations (4)           |       | 271,849                                   |       | 271,849 |   | — |   | — |   | — |   |
| Total contractual cash  obligations |       | $                                         | 1,365,230  |   | $ | 341,756 |   | $ | 136,752 |   | $ | 759,011 |   | $ | 127,711 |   |

 

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(1)           Amounts represent the expected cash payments forprincipal on our total debt and do not include any deferred issuance costs orfair market valuation of our debt.

(2)           Interest amounts calculated using the interestrates in effect as of December 31, 2006, including the effect of interestrate swap agreements.

(3)           Amounts represent the expected cash payments undercapital lease obligations.

(4)           Purchase obligations include agreements topurchase goods or services that are enforceable and legally binding and that specifyall significant terms, including: fixed or minimum quantities to be purchased;fixed, minimum or variable price provisions; and the approximate timing of thetransaction.

**Critical Accounting Policies andEstimates**

Our discussion and analysis ofour financial condition and results of operation is based upon our consolidatedfinancial statements. We prepare these financial statements in conformity with UnitedStates generally accepted accounting principles. As such, we are required tomake certain estimates, judgments and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the periods presented. Webase our estimates on historical experience, available information and variousother assumptions we believe to be reasonable under the circumstances. On anon-going basis, we evaluate our estimates; however, actual results may differfrom these estimates under different assumptions or conditions. The accountingpolicies we believe require management’s most difficult, subjective or complexjudgments and are the most critical to our reporting of results of operationsand financial position are as follows:

*Allowances and Reserves*

Our customers are evaluated forcredit worthiness prior to the extension of credit. We maintain an allowancefor bad debts based on specific customer collection issues and historicalexperience. On an on-going basis, we conduct an evaluation of the financialstrength of our customers based on payment history and make adjustments to theallowance as necessary.

We record a reserve against ourinventory balance for estimated obsolescence. This reserve is based on specificidentification and historical experience.

We accrue amounts for estimatedwarranty claims based upon current and historical product warranty costs andany other related information known to us.

*Depreciation*

Property, plant and equipment arecarried at cost. Depreciation for financial reporting purposes is computed onthe straight-line basis using estimated useful lives and salvage values.

*Business Combinations and Goodwill*

Goodwill and intangible assetsacquired in connection with business combinations represent the excess ofconsideration over the fair value of tangible net assets acquired. Certainassumptions and estimates are employed in determining the fair value of assetsacquired and liabilities assumed, as well as in determining the allocation ofgoodwill to the appropriate reporting unit.

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We perform an impairment test forgoodwill assets annually or earlier if indicators of potential impairmentexist. Our goodwill impairment test involves a comparison of the fair value ofeach of our reporting units with their carrying value. The fair value isdetermined using discounted cash flows and other market-related valuationmodels. Certain estimates and judgments are required in the application of thefair value models. During February 2006, we performed an impairment analysis inaccordance with SFAS No. 142 and determined that no impairment hadoccurred.  During the twelve months endedDecember 31, 2006, no event occurred or circumstances changed that would morelikely than not reduce the fair value of a reporting unit below its carryingvalue.  As a result, an interim test forgoodwill impairment between our annual test dates was not performed.  If for any reason the fair value of ourgoodwill or that of any of our reporting units’ declines below the carryingvalue in the future, we may incur charges for the impairment.

*Long-Lived Assets*

Long-lived assets, which includeproperty, plant and equipment, finite-lived intangibles and other assetscomprise a significant amount of our total assets. In accordance with SFASNo. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” long-lived assets to beheld and used by us are reviewed to determine whether any events or changes incircumstances indicate the carrying amount of the asset may not be recoverable.For long-lived assets to be held and used, we base our evaluation on impairmentindicators such as the nature of the assets, the future economic benefit of theassets, any historical or future profitability measurements and other externalmarket conditions or factors that may be present. If such impairment indicatorsare present or other factors exist that indicate the carrying amount of theasset may not be recoverable, we determine whether an impairment has occurredthrough the use of an undiscounted cash flows analysis. If an impairment hasoccurred, we recognize a loss for the difference between the carrying amountand the estimated fair value of the asset. The fair value of the asset ismeasured using quoted market prices or, in the absence of quoted market prices,is based on an estimate of discounted cash flows.

*Self-Insurance*

We are self-insured up to certain levels, excluding ouroffshore assets, for general liability, vehicle liability, group medical andfor workers’ compensation claims for certain of our employees. We have electedto fully self-insure our offshore assets. We record self-insurance accrualsbased on claims filed and an estimate for significant claims incurred but notreported. We regularly review estimates of reported and unreported claims andprovide for losses through insurance reserves. Although we believe adequatereserves have been provided for expected liabilities arising from ourself-insured obligations, it is reasonably possible our estimates of theseliabilities will change over the near term as circumstances develop.

*Income Taxes*

We provide a wide range ofservices to a global market and as such, are subject to taxation not only inthe United States but also in numerous foreign jurisdictions.  The determination of our tax liabilitiesinvolves the interpretation of local tax laws, tax treaties, and tax authoritypractices and procedures in each jurisdiction. Changes in the operating environment including changes in the tax lawcould impact our estimate of tax liabilities in a given year.

The realizability of our deferredtax assets or the need for associated valuation allowances is reliant upon ourestimates of future domestic and foreign source taxable income and the reversalof taxable temporary differences, such as accelerated depreciation.  Numerous judgments and assumptions areinherent in the determination of future domestic and foreign source taxableincome, including assumptions on future operating conditions and assetutilization.  The judgment andassumptions used to determine future taxable income are consistent with thoseused for other financial statement purposes.

Another item that affects incometaxes is the permanent reinvestment of the earnings of our foreignsubsidiaries.  The assumptions related tothis permanent reinvestment are analyzed and reviewed annually for changes inour international and domestic business outlook.

**Recent Accounting Pronouncements**

See Note 1 to our consolidated financial statements included inPart II, Item 8 (“Financial Statements and Supplementary Data”) of this report.

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**ITEM 7A. *Quantitative and Qualitative Disclosures About MarketRisk***

*Variable Rate Debt*

We are exposed to market risk dueto variable interest rates under our financing and interest rate swaparrangements.

As of December 31, 2006, we had $347.0outstanding under our $500 million revolving credit facility.  The interest rate under the $500 million revolvingcredit facility at December 31, 2006 was based upon LIBOR plus 1.00%. As ofFebruary 23, 2007, the applicable rate was one month LIBOR, which was 5.32% andthe applicable margin was 1.00%.  We haveentered into interest rate swap agreements, which are described below in “– *Interest Rate Swap Arrangements*.”  As of December 31, 2006, after giving effectto these interest rate swap agreements, $47.0 million of this debt remainseffectively subject to a variable interest rate.

As of December 31, 2006, we had $186.7 millionoutstanding under our ABS facility that was subject to a variable interest rateat one month LIBOR, which was 5.32% as of February 23, 2007, plus 0.74%. Wehave entered into interest rate swap agreements, which are described below in “–*Interest Rate Swap Arrangements*.”  As of December 31, 2006, after giving effectto these interest rate swap agreements, only $18.7 million of the ABS facilityremains effectively subject to a variable interest rate.

As of December 31, 2006, $100.0 millionof our 7 1/4% senior notes are subject to interest rate swap agreements whichconvert the fixed rate to a variable rate which are described below in “– *Interest Rate Swap Agreements*.”* *The variable rate under theseinterest rate swap agreements is six month LIBOR, in arrears, plus an averageapplicable margin of 3.21%. As of February 23, 2007, six month LIBOR was 5.39%.

As of December 31, 2006, thePartnership had $125.0 million outstanding under its $225 million revolvingcredit facility that was subject to interestat LIBOR plus 1.25%.  As of February 23, 2007, the applicable rate wasone month LIBOR, which was 5.32%.  Wehave entered into an interest rate swap agreement, which is described below in *“*– *Interest Rate SwapAgreements,”* which effectively fixes the interest rate on all of theoutstanding balance under the Partnership’s credit facility at December 31,2006.

As of December 31, 2006, we had approximately $165.7 million ofoutstanding indebtedness that was effectively subject to floating interestrates and a 1.0% increase in interest rates would result in an approximate $1.7million annual increase in our interest expense.

*Interest Rate Swap Arrangements*

We are a party to interest rate swap agreements which are recorded atfair value in our financial statements. A change in the underlying interest rates may also result in a change intheir recorded value.

As of December 31, 2006, the notional amount of the interest rate swapagreements related to our variable rate debt, excluding the ABS facility andthe Partnership’s debt, was $300.0 million. The fair value of these interestrate swap agreements was an asset of approximately $5.6 million, which wasrecorded as a derivative asset.  Theinterest rate swap agreements amortize ratably from June 2007 through March2010.  The weighted average fixed rate ofthese interest rate swap agreements is 4.02%.

As of December 31, 2006, the notional amount of the interest rate swapagreements related to our ABS facility was $168.0 million and the fair value ofthese interest rate swap agreements was an asset of approximately $1.1 million,which was recorded as a derivative asset. The interest rate swap agreements amortize ratably through 2019. Theaverage fixed rate of these interest rate swap agreements is 4.94%.

As of December 31, 2006, the notional amount of the interest rate swapagreement related to the Partnership’s variable rate debt was $125 million, andthe fair value of this interest rate swap agreement was a liability ofapproximately $1.5 million, which was recorded as a derivative liability.  The swap agreement terminates in December2011 and has a fixed rate of 5.28%.

As of December 31, 2006, thenotional amount of the interest rate swap agreements related to our 7 1/4%senior notes was $100.0 million.  Thefair value of these interest rate swap agreements as of December 31, 2006 was aliability of approximately $3.5 million, which is recorded as a derivativeliability.  These interest rate swapagreements terminate in May 2010.

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**ITEM 8. *Financial Statements and Supplementary Data***

The consolidated statements of Holdingsand Universal included in this Report beginning on page F-1 are incorporatedherein by reference.

**ITEM 9. *Changes in and Disagreements With Accountants onAccounting and Financial Disclosure***

None.

**ITEM 9A. *Controls and Procedures***

*Management’s Evaluation of DisclosureControls and Procedures*

As required byRule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Actof 1934 (the “Exchange Act”), Holdings, and Universal’s management, includingthe Chief Executive Officer and Chief Financial Officer, evaluated as of December 31,2006, the effectiveness of their disclosure controls and procedures as definedin Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer of Holdingsand Universal concluded that their disclosure controls and procedures, as of December 31,2006, were effective for the purpose of ensuring that information required tobe disclosed by Holdings and Universal in this report is recorded, processed,summarized and reported within the time periods specified by the rules andforms of the Exchange Act and is accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures.

*Management’s Annual Report on InternalControl Over Financial Reporting*

As required by Exchange ActRule 13a-15(c) and 15d-15(c), Holdings’ management, including the ChiefExecutive Officer and Chief Financial Officer, is responsible for establishingand maintaining adequate internal control over financial reporting. Managementconducted an evaluation of the effectiveness of internal control over financialreporting based on the Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Because ofits inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness as to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. Based on theresults of management’s evaluation described above, management concluded that Holdings’internal control over financial reporting was effective as of December 31,2006.

The assessment of theeffectiveness of internal control over financial reporting as of December 31,2006, was audited by Deloitte & Touche LLP, an independent registeredpublic accounting firm, as stated in their report found on the following pageof this report.

*Changes in Internal Control OverFinancial Reporting*

There were no changes in Holdings’internal control over financial reporting during the last fiscal quarter thatmaterially affected, or are reasonably likely to materially affect, theirinternal control over financial reporting.

**ITEM 9B. *OtherInformation***

None.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders ofUniversal Compression Holdings, Inc.Houston, TX

We have auditedmanagement’s assessment, included in the accompanying Management’s Annual Reporton Internal Control over Financial Reporting, that Universal CompressionHoldings, Inc. and subsidiaries (“Holdings”) maintained effective internalcontrol over financial reporting as of December 31, 2006 based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Holdings’ management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of Holdings’ internal control over financial reporting based onour audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections ofany evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion,management’s assessment that Holdings maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, Holdings maintained, in all material respects,effective internal control over financial reporting as of December 31, 2005,based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have alsoaudited, in accordance with the standards of the Public Company Accounting OversightBoard (United States), the consolidated financial statements and financialstatement schedules as of and for the twelve months ended December 31, 2006 of Holdingsand our report dated March 1, 2007 expressed an unqualified opinion on thoseconsolidated financial statements and includes an explanatory paragraphrelating to Holdings’ change in its method of accounting for stock-basedcompensation.

 
| /s/ DELOITTE & TOUCHE  LLP |   |
|--------------------------------|--------|
|                           |   |
| Houston, TX                    |
| March 1, 2007                  |

 

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**PART III**

**ITEM 10. *Directors, Executive Officers and CorporateGovernance***

The information required in PartIII – Item 10 of this report will be incorporated by reference to ourdefinitive proxy statement under the captions “Election of Directors” and “CorporateGovernance” to be filed with the SEC, or filed with the SEC as an amendment tothis Form 10-K, within 120 days of the end of our fiscal year.

On May 19, 2006, we submitted tothe New York Stock Exchange a certification of our Chairman and Chief ExecutiveOfficer that he was not aware of any violation by the Company of the New YorkStock Exchange’s corporate governance listing standards as of the date ofcertification.

**ITEM 11. *Executive Compensation***

The information required in PartIII – Item 11 of this report will be incorporated by reference to ourdefinitive proxy statement under the caption “Executive Compensation” to befiled with the SEC, or filed with the SEC as an amendment to this Form 10-K,within 120 days of the end of our fiscal year.

**ITEM 12. *Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters***

The information required in PartIII – Item 12 of this report will be incorporated by reference to ourdefinitive proxy statement under the caption “Security Ownership of CertainBeneficial Owners and Management” and “Equity Compensation Plan Information” tobe filed with the SEC, or filed with the SEC as an amendment to this Form 10-K,within 120 days of the end of our fiscal year.

**ITEM 13. *Certain Relationships and Related Transactions, andDirector Independence***

The information required in PartIII – Item 13 of this report will be incorporated by reference to ourdefinitive proxy statement under the caption “Certain Relationships and RelatedTransactions” and “Director Independence” to be filed with the SEC, or filedwith the SEC as an amendment to this Form 10-K, within 120 days of the end ofour fiscal year.

**ITEM 14. *Principal Accountant Fees and Services***

The information required in PartIII – Item 14 of this report will be incorporated by reference to ourdefinitive proxy statement under the caption “Ratification of Appointment ofIndependent Auditors” to be filed with the SEC, or filed with the SEC as anamendment to this Form 10-K, within 120 days of the end of our fiscal year.

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**PART IV**

**ITEM 15. *Exhibits and Financial Statement Schedules***

(a)                                  The following documents are filed as part of thisReport:

1.                                       Financial Statements—The financial statements of Holdingsand Universal listed in the accompanying Index to Consolidated FinancialStatements on page F-1 are filed as part of this annual report and such Indexto Consolidated Financial Statements is incorporated herein by reference.

2.                                       Financial Statement Schedules—Schedule I UniversalCompression Holdings, Inc. (Parent Company Only) Condensed Financial Statementsbegin on page E-2 and Schedule II Valuation and Qualifying Accounts isincluded on page E-6. All other schedules have been omitted as the requiredinformation is not present in amounts sufficient to require submission of theschedule or because the information required is included in the consolidatedfinancial statements or notes thereto.

(b)                                 Exhibits

**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1          |       | Agreement and Plan of Merger,  dated February 5, 2007, by an among Hanover Compressor Company, Universal  Compression Holdings, Inc., Iliad Holdings, Inc., Hector Sub, Inc., and  Ulysses Sub, Inc. (incorporated by reference to Exhibit 2.1 of Universal  Compression Holdings, Inc.’s Current Report on From 8-K filed February 5,  2007).                                                                                                                                                        |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1          |       | Restated Certificate of Incorporation of Universal  Compression Holdings, Inc. (incorporated by reference to Exhibit 3.1 of  Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2000).                                                                                                                                                                                                                                               |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2          |       | Restated Bylaws of Universal Compression Holdings,  Inc. (incorporated by reference to Exhibit 3.2 of Universal Compression  Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2000).                                                                                                                                                                                                                                                                     |
|         | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         | ** ** | **7 1/4% Senior Notes due 2010**                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1          |       | Indenture, dated May 27, 2003, by and between  Universal Compression, Inc., as Issuer, and The Bank of New York, as Trustee  (incorporated by reference to Exhibit 4.11 of Universal Compression  Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended  March 31, 2003).                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2          |       | Specimen of Universal Compression, Inc.’s 7 1/4%  Senior Notes due 2010 (incorporated by reference to Exhibit 4.11 of  Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for  the twelve months ended March 31, 2003).                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         | ** ** | **ABS Facility**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1         |       | Indenture, dated October 28, 2005, between UCO  Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National Association,  as Indenture Trustee, with respect to the $225,000,000 ABS facility consisting  of $200,000,000 of Series 2005-1 Notes and $25,000,000 of  Series 2005-2 Notes (incorporated by reference to Exhibit 10.1 of  Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the  transition period from April 1, 2005 to December 31, 2005). |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2         |       | Amendment Number 1 to Indenture dated July 31, 2006  by and between UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank,  National Association, as Indenture Trustee (incorporated by reference to  Exhibit 10.1 of Universal Compression Holdings, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2006).                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3         |       | Series 2005-1 Supplement, dated as of  October 28, 2005, to Indenture, dated as of October 28, 2005,                                                                                                                                                                                                                                                                                                                                                                                        |

 

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|        |       | between UCO Compression 2005 LLC, as Issuer, and  Wells Fargo Bank, National Association, as Indenture Trustee, with respect to  the $200,000,000 of Series 2005-1 Notes with regard to the ABS facility  (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings,  Inc.’s Transition Report on Form 10-K for the transition period from April 1,  2005 to December 31, 2005).                                                                                                                                                                                                                                                                                                                                                                           |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4   |       | Series 2005-2 Supplement, dated as of  October 28, 2005, to Indenture, dated as of October 28, 2005,  between UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National  Association, as Indenture Trustee, with respect to the $25,000,000 of  Series 2005-2 Notes with regard to the ABS facility (incorporated by  reference to Exhibit 10.3 of Universal Compression Holdings, Inc.’s Transition  Report on Form 10-K for the transition period from April 1, 2005 to December  31, 2005).                                                                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5   |       | Guaranty, dated as of October 28, 2005 issued  by Universal Compression Holdings, Inc. for the benefit of UCO Compression  2005 LLC, as Issuer, and Wells Fargo Bank, National Association, as Indenture  Trustee (incorporated by reference to Exhibit 10.4 of Universal Compression  Holdings, Inc.’s Transition Report on Form 10-K for the transition period  from April 1, 2005 to December 31, 2005).                                                                                                                                                                                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.6   |       | Management Agreement, dated as of October 28,  2005, by and between Universal Compression, Inc., as Manager and UCO  Compression 2005 LLC, as Issuer (incorporated by reference to Exhibit 10.5 of  Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the  transition period from April 1, 2005 to December 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.7   |       | Amendment Number 1 to Management Agreement dated  July 31, 2006 by and between UCO Compression 2005 LLC, as Issuer, and  Universal Compression, Inc., as Manager (incorporated by reference to Exhibit  10.2 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.8   |       | Back-up Management Agreement, dated as of  October 28, 2005, by and among Caterpillar Inc., as Back-up Manager, UCO  Compression 2005 LLC, as Issuer and Universal Compression, Inc., as Manager  (incorporated by reference to Exhibit 10.6 of Universal Compression Holdings,  Inc.’s Transition Report on Form 10-K for the transition period from April 1,  2005 to December 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.9   |       | Insurance and Indemnity Agreement, dated as of  October 28, 2005, by and among Ambac Assurance Corporation, as Insurer,  UCO Compression 2005 LLC, as Issuer, Universal Compression, Inc., as  Contributor and Manager, UCO Compression 2002 LLC, as Old Lessee, and Wells  Fargo Bank, National Association, as Indenture Trustee (incorporated by  reference to Exhibit 10.7 of Universal Compression Holdings, Inc.’s  Transition Report on Form 10-K for the transition period from April 1, 2005  to December 31, 2005).                                                                                                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.10  |       | Intercreditor and Collateral Agency Agreement dated  as of October 28, 2005, by and among Universal Compression, Inc., in its  individual capacity and as Manager, UCO Compression 2005 LLC, as Issuer,  Wells Fargo Bank, National Association, as Indenture Trustee, Wachovia Bank,  National Association, as Bank Agent, the Various Financing Institutions that  from time to time may become parties thereto as UCI Lenders and  JP Morgan Chase Bank, N.A., in its individual capacity and as Intercreditor  Collateral Agent (incorporated by reference to Exhibit 10.8 of Universal  Compression Holdings, Inc.’s Transition Report on Form 10-K for the  transition period from April 1, 2005 to December 31, 2005).                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ** ** | **Bank Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.11  |       | $650,000,000 Senior Secured Credit Agreement, dated  as January 14, 2005, among Universal Compression, Inc., as Co-US Borrower and  Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and  Guarantor, UC Canadian Partnership Holdings Company, as Canadian Borrower,  Wachovia Bank, National Association, as US Administrative Agent, Congress  Financial Corporation (Canada), as Canadian Administrative Agent, JPMorgan  Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities Inc., The  Bank of Nova Scotia and The Royal Bank of Scotland plc as Co-Documentation  Agents and the Lenders signatory thereto arranged by Wachovia Capital  Markets, LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and  Joint Book Runners and Deutsche |

 

