UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 Form
10-Q
 
 (MARK
ONE)
 
 R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE QUARTERLY PERIOD ENDED September 30, 2009£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE TRANSITION PERIOD
  FROM____________TO____________.
 
 Commission
File No. 001-33078
 
 EXTERRAN
PARTNERS, L.P.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              22-3935108(State
      or Other Jurisdiction of
              (I.R.S.
      EmployerIncorporation
      or Organization)
              Identification
      No.)
 
 16666
      Northchase DriveHouston,
      Texas
              77060(Address
      of principal executive offices)
              (Zip
      Code)
 
 (281)
836-7000
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes £ No £
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer £
              Accelerated
      filer R
              Non-accelerated
      filer £
              Smaller
      reporting company £(Do
      not check if a smaller reporting
company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
 
 As of
October 30, 2009, there were 12,793,612 common units and 6,325,000 subordinated
units outstanding.
 
 
 
 
 TABLE
OF CONTENTS
 
 PagePART
      I. UNAUDITED FINANCIAL INFORMATIONItem
      1. Financial Statements
              
              
              3Condensed
      Consolidated Balance Sheets
              
              
              3Condensed
      Consolidated Statements of Operations
              
              
              4Condensed
      Consolidated Statements of Comprehensive Income
              
              
              5Condensed
      Consolidated Statements of Cash Flows
              
              
              6Notes
      to Unaudited Condensed Consolidated Financial Statements
              
              
              7Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              
              
              18Item
      3. Quantitative and Qualitative Disclosures About Market Risk
              
              
              29Item
      4. Controls and Procedures
              
              
              29PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
              
              
              30Item
      1A. Risk Factors
              
              
              30Item
      6. Exhibits
              
              
              32SIGNATURES
              
              
              33
 
 
  2
  PART
I. FINANCIAL INFORMATION
 
 ITEM
1. Financial Statements
 
 EXTERRAN
PARTNERS, L.P.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands, except for unit amounts)
 (unaudited)
 
 September 30,
                2009
              
              
              December 31,
                2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              330
              
              
              $
              3,244Accounts
      receivable, trade, net of allowance of $334 and $230,
      respectively
              
              
              19,447
              
              
              
              25,958Due
      from affiliates, net
              
              
              8,870
              
              
              
              6,445Total
      current assets
              
              
              28,647
              
              
              
              35,647Compression
      equipment
              
              
              582,986
              
              
              
              566,286Accumulated
      depreciation
              
              
              (155,415
              )
              
              
              (131,973
              )Net
      compression equipment
              
              
              427,571
              
              
              
              434,313Goodwill
              
              
              124,019
              
              
              
              124,019Interest
      rate swaps
              
              
              225
              
              
              
              —Intangibles
      and other assets, net
              
              
              5,492
              
              
              
              5,965Total
      assets
              
              $
              585,954
              
              
              $
              599,944LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      liabilities:Accounts
      payable, trade
              
              $
              86
              
              
              $
              297Accrued
      liabilities
              
              
              8,230
              
              
              
              5,703Accrued
      interest
              
              
              1,994
              
              
              
              1,880Current
      portion of interest rate swaps
              
              
              9,224
              
              
              
              5,483Total
      current liabilities
              
              
              19,534
              
              
              
              13,363Long-term
      debt
              
              
              384,500
              
              
              
              398,750Interest
      rate swaps
              
              
              8,111
              
              
              
              12,204Other
      long-term liabilities
              
              
              —
              
              
              
              159Total
      liabilities
              
              
              412,145
              
              
              
              424,476Commitments
      and contingencies (Note 12)Partners’
      capital:Limited
      partner units:Common
      units, 12,793,612 and 12,767,462 units issued and
    outstanding
              
              
              216,596
              
              
              
              221,090Subordinated
      units, 6,325,000 units issued and outstanding
              
              
              (33,191
              )
              
              
              (35,518
              )General
      partner units, 2% interest with 389,642 units issued and
      outstanding
              
              
              6,737
              
              
              
              6,805Accumulated
      other comprehensive loss
              
              
              (16,333
              )
              
              
              (16,909
              )Total
      partners’ capital
              
              
              173,809
              
              
              
              175,468Total
      liabilities and partners’ capital
              
              $
              585,954
              
              
              $
              599,944
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
  3
  EXTERRAN
PARTNERS, L.P.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except per unit amounts)
 (unaudited)
 
 Three
      Months Ended
                  September
      30,
              
              
              Nine
      Months Ended
                  September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenue
              
              $
              41,317
              
              
              $
              44,390
              
              
              $
              134,627
              
              
              $
              114,656Costs
      and expenses:Cost
      of sales (excluding depreciation and amortization expense)
              
              
              19,802
              
              
              
              19,900
              
              
              
              62,160
              
              
              
              51,980Depreciation
      and amortization
              
              
              9,042
              
              
              
              7,542
              
              
              
              26,054
              
              
              
              19,027Fleet
      impairment
              
              
              —
              
              
              
              —
              
              
              
              2,995
              
              
              
              —Selling,
      general and administrative
              
              
              4,961
              
              
              
              2,423
              
              
              
              16,513
              
              
              
              10,169Interest
      expense
              
              
              5,039
              
              
              
              4,967
              
              
              
              14,663
              
              
              
              12,213Other
      (income) expense, net
              
              
              324
              
              
              
              —
              
              
              
              351
              
              
              
              (1,139
              )Total
      costs and expenses
              
              
              39,168
              
              
              
              34,832
              
              
              
              122,736
              
              
              
              92,250Income
      before income taxes
              
              
              2,149
              
              
              
              9,558
              
              
              
              11,891
              
              
              
              22,406Income
      tax expense
              
              
              141
              
              
              
              147
              
              
              
              424
              
              
              
              369Net
      income
              
              $
              2,008
              
              
              $
              9,411
              
              
              $
              11,467
              
              
              $
              22,037General
      partner interest in net income
              
              $
              289
              
              
              $
              432
              
              
              $
              976
              
              
              $
              805Common
      units interest in net income
              
              $
              1,151
              
              
              $
              5,876
              
              
              $
              7,019
              
              
              $
              13,436Subordinated
      units interest in net income
              
              $
              568
              
              
              $
              3,103
              
              
              $
              3,472
              
              
              $
              7,796Weighted
      average common units outstanding:Basic
              
              
              12,800
              
              
              
              11,980
              
              
              
              12,784
              
              
              
              10,900Diluted
              
              
              12,823
              
              
              
              11,995
              
              
              
              12,794
              
              
              
              10,963Weighted
      average subordinated units outstanding:Basic
              
              
              6,325
              
              
              
              6,325
              
              
              
              6,325
              
              
              
              6,325Diluted
              
              
              6,325
              
              
              
              6,325
              
              
              
              6,325
              
              
              
              6,325Earnings
      per common unit:Basic
              
              $
              0.09
              
              
              $
              0.49
              
              
              $
              0.55
              
              
              $
              1.23Diluted
              
              $
              0.09
              
              
              $
              0.49
              
              
              $
              0.55
              
              
              $
              1.23Earnings
      per subordinated unit:Basic
              
              $
              0.09
              
              
              $
              0.49
              
              
              $
              0.55
              
              
              $
              1.23Diluted
              
              $
              0.09
              
              
              $
              0.49
              
              
              $
              0.55
              
              
              $
              1.23
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
  4
  EXTERRAN
PARTNERS, L.P.
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (in
thousands)
 (unaudited)
 
 Three
      Months Ended
                September
      30,
              
              
              NineMonths Ended

                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      income
              
              $
              2,008
              
              
              $
              9,411
              
              
              $
              11,467
              
              
              $
              22,037Other
      comprehensive income:Interest
      rate swap gain (loss)
              
              
              (1,215
              )
              
              
              (182
              )
              
              
              576
              
              
              
              683Comprehensive
      income
              
              $
              793
              
              
              $
              9,229
              
              
              $
              12,043
              
              
              $
              22,720
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
  5
  EXTERRAN
PARTNERS, L.P.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (unaudited)
 
 Nine
      Months Ended
                  September
      30,2009
              
              
              2008Cash
      flows from operating activities:Net
      income
              
              $
              11,467
              
              
              $
              22,037Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
              
              
              26,054
              
              
              
              19,027Fleet
      impairment
              
              
              2,995
              
              
              
              —Amortization
      of debt issuance cost
              
              
              273
              
              
              
              246Amortization
      of fair value of acquired interest rate swaps
              
              
              112
              
              
              
              150Unit
      based compensation expense (income)
              
              
              555
              
              
              
              (2,142
              )Gain
      on sale of compression equipment
              
              
              —
              
              
              
              (1,119
              )Changes
      in assets and liabilities:Accounts
      receivable, trade
              
              
              6,511
              
              
              
              (14,087
              )Other
      assets
              
              
              94
              
              
              
              25Accounts
      payable, trade
              
              
              (511
              )
              