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|        |   | Bank Securities Inc. as Co-Arranger (incorporated by  reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended December 31,  2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.12  |   | First Amendment to Senior Secured Credit Agreement  dated as of September 22, 2005, among Universal Compression, Inc., as  Co-US Borrower and Guarantor, Universal Compression Holdings, Inc., as Co-US  Borrower and Guarantor, UC Canadian Partnership Holdings Company, as Canadian  Borrower, Wachovia Bank, National Association, as US Administrative Agent,  Congress Financial Corporation (Canada), as Canadian Administrative Agent,  JPMorgan Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities  Inc., The Bank of Nova Scotia and The Royal Bank of Scotland plc as Co-Documentation  Agents and the Lenders signatory thereto arranged by Wachovia Capital  Markets, LLC as Sole Lead Arranger and Sole Book Runner (incorporated by  reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2005). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13  |   | Collateral Agreement, dated as of January 14, 2005,  made by Universal Compression, Inc. and Universal Compression Holdings, Inc.  in favor of Wachovia Bank, National Association, as Administrative Agent  (incorporated by reference to Exhibit 10.2 of Universal Compression  Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14  |   | Pledge and Security Agreement (Assignment of Pledged  Securities), dated as of January 14, 2005, made by Universal Compression  International, Inc., Enterra Compression Investment Company, Universal  Compression Services, LLC and Universal Compression Canadian Holdings, Inc.,  as Pledgors to Wachovia Bank, National Association, as Administrative Agent  (incorporated by reference to Exhibit 10.3 of Universal Compression  Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15  |   | Supplement to Collateral Agreement, dated as of  February 15, 2005, made by Universal Compression Holdings, Inc. in favor  of Wachovia Bank, National Association, as Administrative Agent (incorporated  by reference to Exhibit 10.13 of Universal Compression Holdings, Inc.’s  Annual Report on Form 10-K for the twelve months ended March 31,  2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16  |   | Supplement to Pledge Agreement dated as of  February 15, 2005, made by Universal Compression International, Inc. and  Universal Compression Services, LLC in favor of Wachovia Bank, National  Association, as Administrative Agent (incorporated by reference to Exhibit  10.14 of Universal Compression Holdings, Inc.’s Annual Report on  Form 10-K for the twelve months ended March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17  |   | Supplement to Pledge Agreement dated as of  February 15, 2005, made by Universal Compression Services, LLC in favor  of Wachovia Bank, National Association, as Administrative Agent (incorporated  by reference to Exhibit 10.15 of Universal Compression Holdings, Inc.’s  Annual Report on Form 10-K for the twelve months ended March 31,  2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18  |   | Senior Secured Credit Agreement, dated October 20,  2006, by and among Universal Compression, Inc., as Co-US Borrower and  Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and  Guarantor, Universal Compression Canada, Limited Partnership, as Co-Canadian  Borrower, UC Canadian Partnership Holdings Company, as Co-Canadian Borrower,  Wachovia Bank, National Association, as US Administrative Agent, Wachovia  Capital Finance Corporation (Canada), as Canadian Administrative Agent,  Deutsche Banc Trust Company Americas, as Syndication Agent, JPMorgan Chase  Bank, N.A. and The Bank of Nova Scotia, as Co-Documentation Agents and the  other lenders signatory thereto (incorporated by reference to Exhibit 10.1 of  Universal Compression Holdings, Inc.’s Form 8-K filed October 26, 2006).                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19* |   | Guaranty Agreement dated as of October 20, 2006  made by UCI Compressor Holding, L.P. as Guarantor and UCI MLP LP LLC, as  Guarantor and each of the other Guarantors in favor of Wachovia Bank,  National Association, as Administrative Agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20* |   | Pledge and Security Agreement (Assignment of Pledged  Securities) made by Universal Compression International, Inc., Enterra  Compression Investment Company, Universal Compression Services,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

49

----

 
|             |       | LLC, Universal Compression Canadian Holdings, Inc.,  UCI GP LP LLC, and UCO GP, LLC, as Pledgors to Wachovia Bank, National  Association, as US Administrative Agent effective as of October 20,  2006.                                                                                                                                                          |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21*      |       | Collateral Agreement dated as of October 20,  2006 made by Universal Compression, Inc., Universal Compression Holdings,  Inc., UCI Compressor Holding, L.P., and UCI MLP LP LLC in favor of Wachovia  Bank, National Association, as US Administrative Agent.                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
|        | ** ** | **Executive Compensation Plans and Arrangements**                                                                                                                                                                                                                                                                                                                     |
|        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                            |
| 10.22† |       | Universal Compression Holdings, Inc. Incentive Stock  Option Plan (incorporated by reference to Exhibit 10 of Universal  Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the  period ended September 30, 1998).                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23† |       | Amendment Number One to Incentive Stock Option Plan,  dated April 20, 2000 (incorporated by reference to Exhibit 10.3 of  Amendment No. 2, filed with the SEC on May 22, 2000, to Universal  Compression Holdings, Inc.’s Registration Statement on Form S-1 (File  No. 333-34090)).                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24† |       | Amendment Number Two to Incentive Stock Option Plan,  dated May 15, 2000 (incorporated by reference to Exhibit 10.4 of  Amendment No. 2, filed with the SEC on May 22, 2000, to Universal  Compression Holdings, Inc.’s Registration Statement on Form S-1 (File  No. 333-34090)).                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25† |       | Amendment Number Three to Incentive Stock Option  Plan, dated November 27, 2000 (incorporated by reference to  Exhibit 4.7 of Universal Compression Holdings, Inc.’s Registration  Statement on Form S-8 filed with the SEC on February 9, 2001 (File  No. 333-55260)).                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26† |       | Amendment Number Four to Incentive Stock Option  Plan, dated August 15, 2002 (incorporated by reference to Exhibit 4.8 of  Universal Compression Holdings, Inc.’s Registration Statement on Form S-8  filed with the SEC on September 12, 2002 (File No. 333-99473)).                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.27† |       | Amendment Number Five to Incentive Stock Option  Plan, dated July 23, 2004 (incorporated by reference to Exhibit 4.9 of  Universal Compression Holdings, Inc.’s Registration Statement on  Form S-8 filed with the SEC on October 29, 2004 (File  No. 333-120108)).                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28† |       | Form of Non-Qualified Stock Option Agreement  under the Incentive Stock Option Plan for outside directors of Universal  Compression Holdings, Inc.’s Board of Directors (incorporated by reference to  Exhibit 10.22 of Universal Compression Holdings, Inc.’s Annual Report on  Form 10-K for the twelve months ended March 31, 2005). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.29† |       | Form of Non-Qualified Stock Option Agreement  under the Incentive Stock Option Plan for employees (incorporated by  reference to Exhibit 10.23 of Universal Compression Holdings, Inc.’s  Annual Report on Form 10-K for the twelve months ended March 31,  2005).                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30† |       | Form of Incentive Stock Option Agreement under  the Incentive Stock Option Plan (incorporated by reference to  Exhibit 10.24 of Universal Compression Holdings, Inc.’s Annual Report on  Form 10-K for the twelve months ended March 31, 2005).                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.31† |       | Universal Compression Holdings, Inc. Restricted  Stock Plan for Executive Officers (incorporated by reference to  Exhibit 4.2 of Universal Compression Holdings, Inc.’s Registration  Statement on Form S-8 filed with the SEC on August 17, 2001 (File  No. 333-67784)).                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.32† |       | Amendment Number One to Restricted Stock Plan for  Executive Officers, dated July 23, 2004 (incorporated by reference to  Exhibit 4.11 of Universal Compression Holdings, Inc.’s Registration  Statement on Form S-8 filed with the SEC on October 29, 2004 (File  No. 333-120108)).                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33† |       | Form of Restricted Stock Agreement under the  Restricted Stock Plan for Executive Officers (incorporated by reference to  Exhibit 10.8 of Universal Compression Holdings, Inc.’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2001).                                                                                   |

 

50

----

 
| 10.34†  |       | Universal Compression Holdings, Inc. Directors’  Stock Plan (incorporated by reference to Exhibit 4.3 of Universal  Compression Holdings, Inc.’s Registration Statement on Form S-8 filed  with the SEC on August 17, 2001 (File No. 333-67784)).                                                                                                                             |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.35†  |       | Universal Compression, Inc. Employees’ Supplemental  Savings Plan as revised and restated effective January 1, 2005 (incorporated  by reference to Exhibit 10.29 of Universal Compression Holdings, Inc.’s  Transition Report on Form 10-K for the transition period from April 1, 2005  to December 31, 2005).                                                                                   |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.36†  |       | Amendment Number One to Employees’ Supplemental  Savings Plan (as revised and restated effective January 1, 2005), dated  March 2, 2006, and generally effective as of January 1, 2006  (incorporated by reference to Exhibit 10.30 of Universal Compression  Holdings, Inc.’s Transition Report on Form 10-K for the transition period  from April 1, 2005 to December 31, 2005). |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.37†  |       | Universal Compression Holdings, Inc. Employee Stock  Purchase Plan (incorporated by reference to Exhibit 4.1 of Universal  Compression Holdings, Inc.’s Registration Statement on Form S-8 filed  with the SEC on August 17, 2001 (File No. 333- 67784)).                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.38†  |       | Amendment Number One to Employee Stock Purchase  Plan, dated December 20, 2001 (incorporated by reference to  Exhibit 10.56 of Universal Compression Holdings, Inc.’s Annual Report on  Form 10-K for the twelve months ended March 31, 2002).                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.39†* |       | Amendment Number Two to the Universal Compression  Holdings, Inc. Employee Stock Purchase Plan effective April 19, 2006.                                                                                                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.40†  |       | Form of Indemnification Agreement for executive  officers and directors of Universal Compression Holdings, Inc. (incorporated  by reference to Exhibit 10.27 of Amendment No. 1, filed with the  SEC on May 3, 2000, to Universal Compression Holdings, Inc.’s  Registration Statement on Form S-1 (File No. 333-34090)).                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.41†  |       | Form of Change of Control Agreement for  executive officers of Universal Compression Holdings, Inc. (incorporated by  reference to Exhibit 10.2 of Universal Compression Holdings, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2005).                                                                                                               |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.42†  |       | Letter dated March 15, 2001, with respect to  certain retirement benefits to be provided to Stephen A. Snider (incorporated  by reference to Exhibit 10.43 of Universal Compression Holdings, Inc.’s  Annual Report on Form 10-K for the twelve months ended March 31,  2001).                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.43†  |       | Summary of Officers’ Incentive Plan for Fiscal Year  2006 (incorporated by reference to Exhibit 10.1 of Universal Compression  Holdings, Inc.’s Form 8-K filed August 3, 2005).                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.44†* |       | Summary Compensation Sheet for Directors and  Executive Officers .                                                                                                                                                                                                                                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.45†  |       | Summary of Officers’ Incentive Plan for the period  beginning April 1, 2006 and ending December 31, 2006 (incorporated by  reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K  filed May 5, 2006).                                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.46†  |       | Summary of Officers’ Incentive Plan for the period  beginning April 1, 2006 and ending December 31, 2006 (incorporated by  reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K  filed June 29, 2006).                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.47†  |       | Summary of Officers’ Incentive Plan for the calendar  year 2007 (incorporated by reference to Exhibit 10.1 of Universal Compression  Holdings, Inc.’s Form 8-K filed February 27, 2007).                                                                                                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | ** ** | **Registration Rights Agreements**                                                                                                                                                                                                                                                                                                                                                                          |
|         | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.48        |       | Registration Rights Agreement, dated  February 20, 1998 by and among Universal Compression Holdings, Inc.,  Castle Harlan Partners III, L.P. and each other party listed as signatory  thereto (incorporated by reference to Exhibit 10.14 to Universal  Compression Holdings, Inc.’s Registration Statement on Form S-4 dated  March 19, 1998 (File No. 333-48283)).         |

 

51

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| 10.49  |       | Form of Instruments of Accession to  Registration Rights Agreement for each of Richard W. FitzGerald and Valerie  L. Banner (incorporated by reference to Exhibit 4.10 to Universal  Compression Holdings, Inc.’s Registration Statement on Form S-1 (File  No. 333-34090)).                                                                                      |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.50  |       | Instrument of Accession to Registration Rights  Agreement, dated April 28, 2000, for Energy Spectrum Partners LP  (incorporated by reference to Exhibit 10.19 to Amendment No. 2  dated May 22, 2000, to Universal Compression Holdings, Inc.’s  Registration Statement on Form S-1 (File No. 333-34090)).                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
|   | ** ** | **Miscellaneous**                                                                                                                                                                                                                                                                                                                                                                          |
|   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.51  |       | Purchase Agreement dated December 9, 2005 by  and between Universal Compression Holdings, Inc. and J.P. Morgan Securities,  Inc. (incorporated by reference to Exhibit 10.1 of Universal Compression  Holdings, Inc.’s Form 8-K filed December 12, 2005).                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.52  |       | Omnibus Agreement, dated October 20, 2006, by and  among Universal Compression Partners, L.P., UC Operating Partnership, L.P.,  UCO GP, LLC, UCO General Partner, LP, Universal Compression, Inc., Universal  Compression Holdings, Inc. and UCLP OLP GP LLC (incorporated by reference to  Exhibit 10.2 of Universal Compression Holdings, Inc.’s Form 8-K filed October  26, 2006). |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 21.1*  |       | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 23.1*  |       | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 24.1*  |       | Powers of attorney (set forth on the signature  page hereof).                                                                                                                                                                                                                                                                                                                         |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1*  |       | Rule 13a-14(a) Certifications of the CEO.                                                                                                                                                                                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2*  |       | Rule 13a-14(a) Certifications of the CFO.                                                                                                                                                                                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.3*  |       | Rule 15d-14(a) Certification of the CEO.                                                                                                                                                                                                                                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.4*  |       | Rule 15d-14(a) Certification of the CFO.                                                                                                                                                                                                                                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1*  |       | Section 1350 Certifications.                                                                                                                                                                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.2*  |       | Section 1350 Certifications.                                                                                                                                                                                                                                                                                                                                                          |

 

----

*                                         Filed herewith.

†                                          Management Contract or Compensatory Plan orArrangement.

52

----

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                           | **Page** |
|---------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                      |     |
| Report of Independent Registered Public Accounting  Firm                                                                  | F-2      |
| Consolidated  Balance Sheets – Universal Compression Holdings, Inc                                                   | F-3      |
| Consolidated  Statements of Operations – Universal Compression Holdings, Inc                                         | F-4      |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income – Universal  Compression Holdings,Inc | F-5      |
| Consolidated  Statements of Cash Flows – Universal Compression Holdings, Inc                                         | F-6      |
| Consolidated Balance Sheets – Universal Compression,  Inc                                                            | F-7      |
| Consolidated Statements of Operations – Universal  Compression, Inc                                                  | F-8      |
| Consolidated Statements of Stockholder’s Equity and  Comprehensive Income – Universal Compression, Inc          | F-9      |
| Consolidated Statements of Cash Flows – Universal  Compression, Inc                                                  | F-10     |
| Notes  to Consolidated Financial Statements                                                                               | F-11     |
| Report of  Independent Registered Public Accounting Firm                                                                  | E-1      |
| Schedule  I—Parent Company Only Financials                                                                           | E-2      |
| Schedule II—Valuation and Qualifying Accounts                                                                        | E-7      |

 

F-1

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of

Universal Compression Holdings, Inc.

Houston, TX

We have auditedthe accompanying consolidated balance sheets of Universal Compression Holdings,Inc. and subsidiaries (“Holdings”) as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for the twelve months ended December 31,2006, the nine months ended December 31, 2005 and the twelve months ended March31, 2005.  We have also audited theaccompanying consolidated balance sheets of Universal Compression, Inc. andsubsidiaries (“Universal”) as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, stockholder’s equity and comprehensiveincome, and cash flows for the twelve months ended December 31, 2006, the nine monthsended December 31, 2005 and the twelve months ended March 31, 2005.  These financial statements are theresponsibility of Holdings’ and Universal’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  Universal is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit of Universalincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of Universal’sinternal control over financial reporting. Accordingly, we express no such opinion on Universal’s internal controlover financial reporting.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An auditincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion,such consolidated financial statements present fairly, in all materialrespects, the financial position of Holdings and Universal at December 31, 2006and 2005, and the results of each of their operations and each of their cashflows for the twelve months ended December 31, 2006, the nine months endedDecember 31, 2005 and the twelve months ended March 31, 2005, in conformitywith accounting principles generally accepted in the United States of America.

As discussed inNote 8 to the consolidated financial statements, Holdings and Universal changedtheir method of accounting for stock-based compensation.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Holdings’ internalcontrol over financial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 1, 2007 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of Holdings’ internal control overfinancial reporting and an unqualified opinion on the effectiveness of Holdings’internal control over financial reporting.
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| Houston, TX                   |
| March 1, 2007                 |

 

F-2

----

**UNIVERSAL COMPRESSION HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands)**
| ** **                                                                                                                                                                                   | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                   |       |                            |       |                            |       |
| Current assets:                                                                                                                                                                              |       |                            |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                   |       | $                               | 46,997     |                            | $          | 39,262 |   |
| Restricted cash                                                                                                                                                                              |       | 4,301                           |       | 4,187                           |       |
| Accounts  receivable, net of allowance for bad debts of $4,686 and $3,616 as of  December 31, 2006 and 2005, respectively                                                                    |       | 193,968                         |       | 121,642                         |       |
| Inventories, net  of reserve for obsolescence of $9,158 and $10,896 as of December 31, 2006 and  2005, respectively                                                                          |       | 175,812                         |       | 108,273                         |       |
| Deferred income  taxes                                                                                                                                                                       |       | 7,310                           |       | 7,447                           |       |
| Other                                                                                                                                                                                        |       | 21,800                          |       | 19,787                          |       |
| Total current  assets                                                                                                                                                                        |       | 450,188                         |       | 300,598                         |       |
| Contract compression  equipment                                                                                                                                                              |       | 1,715,266                       |       | 1,567,470                       |       |
| Other property                                                                                                                                                                               |       | 199,835                         |       | 167,946                         |       |
| Accumulated depreciation  and amortization                                                                                                                                                   |       | (468,591                        | )          | (375,575                        | )          |
| Net property,  plant and equipment                                                                                                                                                           |       | 1,446,510                       |       | 1,359,841                       |       |
| Goodwill                                                                                                                                                                                     |       | 412,122                         |       | 403,261                         |       |
| Derivative financial  instruments                                                                                                                                                            |       | 7,269                           |       | 6,954                           |       |
| Other assets                                                                                                                                                                                 |       | 25,942                          |       | 24,641                          |       |
| Total assets                                                                                                                                                                                 |       | $                               | 2,342,031  |                            | $          | 2,095,295 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |       |                            |       |                            |       |
| Current liabilities:                                                                                                                                                                         |       |                            |       |                            |       |
| Accounts  payable, trade                                                                                                                                                                     |       | $                               | 92,063     |                            | $          | 55,014 |   |
| Accrued  liabilities                                                                                                                                                                         |       | 61,315                          |       | 43,796                          |       |
| Unearned revenue                                                                                                                                                                             |       | 93,332                          |       | 36,367                          |       |
| Accrued interest                                                                                                                                                                             |       | 3,583                           |       | 2,458                           |       |
| Current portion  of long-term debt and capital lease obligations                                                                                                                             |       | 14,916                          |       | 18,249                          |       |
| Total current  liabilities                                                                                                                                                                   |       | 265,209                         |       | 155,884                         |       |
| Capital lease  obligations                                                                                                                                                                   |       | —                          |       | 285                             |       |
| Long-term debt                                                                                                                                                                               |       | 815,638                         |       | 904,807                         |       |
| Deferred income taxes                                                                                                                                                                        |       | 205,133                         |       | 186,632                         |       |
| Derivative financial  instruments                                                                                                                                                            |       | 5,528                           |       | 6,006                           |       |
| Other liabilities                                                                                                                                                                            |       | 12,013                          |       | 10,369                          |       |
| Total  liabilities                                                                                                                                                                           |       | 1,303,521                       |       | 1,263,983                       |       |
| Commitments and  contingencies (Note 12)                                                                                                                                                     |       |                            |       |                            |       |
| Minority interest                                                                                                                                                                            |       | 122,080                         |       | —                          |       |
| Stockholders’ equity:                                                                                                                                                                   |       |                            |       |                            |       |
| Preferred stock,  $.01 par value, 50,000 shares authorized, zero outstanding as of December 31,  2006 and 2005, respectively                                                                 |       | —                          |       | —                          |       |
| Common stock,  $.01 par value, 200,000 and 200,000 shares authorized, 33,153 and 32,306  shares issued, 30,130 and 29,866 shares outstanding as of December 31, 2006  and 2005, respectively |       | 331                             |       | 323                             |       |
| Treasury stock,  3,023 and 2,440 shares at cost outstanding as of December 31, 2006 and 2005,  respectively                                                                                  |       | (136,844                        | )          | (100,011                        | )          |
| Additional paid-in  capital                                                                                                                                                                  |       | 786,663                         |       | 759,105                         |       |
| Deferred  compensation                                                                                                                                                                       |       | —                          |       | (6,065                          | )          |
| Accumulated  other comprehensive loss                                                                                                                                                        |       | (11,764                         | )          | (12,428                         | )          |
| Retained  earnings                                                                                                                                                                           |       | 278,044                         |       | 190,388                         |       |
| Total  stockholders’ equity                                                                                                                                                             |       | 916,430                         |       | 831,312                         |       |
| Total liabilities and  stockholders’ equity                                                                                                                                             |       | $                               | 2,342,031  |                            | $          | 2,095,295 |   |

 

See accompanying notes to consolidated financialstatements.

F-3

----

**UNIVERSAL COMPRESSION HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands,except per share amounts)**
| ** **                                                         | ** ** | **Twelve Months Ended  December 31,  2006** | ** ** | **Nine Months Ended  December 31,  2005** | ** ** | **Twelve Months Ended  March 31,  2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Revenue:                                                           |       |                                                       |       |                                                     |       |                                                    |       |
| Domestic  contract compression                                     |       | $                                                          | 398,189    |                                                     | $          | 248,414                                                 |       | $ | 296,239 |   |
| International  contract compression                                |       | 142,448                                                    |       | 94,831                                                   |       | 102,167                                                 |       |
| Fabrication                                                        |       | 215,825                                                    |       | 143,710                                                  |       | 213,994                                                 |       |
| Aftermarket  services                                              |       | 191,245                                                    |       | 126,692                                                  |       | 150,670                                                 |       |
| Total revenue                                                      |       | 947,707                                                    |       | 613,647                                                  |       | 763,070                                                 |       |
| Costs and expenses:                                                |       |                                                       |       |                                                     |       |                                                    |       |
| Cost of sales  (excluding depreciation and amortization expense):  |       |                                                       |       |                                                     |       |                                                    |       |
| Domestic  contract compression                                     |       | 143,871                                                    |       | 88,158                                                   |       | 109,374                                                 |       |
| International  contract compression                                |       | 36,396                                                     |       | 23,756                                                   |       | 23,719                                                  |       |
| Fabrication                                                        |       | 186,464                                                    |       | 129,519                                                  |       | 198,709                                                 |       |
| Aftermarket  services                                              |       | 152,325                                                    |       | 100,879                                                  |       | 121,014                                                 |       |
| Depreciation and  amortization                                     |       | 122,701                                                    |       | 79,899                                                   |       | 93,797                                                  |       |
| Selling, general  and administrative                               |       | 118,762                                                    |       | 65,269                                                   |       | 75,756                                                  |       |
| Interest  expense, net                                             |       | 57,349                                                     |       | 40,221                                                   |       | 64,188                                                  |       |
| Debt  extinguishment costs                                         |       | 1,125                                                      |       | —                                                   |       | 26,543                                                  |       |
| Gain on termination  of interest rate swap agreements              |       | —                                                     |       | —                                                   |       | (3,197                                                  | )          |
| Asset impairment  expense                                          |       | —                                                     |       | —                                                   |       | 3,080                                                   |       |
| Foreign currency  (gain) loss                                      |       | (645                                                       | )          | (692                                                     | )          | 389                                                     |       |
| Minority  interest                                                 |       | 1,354                                                      |       | —                                                   |       | —                                                  |       |
| Other (income)  loss, net                                          |       | (1,928                                                     | )          | 216                                                      |       | (1,125                                                  | )          |
| Total costs and  expenses                                          |       | 817,774                                                    |       | 527,225                                                  |       | 712,247                                                 |       |
| Income before income  taxes                                        |       | 129,933                                                    |       | 86,422                                                   |       | 50,823                                                  |       |
| Income tax expense                                                 |       | 42,277                                                     |       | 31,053                                                   |       | 17,213                                                  |       |
| Net income                                                         |       | $                                                          | 87,656     |                                                     | $          | 55,369                                                  |       | $ | 33,610 |   |
| Weighted average common  and common equivalent shares outstanding: |       |                                                       |       |                                                     |       |                                                    |       |
| Basic                                                              |       | 29,911                                                     |       | 31,773                                                   |       | 31,392                                                  |       |
| Diluted                                                            |       | 31,032                                                     |       | 32,758                                                   |       | 32,224                                                  |       |
|                                                               |       |                                                       |       |                                                     |       |                                                    |       |
| Earnings per  share—Basic                                     |       | $                                                          | 2.93       |                                                     | $          | 1.74                                                    |       | $ | 1.07 |   |
| Earnings per share—Diluted                                    |       | $                                                          | 2.82       |                                                     | $          | 1.69                                                    |       | $ | 1.04 |   |

 

See accompanying notes to consolidated financialstatements.