              
              (257
              )Other
      liabilities
              
              
              2,627
              
              
              
              2,246Net
      cash provided by operating activities
              
              
              50,177
              
              
              
              26,126Cash
      flows from investing activities:Capital
      expenditures
              
              
              (14,694
              )
              
              
              (16,362
              )Proceeds
      from the sale of compression equipment
              
              
              —
              
              
              
              5,275Increase
      in amounts due from affiliates, net
              
              
              (2,425
              )
              
              
              (4,391
              )Net
      cash used in investing activities
              
              
              (17,119
              )
              
              
              (15,478
              )Cash
      flows from financing activities:Borrowings
      under revolving credit facility
              
              
              18,750
              
              
              
              74,250Repayments
      under revolving credit facility
              
              
              (33,000
              )
              
              
              (184,325
              )Borrowings
      under term loan facility
              
              
              —
              
              
              
              117,500Distributions
      to unitholders
              
              
              (27,812
              )
              
              
              (22,928
              )Debt
      issuance costs
              
              
              —
              
              
              
              (309
              )Capital
      contribution from limited and general partner
              
              
              6,090
              
              
              
              10,662Increase
      in amounts due to affiliates, net
              
              
              —
              
              
              
              (7,503
              )Net
      cash used in financing activities
              
              
              (35,972
              )
              
              
              (12,653
              )Net
      decrease in cash and cash equivalents
              
              
              (2,914
              )
              
              
              (2,005
              )Cash
      and cash equivalents at beginning of period
              
              
              3,244
              
              
              
              2,835Cash
      and cash equivalents at end of period
              
              $
              330
              
              
              $
              830Supplemental
      disclosure of cash flow information:Non-cash
      capital contribution from limited and general partner
              
              $
              4,032
              
              
              $
              3,179Contract
      operations equipment acquired/exchanged, net
              
              $
              3,246
              
              
              $
              133,591Goodwill
      allocated in acquisitions
              
              $
              —
              
              
              $
              56,867Intangible
      assets allocated in acquisitions
              
              $
              —
              
              
              $
              4,592Debt
      assumed in acquisition
              
              $
              —
              
              
              $
              175,325Common
      units issued to limited partner
              
              $
              —
              
              
              $
              19,522General
      partner units issued to general partner
              
              $
              —
              
              
              $
              398
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
  6
  EXTERRAN
PARTNERS, L.P.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 Organization
 
 The
accompanying unaudited condensed consolidated financial statements of Exterran
Partners, L.P. (“we,” “us” or “our”) included herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S.”) for interim financial information and the rules and regulations
of the Securities and Exchange Commission (“SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the U.S. (“GAAP”)
are not required in these interim financial statements and have been condensed
or omitted. It is the opinion of management that the information furnished
includes all adjustments, consisting only of normal recurring adjustments, that
are necessary to present fairly our consolidated financial position, results of
operations and cash flows for the periods indicated. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements presented in our Annual
Report on Form 10-K for the year ended December 31, 2008. That report
contains a more comprehensive summary of our accounting policies. These
interim results are not necessarily indicative of results for a full
year.
 
 Exterran
General Partner, L.P. is our general partner and an indirect wholly-owned
subsidiary of Exterran Holdings, Inc. (individually, and together with its
wholly-owned subsidiaries, “Exterran Holdings”). As Exterran General Partner,
L.P. is a limited partnership, its general partner, Exterran GP LLC, conducts
our business and operations, and the board of directors and officers of Exterran
GP LLC make decisions on our behalf.
 
 Earnings
Per Common and Subordinated Unit
 
 The
computations of earnings per common and subordinated unit are based on the
weighted average number of common and subordinated units, respectively,
outstanding during the applicable period. Our subordinated units meet the
definition of a participating security and therefore we are required to use the
two-class method in the computation of basic earnings per unit. Basic earnings
per common and subordinated unit are determined by dividing net income allocated
to the common units and subordinated units, respectively, after deducting the
amount allocated to our general partner (including distributions to our general
partner on its incentive distribution rights), by the weighted average number of
outstanding common and subordinated units, respectively, during the
period.
 
 When
computing earnings per common and subordinated unit under the two-class method
in periods when earnings are greater than distributions, earnings are allocated
to the general partner, common and subordinated units based on how our
partnership agreement would allocate earnings if the full amount of earnings for
the period had been distributed. This allocation of net income does not impact
our total net income, consolidated results of operations or total cash
distributions; however, it may result in our general partner being allocated
additional incentive distributions for purposes of our earnings per unit
calculation, which could reduce net income per common and subordinated unit.
However, as defined in our partnership agreement, we determine cash
distributions based on available cash and determine the actual incentive
distributions allocable to our general partner based on actual distributions.
When computing earnings per common and subordinated unit, the amount of the
assumed incentive distribution rights is deducted from net income and allocated
to our general partner for the period to which the calculation relates. The
remaining amount of net income, after deducting the assumed incentive
distribution rights, is allocated between the general partner, common and
subordinated units based on how our partnership agreement allocates net
income.
 
 When
computing earnings per common and subordinated unit under the two-class method
in periods when distributions are greater than earnings, the excess of
distributions over earnings is allocated to the general partner, common and
subordinated units based on how our partnership agreement allocates net losses.
The amount of the incentive distribution rights is deducted from net income and
allocated to our general partner for the period to which the calculation
relates. The remaining amount of net income, after deducting the incentive
distribution rights, is allocated between the general partner, common and
subordinated units based on how our partnership agreement allocates net
losses.
 
 The
potentially dilutive securities issued by us are unit options and phantom units,
neither of which requires an adjustment to the amount of net income used for
dilutive earnings per unit purposes. The aggregate dilutive effect of unit
options and phantom units to our earnings per common unit for the three and nine
months ended September 30, 2009 was 23,296 units and 9,843 units,
respectively. The aggregate dilutive effect of unit options and phantom units to
our earnings per common unit for the three and nine months ended September 30,
2008 was 15,017 units and 63,443 units, respectively. For the three months
ended September 30, 2009, 580,715 unit
  7
 
 options
and zero phantom units were excluded from the calculation of diluted earnings
per common and subordinated unit because they were anti-dilutive. For the nine
months ended September 30, 2009, 580,715 unit options and 6,060 phantom units
were excluded from the calculation of diluted earnings per common and
subordinated unit because they were anti-dilutive. For the three months ended
September 30, 2008, 332,142 unit options and 38,720 phantom units were excluded
from the calculation of diluted earnings per common and subordinated unit
because they were anti-dilutive. For the nine months ended September 30, 2008,
zero unit options and 38,720 phantom units were excluded from the calculation of
diluted earnings per common and subordinated unit because they were
anti-dilutive.
 
 Due
To/From Affiliates, Net
 
 We have
receivables and payables with Exterran Holdings. A valid right of offset
exists related to the receivables and payables with these affiliates and as a
result, we present such amounts on a net basis on our consolidated balance
sheets.
 
 The
transactions reflected in due to/from affiliates, net primarily consist of
centralized cash management activities between us and Exterran Holdings. Because
these balances are treated as short-term borrowings between us and Exterran
Holdings, serve as a financing and cash management tool to meet our short-term
operating needs, are large, turn over quickly and are payable on demand, we
present borrowings and repayments with our affiliates on a net basis within the
consolidated statements of cash flows. Net receivables from our affiliate are
considered advances and changes are presented as investing activities in the
consolidated statements of cash flows. Net payables due to our affiliate are
considered borrowings and changes are presented as financing activities in the
consolidated statements of cash flows.
 
 Fair
Value of Financial Instruments
 
 Our
financial instruments consist of cash, trade receivables and payables, interest
rate swaps and long-term debt. At September 30, 2009 and December 31, 2008,
the estimated fair values of such financial instruments, except for debt,
approximated their carrying values as reflected in our consolidated balance
sheets. As a result of the current credit environment, we believe that the fair
value of our debt does not approximate its carrying value as of September 30,
2009 and December 31, 2008 because the applicable margin on our debt was
below the market rates as of these dates. The fair value of our debt has been
estimated based on similar debt transactions that occurred near September 30,
2009 and December 31, 2008. A summary of the fair value and carrying value
of our debt as of September 30, 2009 and December 31, 2008 is shown in the
table below (in thousands):
 
 As
      of September 30, 2009
              
              
              As
      of December 31, 2008Carrying
                  Amount
              
              
              Fair
                  Value
              
              
              Carrying
                  Amount
              
              
              Fair
                  ValueLong-term
      debt
              
              $
              384,500
              
              
              $
              362,112
              
              
              $
              398,750
              
              
              $
              366,476
 
 Reclassifications
 
 Certain
amounts in the prior financial statements have been reclassified to conform to
the 2009 financial statement classification. These reclassifications have no
impact on our consolidated results of operations, cash flows or financial
position.
 
 Subsequent
Events
 
 We
reviewed for subsequent events as of the issuance of these financial statements
on November 5, 2009.
 