F-4

----

**UNIVERSAL COMPRESSION HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME**

**(In thousands,except share amounts)**

 
| ** **                                           | ** ** | **Common  Stock  Shares** | ** ** | **Common  Stock  Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|----------------------------|------------|---------------------------------------------|------------|-----------|------------|
| **Balance, March 31, 2004**                          |       | 31,293,000                |       | $                         | 313        |                             | $          | 734,124                |       | $                   | 101,409    |                       | $          | (11                                         | )          | $         | (1,256     | ) | $ | (35,344 | ) | $ | 799,235 |   |
| Option exercises                                     |       | 433,838                   |       | 4                         |       | 8,420                            |       |                   |       |                |       |                       |       |                                        |       | 8,424     |       |
| Shares issued in  employee benefit plans             |       | 80,591                    |       | 1                         |       | 2,438                            |       |                   |       |                |       |                       |       |                                        |       | 2,439     |       |
| Restricted stock  transactions                       |       | 194,636                   |       | 2                         |       | 6,916                            |       |                   |       |                |       | (7,147                     | )          |                                        |       | (229      | )          |
| Amortization of deferred  compensation               |       |                      |       |                      |       |                             |       |                   |       |                |       | 965                        |       |                                        |       | 965       |       |
| Comprehensive income:                                |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       |                                        |       |      |       |
| Net  income                                          |       |                      |       |                      |       |                             |       | 33,610                 |       |                |       |                       |       |                                        |       |      |       |
| Interest  rate swap agreement gain, net of tax       |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       | 8,813                                       |       |      |       |
| Foreign  currency translation adjustment, net of tax |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       | 8,415                                       |       |      |       |
| Total  comprehensive income                          |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       |                                        |       | 50,838    |       |
| **Balance, March 31, 2005**                          |       | 32,002,065                |       | $                         | 320        |                             | $          | 751,898                |       | $                   | 135,019    |                       | $          | (11                                         | )          | $         | (7,438     | ) | $ | (18,116 | ) | $ | 861,672 |   |
| Option exercises                                     |       | 246,315                   |       | 2                         |       | 5,224                            |       |                   |       |                |       |                       |       |                                        |       | 5,226     |       |
| Shares issued in  employee benefit plans             |       | 58,205                    |       | 1                         |       | 2,034                            |       |                   |       |                |       |                       |       |                                        |       | 2,035     |       |
| Restricted stock  transactions                       |       | (1,556                    | )          |                      |       | (51                              | )          |                   |       |                |       | 51                         |       |                                        |       |      |       |
| Amortization of deferred  compensation               |       |                      |       |                      |       |                             |       |                   |       |                |       | 1,322                      |       |                                        |       | 1,322     |       |
| Treasury stock purchased                             |       | (2,439,024                | )          |                      |       |                             |       |                   |       | (100,000            | )          |                       |       |                                        |       | (100,000  | )          |
| Comprehensive income:                                |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       |                                        |       |      |       |
| Net  income                                          |       |                      |       |                      |       |                             |       | 55,369                 |       |                |       |                       |       |                                        |       |      |       |
| Interest  rate swap agreement loss, net of tax       |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       | (971                                        | )          |      |       |
| Foreign  currency translation adjustment, net of tax |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       | 6,659                                       |       |      |       |
| Total  comprehensive income                          |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       |                                        |       | 61,057    |       |
| **Balance, December 31, 2005**                       |       | 29,866,005                |       | $                         | 323        |                             | $          | 759,105                |       | $                   | 190,388    |                       | $          | (100,011                                    | )          | $         | (6,065     | ) | $ | (12,428 | ) | $ | 831,312 |   |
| Option exercises                                     |       | 623,439                   |       | 6                         |       | 14,308                           |       |                   |       |                |       |                       |       |                                        |       | 14,314    |       |
| Shares issued in  employee benefit plans             |       | 87,058                    |       | 1                         |       | 4,102                            |       |                   |       |                |       |                       |       |                                        |       | 4,103     |       |
| Amortization of deferred  compensation               |       |                      |       |                      |       | (6,065                           | )          |                   |       |                |       | 6,065                      |       |                                        |       |      |       |
| Stock-based compensation                             |       | 137,122                   |       | 1                         |       | 15,213                           |       |                   |       |                |       |                       |       |                                        |       | 15,214    |       |
| Treasury stock purchased                             |       | (583,135                  | )          |                      |       |                             |       |                   |       | (36,833             | )          |                       |       |                                        |       | (36,833   | )          |
| Comprehensive income:                                |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       |                                        |       |      |       |
| Net  income                                          |       |                      |       |                      |       |                             |       | 87,656                 |       |                |       |                       |       |                                        |       |      |       |
| Interest  rate swap agreement loss, net of tax       |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       | (510                                        | )          |      |       |
| Foreign  currency translation adjustment, net of tax |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       | 1,174                                       |       |      |       |
| Total  comprehensive income                          |       |                      |       |                      |       |                             |       |                   |       |                |       |                       |       |                                        |       | 88,320    |       |
| **Balance, December 31, 2006**                       |       | 30,130,489                |       | $                         | 331        |                             | $          | 786,663                |       | $                   | 278,044    |                       | $          | (136,844                                    | )          | $         | —     |   | $ | (11,764 | ) | $ | 916,430 |   |

 

See accompanying notes to consolidated financialstatements.

F-5

----

**UNIVERSAL COMPRESSION HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**
| ** **                                                                                                     | ** ** | **Twelve Months Ended  December 31,  2006** | ** ** | **Nine Months Ended  December 31,  2005** | ** ** | **Twelve Months Ended  March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | ** **                                                 | ** ** | ** **                                               | ** ** | ** **                                              | ** ** |
| Cash flows from  operating activities:                                                                         |       |                                                       |       |                                                     |       |                                                    |       |
| Net income                                                                                                     |       | $                                                          | 87,656     |                                                     | $          | 55,369                                                  |       | $ | 33,610 |   |
| Adjustments to  reconcile net income to cash provided by operating activities, net of effect  of acquisitions: |       |                                                       |       |                                                     |       |                                                    |       |
| Depreciation and  amortization                                                                                 |       | 122,701                                                    |       | 79,899                                                   |       | 93,797                                                  |       |
| Minority  interest                                                                                             |       | 1,354                                                      |       | —                                                   |       | —                                                  |       |
| Non-cash  gain from interest rate swap agreement settlement                                                    |       | —                                                     |       | —                                                   |       | (3,197                                                  | )          |
| Loss on early  extinguishment of debt                                                                          |       | 1,125                                                      |       | —                                                   |       | 26,543                                                  |       |
| Loss on asset  impairment                                                                                      |       | —                                                     |       | —                                                   |       | 3,080                                                   |       |
| Gain on asset  sales                                                                                           |       | (1,202                                                     | )          | (92                                                      | )          | (1,972                                                  | )          |
| Amortization of  debt issuance costs                                                                           |       | 1,941                                                      |       | 1,671                                                    |       | 3,974                                                   |       |
| Stock-based  compensation expense                                                                              |       | 7,441                                                      |       | 1,322                                                    |       | 965                                                     |       |
| Increase  (decrease) in deferred taxes                                                                         |       | 26,154                                                     |       | 24,988                                                   |       | 8,213                                                   |       |
| (Increase)  decrease in other assets                                                                           |       | (7,623                                                     | )          | (5,898                                                   | )          | (7,114                                                  | )          |
| (Increase)  decrease in receivables                                                                            |       | (68,730                                                    | )          | (4,212                                                   | )          | (35,847                                                 | )          |
| (Increase)  decrease in inventories                                                                            |       | (67,224                                                    | )          | (12,582                                                  | )          | (2,204                                                  | )          |
| Increase  (decrease) in accounts payable                                                                       |       | 35,188                                                     |       | (2,928                                                   | )          | 12,489                                                  |       |
| Increase  (decrease) in accrued liabilities                                                                    |       | 15,340                                                     |       | 6,331                                                    |       | 428                                                     |       |
| Increase  (decrease) in unearned revenue                                                                       |       | 56,965                                                     |       | 4,166                                                    |       | 6,605                                                   |       |
| Increase  (decrease) in accrued interest                                                                       |       | 1,125                                                      |       | (3,161                                                   | )          | (5,314                                                  | )          |
| Net cash  provided by operating activities                                                                     |       | 212,211                                                    |       | 144,873                                                  |       | 134,056                                                 |       |
| Cash flows from  investing activities:                                                                         |       |                                                       |       |                                                     |       |                                                    |       |
| Additions to  property, plant and equipment                                                                    |       | (219,309                                                   | )          | (118,085                                                 | )          | (143,665                                                | )          |
| Proceeds from  sale of property, plant and equipment                                                           |       | 12,522                                                     |       | 11,808                                                   |       | 24,070                                                  |       |
| Cash paid for  acquisitions, net of cash acquired                                                              |       | (6,286                                                     | )          | —                                                   |       | (61,881                                                 | )          |
| Increase in  restricted cash                                                                                   |       | (114                                                       | )          | (4,187                                                   | )          | —                                                  |       |
| Net cash used in  investing activities                                                                         |       | (213,187                                                   | )          | (110,464                                                 | )          | (181,476                                                | )          |
| Cash flows from  financing activities:                                                                         |       |                                                       |       |                                                     |       |                                                    |       |
| Principal  repayments of long-term debt                                                                        |       | (720,390                                                   | )          | (89,905                                                  | )          | (711,419                                                | )          |
| Proceeds from  issuance of debt                                                                                |       | 631,994                                                    |       | 155,000                                                  |       | 693,225                                                 |       |
| Debt  extinguishment premium and cost                                                                          |       | —                                                     |       | —                                                   |       | (19,927                                                 | )          |
| Proceeds from  common stock issuance                                                                           |       | 15,814                                                     |       | 5,995                                                    |       | 9,349                                                   |       |
| Net proceeds  from issuance of units in subsidiary                                                             |       | 120,693                                                    |       | —                                                   |       | —                                                  |       |
| Interest rate  swap agreement settlement                                                                       |       | —                                                     |       | —                                                   |       | (3,067                                                  | )          |
| Debt issuance  costs                                                                                           |       | (2,821                                                     | )          | (5,399                                                   | )          | (2,456                                                  | )          |
| Purchase of  treasury stock                                                                                    |       | (36,833                                                    | )          | (100,000                                                 | )          | —                                                  |       |
| Payments on  capital lease agreements                                                                          |       | (77                                                        | )          | (425                                                     | )          | (1,294                                                  | )          |
| Net cash  provided by (used in) financing activities                                                           |       | 8,380                                                      |       | (34,734                                                  | )          | (35,589                                                 | )          |
| Effect of exchange rate  changes on cash and cash equivalents                                                  |       | 331                                                        |       | 864                                                      |       | 543                                                     |       |
| Net increase (decrease)  in cash and cash equivalents                                                          |       | 7,735                                                      |       | 539                                                      |       | (82,466                                                 | )          |
| Cash and cash  equivalents at beginning of period                                                              |       | 39,262                                                     |       | 38,723                                                   |       | 121,189                                                 |       |
| Cash and cash  equivalents at end of period                                                                    |       | $                                                          | 46,997     |                                                     | $          | 39,262                                                  |       | $ | 38,723 |   |
| Supplemental disclosure  of cash flow information:                                                             |       |                                                       |       |                                                     |       |                                                    |       |
| Cash paid for  interest                                                                                        |       | $                                                          | 56,224     |                                                     | $          | 41,697                                                  |       | $ | 67,779 |   |
| Cash paid for income  taxes                                                                                    |       | $                                                          | 11,222     |                                                     | $          | 6,425                                                   |       | $ | 13,457 |   |

 

See accompanying notes to consolidated financial statements.

F-6

----

**UNIVERSAL COMPRESSION, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands)**
| ** **                                                                                                                | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                |       |                            |       |                            |       |
| Current assets:                                                                                                           |       |                            |       |                            |       |
| Cash and cash  equivalents                                                                                                |       | $                               | 46,099     |                            | $          | 39,262 |   |
| Restricted cash                                                                                                           |       | 4,301                           |       | 4,187                           |       |
| Accounts  receivable, net of allowance for bad debts of $4,686 and $3,616 as of  December 31, 2006 and 2005, respectively |       | 193,968                         |       | 121,642                         |       |
| Inventories, net  of reserve for obsolescence of $9,158 and $10,896 as of December 31, 2006 and  2005, respectively       |       | 175,812                         |       | 108,273                         |       |
| Deferred income  taxes                                                                                                    |       | 7,310                           |       | 7,447                           |       |
| Other                                                                                                                     |       | 21,800                          |       | 19,787                          |       |
| Total current  assets                                                                                                     |       | 449,290                         |       | 300,598                         |       |
| Contract compression  equipment                                                                                           |       | 1,715,266                       |       | 1,567,470                       |       |
| Other property                                                                                                            |       | 199,835                         |       | 167,946                         |       |
| Accumulated  depreciation and amortization                                                                                |       | (468,591                        | )          | (375,575                        | )          |
| Net property,  plant and equipment                                                                                        |       | 1,446,510                       |       | 1,359,841                       |       |
| Goodwill                                                                                                                  |       | 412,122                         |       | 403,261                         |       |
| Note receivable –  affiliate                                                                                         |       | 78,063                          |       | 100,277                         |       |
| Derivative financial  instruments                                                                                         |       | 7,269                           |       | 6,954                           |       |
| Other assets                                                                                                              |       | 25,942                          |       | 24,641                          |       |
| Total assets                                                                                                              |       | $                               | 2,419,196  |                            | $          | 2,195,572 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                                            |       |                            |       |                            |       |
| Current liabilities:                                                                                                      |       |                            |       |                            |       |
| Accounts  payable, trade                                                                                                  |       | $                               | 92,063     |                            | $          | 55,014 |   |
| Accrued  liabilities                                                                                                      |       | 61,315                          |       | 43,796                          |       |
| Unearned revenue                                                                                                          |       | 93,332                          |       | 36,367                          |       |
| Accrued interest                                                                                                          |       | 3,472                           |       | 2,458                           |       |
| Current portion  of long-term debt and capital lease obligations                                                          |       | 14,916                          |       | 18,249                          |       |
| Total current  liabilities                                                                                                |       | 265,098                         |       | 155,884                         |       |
| Capital lease  obligations                                                                                                |       | —                          |       | 285                             |       |
| Long-term debt                                                                                                            |       | 778,638                         |       | 904,807                         |       |
| Deferred income taxes                                                                                                     |       | 207,254                         |       | 186,729                         |       |
| Derivative financial  instruments                                                                                         |       | 5,528                           |       | 6,006                           |       |
| Other liabilities                                                                                                         |       | 12,013                          |       | 10,369                          |       |
| Total  liabilities                                                                                                        |       | 1,268,531                       |       | 1,264,080                       |       |
| Commitments and  contingencies (Note 12)                                                                                  |       |                            |       |                            |       |
| Minority interest                                                                                                         |       | 122,080                         |       | —                          |       |
| Stockholder’s equity:                                                                                                |       |                            |       |                            |       |
| Common stock,  $10 par value, 5.0 shares authorized, 4.9 issued and outstanding as of  December 31, 2006 and 2005         |       | 49                              |       | 49                              |       |
| Additional paid-in  capital                                                                                               |       | 750,838                         |       | 745,876                         |       |
| Accumulated  other comprehensive loss                                                                                     |       | (11,764                         | )          | (12,428                         | )          |
| Retained  earnings                                                                                                        |       | 289,462                         |       | 197,995                         |       |
| Total  stockholder’s equity                                                                                          |       | 1,028,585                       |       | 931,492                         |       |
| Total liabilities and  stockholder’s equity                                                                          |       | $                               | 2,419,196  |                            | $          | 2,195,572 |   |

 

See accompanying notes to consolidated financialstatements.

F-7

----

**UNIVERSAL COMPRESSION, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands)**
| ** **                                                        | ** ** | **Twelve Months Ended  December 31,  2006** | ** ** | **Nine Months Ended  December 31,  2005** | ** ** | **Twelve Months Ended  March 31,  2005** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Revenue:                                                          |       |                                                       |       |                                                     |       |                                                    |       |
| Domestic  contract compression                                    |       | $                                                          | 398,189    |                                                     | $          | 248,414                                                 |       | $ | 296,239 |   |
| International  contract compression                               |       | 142,448                                                    |       | 94,831                                                   |       | 102,167                                                 |       |
| Fabrication                                                       |       | 215,825                                                    |       | 143,710                                                  |       | 213,994                                                 |       |
| Aftermarket  services                                             |       | 191,245                                                    |       | 126,692                                                  |       | 150,670                                                 |       |
| Total revenue                                                     |       | 947,707                                                    |       | 613,647                                                  |       | 763,070                                                 |       |
| Costs and expenses:                                               |       |                                                       |       |                                                     |       |                                                    |       |
| Cost of sales  (excluding depreciation and amortization expense): |       |                                                       |       |                                                     |       |                                                    |       |
| Domestic  contract compression                                    |       | 143,871                                                    |       | 88,158                                                   |       | 109,374                                                 |       |
| International  contract compression                               |       | 36,396                                                     |       | 23,756                                                   |       | 23,719                                                  |       |
| Fabrication                                                       |       | 186,464                                                    |       | 129,519                                                  |       | 198,709                                                 |       |
| Aftermarket  services                                             |       | 152,325                                                    |       | 100,879                                                  |       | 121,014                                                 |       |
| Depreciation and  amortization                                    |       | 122,701                                                    |       | 79,899                                                   |       | 93,797                                                  |       |
| Selling, general  and administrative                              |       | 118,762                                                    |       | 65,269                                                   |       | 75,756                                                  |       |
| Interest  expense, net                                            |       | 57,187                                                     |       | 40,221                                                   |       | 64,188                                                  |       |
| Interest income from  affiliate                                   |       | (5,730                                                     | )          | (277                                                     | )          | —                                                  |       |
| Debt  extinguishment costs                                        |       | 1,125                                                      |       | —                                                   |       | 26,543                                                  |       |
| Gain on  termination of interest rate swap agreements             |       | —                                                     |       | —                                                   |       | (3,197                                                  | )          |
| Asset impairment  expense                                         |       | —                                                     |       | —                                                   |       | 3,080                                                   |       |
| Foreign currency  (gain) loss                                     |       | (645                                                       | )          | (692                                                     | )          | 389                                                     |       |
| Minority interest                                                 |       | 1,354                                                      |       | —                                                   |       | —                                                  |       |
| Other (income)  loss, net                                         |       | (1,928                                                     | )          | 216                                                      |       | (1,125                                                  | )          |
| Total costs and  expenses                                         |       | 811,882                                                    |       | 526,948                                                  |       | 712,247                                                 |       |
| Income before income  taxes                                       |       | 135,825                                                    |       | 86,699                                                   |       | 50,823                                                  |       |
| Income tax expense                                                |       | 44,358                                                     |       | 31,150                                                   |       | 17,213                                                  |       |
| Net income                                                        |       | $                                                          | 91,467     |                                                     | $          | 55,549                                                  |       | $ | 33,610 |   |

 

See accompanying notes to consolidated financialstatements.

F-8

----

**UNIVERSAL COMPRESSION, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDER’S EQUITY**

**AND COMPREHENSIVE INCOME**

**(In thousands)**
| ** **                                           | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------|------------|
| **Balance, March 31, 2004**                          |       | $                 | 49         |                             | $          | 725,694                |       | $                                           | 108,836    |      | $          | (35,344 | ) | $ | 799,235 |   |
| Capital  contribution from stockholder               |       |              |       | 11,599                           |       |                   |       |                                        |       | 11,599    |       |
| Comprehensive  income:                               |       |              |       |                             |       |                   |       |                                        |       |      |       |
| Net income                                           |       |              |       |                             |       | 33,610                 |       |                                        |       |      |       |
| Foreign currency  translation adjustment, net of tax |       |              |       |                             |       |                   |       | 8,415                                       |       |      |       |
| Interest rate  swap agreement gain, net of tax       |       |              |       |                             |       |                   |       | 8,813                                       |       |      |       |
| Total  comprehensive income                          |       |              |       |                             |       |                   |       |                                        |       | 50,838    |       |
| **Balance, March 31, 2005**                          |       | $                 | 49         |                             | $          | 737,293                |       | $                                           | 142,446    |      | $          | (18,116 | ) | $ | 861,672 |   |
| Capital contribution  from stockholder               |       |              |       | 8,583                            |       |                   |       |                                        |       | 8,583     |       |
| Comprehensive  income:                               |       |              |       |                             |       |                   |       |                                        |       |      |       |
| Net income                                           |       |              |       |                             |       | 55,549                 |       |                                        |       |      |       |
| Foreign currency  translation adjustment, net of tax |       |              |       |                             |       |                   |       | 6,659                                       |       |      |       |
| Interest rate  swap agreement loss, net of tax       |       |              |       |                             |       |                   |       | (971                                        | )          |      |       |
| Total comprehensive  income                          |       |              |       |                             |       |                   |       |                                        |       | 61,237    |       |
| **Balance, December 31, 2005**                       |       | $                 | 49         |                             | $          | 745,876                |       | $                                           | 197,995    |      | $          | (12,428 | ) | $ | 931,492 |   |
| Capital  contribution from stockholder               |       |              |       | 4,962                            |       |                   |       |                                        |       | 4,962     |       |
| Comprehensive  income:                               |       |              |       |                             |       |                   |       |                                        |       |      |       |
| Net income                                           |       |              |       |                             |       | 91,467                 |       |                                        |       |      |       |
| Foreign currency  translation adjustment, net of tax |       |              |       |                             |       |                   |       | 1,174                                       |       |      |       |
| Interest rate  swap agreement gain, net of tax       |       |              |       |                             |       |                   |       | (510                                        | )          |      |       |
| Total  comprehensive income                          |       |              |       |                             |       |                   |       |                                        |       | 92,131    |       |
| **Balance, December 31, 2006**                       |       | $                 | 49         |                             | $          | 750,838                |       | $                                           | 289,462    |      | $          | (11,764 | ) | $ | 1,028,585 |   |

 

See accompanying notes to consolidated financialstatements.