 2.
RECENT ACCOUNTING DEVELOPMENTS
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
guidance under Accounting Standards Codification (“ASC”) 820, “Fair Value
Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes
a framework for measuring fair value in accordance with GAAP and expands
disclosures about fair value measurements. The new provisions of ASC 820 are
effective for fiscal years beginning after November 15, 2007; however, in
February 2008, the FASB deferred the effective date to fiscal years beginning
after November 15, 2008 for all nonfinancial assets and liabilities, except
those that are recognized or disclosed in the financial statements at fair value
on at least an annual basis. Our adoption of the required undeferred provisions
of ASC 820 on January 1, 2008 did not have a material impact on our
consolidated financial statements. Our adoption of the deferred provisions of
ASC 820 on January 1, 2009 did not have a material impact on our
consolidated financial statements.
  8
  In
December 2007, the FASB issued guidance under ASC 805, “Business Combinations”
(“ASC 805”), which requires that all assets, liabilities, contingent
consideration, contingencies and in-process research and development costs of an
acquired business be recorded at fair value at the acquisition date; that
acquisition costs generally be expensed as incurred; that restructuring costs
generally be expensed in periods subsequent to the acquisition date; and that
changes in accounting for deferred tax asset valuation allowances and acquired
income tax uncertainties after the measurement period impact income tax expense.
ASC 805 is effective for business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, with an exception for the accounting for valuation
allowances on deferred taxes and acquired tax contingencies associated with
acquisitions. Under ASC 805, adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of ASC 805 would also apply the provisions of
ASC 805. Our adoption of ASC 805 on January 1, 2009 did not have a material
impact on our consolidated financial statements, although we are not able to
predict its impact on future potential acquisitions.
 
 In March
2008, the FASB issued guidance under ASC 260, “Earnings per Share” (“ASC 260”),
which provides guidance on the accounting treatment of cash distributions in
excess of earnings and earnings in excess of cash distributions. ASC 260 notes
that when earnings are in excess of cash distributions, current-period earnings
should be reduced by the amount of distributions to the general partner, limited
partners and the incentive distribution rights holder determined in accordance
with the contractual terms of our partnership agreement. The remaining
undistributed earnings should be allocated to the general partner, limited
partners and the incentive distribution rights holder using the distribution
waterfall for available cash. When cash distributions are in excess of earnings,
the excess should be allocated to the general partner and limited partners on
the basis of their respective sharing of losses. The excess will also be
allocated to the incentive distribution rights holder if the incentive
distribution rights holder has a contractual obligation to share in losses on a
basis that is objectively determinable. The new guidance under ASC 260 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years, and should be applied retrospectively for all
financial statements presented. Our adoption of the new provisions of ASC 260 on
January 1, 2009 did not have a material impact on our consolidated
financial statements.
 
 In March
2008, the FASB issued guidance under ASC 815, “Derivatives and Hedging” (“ASC
815”), which requires enhanced disclosures for derivative instruments, including
those used in hedging activities. The new guidance in ASC 815 is effective for
fiscal years beginning on or after November 15, 2008. Our adoption of the
new provisions of ASC 815 on January 1, 2009 did not have a material impact
on our consolidated financial statements; however, we have expanded disclosures
regarding our derivative instruments.
 
 In April
2008, the FASB issued guidance under ASC 350, “Intangibles – Goodwill and Other”
(“ASC 350”), which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. The intent of the new guidance is to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset, in
accordance with GAAP. The new guidance under ASC 350 requires an entity to
disclose information for a recognized intangible asset that enables users of the
financial statements to assess the extent to which the expected future cash
flows associated with the asset are affected by the entity’s intent and/or
ability to renew or extend the arrangement. The new guidance under ASC 350 was
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Our
adoption of the new provisions of ASC 350 on January 1, 2009 did not have a
material impact on our consolidated financial statements.
 
 In April
2009, the FASB issued guidance under ASC 825, “Financial Instruments”, section
10-65-1 (“ASC 825-10-65-1”), which requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Prior to issuing ASC 825-10-65-1,
fair values for financial instruments were only disclosed once a year. ASC
825-10-65-1 was effective for interim reporting periods ending after
June 15, 2009. ASC 825-10-65-1 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption, and, in periods
after initial adoption, requires comparative disclosures only for periods ending
after initial adoption. Our adoption of the provisions of ASC 825-10-65-1 on
June 30, 2009 did not have a material impact on our consolidated financial
statements.
 
 In
May 2009, the FASB issued guidance under ASC 855, “Subsequent Events” (“ASC
855”), which is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, and is effective for interim and annual periods
ending after June 15, 2009. Our adoption of the provisions of ASC 855 on
June 30, 2009 did not have a material impact on our consolidated financial
statements.
 
 9
 
 In
June 2009, the FASB issued guidance under ASC 105, “Generally Accepted
Accounting Principles” (“ASC 105”), which identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative GAAP for SEC
registrants. All guidance contained in the codification carries an equal level
of authority. The new guidance under ASC 105 is effective for interim and annual
periods ending after September 15, 2009. Our adoption of the new provisions
of ASC 105 on September 30, 2009 did not have a material impact on our
consolidated financial statements.
 
 3.  JULY
2008 CONTRACT OPERATIONS ACQUISITION
 
 In July
2008, we acquired from Exterran Holdings contract operations customer service
agreements with 34 customers and a fleet of approximately 620 compressor
units used to provide compression services under those agreements having a net
book value of $133.9 million, net of accumulated depreciation of
$16.5 million, and comprising approximately 254,000 horsepower, or 6% (by
then available horsepower) of the combined U.S. contract operations
business of Exterran Holdings and us (the “July 2008 Contract Operations
Acquisition”). In connection with this acquisition, we assumed
$175.3 million of debt from Exterran Holdings and issued to Exterran
Holdings’ wholly-owned subsidiaries approximately 2.4 million common units
and approximately 49,000 general partner units. Concurrent with the closing of
the July 2008 Contract Operations Acquisition, we borrowed $117.5 million
under our term loan and $58.3 million under our revolving credit facility,
which together were used to repay the debt assumed from Exterran Holdings in the
acquisition and to pay other costs incurred in the acquisition.
 
 In
connection with this acquisition, we were allocated $56.9 million
historical cost goodwill and $4.6 million finite life intangible assets of
Exterran Holdings’ North America contract operations segment. The amounts
allocated were based on the ratio of fair value of the net assets transferred to
us to the total fair value of Exterran Holdings’ North America contract
operations segment. The amount of finite life intangible assets included in the
July 2008 Contract Operations Acquisition is comprised of $3.5 million
associated with customer relationships and $1.1 million associated with
customer contracts. These intangible assets are being amortized through 2024 and
2016, respectively, based on the present value of expected income to be realized
from these assets.
 
 An
acquisition of a business from an entity under common control is generally
accounted for under GAAP by the acquirer with retroactive application as if the
acquisition date was the beginning of the earliest period included in the
financial statements. Retroactive effect to the July 2008 Contract Operations
Acquisition was impracticable because such retroactive application would have
required significant assumptions in a prior period that cannot be
substantiated. Accordingly, our financial statements include the assets
acquired, liabilities assumed, revenues and operating expenses associated with
the acquisition beginning on the date of such acquisition. However, the
preparation of pro forma financial information allows for certain assumptions
that do not meet the standards of financial statements prepared in accordance
with GAAP.
 
 Unaudited
Pro Forma Financial Information
 
 Pro forma
financial information for the three and nine months ended September 30, 2008 has
been included to give effect to the significant expansion of our compressor
fleet and service contracts as the result of the July 2008 Contract Operations
Acquisition. The transactions are presented in the pro forma financial
information as though the transactions had occurred as of January 1,
2008.
 
 The
unaudited pro forma financial information for the three and nine months ended
September 30, 2008 reflects the following transactions:
 
 •
              the
      contribution of customer contracts and equipment used to provide
      compression services under those contracts transferred in the July 2008
      Contract Operations Acquisition from Exterran Holdings to
    us;
 
 •
              our
      assumption of $175.3 million of Exterran Holdings’
    debt;
 
 •
              the
      issuance of our common units and general partner units to Exterran
      Holdings’ wholly-owned
subsidiaries; and
 
 •
              our
      borrowing of $175.8 million under our senior secured credit facility
      and use of those proceeds to repay the debt assumed from Exterran
      Holdings.
 
  10
  The
unaudited pro forma financial information below is presented for informational
purposes only and is not necessarily indicative of the results of operations
that would have occurred had the transaction been consummated at the beginning
of the period presented, nor is it necessarily indicative of future results. The
unaudited pro forma consolidated financial information was derived by adjusting
our historical financial statements.
 
 The
following table presents pro forma financial information for the three and nine
months ended September 30, 2008 (in thousands, except per unit
amounts):
 
 Three
      Months
                  Ended
              
              
              Nine
      Months
                  EndedSeptember
      30, 2008Total
      revenues
              
              $
              48,084
              
              
              $
              144,530Net
      income
              
              $
              9,498
              
              
              $
              26,988Earnings
      per limited partner unit—Basic
              
              $
              0.47
              
              
              $
              1.35Earnings
      per limited partner unit—Diluted
              
              $
              0.47
              
              
              $
              1.35
 
 Pro
forma earnings per limited partner unit is determined by dividing the pro
forma net income that would have been allocated to the common and subordinated
unitholders by the weighted average number of common and subordinated units
expected to be outstanding after the completion of the transactions included in
the pro forma consolidated financial statements. All units were assumed to have
been outstanding since the beginning of the periods presented. Pursuant to our
partnership agreement, to the extent the quarterly distributions exceed
certain targets, our general partner is entitled to receive certain incentive
distributions that will result in more net income proportionately being
allocated to our general partner than to the holders of common and subordinated
units. The pro forma net earnings per limited partner unit calculations include
adjustments for the pro forma incentive distributions to our general partner. A
reduction to net income allocable to the limited partners of approximately
$49,000 and $0.2 million, respectively, was included for the three and nine
months ended September 30, 2008, to reflect the amount of additional incentive
distributions that would have occurred if the excess of net earnings over actual
distributions for the period had been distributed.
 
 4.
MERGER BETWEEN UNIVERSAL AND HANOVER
 
 On
August 20, 2007, Universal Compression Holdings, Inc. (“Universal”) and
Hanover Compressor Company (“Hanover”) completed their merger transaction. In
connection with the merger, Universal and Hanover became wholly-owned
subsidiaries of Exterran Holdings, and Universal then merged with and into
Exterran Holdings. As a result of the merger, Exterran Holdings became the
indirect owner of our general partner, which as of September 30, 2009, owned
389,642 general partner units, representing a 2% general partner interest, and
all the incentive distribution rights in us. As of September 30, 2009, Exterran
Holdings owned 4,428,067 common units and 6,325,000 subordinated units which,
together with the general partner interest, represent a 57% total ownership
interest in us.
 
 5.
RELATED PARTY TRANSACTIONS
 
 We are a
party to an omnibus agreement with Exterran Holdings and others (as amended and
restated, the “Omnibus Agreement”), the terms of which include, among other
things:
 
 •
              certain
      agreements not to compete between Exterran Holdings and its affiliates, on
      the one hand, and us and our affiliates, on the other
  hand;
 
 •
              Exterran
      Holdings’ obligation to provide all operational staff, corporate staff and
      support services reasonably necessary to operate our business and our
      obligation to reimburse Exterran Holdings for the provision of such
      services, subject to certain limitations and the cost caps discussed
      below;
 
 •
              the
      terms under which we, Exterran Holdings, and our respective affiliates may
      transfer compression equipment among one another to meet our respective
      contract operations services
obligations;
 
 •
              the
      terms under which we may purchase newly-fabricated contract operations
      equipment from Exterran Holdings’
affiliates;
 
 •
              Exterran
      Holdings’ grant of a license of certain intellectual property to us,
      including our logo; and
  11
  •
              Exterran
      Holdings’ obligation to indemnify us for certain liabilities and our
      obligation to indemnify Exterran Holdings for certain
      liabilities.
 
 The
Omnibus Agreement will terminate upon a change of control of our general partner
or the removal or withdrawal of our general partner, and certain provisions of
the Omnibus Agreement will terminate upon a change of control of Exterran
Holdings.
 
 During
the nine months ended September 30, 2009, pursuant to the terms of the Omnibus
Agreement, we transferred ownership of 81 compressor units, totaling
approximately 34,600 horsepower with a net book value of approximately
$18.0 million, to Exterran Holdings. In exchange, Exterran Holdings
transferred ownership to us of 164 compressor units, totaling approximately
36,800 horsepower with a net book value of approximately $21.2 million. During
the nine months ended September 30, 2008, pursuant to the terms of the Omnibus
Agreement, we transferred ownership of 86 compressor units, totaling
approximately 42,000 horsepower with a net book value of approximately
$20.3 million, to Exterran Holdings. In exchange, Exterran Holdings
transferred ownership to us of 213 compressor units, totaling approximately
45,800 horsepower with a net book value of approximately $20.0 million. During
the nine months ended September 30, 2009, we recorded an equity contribution of
approximately $3.2 million related to the difference in net book value on the
compression equipment that was exchanged with us. During the nine months ended
September 30, 2008, we recorded as an equity distribution approximately $0.3
million related to the difference in net book value on the compression equipment
that was exchanged with us. No customer contracts were included in the
transfers. Under the terms of the Omnibus Agreement, such transfers must be of
equal appraised value, as defined in the Omnibus Agreement, with any difference
being settled in cash. As a result, we paid a nominal amount to Exterran
Holdings for the difference in fair value of the equipment in connection with
the transfers. We recorded the compressor units received at the historical
book basis of Exterran Holdings. The units we received from Exterran Holdings
were being utilized to provide services to our customers on the date of the
transfers and, prior to the transfers, had been leased by us from Exterran
Holdings. The units we transferred to Exterran Holdings were being utilized to
provide services to customers of Exterran Holdings on the date of the transfers,
and prior to the transfers had been leased by Exterran Holdings from
us.
 
 Under the
Omnibus Agreement, Exterran Holdings agreed that, for a period that will
terminate on December 31, 2009, our obligation to reimburse Exterran
Holdings for (i) any cost of sales that it incurs in the operation of our
business will be capped (after taking into account any such costs we incur and
pay directly); and (ii) any selling, general and administrative
(“SG&A”) costs allocated to us will be capped (after taking into account any
such costs we incur and pay directly). From July 9, 2007 through
July 29, 2008, cost of sales were capped at $18.00 per operating horsepower
per quarter. From July 30, 2008 through September 30, 2009, cost of
sales were capped at $21.75 per operating horsepower per quarter. From
July 9, 2007 through July 29, 2008, SG&A costs were capped at
$4.75 million per quarter. From July 30, 2008 through September 30,
2009, SG&A costs were capped at $6.0 million per quarter. These caps
may be subject to future adjustment in connection with expansions of our
operations through the acquisition or construction of new assets or
businesses.
 
 For the
three months ended September 30, 2009 and 2008, our cost of sales exceeded the
cap provided in the Omnibus Agreement by $2.0 million and $3.6 million,
respectively. For the nine months ended September 30, 2009 and 2008, our cost of
sales exceeded the cap provided in the Omnibus Agreement by $6.1 million
and $10.7 million, respectively. For the three and nine months ended
September 30, 2009 our SG&A expense did not exceed the cap provided in the
Omnibus Agreement. For each of the three and nine month periods ended September
30, 2008, our SG&A expense exceeded the cap provided in the Omnibus
Agreement by $16,000. The excess amounts over the caps are included in the
consolidated statements of operations as cost of sales or SG&A expense. The
cash received for the amounts over the caps has been accounted for as a capital
contribution in our consolidated balance sheets and consolidated statements of
cash flows.
 
 Pursuant
to the Omnibus Agreement, we are permitted to purchase newly fabricated
compression equipment from Exterran Holdings or its affiliates at Exterran
Holdings’ cost to fabricate such equipment plus a fixed margin of 10%, which may
be modified with the approval of Exterran Holdings and the conflicts committee
of Exterran GP LLC’s board of directors. During the nine months ended September
30, 2009 and 2008, we purchased $1.3 million and $8.1 million,
respectively, of new compression equipment from Exterran Holdings. Under GAAP,
transfers of assets and liabilities between entities under common control are to
be initially recorded on the books of the receiving entity at the carrying value
of the transferor. Any difference between consideration given and the carrying
value of the assets or liabilities is treated as an equity distribution or
contribution. Transactions between us and Exterran Holdings and its affiliates
are transactions between entities under common control. As a result, the
equipment purchased during the nine months ended September 30, 2009 and 2008 was
recorded in our consolidated balance sheet as property, plant and equipment of
$1.2 million and $7.3 million, respectively, which represents the
carrying value of the Exterran Holdings affiliates that sold it to us, and as a
distribution of equity of $0.1 million and $0.8 million, respectively,
which represents the fixed margin we paid above the carrying value in accordance
with the Omnibus Agreement. During the nine months ended September 30, 2009 and
2008, Exterran
 
 12
 
 Holdings
contributed $4.0 million and $3.2 million, respectively, primarily related to
the completion of overhauls on compression equipment that was exchanged with us
or contributed to us and where overhauls were in progress on the date of
exchange or contribution.
 
 Pursuant
to the Omnibus Agreement, in the event that Exterran Holdings determines in good
faith that there exists a need on the part of Exterran Holdings’ contract
operations services business or on our part to lease compression equipment
between Exterran Holdings and us so as to fulfill the compression services
obligations of either Exterran Holdings or us, such equipment may be leased if
it will not cause us to breach any existing compression services contracts or to
suffer a loss of revenue under an existing compression services contract or
incur any unreimbursed costs. At September 30, 2009, we had equipment on lease
to Exterran Holdings with an aggregate cost and accumulated depreciation of
$9.6 million and $2.7 million, respectively.
 