F-9

----

**UNIVERSAL COMPRESSION, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**
| ** **                                                                                                     | ** ** | **Twelve Months Ended  December 31,  2006** | ** ** | **Nine Months Ended  December 31,  2005** | ** ** | **Twelve Months Ended  March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Cash flows from operating  activities:                                                                         |       |                                                       |       |                                                     |       |                                                    |       |
| Net income                                                                                                     |       | $                                                          | 91,467     |                                                     | $          | 55,549                                                  |       | $ | 33,610 |   |
| Adjustments to  reconcile net income to cash provided by operating activities, net of effect  of acquisitions: |       |                                                       |       |                                                     |       |                                                    |       |
| Depreciation and  amortization                                                                                 |       | 122,701                                                    |       | 79,899                                                   |       | 93,797                                                  |       |
| Minority interest                                                                                              |       | 1,354                                                      |       | —                                                   |       | —                                                  |       |
| Non-cash  gain from interest rate swap agreement settlement                                                    |       | —                                                     |       | —                                                   |       | (3,197                                                  | )          |
| Loss on early  extinguishment of debt                                                                          |       | 1,125                                                      |       | —                                                   |       | 26,543                                                  |       |
| Loss on asset  impairment                                                                                      |       | —                                                     |       | —                                                   |       | 3,080                                                   |       |
| Gain on asset  sales                                                                                           |       | (1,202                                                     | )          | (92                                                      | )          | (1,972                                                  | )          |
| Amortization of  debt issuance costs                                                                           |       | 1,941                                                      |       | 1,671                                                    |       | 3,974                                                   |       |
| Stock-based  compensation expense                                                                              |       | 7,441                                                      |       | 1,322                                                    |       | 965                                                     |       |
| Increase  (decrease) in deferred taxes                                                                         |       | 28,178                                                     |       | 25,085                                                   |       | 8,213                                                   |       |
| (Increase)  decrease in other assets                                                                           |       | (7,623                                                     | )          | (5,898                                                   | )          | (7,114                                                  | )          |
| (Increase)  decrease in receivables                                                                            |       | (68,730                                                    | )          | (4,212                                                   | )          | (35,847                                                 | )          |
| (Increase)  decrease in inventories                                                                            |       | (67,224                                                    | )          | (12,582                                                  | )          | (2,204                                                  | )          |
| Increase  (decrease) in accounts payable                                                                       |       | 35,188                                                     |       | (2,928                                                   | )          | 12,489                                                  |       |
| Increase  (decrease) in accrued liabilities                                                                    |       | 15,340                                                     |       | 6,331                                                    |       | 428                                                     |       |
| Increase  (decrease) in unearned revenue                                                                       |       | 56,965                                                     |       | 4,166                                                    |       | 6,605                                                   |       |
| Increase  (decrease) in accrued interest                                                                       |       | 1,014                                                      |       | (3,438                                                   | )          | (5,314                                                  | )          |
| Net cash  provided by operating activities                                                                     |       | 217,935                                                    |       | 144,873                                                  |       | 134,056                                                 |       |
| Cash flows from  investing activities:                                                                         |       |                                                       |       |                                                     |       |                                                    |       |
| Additions to  property, plant and equipment                                                                    |       | (219,309                                                   | )          | (118,085                                                 | )          | (143,665                                                | )          |
| Proceeds from  sale of property, plant and equipment                                                           |       | 12,522                                                     |       | 11,808                                                   |       | 24,070                                                  |       |
| Cash paid for  acquisitions, net of cash acquired                                                              |       | (6,286                                                     | )          | —                                                   |       | (61,881                                                 | )          |
| Payment from  (loans to) affiliate on notes receivable                                                         |       | 9,359                                                      |       | (100,000                                                 | )          | —                                                  |       |
| Increase in  restricted cash                                                                                   |       | (114                                                       | )          | (4,187                                                   | )          | —                                                  |       |
| Net cash used in  investing activities                                                                         |       | (203,828                                                   | )          | (210,464                                                 | )          | (181,476                                                | )          |
| Cash flows from  financing activities:                                                                         |       |                                                       |       |                                                     |       |                                                    |       |
| Principal  repayments of long-term debt                                                                        |       | (720,390                                                   | )          | (89,905                                                  | )          | (711,419                                                | )          |
| Proceeds from  issuance of debt                                                                                |       | 594,994                                                    |       | 155,000                                                  |       | 693,225                                                 |       |
| Debt  extinguishment premium and cost                                                                          |       | —                                                     |       | —                                                   |       | (19,927                                                 | )          |
| Capital  contribution from stockholder                                                                         |       | —                                                     |       | 5,995                                                    |       | 9,349                                                   |       |
| Net proceeds  from issuance of units in subsidiary                                                             |       | 120,693                                                    |       | —                                                   |       | —                                                  |       |
| Interest rate  swap agreement settlement                                                                       |       | —                                                     |       | —                                                   |       | (3,067                                                  | )          |
| Debt issuance  costs                                                                                           |       | (2,821                                                     | )          | (5,399                                                   | )          | (2,456                                                  | )          |
| Payments on  capital lease agreements                                                                          |       | (77                                                        | )          | (425                                                     | )          | (1,294                                                  | )          |
| Net cash (used  in) provided by financing activities                                                           |       | (7,601                                                     | )          | 65,266                                                   |       | (35,589                                                 | )          |
| Effect of exchange rate  changes on cash and cash equivalents                                                  |       | 331                                                        |       | 864                                                      |       | 543                                                     |       |
| Net increase (decrease)  in cash and cash equivalents                                                          |       | 6,837                                                      |       | 539                                                      |       | (82,466                                                 | )          |
| Cash and cash  equivalents at beginning of period                                                              |       | 39,262                                                     |       | 38,723                                                   |       | 121,189                                                 |       |
| Cash and cash  equivalents at end of period                                                                    |       | $                                                          | 46,099     |                                                     | $          | 39,262                                                  |       | $ | 38,723 |   |
| Supplemental disclosure  of cash flow information:                                                             |       |                                                       |       |                                                     |       |                                                    |       |
| Cash paid for  interest                                                                                        |       | $                                                          | 56,173     |                                                     | $          | 41,697                                                  |       | $ | 67,779 |   |
| Cash paid for income  taxes                                                                                    |       | $                                                          | 11,222     |                                                     | $          | 6,425                                                   |       | $ | 13,457 |   |

 

See accompanying notes to consolidated financialstatements.

F-10

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**UNIVERSAL COMPRESSION HOLDINGS, INC.**

**UNIVERSAL COMPRESSION, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**1. Basis of Presentation and Summary ofSignificant Accounting Policies**

*Organization*

These notes apply to the consolidated financialstatements of both Universal Compression Holdings, Inc. (“Holdings”) andUniversal Compression, Inc. (“Universal”) and their subsidiaries. The term “Company”will be used if a statement is applicable to both Holdings and Universal.  Holdingsis a holding company, which conducts its operations through its wholly-ownedsubsidiary, Universal.

*Nature of Operations*

The Company is the second largest natural gas compression servicescompany in the world in terms of compressor fleet horsepower, with a fleet asof December 31, 2006 of approximately 7,100 compressor units comprisingapproximately 2.7 million horsepower. Natural gas compression is a mechanical process whereby a volumeof natural gas at an existing pressure is increased to a desired higherpressure for transportation from one point to another, and is essential to thetransportation and production of natural gas. Compression is typically requiredseveral times during the natural gas production and transportation cycle,including: (1) at the wellhead; (2) throughout gathering and distributionsystems; (3) into and out of processing and storage facilities; and (4) alongintrastate and interstate pipelines.  The Company provides a full range of natural gascompression services and products including sales, operations, maintenance andfabrication to the natural gas industry, both domestically and internationally.

*Initial Public Offering ofSubsidiary Company*

In October 2006, asubsidiary of the Company, Universal Compression Partners, L.P. (along with itssubsidiaries the “Partnership”), completed an initial public offering of6,325,000 common units at a price of $21.00 per unit, representing limitedpartner interests in the Partnership, including 825,000 common units soldpursuant to the exercise of the underwriters’ overallotment option. All of theunits were issued by the Partnership. The Partnership was formed to provide natural gas contract compressionservices to customers throughout the United States (“U.S.”). A subsidiary ofthe Company is the general partner of the Partnership.

The net proceedsof the offering were $120.7 million after deducting underwriting discounts andcommissions and expenses associated with the offering.  In connection with the offering, the Companycontributed to the Partnership contract compression services contracts withnine customers and a fleet of compressor units to service those customers,comprising approximately 330,000 horsepower, or approximately 17% (by availablehorsepower) of the Company’s domestic contract compression business, thePartnership assumed $228.4 million in debt from the Company and the Companyreceived 825,000 common units and 6,325,000 subordinated units representinglimited partner interests in the Partnership. The Partnership used the aggregate net proceeds from the offering torepay a portion of the debt it assumed from the Company and to redeem the825,000 common units it issued to the Company.

The common unitssold to the public represent a 49% limited partner interest in the Partnership.The Company owns the remaining equity interests in the Partnership.  The Company consolidates the financialposition and results of operations of the Partnership.

The Company and the Partnership entered into anomnibus agreement, the terms of which include, among other things, the Company’sagreement to provide to the Partnership operational staff, corporate staff andsupport services, the terms under which the Company may sell to the Partnershipnewly fabricated equipment and under which it may transfer to and receive fromthe Partnership idle compression equipment and an agreement by the Company toprovide caps on the amount of cost of sales and selling, general andadministrative costs that the Partnership must pay.  The caps expire on December 31, 2008.

F-11

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*Principles of Consolidation*

The accompanying consolidatedfinancial statements include the Company and its majority-owned subsidiaries.All significant intercompany accounts and transactions have been eliminated inconsolidation.

*Results of Operations for Universal*

Universal’s results of operations were identical toHoldings for the twelve months ended December 31, 2006, except as follows:Holdings’ income before taxes and income tax expense were $5.9 million and $2.1million, respectively, lower than the corresponding amounts for Universal.  For the nine months ended December 31, 2005,the only differences were Holdings’ income before taxes and income tax expensewere $0.3 million and $0.1 million, respectively, lower than the correspondingamounts for Universal.  Universal’sresults of operations were identical to Holdings for the twelve months endedMarch 31, 2005.  The impact of these differencesfor purposes of disclosures is immaterial and therefore separate disclosuresfor Universal that would be impacted by these differences have not beenpresented in these notes.

*Fiscal Year*

In December 2005, Holdings’ board of directorsapproved a change to its fiscal year end from March 31 to December 31,effective in 2005.  As a result of thischange, the Company is reporting a nine-month transition period ended December31, 2005.  The fiscal year ended December31, 2006 represents a twelve-month period.

F-12

----

Consolidated comparative financial data for the twelvemonths ended December 31, 2006 and 2005 and for the nine months ended December31, 2005 and 2004 are summarized below (shares outstanding and earnings pershare information is for Holdings only) (in thousands, except per shareamounts).  Data for the twelve monthsended December 31, 2005 is derived from the Company’s audited financialstatements for the nine-month transition period ended December 31, 2005 and theCompany’s unaudited financial statements for the three-month period ended March31, 2005.  Data for the nine months ended December 31, 2004 is derivedfrom the Company’s unaudited financial statements, which were presented in itsForm 10-Q for the nine months ended December 31, 2004.
| ** **                                                         | ** ** | **Twelve Months Ended December 31,** | ** ** | **Nine Months Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                                 | ** ** | **2005**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | ** **                                               | ** ** | **(Unaudited)**                                        | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** |
| Revenue:                                                           |       |                                                     | ** ** | ** **                                             |       |   | ** ** | ** ** | ** ** |
| Domestic  contract compression                                     |       | $                                                        | 398,189    |                                                   | $          | 325,332 |   | $ | 248,414 |   | $ | 219,321 |   |
| International  contract compression                                |       | 142,448                                                  |       | 123,570                                                |       | 94,831 |   | 73,428 |   |
| Fabrication                                                        |       | 215,825                                                  |       | 191,747                                                |       | 143,710 |   | 165,957 |   |
| Aftermarket  services                                              |       | 191,245                                                  |       | 166,634                                                |       | 126,692 |   | 110,728 |   |
| Total revenue                                                      |       | 947,707                                                  |       | 807,283                                                |       | 613,647 |   | 569,434 |   |
| Costs and expenses:                                                |       |                                                     |       |                                                   |       |   |   |   |   |
| Cost of sales  (excluding depreciation and amortization expense:   |       |                                                     |       |                                                   |       |   |   |   |   |
| Domestic  contract compression                                     |       | 143,871                                                  |       | 117,398                                                |       | 88,158 |   | 80,134 |   |
| International  contract compression                                |       | 36,396                                                   |       | 30,723                                                 |       | 23,756 |   | 16,752 |   |
| Fabrication                                                        |       | 186,464                                                  |       | 174,515                                                |       | 129,519 |   | 153,713 |   |
| Aftermarket  services                                              |       | 152,325                                                  |       | 134,160                                                |       | 100,879 |   | 87,733 |   |
| Depreciation and  amortization                                     |       | 122,701                                                  |       | 104,289                                                |       | 79,899 |   | 69,407 |   |
| Selling, general  and administrative                               |       | 118,762                                                  |       | 85,341                                                 |       | 65,269 |   | 55,684 |   |
| Interest  expense, net                                             |       | 57,349                                                   |       | 54,617                                                 |       | 40,221 |   | 49,792 |   |
| Debt  extinguishment costs                                         |       | 1,125                                                    |       | 26,068                                                 |       | — |   | 475 |   |
| Gain on  termination of interest rate swap agreements              |       | —                                                   |       | —                                                 |       | — |   | (3,197 | ) |
| Asset impairment  expense                                          |       | —                                                   |       | 3,080                                                  |       | — |   | — |   |
| Foreign currency  (gain) loss                                      |       | (645                                                     | )          | (589                                                   | )          | (692 | ) | 286 |   |
| Minority  interest                                                 |       | 1,354                                                    |       | —                                                 |       | — |   | — |   |
| Other (income)  loss, net                                          |       | (1,928                                                   | )          | (681                                                   | )          | 216 |   | (228 | ) |
| Total costs and  expenses                                          |       | 817,774                                                  |       | 728,921                                                |       | 527,225 |   | 510,551 |   |
| Income before income  taxes                                        |       | 129,933                                                  |       | 78,362                                                 |       | 86,422 |   | 58,883 |   |
| Income tax expense                                                 |       | 42,277                                                   |       | 27,483                                                 |       | 31,053 |   | 20,783 |   |
| Net income                                                         |       | $                                                        | 87,656     |                                                   | $          | 50,879 |   | $ | 55,369 |   | $ | 38,100 |   |
| Weighted average common  and common equivalent shares outstanding: |       |                                                     |       |                                                   |       |   |   |   |   |
| Basic                                                              |       | 29,911                                                   |       | 31,799                                                 |       | 31,773 |   | 31,330 |   |
| Diluted                                                            |       | 31,032                                                   |       | 32,615                                                 |       | 32,758 |   | 31,998 |   |
| Earnings per  share—Basic                                     |       | $                                                        | 2.93       |                                                   | $          | 1.60 |   | $ | 1.74 |   | $ | 1.22 |   |
| Earnings per share—Diluted                                    |       | $                                                        | 2.82       |                                                   | $          | 1.56 |   | $ | 1.69 |   | $ | 1.19 |   |

 

*Use of Estimates*

In preparing the Company’sfinancial statements, management makes estimates and assumptions that affectthe amounts reported in the financial statements and related disclosures.Actual results may differ from these estimates.

*Cash and Cash Equivalents*

The Company considers all highlyliquid investments purchased with an original maturity of three months or lessto be cash equivalents. Cash flows are computed using the indirect method.

F-13

----

*Revenue Recognition*

Revenue is recognized by theCompany’s four reportable business segments using the following criteria:(a) persuasive evidence of an exchange arrangement exists;(b) delivery has occurred or services have been rendered; (c) thebuyer’s price is fixed or determinable and (d) collectibility isreasonably assured.

Revenue from contract compressionservice is recorded when earned, which generally occurs monthly at the time themonthly compression service is provided to customers in accordance with thecontracts. Aftermarket services revenue is recorded as products are deliveredor services are performed for the customer. Fabrication revenue is recognizedusing the completed-contract method which recognizes revenue uponcompletion of the contract. This method is used because the typical contract iscompleted within two to three months.

*Concentration of Credit Risk*

Trade accounts receivable are duefrom companies of varying size engaged principally in oil and gas activities inthe U.S. and in international locations including Canada, Latin America,Europe, Africa and the Asia Pacific region. The Company reviews the financialcondition of customers prior to extending credit and periodically updatescustomer credit information. Payment terms are on a short-term basis and inaccordance with industry standards. No single customer accounted for 10% ormore of the Company’s revenue for the twelve months ended December 31, 2006, ninemonths ended December 31, 2005 and twelve months ended March 31, 2005. Forthe twelve months ended December 31, 2006, nine months ended December 31, 2005and twelve months ended March 31, 2005, the Company wrote off bad debts,net of recoveries totaling $0.6 million, $0.6 million and $1.8 million,respectively.

*Inventories*

Inventories are recorded at thelower of average cost or market (net realizable value). Some items ofcompression equipment are acquired and placed in inventories for subsequentsale.

A reserve is recorded againstinventory balances for estimated obsolescence. This reserve is based onspecific identification and historical experience.

*Property, Plant and Equipment*

Property, plant and equipment arecarried at cost. Depreciation for financial reporting purposes is computed onthe straight-line basis using estimated useful lives. For compressionequipment, depreciation begins with the first compression service.  The estimated useful lives as of December 31,2006 were as follows:
| Buildings                      |   | 20-35  years |   |
|--------------------------------|--------|--------------|--------|
| Compression equipment          |   | 5-30  years  |   |
| Other properties and equipment |   | 2-25 years   |   |

 

Maintenance and repairs arecharged to expense as incurred. Overhauls and major improvements that increasethe value or extend the life of contract compressor units are capitalized anddepreciated over the estimated useful life of up to 6.5 years.

Depreciation expense for the twelvemonths ended December 31, 2006, nine months ended December 31, 2005 and twelvemonths March 31, 2005 was $122.0 million, $79.0 million and $92.7 million,respectively.

Property, plant and equipment arereviewed for impairment whenever events or circumstances indicate that thecarrying amount of an asset may not be recoverable based upon undiscounted cashflows. Any impairment losses are measured based upon the excess of the carryingvalue over the fair value. Included within net income for the twelve monthsended March 31, 2005 is a $3.1 million loss on the impairment of theCompany’s Tulsa, Oklahoma fabrication facility due to the decision topermanently discontinue operations and dispose of this facility. The carryingvalue of this facility was written down to estimated market value, which wasdetermined by the Company based upon recent appraisals at that time.

F-14

----

*Goodwill*

Goodwill and intangible assetsacquired in connection with business combinations represent the excess ofconsideration over the fair value of tangible net assets acquired. Certainassumptions and estimates are employed in determining the fair value of assetsacquired and liabilities assumed, as well as in determining the allocation ofgoodwill to the appropriate reporting unit.

The Company performs animpairment test for goodwill assets annually or earlier if indicators ofpotential impairment exist. The Company’s goodwill impairment test involves acomparison of the fair value of each of its reporting units with their carryingvalue. The fair value is determined using discounted cash flows and othermarket-related valuation models. Certain estimates and judgments arerequired in the application of the fair value models. In February 2006, theCompany performed an impairment analysis in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets,” and determined that no impairment had occurred.  During the twelve months ended December 31,2006, no event occurred or circumstances changed that would more likely thannot reduce the fair value of a reporting unit below its carrying value.  As a result, an interim test for goodwillimpairment between our annual test dates was not performed.  If for any reason the fair value of thegoodwill or that of any of the Company’s reporting units declines below thecarrying value in the future, the Company may incur charges for the impairment.

*Note Receivable — Affiliate(Universal only)*

In December 2005,Universal entered into a revolving loan agreement with Holdings.  The balance of loans to Holdings, includingaccrued interest, at December 31, 2006 and 2005 was $78.1 million and $100.3million, respectively.  The revolvingloan agreement and all accrued interest are due in December 2007.  The revolving loan agreement bears interestat LIBOR plus 1.00%. Holdings may borrow up to a total of $115 million duringthe term of the agreement.  Holdings canprepay amounts outstanding under the revolving loan agreement at anytimewithout penalty.  Universal hasclassified this note receivable as long-term due to Holdings having the abilityand capacity to refinance the amount outstanding under the five-year $500million revolving credit facility (see Note 5) entered into in October 2006.

*Other Assets*

Included in other assets are debtissuance costs, net of accumulated amortization, totaling approximately $15.5 millionand $14.5 million at December 31, 2006 and 2005, respectively. Such costsare amortized over the period of the respective debt agreements on astraight-line method which approximates the effective interest method.

*Warranty*

The Company accrues amounts forestimated warranty claims based upon current and historical product warrantycosts and any other related information known.

*Stock-Based Compensation*

Effective January 1, 2006, theCompany adopted SFAS No. 123R, “Share-Based Payment,” which requiresthat compensation cost relating to share-based payment transactions berecognized in the financial statements. That cost is measured based on the fair value of the equity or liabilityinstruments issued.  Prior to 2006, theCompany accounted for stock options in accordance with Accounting PrinciplesBoard Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”.  Under APB 25, stock option expense was notrecognized in net income as the exercise price of stock options granted wasequal to the market value of the stock on the date of grant.  The Company has previously provided footnotedisclosure of pro forma net income and earnings per share amounts as if stockoption expense had been recognized based on fair value.

The Company adopted SFAS No. 123R utilizing themodified prospective transition method. As a result, prior periods have not been restated to reflect the impact ofSFAS No. 123R.  For the twelve monthsended December 31, 2006, the adoption of SFAS No. 123R impacted our results ofoperation by increasing stock-based compensation expense by $5.0 million ($3.4million, net of tax) as compared to the expense that would have been recognizedunder APB 25.  The adoption of SFAS No.123R decreased each of Holdings’ basic and diluted earnings per share for the twelvemonths ended December 31, 2006 by $0.11 per share.

F-15

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*Income Taxes*

The Company accounts for incometaxes using an asset and liability approach that requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been recognized in the Company’s financial statements or taxreturns. In estimating future tax consequences, all expected events areconsidered other than future enactments of changes in the tax laws or rates.

The Company provides compressionservices to a global market. As such, the Company is subject to taxation notonly in the U.S. but also in numerous foreign jurisdictions. Having to considerthese different jurisdictions complicates the estimate of future domestic andforeign source taxable income, which in turn determines the realizability ofits deferred tax assets. Numerous judgments and assumptions are inherent in thedetermination of future domestic and foreign source taxable income, includingassumptions on future operating conditions and asset utilization. The judgmentsand assumptions used to determine future taxable income are consistent withthose used for other financial statement purposes.

Additionally, the Company mustconsider any prudent and feasible tax planning strategies that would minimizethe amount of deferred tax liabilities recognized or the amount of anyvaluation allowance recognized against deferred tax assets. A tax planningstrategy that the Company employs is the permanent reinvestment of the earningsof foreign subsidiaries. The assumptions related to the permanent reinvestmentof the foreign earnings are analyzed and reviewed annually for changes in ourinternational and domestic business outlook.

*Foreign Currency Translation*

The majority of the Company’sforeign subsidiaries have designated the local currency as their functionalcurrency and, as such, gains and losses resulting from financial statementtranslation of foreign operations are included as a separate component ofaccumulated other comprehensive income (loss) within stockholders’ equity.Gains and losses from balances that are receivable or payable in currency otherthan functional currency are included in the consolidated statements ofoperations during the period incurred.

*Fair Value of Financial Instruments*

The Company’s financial instruments consist of trade receivables andpayables (which have carrying values that approximate fair value) and long-termdebt. The fair value of the Company’s revolving credit facilities (seeNote 5) as of December 31, 2006 and 2005 are representative of theircarrying values based upon variable rate terms. The fair value of the $175million face value 7 1/4% senior notes approximated their carrying values of$171.5 million and $171.1 million at December 31, 2006 and 2005,respectively.   The carrying valueof $186.7 and $200.0, respectively, for the notes under the asset-backsecuritization facility (“ABS facility”) approximated their fair values as ofDecember 31, 2006 and 2005, respectively. The estimated fair value amounts have been determined by the Companyusing appropriate valuation methodologies and information available tomanagement as of December 31, 2006 and 2005.

*Hedging and Use of DerivativeInstruments*

The Company utilizes interestrate swap agreements to hedge the exposure to variable cash flows on itsfloating rate debt (cash flow hedge) and hedge the exposure to changes in thefair value of its fixed rate debt (fair value hedge).  The swaps are not used for trading or speculativepurposes.  In accordance with SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” asamended, the Company records these interest rate swap agreements on the balancesheet as either derivative assets or derivative liabilities measured at theirfair value.  Fair value was estimatedusing a discounted cash flow approach.  Theseinstruments qualify for hedge accounting as they either reduce the interestrate risk of the underlying hedged item and are designated as a cash flow hedgeat inception or they reduce the risk related to changes in the fair value ofthe hedged item and are designated as a fair value hedge at inception. Theseswaps result in financial impacts that are inversely correlated to those of theitems being hedged. Changes in the fair value of the swaps designated as cashflow hedges are deferred in accumulated other comprehensive loss, net of tax,to the extent the contracts are effective as hedges until settlement of theunderlying hedged transaction. Changes in the fair value of the swapsdesignated as fair value hedges are recorded to interest expense in the periodof change together with the offsetting gain or loss on the fair value of theunderlying debt and any ineffective portion of the gain or loss is recognizedin earnings.  To qualify for hedgeaccounting treatment, companies must formally document, designate and assessthe effectiveness of the transactions. If the necessary correlation ceases toexist or if physical delivery of the hedged item becomes improbable, theCompany would discontinue hedge accounting and apply mark-to-market 

F-16

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accounting. Amounts paid or received from interest rateswap agreements are charged or credited to interest expense and matched withthe cash flows and interest expense of the debt being hedged, resulting in anadjustment to the effective interest rate.

*Environmental Liabilities*

The costs to remediate andmonitor environmental matters are accrued when such liabilities are consideredprobable and a reasonable estimate of such costs is determinable.

*Minority Interests*

Minority interest reflects theportion of the Partnership’s capital and earnings which are applicable to the49% limited partnership interest not owned by the Company.

*Earnings Per Share*

Earnings per share, basic anddiluted, is calculated for Holdings in accordance with SFAS No. 128, “Earningsper share.”  The only potentiallydilutive securities issued by Holdings are stock options and unvestedrestricted stock grants, neither of which would impact the calculation of netincome for dilutive earnings per share purposes.

The dilutive effect of stockoptions and unvested restricted stock grants outstanding for the twelve monthsended December 31, 2006, nine months ended December 31, 2005 and twelve monthsended March 31, 2005 were 1,121,000, 985,000, and 832,000 shares,respectively. For the twelve months ended December 31, 2006, nine months endedDecember 31, 2005 and twelve months ended March 31, 2005 outstanding stockoptions of zero, 194,000, and 239,000, respectively, were excluded from thecomputation of diluted earnings per share as the options’ exercise prices weregreater than the average market price of the common stock for such periods.

*New Accounting Pronouncements*

In November 2004, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 151, “Inventory Costs - an amendmentof ARB 43, Chapter 4.” SFAS No. 151 provides clarification that abnormal amounts ofidle facility expense, freight, handling costs and wasted material berecognized as current period charges. In addition, SFAS No. 151requires the allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.SFAS No. 151 is effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. The adoption of SFAS No. 151 did nothave a material impact on the Company’s financial statements.

In May 2005, theFASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3.” SFAS No. 154 requires retrospective applicationto prior periods’ financial statements for changes in accounting principle,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. SFAS No. 154 also requires that a changein depreciation, amortization, or depletion method for long-lived,non-financial assets be accounted for as a change in accounting estimate affectedby a change in accounting principle. SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005. The adoption of SFAS No. 154 did not have a material impact on theCompany’s financial statements.

In June 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109.”  FIN 48 was issued to clarify the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsby prescribing a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15,2006.  The Company is currentlyevaluating the impact that the adoption of FIN 48 will have on its financialstatements.

In June 2006, the FASB’sEmerging Issues Task Force reached a consensus on Issue 06-3, “How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation)”that concludes that the presentation of taxes within the Issue’s scope is anaccounting policy decision that should be disclosed. If the taxes are reportedon a gross basis, companies are required to disclose the amounts of those taxesif such amounts are deemed significant. This pronouncement is effective forinterim and annual reporting periods 

F-17

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beginning after December15, 2006. The Company is evaluating this pronouncement to determine whatdisclosures will be required in its financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which definesfair value, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007.  The Company iscurrently evaluating the impact that the adoption of SFAS No. 157 willhave on its financial statements.

In September 2006, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements.” SAB 108 provides interpretive guidance on how the effectsof the carryover or reversal of prior year misstatements should be consideredin quantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. The guidance in SAB 108 must be applied to annualfinancial statements for fiscal years ending after November 15, 2006.  The adoption of SAB 108 did not have amaterial impact on the Company’s financial statements.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” which permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.  SFAS No. 159 will be effective for theCompany on January 1, 2008.  The Companyis currently evaluating the impact that the adoption of SFAS No. 159 will haveon its financial statements.

**2. Goodwill and Intangible Assets**

The Company’s acquisitions wereaccounted for as purchases and, accordingly, the results of operations of theacquired businesses are included in the accompanying financial statements fromthe dates of acquisition. Goodwill has been recognized for the amount of theexcess of the purchase price over the fair value of the net assets acquired andis accounted for in accordance with SFAS No. 142.

The changes in the carryingamount of goodwill from March 31, 2005 to December 31, 2006, are asfollows (in thousands):
| ** **                              | ** ** | **Domestic  Contract  Compression** | ** ** | **International  Contract  Compression** | ** ** | **Aftermarket  Services** | ** ** | **Fabrication** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|-----------------|------------|-----------|------------|
| Balance as of March 31,  2005           |       | $                                   | 261,752    |                                     | $          | 61,689                    |       | $               | 48,795     |      | $          | 29,042 |   | $ | 401,278 |   |
| Purchase price  adjustments and other   |       | —                              |       | 97                                       |       | 892                       |       | —          |       | 989       |       |
| Impact of foreign  currency translation |       | —                              |       | 994                                      |       | —                    |       | —          |       | 994       |       |
| Balance as of December  31, 2005        |       | 261,752                             |       | 62,780                                   |       | 49,687                    |       | 29,042          |       | 403,261   |       |
| Acquisitions                            |       | —                              |       | —                                   |       | 8,541                     |       | —          |       | 8,541     |       |
| Impact of foreign  currency translation |       | —                              |       | 320                                      |       | —                    |       | —          |       | 320       |       |
| Balance as of December 31, 2006         |       | $                                   | 261,752    |                                     | $          | 63,100                    |       | $               | 58,228     |      | $          | 29,042 |   | $ | 412,122 |   |

 

During February 2006, the Company performed an impairment analysis onits goodwill in accordance with SFAS No. 142 and determined that no impairmenthad occurred.

At December 31, 2006 and2005, the Company had intangible assets with a gross carrying value of $8.1 millionand $8.6 million, respectively, whichrelate to acquired customer contracts and non-compete agreements. The carryingamount net of accumulated amortization at December 31, 2006 was $3.3 million.Intangible assets are amortized on a straight-line basis with useful livesranging from 10 months to 15 years. Amortization expense was $0.7million, $0.9 million and $1.1 million for the twelve months ended December 31,2006, nine months ended December 31, 2005 and twelve months ended March 31,2005, respectively.  In addition, theCompany had an intangible asset with a gross carrying value of $0.4 millionat December 31, 2006 related to an acquired registration certificate. Thisasset is not being amortized as it has been deemed to have an indefinite life.

F-18

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**3.  Business Acquisitions**

In November 2004, theCompany purchased the Canadian contract compression fleet of Hanover CompressorCompany for $56.9 million in cash. As a result of the acquisition, theCompany recorded $46.2 million in property, plant and equipment,$3.1 million in identifiable intangible assets and $7.6 million ingoodwill. At the time of the acquisition, the acquired fleet totaledapproximately 83,000 horsepower. The acquisition was funded by$50.0 million in borrowings under the revolving credit facility and$6.9 million in cash. The pro forma information set forth below assumesthe acquisition is accounted for as if the purchase occurred at the beginningof the twelve months ended March 31, 2005. The pro forma information is presentedfor informational purposes only and is not necessarily indicative of theresults of operations that actually would have been achieved had theacquisition been consummated at that time (in thousands, except per shareamounts):
|                                   | ** ** | **Twelve Months Ended  March 31, 2005** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                        | ** ** | **As Reported**                                        | ** ** | **Pro Forma  as Adjusted** | ** ** |
| ** **                        | ** ** | ** **                                                  | ** ** | **(unaudited)** | ** ** |
| Revenue                           |       | $                                                           | 763,070    |   | $ | 771,288 |   |
| Net income                        |       | 33,610                                                      |       | 36,199 |   |
| Earnings per common  share-basic  |       | 1.07                                                        |       | 1.15 |   |
| Earnings per common share-diluted |       | 1.04                                                        |       | 1.12 |   |
|                                   |            |                                                             |            |  |  |  |  |

 

**4. Inventories, Net**

Inventories, net consisted of thefollowing (in thousands):
|                           | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Raw materials             |       | $                                     | 83,688     |   | $ | 67,125 |   |
| Work-in-progress          |       | 100,866                               |       | 50,810 |   |
| Finished goods            |       | 416                                   |       | 1,234 |   |
| Total inventories         |       | 184,970                               |       | 119,169 |   |
| Reserve for  obsolescence |       | (9,158                                | )          | (10,896 | ) |
| Inventories, net          |       | $                                     | 175,812    |   | $ | 108,273 |   |

 

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**5. Long-Term Debt**

The Company’s debt consisted ofthe following (in thousands):
|                                                                                                                                                                          | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Notes due  October 2025, bearing interest at a variable rate of LIBOR plus 0.74% (see  “ABS Facility” below) (1)                                               |       | $                                     | 186,667    |   | $ | 200,000 |   |
| Senior notes,  bearing interest at 7 1/4% per annum, due 2010 (see“7 1/4% Senior Notes”  below) (2)                                                            |       | 171,516                               |       | 171,078 |   |
| Seven-year term  loan due February 2012, bearing interest at a variable rate of LIBOR plus  1.50% (see “2005 Credit Facility” below) (3)                       |       | —                                |       | 471,812 |   |
| Revolving credit  facility due 2010, bearing interest at a variable rate of LIBOR plus 1.25%  (see “2005 Credit Facility” below)                               |       | —                                |       | 80,000 |   |
| Revolving credit  facility due 2011, bearing interest at a variable rate of LIBOR plus 1.00%  (see “2006 Credit Facility” below) (4)                      |       | 347,000                               |       | — |   |
| Revolving credit  facility of the Partnership due 2011, bearing interest at a variable rate of  LIBOR plus 1.25% (see “Partnership Credit Facility” below) (5) |       | 125,000                               |       | — |   |
| Total debt                                                                                                                                                               |       | 830,183                               |       | 922,890 |   |
| Less current  maturities                                                                                                                                                 |       | 14,545                                |       | 18,083 |   |
| Total long-term  debt                                                                                                                                                    |       | $                                     | 815,638    |   | $ | 904,807 |   |

 

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(1)                                  As of December 31, 2006, approximately $168.0million of this facility had LIBOR effectively fixed at 4.94% through the useof interest rate swap agreements.

(2)                                 Facevalue outstanding is $175.0 million as of December 31, 2006 and 2005.  Of the amount outstanding as of December 31,2006 and 2005, $100.0 million had been hedged through interest rate swapagreements which hedge the change in the fair value of the debt.  As a result, changes in the fair value of theportion of the debt that is hedged are recorded as adjustments to the carryingvalue of the debt (see Note 1 “Hedging and Use of Derivative Instruments”).

(3)                                  LIBOR was fixed at a weighted average rate of4.02% for $300.0 million of this debt through the use of interest rateswap agreements as of December 31, 2005.

(4)                                  LIBORis fixed at a weighted average rate of 4.02 % for $300.0 million of this debtthrough the use of interest rate swap agreements as of December 31, 2006.

(5)                                  LIBORis fixed at a weighted average rate of 5.28% for $125.0 million of this debtthrough the use of an interest rate swap agreement as of December 31, 2006.

*ABS Facility*

In February 2001, the Company entered into a $200.0 millionasset-backed securitization operating facility (the “ABS facility”). InOctober, 2005, the Company completed the planned restructuring of the ABSfacility. Under the restructured ABS facility, the notes will amortize based onthe revenues of the secured assets, which is expected to result in a fourteen yearamortization.  The Company has pledgedcompression equipment with a carrying value of $242.8 million as of December31, 2006 as collateral for the ABS facility. Under the ABS facility, the Company had $4.3 million of restricted cashas of December 31, 2006.

*7 1/4% Senior Notes*

In May 2003, the Company issued$175.0 million of 7 1/4% senior notes. The net proceeds from the sale,together with other available funds, were used to repurchase or redeem theoutstanding $229.8 million of 97/8%senior discount notes due 2008.

*2005 Credit Facility*

In January 2005, Holdings,Universal and their wholly-owned subsidiary, UC Canadian PartnershipHoldings Company, closed a $650.0 million senior secured credit facility(the “2005 Credit Facility”) with a syndicate of lenders and financialinstitutions consisting of a $250.0 million, five-year revolving creditfacility and a $400.0 million seven-year term loan.  In 

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October2006, all amounts outstanding under the 2005 Credit Facility were repaid using $330million advanced under the 2006 Credit Facility, together with debt assumed bythe Partnership in connection with its initial public offering and proceedsreceived from the redemption by the Partnership of 825,000 common unitsrepresenting limited partner interests in the Partnership issued to the Companyin connection with the initial public offering. The 2005 Credit Facility was subsequently terminated.  The Company recorded a write-off ofunamortized debt issuance costs of $1.1 million in 2006 associated with thetermination of the 2005 Credit Facility.

The 2005 Credit Facility boreinterest, if the borrowings were in U.S. dollars, at the Company’s option, of abase rate or LIBOR plus a margin or, if the borrowings were in Canadiandollars, at the Company’s option, of Canadian prime rate plus a variable amountdepending on its leverage ratio or the CDOR rate plus a specified amountdepending on the lender. The 2005 Credit Facility was secured by substantiallyall of the domestic assets of the Company (except for the assets pledged to theABS facility), as well as all the capital stock of the direct and indirect U.S.subsidiaries of Universal and 65% of the capital stock of Universal’s firsttier foreign subsidiaries.

In September 2005, the Company entered into an amendmentto the 2005 Credit Facility (the “Amendment”). The Amendment, among otherthings, reduced the interest rate applicable to the Company’s seven-year termloan by 0.25%, resulting in a rate of LIBOR plus 1.50% and reduced theborrowing capacity under the revolving credit facility by $75.0 million to$175.0 million. In addition, under the terms of the Amendment, in October 2005,$75.0 million of the Company’s outstanding revolving credit facility balancewas funded to the seven-year term loan.

The Company used approximately$508.6 million under the 2005 Credit Facility, together with$100 million under the ABS facility, to repay and redeem the outstanding$522.0 million under the then outstanding operating facility and to repay$50.0 million in debt under the Company’s now terminated$125.0 million revolving credit facility. Due to this early extinguishmentof debt, the Company recognized expenses of $26.1 million in the twelvemonths ended March 31, 2005 consisting primarily of redemption premiums of$19.5 million and the write-off of unamortized debt issuance costs of $6.6 million.

*2006 Credit Facility*

OnOctober 20, 2006, Holdings, and three of its wholly owned subsidiaries,Universal (together with Holdings the “US Borrowers”) and UC CanadianPartnership Holdings Company and Universal Compression Canada, LimitedPartnership (together with the US Borrowers, the “Borrowers”), entered into asenior secured credit agreement (the “2006 Credit Facility”).  The new credit facility under the creditagreement consists of a five-year $500 million revolving credit facility.  Borrowings under the credit agreement aresecured by substantially all of the personal property assets of the USBorrowers and a mortgage of the Borrowers’ Houston, Texas real property. Inaddition, all of the capital stock of the domestic restricted subsidiaries,except for subsidiaries used in connection with the ABS facility, and 65% ofthe capital stock of the first tier foreign subsidiaries has been pledged tosecure the obligations under the credit agreement. The new credit facility isnot secured by the capital stock of the Partnership or any assets owned by thePartnership.

At December 31, 2006, approximately $28.8 millionof letters of credit were outstanding.

Under the 2006 Credit Facility, the Borrowers aresubject to certain limitations, including limitations on their ability: toincur additional debt or sell assets, with restrictions on the use of proceeds;to make certain investments and acquisitions; to grant liens; and to paydividends and distributions. In addition, the Borrowers will be required to paydown the facility under certain circumstances if they sell certain assets orproperty. The credit agreement contains certain affirmative covenants toprovide guarantees from any domestic subsidiary with gross assets exceeding$50 million. The Borrowers are also subject to financial covenants whichinclude a total leverage ratio (total debt of the Borrowers to earnings beforeinterest, taxes, depreciation, amortization and certain other non-cashexpenses), an interest coverage ratio (earnings before interest, taxes,depreciation, amortization and certain other non-cash expenses to totalinterest expense of the Borrowers) and a senior secured leverage ratio (totalsenior secured debt of the Borrowers to earnings before interest, taxes,depreciation, amortization and certain other non-cash expenses).   For the purposes of calculating theforegoing required ratios, the debt, interest expense 

F-21

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andearnings of the Partnership are excluded and cash distributions actuallyreceived by the Borrowers from the Partnership are included as additionalearnings.

*Partnership Credit Facility*

OnOctober 20, 2006, the Partnership, as guarantor, and UC OperatingPartnership, L.P., a wholly owned subsidiary of the Partnership (“OperatingPartnership” and together the “Partnership Borrowers”), entered into a seniorsecured credit agreement.   The newcredit facility under the credit agreement consists of a five-year$225 million revolving credit facility, of which approximately$125 million was drawn at the closing of its initial public offering.Borrowings under the credit agreement are secured by substantially all of thepersonal property assets of the Partnership Borrowers. In addition, all of thecapital stock of the Partnership’s domestic restricted subsidiaries has beenpledged to secure the obligations under the credit agreement.

The Operating Partnership used approximately$125 million advanced under the credit agreement to repay indebtednessassumed by the Operating Partnership and the Partnership from the Company inconnection with the Operating Partnership’s acquisition of a portion of theCompany’s domestic contract compression business.

Under the creditagreement, the Operating Partnership and the Partnership are subject to certainlimitations, including limitations on their ability: to incur additional debtor sell assets, with restrictions on the use of proceeds; to make certaininvestments and acquisitions; to grant liens; and to pay dividends anddistributions. The Partnership Borrowers are also subject to financialcovenants which include a total leverage ratio (total debt of the PartnershipBorrowers to earnings before interest, taxes, depreciation, amortization andcertain other non-cash expenses) and an interest coverage ratio (earningsbefore interest, taxes, depreciation, amortization and certain other non-cashexpenses to total interest expense of the Partnership Borrowers).

*Debt Restrictions and Other Terms*

Certain of Holdings’ subsidiaries have restrictions ontheir ability to pay dividends and make intercompany loans and advancespursuant to their financing arrangements. The amount of restricted net assetsof Holdings’ subsidiaries as of December 31, 2006 is approximately $808.8 million.

The Company has pledged propertyand compression equipment with a carrying value of $938.0 million and $166.0 millionas of December 31, 2006 as collateral for the 2006 Credit Facility and thePartnership’s credit facility, respectively.