 For the
nine months ended September 30, 2009 and 2008, we had revenues of
$0.8 million and $1.2 million, respectively, from Exterran Holdings
related to the lease of our compression equipment. For the nine months ended
September 30, 2009 and 2008, we had cost of sales of $8.1 million and
$5.5 million, respectively, with Exterran Holdings related to the lease of
Exterran Holdings’ compression equipment.
 
 6.
DEBT
 
 Long-term
debt consisted of the following (in thousands):
 
 September
      30,
                  2009
              
              
              December
      31,
                  2008Revolving
      credit facility due October 2011
              
              $
              267,000
              
              
              $
              281,250Term
      loan facility due October 2011
              
              
              117,500
              
              
              
              117,500Long-term
      debt
              
              $
              384,500
              
              
              $
              398,750
 
 Our
senior secured credit facility contains various covenants with which we must
comply, including restrictions on the use of proceeds from borrowings and
limitations on our ability to incur additional debt or sell assets, make certain
investments and acquisitions, grant liens and pay dividends and distributions.
We must maintain various consolidated financial ratios, including a ratio of
EBITDA (as defined in the credit agreement) to Total Interest Expense (as
defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of
Total Debt (as defined in the credit agreement) to EBITDA of not greater than
5.0 to 1.0. As of September 30, 2009, we maintained a 4.3 to 1.0 EBITDA to Total
Interest Expense ratio and a 4.7 to 1.0 Total Debt to EBITDA ratio. As of
September 30, 2009, we were in compliance with all financial covenants under the
credit agreement.
 
 7.
CASH DISTRIBUTIONS
 
 We will
make distributions of available cash (as defined in our partnership agreement)
from operating surplus for any quarter during any subordination period in the
following manner:
 
 •
              first, 98% to the
      common unitholders, pro rata, and 2% to our general partner, until we
      distribute for each outstanding common unit an amount equal to the minimum
      quarterly distribution for that
quarter;
 
 •
              second, 98% to the
      common unitholders, pro rata, and 2% to our general partner, until we
      distribute for each outstanding common unit an amount equal to any
      arrearages in payment of the minimum quarterly distribution on the common
      units for any prior quarters during the subordination
    period;
 
 •
              third, 98% to the
      subordinated unitholders, pro rata, and 2% to our general partner, until
      we distribute for each subordinated unit an amount equal to the minimum
      quarterly distribution for that
quarter;
 
 •
              fourth, 85% to all
      common and subordinated unitholders, pro rata, and 15% to our general
      partner, until each unit has received a distribution of
      $0.4375;
 
 •
              fifth, 75% to all
      common and subordinated unitholders, pro rata, and 25% to our general
      partner, until each unit has received a total of
      $0.525; and
 
 •
              thereafter, 50% to all
      common and subordinated unitholders, pro rata, and 50% to our general
      partner.
 
  13
  The
following table summarizes our distributions per unit for 2007, 2008 and
2009:
 
 Period
      Covering
              
              Payment
      Date
              
              Distribution
      per
                  Limited
      Partner Unit
              
              Total
      Distribution1/1/2007 – 3/31/2007
              
              May 15,
      2007
              
              $
              0.3500
              
              $                     4.5 million4/1/2007 – 6/30/2007
              
              August 14,
      2007
              
              
              0.3500
              
              6.0 million7/1/2007 – 9/30/2007
              
              November 14,
      2007
              
              
              0.4000
              
              6.8 million10/1/2007 – 12/31/2007
              
              February 14,
      2008
              
              
              0.4250
              
              7.3
      million (1)1/1/2008 – 3/31/2008
              
              May 14,
      2008
              
              
              0.4250
              
              7.3 million (1)4/1/2008 – 6/30/2008
              
              August 14,
      2008
              
              
              0.4250
              
              8.3 million (1)7/1/2008 – 9/30/2008
              
              November 14,
      2008
              
              
              0.4625
              
              9.3 million (1)10/1/2008 – 12/31/2008
              
              February 13,
      2009
              
              
              0.4625
              
              9.3 million
      (1)1/1/2009 – 3/31/2009
              
              May
      15, 2009
              
              
              0.4625
              
              9.3 million (1)4/1/2009 – 6/30/2009
              
              August
      14, 2009
              
              
              0.4625
              
              9.3 million (1)
 
 (1)
              Including
      distributions to our general partner on its incentive distribution
      rights.
 
 On
October 30, 2009, the board of directors of Exterran GP LLC approved a cash
distribution of $0.4625 per limited partner unit, or approximately $9.3 million,
including distributions to our general partner on its incentive distribution
rights. The distribution covers the time period from July 1, 2009 through
September 30, 2009. The record date for this distribution is November 9, 2009
and payment is expected to occur on November 13, 2009.
 
 8.
UNIT-BASED COMPENSATION
 
 Long-Term
Incentive Plan
 
 We have a
long-term incentive plan that was adopted by Exterran GP LLC, the general
partner of our general partner, in October 2006 for employees, directors and
consultants of us, Exterran Holdings or our respective affiliates. The long-term
incentive plan currently permits the grant of awards covering an aggregate of
1,035,378 common units, common unit options, restricted units and phantom units.
The long-term incentive plan is administered by the board of directors of
Exterran GP LLC or a committee thereof (the “Plan Administrator”).
 
 Unit
options will have an exercise price that is not less than the fair market value
of the units on the date of grant and will become exercisable over a period
determined by the Plan Administrator. Phantom units are notional units that
entitle the grantee to receive a common unit upon the vesting of the phantom
unit or, at the discretion of the Plan Administrator, cash equal to the fair
value of a common unit.
 
 In
October 2008, our long-term incentive plan was amended to allow us the option to
settle any exercised unit options in a cash payment equal to the fair market
value of the number of common units that we would otherwise issue upon exercise
of such unit option less the exercise price and any amounts required to meet
withholding requirements.
 
 We have
granted unit options to individuals who are not our employees, but who are
employees of Exterran Holdings and its subsidiaries who provide services to us.
We have also granted phantom units to directors of Exterran GP LLC and to
employees of Exterran Holdings and its subsidiaries. Because we grant unit
options and phantom units to non-employees, we are required to re-measure the
fair value of these unit options and phantom units each period and record a
cumulative adjustment of the expense previously recognized. We recorded
$67,000 and $0.1 million, respectively, in SG&A expense related to the
re-measurement of fair value of the phantom units for the three and nine months
ended September 30, 2009. We recorded a reduction to expense of $3.6 million and
$3.8 million for the three and nine months ended September 30, 2008 related to
the re-measurement of fair value of the unit options and phantom
units.
 
  14
  Unit
Options
 
 As of
September 30, 2009, we had 580,715 outstanding unit options. The unit options
vested and became exercisable on January 1, 2009, and expire on
December 31, 2009.
 
 The
following table presents unit option activity for the nine months ended
September 30, 2009 (remaining life in years):
 
 Unit
                  Options
              
              
              Weighted
                  Average
                  Exercise
                  Price
              
              
              Weighted
                  Average
                  Remaining
                  Life
              
              
              Aggregate
                  Intrinsic
                  ValueUnit
      options outstanding, December 31, 2008
              
              
              591,429
              
              
              $
              23.77Cancelled
              
              
              (10,714
              )
              
              
              25.94Unit
      options outstanding, September 30, 2009
              
              
              580,715
              
              
              $
              23.73
              
              
              
              0.3
              
              
              $
              —Unit
      options exercisable, September 30, 2009
              
              
              580,715
              
              
              $
              23.73
              
              
              
              0.3
              
              
              $
              —
 
 Intrinsic
value is the difference between the market value of our units and the exercise
price of each unit option multiplied by the number of unit options outstanding
for those unit options where the market value exceeds their exercise
price.
 
 Phantom
Units
 
 During
the nine months ended September 30, 2009, we granted 84,166 phantom units
to officers and directors of Exterran GP LLC and certain employees of Exterran
Holdings and its subsidiaries, which settle 33 1/3% on each of the first three
anniversaries of the grant date.
 
 The
following table presents phantom unit activity for the nine months ended
September 30, 2009:
 
 Phantom
                  Units
              
              
              Weighted
                  Average
                  Grant-Date
                  Fair
      Value
                  per
      UnitPhantom
      units outstanding, December 31, 2008
              
              
              48,152
              
              
              $
              30.98Granted
              
              
              84,166
              
              
              
              11.85Vested
              
              
              (34,576
              )
              
              
              24.02Cancelled
              
              
              (6,945
              )
              
              
              16.30Phantom
      units outstanding, September 30, 2009
              
              
              90,797
              
              
              $
              17.01
 
 During
the nine months ended September 30, 2009, 8,426 phantom units were withheld from
the 34,576 phantom units vested during the period to cover taxes withheld
on the vesting date.
 