Covenants in our credit facilities require that wemaintain various financial ratios.  As ofDecember 31, 2006, the Company was in compliance with all financial covenants.

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*Maturities of Long-Term Debt*

The maturities of long-term debt outstandingas of December 31, 2006 for the twelve months ending December 31 of the periodsindicated are shown below (in thousands). We expect to pay these principal payments through cash generated byoperations and debt refinancing activity.
| 2007       |   | $       | 14,545  |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 14,545  |    |
| 2009       |   | 14,545  |    |
| 2010       |   | 186,062 |    |
| 2011       |   | 486,545 |    |
| Thereafter |   | 113,941 |    |
| Total      |   | $       | 830,183 |   |

 

**6. Capital Leases**

Property, plant and equipment includethe following amounts for capitalized leases (in thousands):
|                                 | ** ** | **As of December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Compression equipment           |       | $                                     | 720        |   | $ | 563 |   |
| Less accumulated  depreciation  |       | (144                                  | )          | (212 | ) |
| Net assets under capital leases |       | $                                     | 576        |   | $ | 351 |   |

 

Future minimum lease paymentsunder non-cancelable capital leases as of December 31, 2006 are $0.3 million andare payable in 2007.

F-23

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**7. Income Taxes**

The components of income beforeincome taxes were as follows (in thousands):
|                                         | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months  Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                     | ** ** |
|                                    |       |                                                 |       |                                               |       |                                         |       |
| United States                           |       | $                                                    | 72,030     |                                               | $          | 52,363                                       |       | $ | 20,211 |   |
| Foreign                                 |       | 57,903                                               |       | 34,059                                             |       | 30,612                                       |       |
| Consolidated income before income taxes |       | $                                                    | 129,933    |                                               | $          | 86,422                                       |       | $ | 50,823 |   |

 

Income tax expense consisted ofthe following (in thousands):
|                          | ** ** | **Twelve Months  Ended** | ** ** | **Nine Months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|--------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **December 31,**         | ** ** | **December 31,**       | ** ** | **March 31,**            | ** ** |
| ** **               | ** ** | **2006**                      | ** ** | **2005**                    | ** ** | **2005**                      | ** ** |
| Current:                 |       |                          |       |                        |       |                          |       |
| U.S. Federal             |       | $                             | 1,260      |                        | $          | 372                           |       | $ | — |   |
| State                    |       | 54                            |       | 39                          |       | —                        |       |
| Foreign                  |       | 14,809                        |       | 6,963                       |       | 9,069                         |       |
| Total current            |       | 16,123                        |       | 7,374                       |       | 9,069                         |       |
|                     |       |                          |       |                        |       |                          |       |
| Deferred:                |       |                          |       |                        |       |                          |       |
| U.S. Federal             |       | 22,558                        |       | 17,624                      |       | 5,178                         |       |
| State                    |       | 431                           |       | 2,427                       |       | 888                           |       |
| Foreign                  |       | 3,165                         |       | 3,628                       |       | 2,078                         |       |
| Total deferred           |       | 26,154                        |       | 23,679                      |       | 8,144                         |       |
| Total income tax expense |       | $                             | 42,277     |                        | $          | 31,053                        |       | $ | 17,213 |   |

 

A reconciliation of the provisionfor income taxes and the amount computed by applying the U.S. federal statutoryincome tax rate to income before taxes is as follows (in thousands):
|                                                               | ** ** | **Twelve Months  Ended** | ** ** | **Nine Months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | **December 31,**         | ** ** | **December 31,**       | ** ** | **March 31,**            | ** ** |
| ** **                                                    | ** ** | **2006**                      | ** ** | **2005**                    | ** ** | **2005**                      | ** ** |
| Income tax expense at  the U.S. federal statutory rate of 35% |       | $                             | 45,477     |                        | $          | 30,248                        |       | $ | 17,790 |   |
| State taxes                                                   |       | 445                           |       | 1,468                       |       | 671                           |       |
| Foreign taxes (benefit)                                       |       | (4,657                        | )          | (984                        | )          | (306                          | )          |
| Non-deductible  expenses (benefit) and other                  |       | 1,012                         |       | 321                         |       | (942                          | )          |
| Total income tax  expense                                     |       | $                             | 42,277     |                        | $          | 31,053                        |       | $ | 17,213 |   |

 

In 2006, the Stateof Texas enacted a law which modifies its existing franchise tax.  The tax is considered an income tax and isaccounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”  As a result, the Company recorded a deferredtax asset and related deferred tax benefit of $0.8 million.

In 2006, the U.S.Congress passed the Tax Increase Prevention and Reconciliation Act of2005.  This Act had the impact ofreducing the Company’s Subpart F income from applying a new look-through rulebetween related controlled 

F-24

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foreigncorporations.  As a result, the Companyrecorded a reduction in its deferred tax liability and a related deferred taxbenefit of $1.6 million.

In May and June 2006, reductions in the Alberta,Canada and Canadian federal income tax rates were enacted.  As a result, the Company recorded a reductionof its deferred tax liability and a deferred tax benefit of $1.6 million.

Deferred income tax balances arethe direct effect of taxable temporary differences between the financialstatement carrying amounts and tax basis of assets and liabilities at the enactedtax rates expected to be in effect when the taxes are actually paid orrecovered.  The tax effects of temporarydifferences that give rise to deferred tax assets and deferred tax liabilitiesare (in thousands):
|                                                       | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Deferred tax assets:                                  |       |                                  |       |   |   |
| Net operating  loss carryforwards                     |       | $                                     | 106,421    |   | $ | 134,688 |   |
| AMT credits                                           |       | 1,619                                 |       | 411 |   |
| Accrued reserves                                      |       | 6,662                                 |       | 7,447 |   |
| Foreign tax  credits                                  |       | 17,855                                |       | 4,150 |   |
| Other                                                 |       | 16,497                                |       | 12,357 |   |
| Subtotal                                              |       | 149,054                               |       | 159,053 |   |
| Valuation allowances                                  |       | (12,941                               | )          | (890 | ) |
| Total deferred  tax assets                            |       | 136,113                               |       | 158,163 |   |
| Deferred tax  liabilities:                            |       |                                  |       |   |   |
| Depreciation  differences on properties and equipment |       | (290,456                              | )          | (326,937 | ) |
| Basis difference  in the Partnership                  |       | (20,673                               | )          | — |   |
| Other                                                 |       | (22,807                               | )          | (10,411 | ) |
| Total deferred  tax liabilities                       |       | (333,936                              | )          | (337,348 | ) |
| Net deferred tax  liability                           |       | $                                     | (197,823   | ) | $ | (179,185 | ) |

 

At December 31, 2006, the Companyhad U.S. federal net operating loss carryforwards of approximately $268.3million that are available to offset future taxable income.  Annual utilization of the carryforwards couldbe limited by Section 382 of the Internal Revenue Code of 1986, asamended.  If not utilized, thecarryforwards will begin to expire in 2020. The Company also had available net operating loss carryforwardsapplicable to its non-U.S. subsidiaries of approximately $21.4 million, withcertain of those carryforwards beginning to expire in 2007.  Foreign tax credits of $17.9 million and AMTcredits of $1.6 million are available to the Company to offset future paymentsof U.S. federal income tax.  The foreigntax credits will expire in varying amounts beginning in 2015, whereas the AMTcredits may be carried forward indefinitely under current U.S. law.

The Company records valuationallowances when it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on theability to generate sufficient taxable income of the appropriate character inthe future and in the appropriate taxing jurisdictions.  The increase in valuation allowances recordedin 2006 relates to foreign tax credits and loss carryforwards of certainnon-U.S. subsidiaries of $10.9 million and $1.1 million, respectively.

The Company has not provided U.S.or additional foreign taxes on the indefinitely (or permanently) reinvestedcumulative earnings of approximately $189.1 million generated by its non-U.S.subsidiaries.  Such earnings are fromongoing operations which will be used to fund growth in the non-U.S.subsidiaries’ countries as well as future international expansion.  It is not practical to determine theadditional amount of taxes that would be payable if such earnings were notindefinitely reinvested.

During 2006, the Company recognized a deferred taxliability for the taxable temporary difference related to the excess of thebook value of its investment in the Partnership over its related tax basis inthe Partnership.

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**8. Stock-Based Compensation**

The following table presents thestock-based compensation expense included in the Company’s results ofoperations (in thousands):
|                                                  | ** ** | **Twelve Months  Ended** | ** ** | **Nine Months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **December 31,**         | ** ** | **December 31,**       | ** ** | **March 31,**            | ** ** |
| ** **                                       | ** ** | **2006**                      | ** ** | **2005**                    | ** ** | **2005**                      | ** ** |
| Stock options, unit  options and phantom units   |       | $                             | 4,593      |                        | $          | —                        |       | $ | — |   |
| Restricted stock                                 |       | 2,395                         |       | 1,322                       |       | 965                           |       |
| Unit appreciation  rights                        |       | 19                            |       | —                      |       | —                        |       |
| Employee stock purchase  plan                    |       | 434                           |       | —                      |       | —                        |       |
| Total stock-based  compensation expense          |       | 7,441                         |       | 1,322                       |       | 965                           |       |
| Income tax benefit                               |       | (2,423                        | )          | (475                        | )          | (328                          | )          |
| Total after-tax stock-based compensation expense |       | $                             | 5,018      |                        | $          | 847                           |       | $ | 637 |   |

 

There was no stock-basedcompensation cost capitalized during the twelve months ended December 31, 2006,nine months ended December 31, 2005 and twelve months ended March 31, 2005.

*Stock options*

The Incentive Stock Option Plan(the “ISO Plan”) authorizes the Company to grant stock options to itsemployees, consultants and directors. The Company utilizes stock options under the ISO Plan in order tomotivate and retain key employees.  InJuly 2004, an amendment to the ISO Plan was approved, increasing by 1,000,000the number of shares of common stock available for grant under the ISO Planfrom 5,012,421 shares to 6,012,421 shares to allow the continuation of thislong-term incentive program.  Options generallyvest over the following time period:
| Year 1 |   | 331¤3 | % |
|--------|--------|------------|---|
| Year 2 |   | 331¤3 | % |
| Year 3 |   | 331¤3 | % |

 

Under the ISO Plan, options topurchase common stock may be granted until 2011. Options are granted at fairmarket value at the date of grant, are exercisable in installments beginningone year from the date of grant, and expire ten years after the date ofgrant.

The weighted average fair valuesat date of grant for options granted during the twelve months ended December31, 2006, nine months ended December 31, 2005 and twelve months ended March 31,2005 were $18.22, $14.30 and $15.51, respectively, and were estimated using theBlack-Scholes option valuation model with the following weighted averageassumptions:
|                         | ** ** | **Twelve Months  Ended** | ** ** | **Nine Months  Ended** | ** ** | **Twelve Months  Ended** | ** ** |
|-------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **December 31,**         | ** ** | **December 31,**       | ** ** | **March 31,**            | ** ** |
| ** **              | ** ** | **2006**                      | ** ** | **2005**                    | ** ** | **2005**                      | ** ** |
| Expected life in years  |       | 6                             |       | 5                           |       | 6                             |       |
| Risk-free interest rate |       | 4.72                          | %          | 4.06                        | %          | 4.16                          | %          |
| Volatility              |       | 33.15                         | %          | 33.30                       | %          | 40.77                         | %          |
| Dividend yield          |       | 0.00                          | %          | 0.00                        | %          | 0.00                          | %          |

 

The expected life represents theperiod of time the stock options are expected to be outstanding prior toexercise and is based on the simplified model. The risk-free interest rate is based on the U.S. Treasury yield curve ineffect at the time of the grant for a period commensurate with the estimatedexpected life of the stock options. Expected volatility is based on the historical volatility of the Company’sstock over the most recent period commensurate with the expected life of thestock options and other factors.  TheCompany has not historically paid a dividend and does not expect to pay adividend during the expected life of the stock options.  Under SFAS No. 123R, the Company is requiredto record compensation cost from stock-based 

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compensation utilizing an estimated forfeiture rate.  Historical data related to forfeituresexperienced by the Company was used to estimate forfeiture rates.

The following table presentsstock option activity for the twelve months ended December 31, 2006 (remaininglife in years, intrinsic value in thousands):
|                                           | ** ** | **Stock  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Options  outstanding, December 31, 2005   |       | 2,219,014          |       | $                                      | 25.92      |                                   |       |                            |       |   |
| Granted                                   |       | 318,550            |       | 43.87                                  |       |                                   |       |                            |       |
| Exercised                                 |       | (623,439           | )          | 22.96                                  |       |                                   |       |                            |       |
| Cancelled                                 |       | (19,839            | )          | 31.90                                  |       |                                   |       |                            |       |
| Options  outstanding, December 31, 2006   |       | 1,894,286          |       | $                                      | 29.85      |                                   | 6.3        |                            | $          | 61,114 |   |
| Options exercisable at  December 31, 2006 |       | 1,385,234          |       | $                                      | 26.13      |                                   | 5.5        |                            | $          | 49,843 |   |

 

Intrinsic value is the differencebetween the market value of the Company’s stock and the exercise price of eachoption multiplied by the number of options outstanding.  The total intrinsic value of stock optionsexercised during the twelve months ended December 31, 2006, nine months endedDecember 31, 2005 and twelve months ended March 31, 2005 was $22.1 million, $4.6million and $7.6 million, respectively. The total grant date fair value of stock options that vested during thetwelve months ended December 31, 2006, nine months ended December 31, 2005 and twelvemonths ended March 31, 2005 was $4.5 million, $3.3 million and $5.0 million,respectively.  As of December 31, 2006, $5.6million of unrecognized compensation cost related to non-vested stock optionsis expected to be recognized over the weighted-average period of 1.8 years.

Cash received from stock optionexercises during the twelve months ended December 31, 2006, nine months endedDecember 31, 2005 and twelve months ended March 31, 2005 was $14.3 million, $5.2million and $8.4 million, respectively. The actual tax benefit realized for the tax deductions for optionexercises of the share-based payment arrangements for the twelve months endedDecember 31, 2006, nine months ended December 31, 2005 and twelve months endedMarch 31, 2005 totaled $7.8 million, $1.6 million and none, respectively.

*Restricted Stock*

The Company utilizes grants ofrestricted stock as long-term compensation for designated employees. TheCompany’s restricted stock plan provides for the award of up to 1,350,000shares of the Company’s common stock to certain officers and designatedemployees. Generally, common stock subject to restricted stock grants will vest0% upon the first anniversary of the grant and 25% on each anniversarythereafter through the fifth anniversary.

Under APB 25, prior to January 1,2006, deferred compensation was charged for the market value of restrictedshares granted. The deferred compensation balance is shown as a reduction toHoldings’ stockholders’ equity in the accompanying consolidated balance sheetat December 31, 2005.  Upon adoption ofSFAS No. 123R, the deferred compensation balance at January 1, 2006 wasreversed and recorded to additional paid-in capital.  Under both APB 25 and SFAS No. 123R, themarket value of the restricted shares granted is amortized ratably over therestricted period of five years.

Prior to January 1, 2006, underAPB 25, the Company recorded the effect of forfeitures on compensation expenserelated to restricted stock as it actually occurred.  Effective January 1, 2006, under SFAS No.123R, the Company is required to record compensation cost from stock-basedcompensation utilizing an estimated forfeiture rate.  Historical data related to forfeituresexperienced by the Company was used to estimate forfeiture rates.  The impact on previously recognized expensefrom the change in forfeiture rates was immaterial.

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The following table presentsrestricted stock activity for the twelve months ended December 31, 2006:
|                                                 | ** ** | **Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------------------------------------|------------|
| Non-vested restricted  stock, December 31, 2005 |       | 242,194    |       | $                                                  | 33.01      |   |
| Granted                                         |       | 143,397    |       | 44.42                                              |       |
| Vested                                          |       | (39,250    | )          | 26.18                                              |       |
| Cancelled                                       |       | (6,275     | )          | 43.49                                              |       |
| Non-vested restricted stock, December 31, 2006  |       | 339,362    |       | $                                                  | 38.38      |   |

 

The total grant date fair valueof restricted stock that vested during the twelve months ended December 31,2006, nine months ended December 31, 2005 and twelve months ended March 31,2005 was $1.1 million, $0.6 million and $0.7 million, respectively. As ofDecember 31, 2006, $8.9 million of unrecognized compensation cost related tonon-vested restricted stock is expected to be recognized over theweighted-average period of 3.6 years.

*Employee Stock Purchase Plan*

The Employee Stock Purchase Plan(“ESPP”) is intended to encourage employees to participate in the Company’sgrowth by providing them the opportunity to acquire an interest in the Company’slong-term performance and success through the purchase of shares of commonstock at a price typically less than fair market value. In 2001, the Company’sstockholders approved the ESPP, under which 250,000 shares of the Company’scommon stock could be purchased by employees. In 2006, the Company’s stockholders approved an amendment to the ESPP,increasing the aggregate number of shares of the Company’s common stock reservefor issuance under the ESPP from 250,000 shares to 500,000 shares.  An employee is eligible to participate aftercompleting 90 days of employment. Each quarter, an eligible employee mayelect to withhold up to 10% of his or her eligible pay to purchase shares ofthe Company’s common stock at a price equal to 85% to 100% of the fair marketvalue of the stock as of the first trading day of the quarter or the lasttrading day of the quarter, whichever is lower. The ESPP will terminate on thedate that all shares of common stock authorized for sale under the ESPP havebeen purchased, except as otherwise extended by authorizing additional sharesunder the ESPP. At December 31, 2006, 290,051 shares remained available forpurchase under the ESPP.  Under SFAS No.123R, the Company’s ESPP plan is compensatory, and as a result, the amount ofthe discount from the fair market value of the stock price at the end of thequarter received by the employee upon purchase of the stock is recorded asexpense in that quarter.

*Unit Appreciation Rights*

During December2006, the Company issued 332,143 unit appreciation rights (“UARs”) to certain employees.  These UARs entitle the holder to receive apayment from the Company in cash equal to the excess of the fair market valueof a common unit of the Partnership on the date of exercise over the exerciseprice.  These UARs vest on January 1,2009 and expire on March 15, 2010.  As ofDecember 31, 2006, all UARs were still outstanding.

As the holders of the UARs will receive a cash paymentfrom the Company, these awards have been recorded as a liability and theCompany is required to remeasure the fair value of these awards at eachreporting date under the guidance of SFAS No. 123R.  At December 31, 2006, the fair value of eachUAR was $2.31 and was estimated using theBlack-Scholes option valuation model with the following weighted averageassumptions:
|                          | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** |
| Expected life in  years  |       | 2.61                  |       |
| Risk-free  interest rate |       | 4.79                  | %          |
| Volatility               |       | 13.70                 | %          |
| Dividend yield           |       | 5.22                  | %          |

 

The expected life represents theperiod of time the UARs are expected to be outstanding prior to exercise and isbased on the simplified model.  Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of the time of remeasurement for a period commensurate with the estimatedexpected life of the UARs.  Expectedvolatility is based on the historical volatility of comparable partnerships’units over the most recent period commensurate with the expected life of the 

F-28

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UAR and other factors. The dividend yield is the expected dividend rate that will be paid outon the underlying units during the expected term of the options.   Under SFAS No. 123R, the Company is requiredto record compensation cost from unit-based compensation utilizing an estimatedforfeiture rate.  Historical data relatedto forfeitures experienced by the Company was used to estimate forfeiturerates.

The following table presents UARactivity for the twelve months ended December 31, 2006 (remaining life inyears, intrinsic value in thousands):
|                                      | ** ** | **UARs** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------|------------|----------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| UARs  outstanding, December 31, 2005 |       | —   |       | $                                          | —     |                                       |       |                                |       |   |
| Granted                              |       | 332,143  |       | 25.94                                      |       |                                       |       |                                |       |
| UARs outstanding,  December 31, 2006 |       | 332,143  |       | $                                          | 25.94      |                                       | 3.21       |                                | $          | 299 |   |
|                                      |            |          |            |                                            |            |                                            |            |                                     |            |  |  |

 

As of December 31, 2006, no UARswere exercisable.

Intrinsic value is the difference between the market value of thePartnership’s common units and the exercise price of each UAR multiplied by thenumber of UARs outstanding.  As ofDecember 31, 2006, $0.7 million of unrecognized compensation cost related tonon-vested UARs is expected to be recognized over the weighted-average periodof two years.

*PartnershipLong-Term Incentive Plans*

The Partnership has a long-termincentive plan that was adopted by UCO GP, LLC, the general partner of thegeneral partner of the Partnership, in October, 2006, for its employees,directors and affiliates who perform services for the Partnership.  The long-term incentive plan currentlypermits the grant of awards covering an aggregate of 625,000 common units,common unit options, restricted units and phantom units.  The long-term incentive plan is administeredby the board of directors of UCO GP, LLC or a committee thereof (the “planadministrator”).

Unit options will have anexercise price that is not less than the fair market value of the units on thedate of grant and will become exercisable over a period determined by the planadministrator.  Phantom units arenotional units that entitle the grantee to receive a common unit upon the vestingof the phantom unit or, in the discretion of the plan administrator, cash equalto the fair value of a common unit.

During the twelve months endedDecember 31, 2006, the Partnership granted 593,572 unit options and 5,607phantom units.  The unit options vest onJanuary 1, 2009 and have a contractual life of three years.  The phantom units will vest and settle onJanuary 1, 2009.

The weighted average fair valueat date of grant for unit options and phantom units granted during the twelvemonths ended December 31, 2006 was $1.66 and was estimated using the Black-Scholesoption valuation model with the following weighted average assumptions:
|                          | ** ** | **Twelve Months  Ended** | ** ** |
|--------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **December 31,**         | ** ** |
| ** **               | ** ** | **2006**                      | ** ** |
| Expected life in  years  |       | 2.63                          |       |
| Risk-free  interest rate |       | 4.72                          | %          |
| Volatility               |       | 14.47                         | %          |
| Dividend yield           |       | 5.95                          | %          |

 

The expected life represents theperiod of time the unit options are expected to be outstanding prior toexercise and is based on the simplified model. The risk-free interest rate is based on the U.S. Treasury yield curve ineffect at the time of the 

F-29

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grant for a period commensurate with the estimatedexpected life of the unit options.  Expectedvolatility is based on the historical volatility of comparable partnerships’ unitsover the most recent period commensurate with the expected life of the unitoptions and other factors.  The dividendyield is the expected dividend rate that will be paid out on the underlyingunits during the expected term of the options. The phantom units were granted distribution equivalent rights and, as aresult, a dividend yield was not used in the calculation of their fairvalue.  Under SFAS No. 123R, the Partnershipis required to record compensation cost from unit-based compensation utilizingan estimated forfeiture rate.  Historicaldata related to forfeitures experienced by the Company was used to estimateforfeiture rates.