 9.
ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS
 
 We are
exposed to market risks primarily associated with changes in interest
rates. We use derivative financial instruments to minimize the risks and
costs associated with financial activities by managing our exposure to interest
rate fluctuations on a portion of our debt obligations. We do not use derivative
financial instruments for trading or other speculative purposes.
 
 Interest
Rate Risk
 
 At
September 30, 2009, we were party to four interest rate swaps in which we pay
fixed payments and receive floating payments on a notional value of
$255.0 million. We entered into these swaps to offset changes in
expected cash flows due to fluctuations in the associated variable interest
rates. Our interest rate swaps expire over varying dates through July
2012. The weighted average effective fixed interest rate payable on our
interest rate swaps was 4.7% as of September 30, 2009. We have designated these
interest rate swaps as cash flow hedging instruments so that any change in their
fair values is recognized as a component of comprehensive income (loss) and is
included in accumulated other comprehensive income (loss) to the extent the
hedge is effective. The swap terms substantially coincide with the hedged item
and are expected to offset changes in expected cash flows due to fluctuations in
the variable rate, and therefore we currently do not expect a significant amount
of ineffectiveness on these hedges.
 
 15
  We
perform quarterly calculations to determine whether the swap agreements are
still effective and to calculate any ineffectiveness. For the three and nine
months ended September 30, 2009 and 2008, there was no ineffectiveness related
to these swaps. We estimate that $9.2 million of deferred pre-tax losses
from the interest rate swaps will be realized as an expense during the next
twelve months. Cash flows from derivatives designated as hedges are
classified in our condensed consolidated statements of cash flows under the same
category as the cash flows from the underlying assets, liabilities or
anticipated transactions.
 
 The
following tables present the effect of derivative instruments on our
consolidated financial position and results of operations (in
thousands):
 
 September
      30, 2009Balance
      Sheet Location
              
              Fair
      Value
                  Asset
      (Liability)Derivatives
      designated as hedging instruments:Interest
      rate hedges
              Interest
      rate swaps
              
              $
              225Interest
      rate hedges
              Current
      portion of interest rate swaps
              
              
              (9,224
              )Interest
      rate hedges
              Interest
      rate swaps
              
              
              (8,111
              )Total
      derivatives
              
              
              $
              (17,110
              )
 
 Three
      Months Ended September 30, 2009
              
              
              Nine
      Months Ended September 30, 2009Gain
      (Loss) Recognized in Other Comprehensive Income (Loss) on
      Derivatives
              
              Location
      of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
      (Loss) into Income (Loss)
              
              Gain
      (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
      into Income (Loss)
              
              
              Gain
      (Loss) Recognized in Other Comprehensive Income (Loss) on
      Derivatives
              
              Location
      of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
      (Loss) into Income (Loss)
              
              Gain
      (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
      into Income (Loss)Derivatives
      designated as cash flow hedges:Interest
      rate hedges
              
              $
              (1,215
              )
              Interest
      expense
              
              $
              (839)
              
              
              $
              576
              
              Interest
      expense
              
              $
              (4,801)
 
 The
counterparties to our derivative agreements are major international financial
institutions. We monitor the credit quality of these financial institutions and
do not expect non-performance by any counterparty, although such non-performance
could have a material adverse effect on us. We have no specific collateral
posted for our derivative instruments. The counterparties to our interest
rate swaps are also lenders under our credit facility and, in that capacity,
share proportionally in the collateral pledged under the credit
facility.
 
 10.
FAIR VALUE MEASUREMENTS
 
 ASC 820
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into the following three broad
categories.
 
 •
              Level 1— Quoted unadjusted prices for identical instruments in active
      markets to which we have access at the date of
  measurement.
 
 •
              Level 2— Quoted prices for similar instruments in active markets;
      quoted prices for identical or similar instruments in markets that are not
      active; and model-derived valuations in which all significant inputs and
      significant value drivers are observable in active markets. Level 2
      inputs are those in markets for which there are few transactions, the
      prices are not current, little public information exists or prices vary
      substantially over time or among brokered market
  makers.
 
 •
              Level 3— Model derived valuations in which one or more significant
      inputs or significant value drivers are unobservable. Unobservable inputs
      are those inputs that reflect our own assumptions regarding how market
      participants would price the asset or liability based on the best
      available information.
  16
 
 The
following table summarizes the valuation of our interest rate swaps under ASC
820 pricing levels as of September 30, 2009 (in thousands):
 
 Total
              
              
              Quoted
      Market
                Prices
      in Active
                Markets
                (Level 1)
              
              
              Significant
      Other
                Observable
      Inputs
                (Level 2)
              
              
              Significant
                Unobservable
                Inputs
                (Level 3)Interest
      rate swaps asset (liability)
              
              $
              (17,110
              )
              
              $
              —
              
              
              $
              (17,110
              )
              
              $
              —
 
 Our
interest rate swaps are recorded at fair value utilizing a combination of the
market and income approach to fair value. We use discounted cash flows and
market based methods to compare similar interest rate swaps.
 
 11.
FLEET IMPAIRMENT
 
 As a
result of a decline in market conditions and operating horsepower, during the
second quarter of 2009, we reviewed the idle compression fleet used in our
business for units that are not of the type, configuration, make or model that
are cost efficient to maintain and operate. As a result of that review, we
decided that 50 units representing 8,700 horsepower would be retired from the
fleet.
 We
performed a cash flow analysis of the expected proceeds from the disposition of
these units to determine the fair value of the fleet assets we will no longer
utilize in our operations. The net book value of these assets exceeded the fair
value by $3.0 million, and the difference was recorded as a long-lived
asset impairment in the second quarter of 2009. The impairment is recorded in
Fleet impairment expense in the consolidated statements of
operations.
 12.
COMMITMENTS AND CONTINGENCIES
 
 In the
ordinary course of business, we are involved in various pending or threatened
legal actions. In the opinion of management, the amount of ultimate liability,
if any, with respect to these actions will not have a material adverse effect on
our consolidated financial position, results of operations or cash flows;
however, because of the inherent uncertainty of litigation, we cannot provide
assurance that the resolution of any particular claim or proceeding to which we
are a party will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows for the period in which
that resolution occurs.
 
 13.
SUBSEQUENT EVENTS
 
 In
October 2009, we and Exterran Holdings announced a transaction, which is
expected to close in November 2009, pursuant to which we will acquire from
Exterran Holdings contract operations customer service agreements with 18
customers and a fleet of approximately 900 compressor units used to provide
compression services under those agreements, comprising approximately 273,000
horsepower, or approximately 6% (by available horsepower) of the combined U.S.
contract operations business of Exterran Holdings and us (the “November 2009
Contract Operations Acquisition”). The total value of the transaction is
approximately $143.0 million, excluding estimated transaction costs. In
connection with this acquisition, we intend to assume $57.2 million of debt from
Exterran Holdings and issue to Exterran Holdings’ wholly-owned subsidiaries
approximately 4.7 million common units and approximately 97,000 general partner
units.
 
 In
connection with the transaction described above, we entered into a new $150
million asset-backed securitization facility (the “2009 ABS Facility”), a
portion of which is expected to be used to fund the November 2009 Contract
Operations Acquisition. The 2009 ABS Facility notes are revolving in nature and
are payable in July 2013. Interest and fees payable to the noteholders will
accrue on these notes at a variable rate consisting of an applicable margin of
3.5% plus, at our option, either LIBOR or a base rate. Repayment of the 2009 ABS
Facility notes has been secured by a pledge of all of the assets of EXLP ABS
2009 LLC and its subsidiaries, consisting primarily of compression services
contracts and a fleet of natural gas compressor units. As of November 5, 2009,
none of the 2009 ABS Facility notes has been issued.
 
 Also, in
connection with the closing of the November 2009 Contract Operations
Acquisition, we intend to amend and restate our existing Omnibus Agreement with
Exterran Holdings. The agreement, among other things, will increase the cap
on the amount we must reimburse Exterran Holdings for SG&A expenses it
incurs on our behalf from $6.0 million per quarter to $7.6 million per quarter
(after taking into account such costs that we incur and pay directly) and extend
the duration of the cap on our reimbursement of SG&A expenses and the cap on
our reimbursement of cost of sales Exterran Holdings allocates to us, based on
such costs it incurs on our behalf, for an additional year such that the caps
will then terminate on December 31, 2010.
  17
   ITEM
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
 
 This
report contains “forward-looking statements” within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All
statements other than statements of historical fact contained in this report are
forward-looking statements, including, without limitation, statements regarding
future financial position, business strategy, proposed acquisitions, budgets,
litigation, projected costs and plans and objectives of management for future
operations. You can identify many of these statements by looking for words such
as “believes,” “expects,” “intends,” “projects,” “anticipates,” “estimates” or
similar words or the negative thereof.
 