The following table presents unitoption and phantom unit activity for the twelve months ended December 31, 2006(remaining life in years, intrinsic value in thousands):
|                                                                | ** ** | **Unit  Options and  Phantom  Units** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| Unit options and  phantom units outstanding, December 31, 2005 |       | —                                     |       | $                                          | —     |                                   |       |                                |       |   |
| Granted                                                        |       | 599,179                                    |       | 23.74                                      |       |                                   |       |                                |       |
| Unit options and phantom units outstanding, December 31, 2006  |       | 599,179                                    |       | $                                          | 23.74      |                                   | 3.01       |                                | $          | 1,858 |   |
|                                                                |            |                                            |            |                                            |            |                                        |            |                                     |            |  |  |

 

As of December 31, 2006, no unit optionsor phantom units were exercisable.

Intrinsic value is the difference between the market value of thePartnership’s units and the exercise price of each unit option multiplied bythe number of options outstanding.  As ofDecember 31, 2006, $0.9 million of unrecognized compensation cost related tonon-vested unit options and phantom units is expected to be recognized over theweighted-average period of two years.

*Pro Forma Results*

The following table summarizesresults as if we had recorded compensation expense under the provisions of SFASNo. 123 (earnings per share information is for Holdings only) (inthousands, except per share amounts):
|                                                                                                         | ** ** | **Nine Months  Ended  December 31, 2005** | ** ** | **Twelve Months  Ended  March 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                                                                    |       |                                                     |       |                                                    |       |
| Net income, as reported                                                                                 |       | $                                                        | 55,369     |                                                    | $          | 33,610 |   |
| Add: Stock-based  compensation for restricted stock awards included in reported net income, net  of tax |       | 847                                                      |       | 637                                                     |       |
| Deduct: Stock-based  compensation determined under the fair value method, net of tax                    |       | (3,061                                                   | )          | (3,204                                                  | )          |
| Pro forma net income                                                                                    |       | $                                                        | 53,155     |                                                    | $          | 31,043 |   |
| Basic earnings per  share:                                                                              |       |                                                     |       |                                                    |       |
| As reported                                                                                             |       | $                                                        | 1.74       |                                                    | $          | 1.07 |   |
| Pro forma                                                                                               |       | $                                                        | 1.67       |                                                    | $          | 0.99 |   |
| Diluted earnings per  share:                                                                            |       |                                                     |       |                                                    |       |
| As reported                                                                                             |       | $                                                        | 1.69       |                                                    | $          | 1.04 |   |
| Pro forma                                                                                               |       | $                                                        | 1.62       |                                                    | $          | 0.96 |   |

 

**9. Employee Benefits Other ThanStock-Based Compensation**

The Company has a definedcontribution 401(k) plan that substantially all U.S.-based employees areeligible to participate in.  Prior toJanuary 1, 2006, the Company made matching contributions under this plan in theform of Company stock equal to 50% of each participant’s contribution, with amaximum match of 3% of eligible pay. Effective January 1, 2006, the matching formula for the 401(k) plan wasamended to provide a match of 75% of the participant’s contribution, with amaximum match of 4.5% of eligible pay, for employees who have five or moreyears of service.  The match foremployees with less than 

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five years of service remains 50% of each participant’scontribution of up to 6%, with a maximum match of 3% of eligible pay.  For the twelve months ended December 31,2006, nine months ended December 31, 2005 and twelve months ended March 31,2005, the Company’s stock contributions to the plan of approximately 49,500 shares,33,000 shares and 45,000 shares, respectively were valued at approximately $2.6 million,$1.2 million and $1.5 million, respectively.

The Employees’ SupplementalSavings Plan (“the ESSP”) provides executive officers and designated employeesthe opportunity to defer up to 25% of their eligible compensation that cannotbe deferred under the existing 401(k) plan due to IRS limitations. Participantscan also defer up to 100% of their bonuses. Prior to January 1, 2006 theCompany matched 50% of the participant’s deferrals, with a maximum match of 3%of eligible pay. The vesting periods are generally the same as the 401(k)plan.  The Company’s matchingcontributions related to the ESSP have been in the form of common stock.  Effective January 1, 2006, the matchingformula for the ESSP plan was amended to provide a match of 75% of theparticipant’s deferrals, with a maximum match of 4.5% of eligible pay, foremployees who have five or more years of service.  The match for employees with less than fiveyears of service remains 50% of each participant’s deferrals, with a maximummatch of 3% of eligible pay.  Deferralsfrom bonuses are not eligible for the match. The match limits of 3% and 4.5% are aggregate amounts and include boththe 401(k) plan and the ESSP match amounts.

**10. Stockholders’ Equity**

In December 2005,Holdings entered into an underwriting agreement with Weatherford InternationalLtd. and J. P. Morgan Securities Inc., as sole underwriter, in connection withthe offering of 6,750,000 shares of Holdings’ common stock byWeatherford.  Holdings did not sell any shares of common stock inconnection with the offering and did not receive any of the proceeds from thesale of the shares by Weatherford.  Inconnection with the underwriting agreement, Holdings entered into a purchaseagreement with J. P. Morgan Securities, pursuant to which it agreed to purchase2,439,024 of the 6,750,000 shares of common stock acquired by them in theoffering, at a price of $41.00 per share. The purchase price of approximately$100.0 million was funded from borrowings of approximately $80.0 million under therevolving credit facility with the balance of the funding provided fromavailable cash.

OnNovember 6, 2006, Holdings’ board of directors authorized the repurchaseof up to $200 million of Holdings’ common stock through November 6, 2008.Under the stock repurchase program, Holdings may repurchase shares in openmarket purchases or in privately negotiated transactions in accordance withapplicable insider trading and other securities laws and regulations.  Holdings may also implement all or part ofthe repurchases under a Rule 10b5-1 trading plan, so as to provide theflexibility to extend its share repurchases beyond the quarterly purchasingwindow.  The timing and extent to whichHoldings repurchases its shares will depend upon market conditions and othercorporate considerations, and will be in management’s discretion.  Repurchases under the program may commence orbe suspended at any time without prior notice. The stock repurchase program maybe funded through cash provided by operating activities or borrowings.  Under the terms of the merger agreementbetween the Company and Hanover Compressor Company (see Note 15), the Companymay repurchase up to an additional $75 million of its common stock pursuant tothe stock repurchase program prior to the consummation of the merger or thetermination of the merger agreement.

During the twelvemonths ended December 31, 2006, the Company repurchased 569,499 shares of itscommon stock at an aggregate cost of $36.1 million.  Also, due to vesting of certain restrictedshares during 2006, 13,636 shares were repurchased by the Company for $0.7 millionas reimbursement for the related employee tax liability paid by the Company.

**11. Accounting for Interest Rate SwapAgreements**

In accordance with SFASNo. 133, all derivative instruments must be recognized on the balancesheet at fair value, and changes in such fair values are recognized in earningsunless specific hedging criteria are met. Changes in the values of derivativesthat meet these hedging criteria will ultimately offset related earningseffects of the hedged item pending recognition in earnings.

In June 2004, the Companyreduced the notional amount of interest rate swap agreements that convertvariable interest payments under the ABS facility to fixed interest payments inconnection with a debt repayment of $80.0 million. In accordance with SFASNo. 133, the Company recorded a gain of $3.2 million to earnings thathad previously been recorded in accumulated other comprehensive income as aresult of the reduction in the notional amount of such interest rate swapagreements. As of December 31, 2006 and 2005, the Company had interestrate swap agreements with a notional amount of $168.0 million and $180.0million, respectively, related to $186.7 million and $200.0 million,respectively, outstanding under the ABS facility. The swaps outstanding atDecember 31, 2006 amortize ratably through 2019 and have a weighted averagefixed rate of 4.94%. The 

F-31

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swaps outstanding at December 31, 2005 would haveterminated in February 2013 and had a weighted average fixed rate of 5.21%.  In accordance with SFAS No. 133, theCompany’s balance sheet at December 31, 2006 and 2005 included a $1.1million derivative asset and a $1.1 million derivative liability, respectively,related to the interest rate swap agreements.

In January 2005, the Companyentered into interest rate swap agreements to convert variable interestpayments related to $300 million of floating rate debt to fixed interestpayments. These swaps amortize ratably from June 2007 through March 2010and have a weighted average fixed rate of 4.02%, resulting in a net effectivefixed interest rate on this $300 million of debt of 5.02% (4.02% plus the1.00% margin applicable to our 2006 Credit Facility). In accordance with SFASNo. 133, the Company’s balance sheet at December 31, 2006 and 2005included a $5.6 million and $5.9 million, respectively, derivative assetrelated to the interest rate swap agreements.

In August 2006, the Companyentered into a forward starting swap agreement related to a notional amount of$125.0 million of their floating rate debt. In October 2006, this swap was transferred to the Partnership.  The effective date of the swap agreement wasDecember 1, 2006.  The swap agreementterminates in December 2011 and has a fixed rate of 5.28%.  In accordance with SFAS No. 133, the Company’sbalance sheet at December 31, 2006 includes a $1.5 million derivative liabilityrelated to this interest rate swap agreement.

These swaps, except for the swapagreement related to the $125.0 million of floating rate debt, which theCompany has designated as cash flow hedging instruments, meet the specifichedge criteria and any changes in their fair values were recognized inaccumulated other comprehensive income or loss. Because the terms of the hedgeditem and the swaps substantially coincide, the hedge is expected to exactlyoffset changes in expected cash flows due to fluctuations in the variable rateand, therefore, the Company currently does not expect any ineffectiveness.  For the swap agreement related to the $125million of floating rate debt, the Company performs calculations to determineif the swap agreement is still effective and to calculate any ineffectiveness.  As of December 31, 2006, this swap wasconsidered effective and for the twelve months ended December 31, 2006 therewas no ineffectiveness.

As of December 31, 2006 and 2005,the Company had interest rate swap agreements to hedge $100.0 million ofits $175.0 million 7 1/4% senior notes. The swaps are used to hedge thechange in fair value of the debt and, in effect, convert the fixed interestpayment to a variable interest payment based on the six-month LIBOR rate. Theswaps are accounted for in accordance with SFAS No. 133 and, as such, arerecorded at fair value on the balance sheet. The Company’s balance sheet atDecember 31, 2006 and 2005, included a $3.5 million and $3.9 million,respectively, derivative liability related to the interest rate swapagreements. The change in the debt’s fair value for that portion which ishedged is recorded as an adjustment to the carrying value of the debt with theoffset being recorded to interest expense. The swaps, which the Company hasdesignated as fair value hedging instruments, meet the specific hedge criteriaand any changes in their fair values were recognized in interest expense. Forthe twelve months ended December 31, 2006, the change in the debt’s fairvalue and the change in the swaps’ fair value exactly offset and did not impactnet income. Because the terms of the hedged item and the swaps substantiallycoincide, the hedge is expected to exactly offset changes in fair values due tofluctuations in the variable rate and, therefore, the Company currently doesnot expect any ineffectiveness.

The counterparties to the Company’sinterest rate swap agreements are major international financial institutions.The Company monitors the credit quality of these financial institutions anddoes not expect non-performance by them.

**12. Commitments and Contingencies**

In the ordinary course of business, the Company isinvolved in various pending or threatened legal actions. In the opinion ofmanagement, the amount of ultimate liability, if any, with respect to theseactions will not have a material adverse effect on the Company’s financialposition, results of operations or cash flows; however, because of the inherentuncertainty of litigation, the Company cannot provide assurance that theresolution of any particular claim or proceeding to which it is a party willnot have a material adverse effect on the Company’s financial position, resultsof operations or cash flows for the period in which that resolution occurs.

On May 1, 2006,the Bolivian government announced the nationalization of the country’shydrocarbon reserves. The Company owns and operates a natural gas liquidsextraction facility in Bolivia that processes natural gas owned by itscustomer. The Company currently believes that the nationalization includes theownership of the natural gas reserves of its customer but does not impact theCompany’s ownership or control of its facility. To date, there has been noimpact on our operations or cash flows. The Company cannot currently estimatethe future impact, if any, that the nationalization of its customer’s naturalgas reserves will have on its contract for this facility. The Company’s netinvestment in Bolivia was $13.8 

F-32

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million at December 31,2006.

**13. Industry Segments and GeographicInformation**

The Company has four principalbusiness segments: domestic contract compression, international contractcompression, fabrication and aftermarket services. The domestic contractcompression segment provides natural gas compression to customers in the U.S..The international contract compression segment provides natural gas compressionto international customers, including Canada. The fabrication segment providesservices related to the design, engineering and assembly of natural gascompressors for sale to third parties in addition to those that the Companyuses in its contract compression fleet. The aftermarket services segment sellsparts and components and provides maintenance to customers who own compressionequipment and customers who use equipment provided by other companies.Fabrication and aftermarket services revenue presented in the table belowinclude only sales to third parties.

The Company’s reportable segmentsare strategic business units that offer distinct products and services. Theyare managed separately since each business segment requires different marketingstrategies due to customer specifications. The Company evaluates theperformance of its reportable segments based on segment gross margin. Gross marginis defined as total revenue less cost of sales, excluding depreciation and amortizationexpense. The segment gross margin measure used by management for evaluationpurposes excludes inter-segment transactions and, accordingly, there isno inter-segment revenue to be reported.

The following table presentsrevenue, gross margin and identifiable assets by business segment (inthousands):
|                                     | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                          | ** ** |
| **Revenue:**                        |       |                                                 |       |                                               |       |                                              |       |
| Domestic  contract compression      |       | $                                                    | 398,189    |                                               | $          | 248,414                                           |       | $ | 296,239 |   |
| International  contract compression |       | 142,448                                              |       | 94,831                                             |       | 102,167                                           |       |
| Fabrication                         |       | 215,825                                              |       | 143,710                                            |       | 213,994                                           |       |
| Aftermarket  services               |       | 191,245                                              |       | 126,692                                            |       | 150,670                                           |       |
| Total                               |       | $                                                    | 947,707    |                                               | $          | 613,647                                           |       | $ | 763,070 |   |
| **Gross  Margin**(1)**:**           |       |                                                 |       |                                               |       |                                              |       |
| Domestic contract  compression      |       | $                                                    | 254,318    |                                               | $          | 160,256                                           |       | $ | 186,865 |   |
| International  contract compression |       | 106,052                                              |       | 71,075                                             |       | 78,448                                            |       |
| Fabrication                         |       | 29,361                                               |       | 14,191                                             |       | 15,285                                            |       |
| Aftermarket  services               |       | 38,920                                               |       | 25,813                                             |       | 29,656                                            |       |
| Total                               |       | $                                                    | 428,651    |                                               | $          | 271,335                                           |       | $ | 310,254 |   |

 
|                                     | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** | **As of  March 31,  2005** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|
| **Identifiable  Assets:**           | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** **                           | ** ** |
| Domestic  contract compression      |       | $                                       | 1,569,763  |                                    | $          | 1,432,301                            |       | $ | 1,423,979 |   |
| International  contract compression |       | 443,990                                 |       | 402,174                                 |       | 353,880                              |       |
| Fabrication                         |       | 119,034                                 |       | 102,412                                 |       | 99,462                               |       |
| Aftermarket  services               |       | 209,244                                 |       | 158,408                                 |       | 145,437                              |       |
| Total                               |       | $                                       | 2,342,031  |                                    | $          | 2,095,295                            |       | $ | 2,022,758 |   |

 

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(1)            Grossmargin, a non-GAAP financial measure, is reconciled to net income below.

No one customer accounted formore than 10% of net sales for any of the periods presented.

F-33

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*Geographic Area*

The following table illustratesrevenue, gross margin and identifiable assets by geographic locations (inthousands). The basis of attributing revenue and gross margin to specific geographiclocations is primarily based upon the geographic location of the sale, serviceor where the assets are utilized.
|                           | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended  March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                          | ** ** |
| **Revenue:**              |       |                                                 |       |                                               |       |                                              |       |
| United States             |       | $                                                    | 647,820    |                                               | $          | 428,781                                           |       | $ | 535,258 |   |
| Canada                    |       | 117,863                                              |       | 60,530                                             |       | 81,357                                            |       |
| Argentina                 |       | 70,435                                               |       | 59,328                                             |       | 45,950                                            |       |
| Other international       |       | 111,589                                              |       | 65,008                                             |       | 100,505                                           |       |
| Total                     |       | $                                                    | 947,707    |                                               | $          | 613,647                                           |       | $ | 763,070 |   |
| **Gross  Margin**(1)**:** |       |                                                 |       |                                               |       |                                              |       |
| United States             |       | $                                                    | 295,285    |                                               | $          | 187,935                                           |       | $ | 218,410 |   |
| Canada                    |       | 30,439                                               |       | 18,898                                             |       | 19,754                                            |       |
| Argentina                 |       | 47,294                                               |       | 28,073                                             |       | 31,401                                            |       |
| Other international       |       | 55,633                                               |       | 36,429                                             |       | 40,689                                            |       |
| Total                     |       | $                                                    | 428,651    |                                               | $          | 271,335                                           |       | $ | 310,254 |   |

 
|                           | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** | **As of March  31,  2005** | ** ** |
|---------------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| **Identifiable  Assets:** | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| United States             |       | $                             | 1,813,593  |                          | $          | 1,632,946                  |       | $ | 1,619,113 |   |
| Canada                    |       | 165,772                       |       | 157,612                       |       | 140,928                    |       |
| Argentina                 |       | 128,337                       |       | 117,388                       |       | 107,035                    |       |
| Other international       |       | 234,329                       |       | 187,349                       |       | 155,682                    |       |
| Total                     |       | $                             | 2,342,031  |                          | $          | 2,095,295                  |       | $ | 2,022,758 |   |

 

----

(1)          Gross margin, a non-GAAPfinancial measure, is reconciled to net income below.

Thefollowing table reconciles gross margin to net income (in thousands):
|                                                       | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                          | ** ** |
| **Gross  Margin**                                     |       | $                                                    | 428,651    |                                               | $          | 271,335                                           |       | $ | 310,254 |   |
| Depreciation and  amortization                        |       | 122,701                                              |       | 79,899                                             |       | 93,797                                            |       |
| Selling, general  and administrative                  |       | 118,762                                              |       | 65,269                                             |       | 75,756                                            |       |
| Interest  expense, net                                |       | 57,349                                               |       | 40,221                                             |       | 64,188                                            |       |
| Debt  extinguishment costs                            |       | 1,125                                                |       | —                                             |       | 26,543                                            |       |
| Minority  interest                                    |       | 1,354                                                |       | —                                             |       | —                                            |       |
| Gain on termination of  interest rate swap agreements |       | —                                               |       | —                                             |       | (3,197                                            | )          |
| Asset impairment  expense                             |       | —                                               |       | —                                             |       | 3,080                                             |       |
| Foreign currency  (gain) loss                         |       | (645                                                 | )          | (692                                               | )          | 389                                               |       |
| Other (income)  loss, net                             |       | (1,928                                               | )          | 216                                                |       | (1,125                                            | )          |
| Income tax  expense                                   |       | 42,277                                               |       | 31,053                                             |       | 17,213                                            |       |
| **Net Income**                                        |       | $                                                    | 87,656     |                                               | $          | 55,369                                            |       | $ | 33,610 |   |

 

F-34

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**14. Selected Quarterly Financial Data(Unaudited)**

Summarized quarterly financialdata is as follows (earnings per share information is for Holdings only) (inthousands, except per share data):
|                                         | ** ** | **December 31** | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|-----------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|
| Twelve Months Ended  December 31, 2006: |       |                 |       |                  |       |             |       |              |       |
| Revenue                                 |       | $                    | 252,991    |                  | $          | 246,932          |       | $                 | 218,716    |   | $ | 229,068 |   |
| Gross profit (1)                        |       | 78,859               |       | 85,337                |       | 76,521           |       | 74,170            |       |
| Net income                              |       | 20,005               |       | 24,960                |       | 21,816           |       | 20,875            |       |
| Earnings per  common share—basic   |       | $                    | 0.67       |                  | $          | 0.83             |       | $                 | 0.73       |   | $ | 0.70 |   |
| Earnings per  common share—diluted |       | $                    | 0.64       |                  | $          | 0.80             |       | $                 | 0.70       |   | $ | 0.68 |   |

 
|                                         | ** ** | **December 31** | ** ** | **September 30** | ** ** | **June 30** | ** ** |
|-----------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|
| Nine Months Ended  December 31, 2005:   |       |                 |       |                  |       |             |       |
| Revenue                                 |       | $                    | 224,835    |                  | $          | 181,128          |       | $ | 207,684 |   |
| Gross profit (1)                        |       | 72,754               |       | 61,953                |       | 61,981           |       |
| Net income                              |       | 19,554               |       | 17,679                |       | 18,136           |       |
| Earnings per  common share—basic   |       | $                    | 0.62       |                  | $          | 0.55             |       | $ | 0.57 |   |
| Earnings per  common share—diluted |       | $                    | 0.60       |                  | $          | 0.54             |       | $ | 0.56 |   |

 

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(1)       Gross profit is defined as revenue less cost ofsales and direct depreciation and amortization expense.

**15. Subsequent Events (Unaudited)**

In January 2007,the Company acquired B.T.I. Holdings Pte Ltd (“B.T.I.”) and its wholly-ownedsubsidiary B.T. Engineering Pte Ltd, a Singapore based fabricator of oil andgas, petrochemical, marine and offshore equipment, including pressure vessels,floating, production, storage and offloading process modules, terminal buoys,turrets, natural gas compression units and related equipment for $25 million incash plus certain other working capital adjustments to be determined.  Total consideration will also include acontingent obligation of up to $20 million which is based on earnings of B.T.I.over the two years ended March 31, 2009.

In February 2007, theCompany and Hanover Compressor Company (“Hanover”) entered into a mergeragreement. Upon consummation of the transactions set forth in the mergeragreement, each common share of Hanover will be converted into 0.325 shares ofcommon stock of a newly created holding company, and each common share of Holdingswill be converted into one share of the holding company.  Hanover will be treated as the acquirer foraccounting purposes.

The mergeragreement has been unanimously approved by both companies’ boards of directors.Completion of the merger is subject to a number of conditions, including theapproval of the stockholders of both companies and customary regulatoryapprovals, including the expiration or termination of the applicable waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Closing of thetransaction is currently anticipated in the third quarter of 2007. The Companybelieves that its expectation as to timing for the closing of the merger isreasonable, however, no assurances can be given as to the timing of thesatisfaction of all closing conditions or that all required approvals will bereceived.

The mergeragreement requires the Company and Hanover to continue to operate theirbusinesses in the ordinary course of business and to obtain the other party’sconsent prior to engaging in certain specified activities, such as issuing or repurchasingsecurities, acquiring or disposing of businesses above specified thresholds, incurringnew debt other than below specified thresholds and or for specified purposes,paying dividends or granting awards with respect to our common stock (other thanunder employee compensation arrangements). These agreements are subject to specified exceptions, including those(1) permitting the Company to repurchase up to an additional $75 million of itscommon stock in accordance with its previously 

F-35

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announced open-marketstock repurchase program, (2) permitting the Partnership to make cashdistributions in accordance with its partnership agreement, (3) permitting theCompany to make contributions of its domestic compression assets to thePartnership and (4) permitting the Company to redeem its 7 1/4% Senior Notesdue 2010.

F-36

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directorsand Stockholders ofUniversal Compression Holdings, Inc.Houston, TX

We have auditedthe consolidated financial statements of Universal Compression Holdings, Inc.and subsidiaries (“Holdings”) and Universal Compression, Inc. and subsidiaries(“Universal”) (collectively “the Company”) as of December 31, 2006 and 2005,and for the twelve months ended December 31, 2006, the nine months endedDecember 31, 2005 and the twelve months ended March 31, 2005, management’sassessment of the effectiveness of Holdings’ internal control over financialreporting as of December 31, 2006, and the effectiveness of Holdings’ internalcontrol over financial reporting as of December 31, 2006, and have issued ourreports thereon dated March 1, 2007 (such report on the consolidated financialstatements of the Company expresses an unqualified opinion and includes anexplanatory paragraph relating to the Company’s change in its method ofaccounting for stock-based compensation); such consolidated financialstatements and reports are included elsewhere in this Form 10-K. Our auditsalso included the financial statement schedules of Holdings and Universal listedin Item 15.  These financial statementschedules are the responsibility of the Company’s management.  Our responsibility is to express an opinionbased on our audits.  In our opinion,such financial statement schedules, when considered in relation to the basicconsolidated financial statements taken as a whole for each of Holdings and Universal,present fairly, in all material respects, the information set forth therein.

 
| /S/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| Houston, TX                   |
| March 1, 2007                 |

 

E-1

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**UNIVERSAL COMPRESSION HOLDINGS, INC.SCHEDULE I(PARENT COMPANY ONLY)CONDENSED BALANCE SHEETS(In thousands)**
| ** **                                                                                                                                                                                                | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                |       |                        |       |                        |       |
| Cash                                                                                                                                                                                                      |       | $                           | 898        |                        | $          | — |   |
| Investment in  subsidiary                                                                                                                                                                                 |       | 1,028,585                   |       | 931,492                     |       |
| Deferred income taxes                                                                                                                                                                                     |       | 2,121                       |       | 97                          |       |
| Total assets                                                                                                                                                                                              |       | $                           | 1,031,604  |                        | $          | 931,589 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            |       |                        |       |                        |       |
| Current liabilities                                                                                                                                                                                       |       | $                           | 111        |                        | $          | — |   |
| Note payable to  subsidiary                                                                                                                                                                               |       | 78,063                      |       | 100,277                     |       |
| Long-term debt                                                                                                                                                                                            |       | 37,000                      |       | —                      |       |
| Common stock, $.01 par  value, 200,000 and 200,000 shares authorized, 33,153 and 32,306 shares  issued, 30,130 and 29,866 shares outstanding as of December 31, 2006 and  December 31, 2005, respectively |       | 330                         |       | 323                         |       |
| Other stockholders’  equity                                                                                                                                                                          |       | 916,100                     |       | 830,989                     |       |
| Total  stockholders’ equity                                                                                                                                                                          |       | 916,430                     |       | 831,312                     |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                          |       | $                           | 1,031,604  |                        | $          | 931,589 |   |

 

**UNIVERSALCOMPRESSION HOLDINGS, INC.SCHEDULE I(PARENT COMPANY ONLY)CONDENSED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**
| ** **                                                         | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                          | ** ** |
| Interest expense                                                   |       | $                                                    | (5,892     | )                                                  | $          | (277                                              | )          | $ | — |   |
| Equity earnings in  subsidiary, net of tax                         |       | 91,467                                               |       | 55,549                                             |       | 33,610                                            |       |
| Benefit from income  taxes                                         |       | 2,081                                                |       | 97                                                 |       | —                                            |       |
| Net income                                                         |       | $                                                    | 87,656     |                                               | $          | 55,369                                            |       | $ | 33,610 |   |
| Weighted average common  and common equivalent shares outstanding: |       |                                                 |       |                                               |       |                                              |       |
| Basic                                                              |       | 29,911                                               |       | 31,773                                             |       | 31,392                                            |       |
| Diluted                                                            |       | 31,032                                               |       | 32,758                                             |       | 32,224                                            |       |
| Earnings per  share—Basic                                     |       | $                                                    | 2.93       |                                               | $          | 1.74                                              |       | $ | 1.07 |   |
| Earnings per share—Diluted                                    |       | $                                                    | 2.82       |                                               | $          | 1.69                                              |       | $ | 1.04 |   |

 

See accompanying notes tocondensed financial statements.

E-2

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**UNIVERSALCOMPRESSION HOLDINGS, INC.SCHEDULE I(PARENT COMPANY ONLY)CONDENSED STATEMENTS OF CASH FLOWS(In thousands)**
| ** **                                             | ** ** | **Twelve Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** | **Twelve Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                             | ** ** | **2005**                                           | ** ** | **2005**                                          | ** ** |
| Cash flows used in  operating activities               |       | $                                                    | (5,724     | )                                                  | $          | —                                            |       | $ | — |   |
| Cash flows from  investing activities:                 |       |                                                 |       |                                               |       |                                              |       |
| Investment in  subsidiary                              |       | —                                               |       | (5,995                                             | )          | (9,349                                            | )          |
| Net cash used in  investing activities                 |       | —                                               |       | (5,995                                             | )          | (9,349                                            | )          |
| Cash flows from  financing activities:                 |       |                                                 |       |                                               |       |                                              |       |
| Proceeds from  common stock issuance                   |       | 15,814                                               |       | 5,995                                              |       | 9,349                                             |       |
| (Payments to)  receipts from affiliate on note payable |       | (9,359                                               | )          | 100,000                                            |       | —                                            |       |
| Proceeds from  issuance of debt                        |       | 37,000                                               |       | —                                             |       | —                                            |       |
| Purchase of  treasury stock                            |       | (36,833                                              | )          | (100,000                                           | )          | —                                            |       |
| Net cash  provided by financing activities             |       | 6,622                                                |       | 5,995                                              |       | 9,349                                             |       |
| Net increase (decrease)  in cash and cash equivalents  |       | 898                                                  |       | —                                             |       | —                                            |       |
| Cash and cash  equivalents at beginning of period      |       | —                                               |       | —                                             |       | —                                            |       |
| Cash and cash equivalents at end of period             |       | $                                                    | 898        |                                               | $          | —                                            |       | $ | — |   |

 

See accompanying notes tocondensed financial statements.

E-3

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**UNIVERSALCOMPRESSION HOLDINGS, INC.SCHEDULE I(PARENT COMPANY ONLY)NOTES TO CONDENSED FINANCIAL STATEMENTS**

**1. Basis of Presentation**

These condensed parent company financial statementshave been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X,as restricted net assets of Universal Compression Holdings, Inc. (“Holdings”)subsidiary exceeds 25% of the consolidated net assets of Holdings.  Holdingsis a holding company, which conducts its operations through its wholly-ownedsubsidiary, Universal Compression Inc. (“Universal”).

**2. Debt**

In January 2005, Holdings,Universal and their wholly-owned subsidiary, UC Canadian Partnership HoldingsCompany (collectively “the Borrowers”), closed a $650.0 million seniorsecured credit facility (the “2005 Credit Facility”) with a syndicate oflenders and financial institutions consisting of a $250.0 million,five-year revolving credit facility and a $400.0 million seven-year termloan.  In October 2006, allamounts outstanding under the 2005 Credit Facility were repaid using $330million advanced under the 2006 Credit Facility, together with debt assumed bythe Partnership in connection with its initial public offering and proceedsreceived from the redemption by the Partnership of 825,000 common unitsrepresenting limited partner interests in the Partnership issued to the Companyin connection with the initial public offering. The 2005 Credit Facility was subsequently terminated.

The 2005 Credit Facility boreinterest, if the borrowings were in U.S. dollars, at the Borrower’s option, ofa base rate or LIBOR plus a margin or, if the borrowings were in Canadiandollars, at the Borrower’s option, of Canadian prime rate plus a variableamount depending on its leverage ratio or the CDOR rate plus a specified amountdepending on the lender. The 2005 Credit Facility was secured by substantiallyall of the domestic assets of the Borrowers (except for the assets pledged tothe ABS facility), as well as all the capital stock of the direct and indirectU.S. subsidiaries of Universal and 65% of the capital stock of Universal’sfirst tier foreign subsidiaries.

In September 2005, the Borrowers entered into anamendment to the 2005 Credit Facility (the “Amendment”). The Amendment, amongother things, reduced the interest rate applicable to the Borrower’s seven-yearterm loan by 0.25%, resulting in a rate of LIBOR plus 1.50% and reduced theborrowing capacity under the revolving credit facility by $75.0 million to$175.0 million. In addition, under the terms of the Amendment, in October 2005,$75.0 million of the Universal’s outstanding revolving credit facility balancewas funded to the seven-year term loan.

OnOctober 20, 2006, Holdings, and three of its wholly owned subsidiaries,Universal (together with Holdings the “US Borrowers”) and UC CanadianPartnership Holdings Company and Universal Compression Canada, LimitedPartnership (together with the US Borrowers, the “Borrowers”), entered into asenior secured credit agreement (the “2006 Credit Facility”).  The new credit facility under the creditagreement consists of a five-year, $500 million revolving creditfacility.  Borrowings under the creditagreement are secured by substantially all of the personal property assets ofthe US Borrowers and a mortgage of the Borrowers’ Houston, Texas real property.In addition, all of the capital stock of the domestic restricted subsidiaries,except for subsidiaries used in connection with the ABS facility, and 65% ofthe capital stock of the first tier foreign subsidiaries has been pledged tosecure the obligations under the credit agreement. The new credit facility isnot secured by the capital stock of the Partnership or any assets owned by thePartnership.  At December 31, 2006 theborrowers had selected three month LIBOR and the applicable margin was 1.0%.

At December 31, 2006, approximately $28.8 millionof letters of credit were outstanding.

Under the 2006 Credit Facility, the Borrowers aresubject to certain limitations, including limitations on their ability: toincur additional debt or sell assets, with restrictions on the use of proceeds;to make certain investments and acquisitions; to grant liens; and to paydividends and distributions. In addition, the Borrowers will be required to paydown the facility under

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certaincircumstances if they sell certain assets or property. The credit agreement containscertain affirmative covenants to provide guarantees from any domesticsubsidiary with gross assets exceeding $50 million. The Borrowers are alsosubject to financial covenants which include a total leverage ratio (total debtof the Borrowers to earnings before interest, taxes, depreciation, amortizationand certain other non-cash expenses), an interest coverage ratio (earningsbefore interest, taxes, depreciation, amortization and certain other non-cashexpenses to total interest expense of the Borrowers) and a senior securedleverage ratio (total senior secured debt of the Borrowers to earnings beforeinterest, taxes, depreciation, amortization and certain other non-cashexpenses).   For the purposes ofcalculating the foregoing required ratios, the debt, interest expense andearnings of the Partnership are excluded and cash distributions actuallyreceived by the Borrowers from the Partnership are included as additionalearnings.

Holdings’borrowings under the 2006 Credit Facility as of December 31, 2006 was $37.0million and matures in October 2011.

In December 2005,Holdings entered into a revolving loan agreement with Universal.  The balance of loans from Universal, includingaccrued interest was $78.1 million and $100.3 million, at December 31, 2006 and2005, respectively.  The revolving loanagreement bears interest at LIBOR plus 1.25%. Holdings may borrow up to a total of $115 million during the term of theagreement.  Holdings can prepay amountsoutstanding under the revolving loan agreement at anytime without penalty.  Holdings’ borrowing under this agreementmatures in December 2007.

**3. Stock Repurchase Program**

OnNovember 6, 2006, Holdings’ board of directors authorized the repurchaseof up to $200 million of Holdings’ common stock through November 6, 2008.Under the stock repurchase program, Holdings may repurchase shares in openmarket purchases or in privately negotiated transactions in accordance withapplicable insider trading and other securities laws and regulations.  Holdings may also implement all or part ofthe repurchases under a Rule 10b5-1 trading plan, so as to provide theflexibility to extend its share repurchases beyond the quarterly purchasingwindow.  The timing and extent to whichHoldings repurchases its shares will depend upon market conditions and othercorporate considerations, and will be in management’s discretion.  Repurchases under the program may commence orbe suspended at any time without prior notice. The stock repurchase program maybe funded through cash provided by operating activities or borrowings.  Under the terms of the merger agreementbetween Holdings and Hanover Compressor Company (See Note 4), Holdings mayrepurchase up to an additional $75 million of its common stock pursuant to thestock repurchase program prior to the consummation of the merger or thetermination of the merger agreement.

During the twelvemonths ended December 31, 2006, Holdings repurchased 569,499 shares of itscommon stock at an aggregate cost of $36.1 million.

**4. Subsequent Events (Unaudited)**

In February 2007, Holdingsand Hanover Compressor Company (“Hanover”) entered into a merger agreement.Upon consummation of the transactions set forth in the merger agreement, eachcommon share of Hanover will be converted into 0.325 shares of common stock ofa newly created holding company, and each common share of Holdings will beconverted into one share of the holding company. Hanover will be treated as theacquirer for accounting purposes.

The mergeragreement has been unanimously approved by both companies’ boards of directors.Completion of the merger is subject to a number of conditions, including theapproval of the stockholders of both companies and customary regulatoryapprovals, including the expiration or termination of the applicable waitingperiod under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Closing of thetransaction is currently anticipated in the third quarter of 2007. Holdingsbelieves that its expectation as to timing for the closing of the merger isreasonable, however, no assurances can be given as to the timing of thesatisfaction of all closing conditions or that all required approvals will bereceived.

The mergeragreement requires Holdings and Hanover to continue to operate their businessesin the ordinary course of business and to obtain the other party’s consentprior to engaging in certain specified activities, such as issuing orrepurchasing securities, acquiring or disposing of businesses above specifiedthresholds, incurring new debt other than below specified thresholds or forspecified purposes, paying dividends or granting awards with respect to ourcommon stock (other than under employee compensation arrangements).  These agreements are subject to specifiedexceptions, including those (1)

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permitting Holdings torepurchase up to an additional $75 million of its common stock in accordancewith its previously announced open-market stock repurchase program, (2)permitting the Partnership to make cash distributions in accordance with itspartnership agreement, (3) permitting Holdings to make contributions ofUniversal’s domestic compression assets to the Partnership and (4) permittingUniversal to redeem its 7 1/4% Senior Notes due 2010.

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**UNIVERSALCOMPRESSION HOLDINGS, INC.UNIVERSAL COMPRESSION, INC.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**
| Item                                               | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses (1)** | ** ** | **Collections/  Deductions (2)** | ** ** | **Balance at  Close of  Period** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **(In thousands)**                        | ** ** |
| December 31,  2006 Allowance for doubtful accounts |       | $                                              | 3,616      |                                                   | $          | 1,656                                 |       | $                                          | (586       | ) | $ | 4,686 |   |
| December 31,  2005 Allowance for doubtful accounts |       | $                                              | 2,747      |                                                   | $          | 1,507                                 |       | $                                          | (638       | ) | $ | 3,616 |   |
| March 31, 2005  Allowance for doubtful accounts    |       | $                                              | 3,189      |                                                   | $          | 1,335                                 |       | $                                          | (1,777     | ) | $ | 2,747 |   |

 

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(1)                                  Amounts accrued for uncollectibility

(2)                                  Uncollectible accounts written off, net ofrecoveries
| Item                                                  | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses (1)** | ** ** | **Inventory  Write-offs (2)** | ** ** | **Balance at  Close of  Period** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **(In thousands)**                        | ** ** |
| December 31,  2006 Reserve for inventory obsolescence |       | $                                              | 10,896     |                                                   | $          | 1,770                              |       | $                                          | (3,508     | ) | $ | 9,158 |   |
| December 31,  2005 Reserve for inventory obsolescence |       | $                                              | 10,981     |                                                   | $          | 1,465                              |       | $                                          | (1,550     | ) | $ | 10,896 |   |
| March 31, 2005 Reserve  for inventory obsolescence    |       | $                                              | 12,041     |                                                   | $          | 1,897                              |       | $                                          | (2,957     | ) | $ | 10,981 |   |

 

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(1)                                  Amounts accrued for inventory obsolescence

(2)                                  Amounts written-off for inventory obsolescence
| Item                                | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses (1)** | ** ** | **Deductions (2)** | ** ** | **Balance at  Close of  Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **(In thousands)**                        | ** ** |
| December 31,  2006 Warranty accrual |       | $                                              | 3,614      |                                                   | $          | 2,214                   |       | $                                          | (5,314     | ) | $ | 514 |   |
| December 31,  2005 Warranty accrual |       | $                                              | 3,025      |                                                   | $          | 3,205                   |       | $                                          | (2,616     | ) | $ | 3,614 |   |
| March 31, 2005 Warranty  accrual    |       | $                                              | 1,493      |                                                   | $          | 3,353                   |       | $                                          | (1,821     | ) | $ | 3,025 |   |

 

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(1)                                  Amounts accrued for warranty charges

(2)                                  Warranty charges incurred
| Item                                                            | ** ** | **Balance at  Beginning  of Period** | ** ** | **Amounts  recorded (1)** | ** ** | **Amounts  released (2)** | ** ** | **Balance at  Close of  Period** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **(In thousands)**                        | ** ** |
| December 31,  2006 Valuation allowances for deferred tax assets |       | $                                              | (890       | )                              | $          | (12,941                        | )          | $                                          | 890        |   | $ | (12,941 | ) |
| December 31,  2005 Valuation allowances for deferred tax assets |       | $                                              | (1,634     | )                              | $          | —                         |       | $                                          | 744        |   | $ | (890 | ) |
| March 31, 2005  Valuation allowances for deferred tax assets    |       | $                                              | (1,779     | )                              | $          | —                         |       | $                                          | 145        |   | $ | (1,634 | ) |

 

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(1)                                  Amounts recorded for foreign tax credits and losscarryforwards of non-U.S. subsidiaries

(2)                                  Amounts released for expiring foreign tax credits

E-7

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**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized, on February 28, 2007.
|        | Universal Compression Holdings, Inc. |
|--------|--------------------------------------|
|   |                                 |
|   | By:                                  | /s/ STEPHEN A. SNIDER |
|   |                                 | Stephen A. Snider*President and Chief Executive Officer* |

 

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**POWER OFATTORNEY**

KNOW ALL MEN BY THESE PRESENTS,that each person whose signature appears below constitutes and appoints StephenA. Snider, Ernie L. Danner, J. Michael Anderson and Donald C. Wayne, and eachof them, his true and lawful attorneys-in-fact and agents, with full power ofsubstitution and resubstitution for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this Report, and tofile the same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission granting unto saidattorneys-in-fact and agents full power and authority to do and perform eachand every act and thing requisite and necessary to be done as fully to all saidattorneys-in-fact and agents, or any of them, may lawfully do or cause to bedone by virtue thereof.

Pursuant to the requirements of theSecurities Act of 1934, this report has been signed by the following persons inthe capacities indicated on February 28, 2007.
| **Name**                 | ** ** | **Title**                                            |
|--------------------------|------------|------------------------------------------------------|
|                     |       |                                                 |
| /s/ STEPHEN A. SNIDER    |       | President, Chief Executive Officer and Director      |
| Stephen A. Snider        |       | (Principal  Executive Officer)                       |
|                     |       |                                                 |
| /s/ J. MICHAEL ANDERSON  |       | Senior Vice President and Chief Financial Officer    |
| J. Michael Anderson      |       | (Principal  Financial Officer)                       |
|                     |       |                                                 |
| /s/ KENNETH R. BICKETT   |       | Vice President, Accounting and  Corporate Controller |
| Kenneth R. Bickett       |       | (Principal  Accounting Officer)                      |
|                     |       |                                                 |
| /s/ ERNIE L. DANNER      |       | Executive Vice President and Director                |
| Ernie L. Danner          |       |                                                 |
|                     |       |                                                 |
| /s/ THOMAS C. CASE       |       | Director                                             |
| Thomas C. Case           |       |                                                 |
|                     |       |                                                 |
| /s/ JANET F. CLARK       |       | Director                                             |
| Janet F. Clark           |       |                                                 |
|                     |       |                                                 |
| /s/ URIEL E. DUTTON      |       | Director                                             |
| Uriel E. Dutton          |       |                                                 |
|                     |       |                                                 |
| /s/ LISA W. RODRIGUEZ    |       | Director                                             |
| Lisa W. Rodriguez        |       |                                                 |
|                     |       |                                                 |
| /s/ WILLIAM M. PRUELLAGE |       | Director                                             |
| William M. Pruellage     |       |                                                 |
|                     |       |                                                 |
| /s/ J.W.G. HONEYBOURNE   |       | Director                                             |
| J.W.G. Honeybourne       |       |                                                 |

 

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**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized, on February 28, 2007.
|        | Universal Compression, Inc. |
|--------|-----------------------------|
|   |                        |
|   | By:                         | /s/ STEPHEN A. SNIDER |
|   |                        | Stephen A. Snider*President and Chief Executive Officer* |

 

Pursuant to the requirements ofthe Securities Exchange act of 1934, this report has been signed by thefollowing persons in the capacities indicated on February 28, 2007.
| **Name**                | ** ** | **Title**                                            |
|-------------------------|------------|------------------------------------------------------|
|                    |       |                                                 |
| /s/ STEPHEN A. SNIDER   |       | President, Chief Executive Officer and Director      |
| Stephen A. Snider       |       | (Principal  Executive Officer)                       |
|                    |       |                                                 |
| /s/ J. MICHAEL ANDERSON |       | Senior Vice President and Chief Financial Officer    |
| J. Michael Anderson     |       | (Principal  Financial Officer)                       |
|                    |       |                                                 |
| /s/ KENNETH R. BICKETT  |       | Vice President, Accounting and  Corporate Controller |
| Kenneth R. Bickett      |       | (Principal  Accounting Officer)                      |
|                    |       |                                                 |
| /s/ ERNIE L. DANNER     |       | Executive Vice President and Director                |
| Ernie L. Danner         |       |                                                 |

 

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