 Such
forward-looking statements in this report include, without limitation,
statements regarding:
 
 •
              our
      business growth strategy and projected
costs;
 
 •
              our
      future financial position;
 
 •
              the
      sufficiency of available cash flows to make cash
      distributions;
 
 •
              our
      ability to comply with financial covenants contained in our credit
      agreements;
 
 •
              the
      expected timing and amount of our capital
  expenditures;
 
 •
              anticipated
      cost savings, future revenue, gross margin and other financial or
      operational measures related to our
business;
 
 •
              the
      future value of our equipment;
 
 •
              plans
      and objectives of our management for our future operations;
      and
 
 •
              any
      potential contribution of additional assets from Exterran Holdings, Inc.
      (individually, and together with its wholly-owned subsidiaries, “Exterran
      Holdings”) to us.
 
 Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this report. Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct. These
forward-looking statements are also affected by the risk factors described in
our Annual Report on Form 10-K for the year ended December 31, 2008, and those
set forth from time to time in our filings with the Securities and Exchange
Commission (“SEC”), which are available through our website at www.exterran.com
and through the SEC’s website at www.sec.gov. Important factors that
could cause our actual results to differ materially from the expectations
reflected in these forward-looking statements include, among other
things:
 
 •
              conditions
      in the oil and gas industry, including a sustained decrease in the level
      of supply or demand for natural gas and the impact on the price of natural
      gas, which could cause a decline in the demand for our compression
      services;
 
 •
              reduced
      profit margins or the loss of market share resulting from competition or
      the introduction of competing technologies by other
    companies;
 
 •
              our
      dependence on Exterran Holdings to provide services, including its ability
      to hire, train and retain key employees and to timely and cost effectively
      obtain components necessary to conduct our
  business;
 
 •
              changes
      in economic or political conditions, including terrorism and legislative
      changes;
 
 •
              the
      inherent risks associated with our operations, such as equipment defects,
      malfunctions and natural disasters;
 
 •
              an
      Internal Revenue Service challenge to our valuation methodologies, which
      may result in a shift of income, gains, losses and/or deductions between
      our general partner and our
unitholders;
  18
  •
              the
      risk that counterparties will not perform their obligations under our
      financial instruments;•
              the
      financial condition of our
customers;
 
 •
              our
      ability to implement certain business and financial objectives, such
      as:
 
 •
              growing
      our asset base, particularly our fleet of
  compressors;
 
 •
              integrating
      acquired businesses;
 
 •
              generating
      sufficient cash;
 
 •
              accessing
      the capital markets at an acceptable
cost;
 
 •
              purchasing
      additional contract operation contracts and equipment from Exterran
      Holdings; and
 
 •
              refinancing
      existing or incurring additional indebtedness to fund our
      business;
 
 •
              liability
      related to the use of our products and
services;
 
 •
              changes
      in governmental safety, health, environmental or other regulations, which
      could require us to make significant
  expenditures; and
 
 •
              our
      level of indebtedness and ability to fund our
  business.
 
 All
forward-looking statements included in this report are based on information
available to us on the date of this report. Except as required by law, we
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this report.
 
 GENERAL
 
 We are a
publicly held Delaware limited partnership formed on June 22, 2006 to
acquire certain contract operations customer service agreements and a compressor
fleet used to provide compression services under those agreements. We completed
our initial public offering in October 2006.
 
 In August
2007, we changed our name from Universal Compression Partners, L.P. to Exterran
Partners, L.P. concurrent with the closing of the merger of Hanover Compressor
Company (“Hanover”) and Universal Compression Holdings, Inc. (“Universal”). In
connection with the merger, Universal and Hanover became wholly-owned
subsidiaries of Exterran Holdings, a new company formed in anticipation of the
merger, and Universal was merged with and into Exterran Holdings. As of
September 30, 2009, public unitholders held a 43% ownership interest in us and
Exterran Holdings owned our remaining equity interests, including the general
partner interests and all of our incentive distribution rights.
 
 July
2008 Contract Operations Acquisition
 
 In July
2008, we acquired from Exterran Holdings contract operations customer service
agreements with 34 customers and a fleet of approximately 620 compressor units
used to provide compression services under those agreements having a net book
value of $133.9 million, net of accumulated depreciation of
$16.5 million, and comprising approximately 254,000 horsepower, or 6% (by
then available horsepower) of the combined U.S. contract operations
business of Exterran Holdings and us (the “July 2008 Contract Operations
Acquisition”). In connection with this acquisition, we assumed
$175.3 million of debt from Exterran Holdings and issued to Exterran
Holdings’ wholly-owned subsidiaries approximately 2.4 million common units
and approximately 49,000 general partner units. Concurrent with the closing of
the July 2008 Contract Operations Acquisition, we borrowed $117.5 million
under our term loan and $58.3 million under our revolving credit facility,
which together were used to repay the debt assumed from Exterran Holdings in the
acquisition and to pay other costs incurred in the acquisition.
 
  19
  November
2009 Contract Operations Acquisition
 
 In
October 2009, we and Exterran Holdings announced a transaction, which is
expected to close in November 2009, pursuant to which we will acquire from
Exterran Holdings contract operations customer service agreements with 18
customers and a fleet of approximately 900 compressor units used to provide
compression services under those agreements, comprising approximately 273,000
horsepower, or approximately 6% (by available horsepower) of the combined U.S.
contract operations business of Exterran Holdings and us (the “November 2009
Contract Operations Acquisition”). The total value of the transaction is
approximately $143.0 million, excluding estimated transaction costs. In
connection with this acquisition, we intend to assume $57.2 million of debt from
Exterran Holdings and issue to Exterran Holdings’ wholly-owned subsidiaries
approximately 4.7 million common units and approximately 97,000 general partner
units.
 
 In
connection with the transaction discussed above, we entered into a new $150
million asset-backed securitization facility (the “2009 ABS Facility”), a
portion of which is expected to be used to fund the November 2009 Contract
Operations Acquisition. The 2009 ABS Facility notes are revolving in nature and
are payable in July 2013. Interest and fees payable to the noteholders will
accrue on these notes at a variable rate consisting of an applicable margin of
3.5% plus, at our option, either LIBOR or a base rate. Repayment of the 2009 ABS
Facility notes has been secured by a pledge of all of the assets of EXLP ABS
2009 LLC and its subsidiaries, consisting primarily of compression services
contracts and a fleet of natural gas compressor units. As of November 5, 2009,
none of the 2009 ABS Facility notes has been issued.
 Also, in
connection with the closing of the November 2009 Contract Operations
Acquisition, we intend to amend and restate our existing Omnibus Agreement with
Exterran Holdings. The transaction, among other things, will increase the
cap on the amount we must reimburse Exterran Holdings for SG&A expenses it
incurs on our behalf from $6.0 million per quarter to $7.6 million per quarter
(after taking into account such costs that we incur and pay directly) and extend
the duration of the cap on our reimbursement of SG&A expenses and the cap on
our reimbursement of cost of sales Exterran Holdings allocates to us, based on
such costs it incurs on our behalf, for an additional year such that the caps
will then terminate on December 31, 2010.
 
 Omnibus
Agreement
 
 We are a
party to an Omnibus Agreement, the terms of which include, among other
things:
 
 •
              certain
      agreements not to compete between Exterran Holdings and its affiliates, on
      the one hand, and us and our affiliates, on the other
  hand;
 
 •
              Exterran
      Holdings’ obligation to provide all operational staff, corporate staff and
      support services reasonably necessary to operate our business and our
      obligation to reimburse Exterran Holdings for the provision of such
      services, subject to certain limitations and the cost caps discussed
      below;
 
 •
              the
      terms under which we, Exterran Holdings, and our respective affiliates may
      transfer compression equipment among one another to meet our respective
      contract operations services
  obligations; and
 
 •
              the
      terms under which we may purchase newly-fabricated contract operations
      equipment from Exterran Holdings’
affiliates.
 
 For
further discussion of the Omnibus Agreement, see Notes 5 and 13 to the
Financial Statements of this report.
 
 OVERVIEW
 
 Industry
Conditions and Trends
 
 Our
business environment and corresponding operating results are affected by the
level of energy industry spending for the exploration, development and
production of natural gas reserves. Spending by natural gas exploration and
production companies is dependent upon these companies’ forecasts regarding the
expected future supply and demand for and future pricing of oil and natural gas
products, as well as their estimates of risk-adjusted costs to find, develop and
produce reserves. Although we believe our business is typically less impacted by
commodity prices than certain other oil and natural gas service providers,
changes in natural gas exploration and production spending will normally result
in increased or decreased demand for our products and services.
 
  20
  Natural
gas consumption in the United States of America (“U.S.”) for the twelve months
ended July 31, 2009 decreased by approximately 3.8% over the twelve months ended
July 31, 2008. Total natural gas consumption in the U.S. is projected by the
Energy Information Administration (“EIA”) to decline by 2.0% in 2009 and by 0.2%
in 2010, and is expected to increase by an average of  0.7% per year
until 2030. For 2008, the U.S. accounted for an estimated annual production of
approximately 21 trillion cubic feet of natural gas. The EIA expects total
U.S. marketed natural gas production to increase by 1.5% in 2009 and decline by
3.8% in 2010.The EIA
estimates that the U.S.’s natural gas production level will be approximately 23
trillion cubic feet in calendar year 2030.
 
 We
believe the contract compression services industry in the U.S. will
continue to have growth opportunities due to the following factors, among
others:
 
 •
              aging
      producing natural gas fields will require more compression to continue
      producing the same volume of natural
  gas; and
 
 •
              increased
      production from unconventional sources, which include tight sands, shales
      and coal beds, generally requires more compression than production from
      conventional sources to produce the same volume of natural
      gas.
 
 Our
Performance Trends and Outlook
 
 Beginning
in the second half of 2008, there have been reductions in global economic
activity which have had a significant adverse impact on oil-and-gas-related
commodity prices. Recently, there have been indications that global economic
activity is beginning to rebound and oil prices have increased and natural gas
prices have stabilized. However, we continue to believe the decrease in activity
levels in the energy industry in the U.S. as compared to 2008 will continue to
negatively impact the level of capital spending by our customers and, therefore,
our business activity for the near term.
 
 Our
revenue, earnings and financial position are affected by, among other things,
(i) market conditions that impact demand and pricing for natural gas
compression, (ii) our customers’ decisions to utilize our services rather
than purchase equipment or utilize our competitors’ services, and (iii) the
timing and consummation of acquisitions of additional contract operations
customer contracts and equipment from Exterran Holdings. In particular, many of
our contracts with customers have short initial terms; we cannot be certain that
these contracts will be renewed after the end of the initial contractual term,
and any such nonrenewal, or renewal at a reduced rate, could adversely impact
our results of operations and cash available for distribution.
 
 Given the
current economic environment in the U.S. and anticipated impact of lower
capital spending by customers, we expect a further reduction in demand for our
services. We believe that the current economic environment and the available
supply of idle and underutilized compression equipment owned by our customers
and competitors will continue to negatively impact our ability to improve our
horsepower utilization and revenues in the near term (excluding the impact of
potential transfers of additional contract operations customer contracts and
equipment from Exterran Holdings to us). In addition, because we initially
purchased only contracted equipment from Exterran Holdings, we anticipate that
the average utilization of our contract operations fleet will decrease over time
as some units become idle due to the termination of contract operations service
agreements. A 1% decrease in average utilization of our contract operations
fleet would result in a decrease in our revenue and gross margin (defined as
revenue less cost of sales, excluding depreciation and amortization expense) for
the nine months ended September 30, 2009 of approximately $1.3 million and
$0.7 million, respectively.
 
 Our level
of capital spending depends on the demand for our services and the equipment we
require to render those services to our customers. While the contract operations
services business has historically experienced more stable demand than that for
certain other energy service products and services, our total operating
horsepower decreased by approximately 11% from December 31, 2008 to September
30, 2009, and we expect further horsepower declines during the remainder of 2009
and into 2010.
 
 Pursuant
to the Omnibus Agreement between us and Exterran Holdings, our obligation to
reimburse Exterran Holdings for cost of sales and SG&A expenses is capped
through December 31, 2009 (see Note 5 and Note 13 to the Financial
Statements). During the three months ended September 30, 2009 and 2008, our cost
of sales exceeded this cap by $2.0 million and $3.6 million, respectively.
During the nine months ended September 30, 2009 and 2008, our cost of sales
exceeded this cap by $6.1 million and $10.7 million, respectively. For
the three and nine months ended September 30, 2009 our SG&A expense did not
exceed the cap provided in the Omnibus Agreement. For each of the three and nine
month periods ended September 30, 2008, our SG&A expense exceeded the cap
provided in the Omnibus Agreement by $16,000.
 
  21
  Exterran
Holdings intends for us to be the primary growth vehicle for its
U.S. contract operations business and intends to offer us the opportunity
to purchase the remainder of its U.S. contract operations business over
time, but is not obligated to do so. Likewise, we are not required to purchase
any additional portions of such business. The consummation of any future
purchase of additional portions of that business and the timing of any such
purchase will depend upon, among other things, our reaching an agreement with
Exterran Holdings regarding the terms of such purchase, which will require the
approval of the conflicts committee of Exterran GP LLC’s board of directors. The
timing of such transactions would also depend on, among other things, market and
economic conditions and the availability to us of debt and equity capital.
Future contributions of assets to us upon consummation of transactions with
Exterran Holdings may increase or decrease our operating performance, financial
position and liquidity. In October
2009, we and Exterran Holdings announced a transaction, which is expected to
close in November 2009, pursuant to which we will acquire from Exterran Holdings
additional contract operations customer service agreements with 18 customers and
a fleet of approximately 900 compressor units used to provide compression
services under those agreements. This discussion of performance trends and
outlook excludes any future potential transfers of additional contract
operations customer contracts and equipment from Exterran Holdings to
us.
 
 Operating
Highlights
 
 The
following table summarizes total available horsepower, total operating
horsepower, average operating horsepower and horsepower utilization
percentages:
 
 Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Total
      Available Horsepower (at period end)
              
              
              1,038,607
              
              
              
              1,017,417
              
              
              
              1,038,607
              
              
              
              1,017,417Total
      Operating Horsepower (at period end)
              
              
              808,275
              
              
              
              909,011
              
              
              
              808,275
              
              
              
              909,011Average
      Operating Horsepower
              
              
              819,152
              
              
              
              828,594
              
              
              
              858,567
              
              
              
              708,010Horsepower
      Utilization:Spot
      (at period end)
              
              
              78
              %
              
              
              89
              %
              
              
              78
              %
              
              
              89
              %Average
              
              
              79
              %
              
              
              89
              %
              
              
              83
              %
              
              
              90
              %
 
 FINANCIAL
RESULTS OF OPERATIONS
 
 The
three months ended September 30, 2009 compared to the three months ended
September 30, 2008
 
 The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income (dollars in thousands):
 
 Three Months Ended September 30,2009
              
              
              2008Revenue
              
              $
              41,317
              
              
              $
              44,390Gross
      margin (1)
              
              
              21,515
              
              
              
              24,490Gross
      margin percentage
              
              
              52
              %
              
              
              55
              %Expenses:Depreciation
      and amortization
              
              $
              9,042
              
              
              $
              7,542Selling,
      general and administrative
              
              
              4,961
              
              
              
              2,423Interest
      expense
              
              
              5,039
              
              
              
              4,967Other
      (income) expense, net
              
              
              324
              
              
              
              —Income
      tax expense
              
              
              141
              
              
              
              147Net
      income
              
              $
              2,008
              
              
              $
              9,411
 
 ____________
 
 (1)
              For
      a reconciliation of gross margin to net income, its most directly
      comparable financial measure, calculated and presented in accordance with
      accounting principles generally accepted in the U.S. (“GAAP”), please read
      Part I, Item 2 (“Management’s Discussion and Analysis of Financial
      Condition and Results of Operations – Non-GAAP Financial Measure”) of this
      report.
 
 Revenue.Average
monthly operating horsepower was 819,152 and 828,594 for the three
months ended September 30, 2009 and 2008, respectively. The decrease in revenue
and gross margin percentage was primarily due to pricing pressure that occurred
during the three months ended September 30, 2009. The decrease in average
monthly operating horsepower was primarily due to a deterioration in the
economic climate and natural gas energy conditions in the U.S.
 
  22
  Gross Margin.  The
decrease in gross margin (defined as revenue less cost of sales, excluding
depreciation and amortization expense) for the three months ended September 30,
2009 compared to the three months ended September 30, 2008 was primarily due to
the decrease in revenue caused by pricing pressure experienced in the three
months ended September 30, 2009 compared to the three months ended September 30,
2008.
 
 Depreciation and
Amortization.The increase in depreciation and amortization
expense was primarily due to the additional depreciation on compression
equipment additions, including the assets acquired in the July 2008 Contract
Operations Acquisition.
 
 SG&A.  SG&A
expenses are primarily comprised of an allocation of expenses, including costs
for personnel support and related expenditures, from Exterran Holdings. SG&A
expenses represented 12% and 5% of revenues for the three months ended September
30, 2009 and 2008, respectively. The increase in SG&A expense and SG&A
expense as a percentage of revenue was primarily due to the difference in the
impact of the re-measurement of fair value of our unit options and phantom
units. We recorded $67,000 in SG&A expense related to the
re-measurement of fair value of the phantom units for the three months ended
September 30, 2009 and we recorded a $3.6 million reduction in SG&A
expense related to the re-measurement of fair value of the unit options and
phantom units for the three months ended September 30, 2008. We have granted
unit options and phantom units to individuals who are not our employees, but who
are employees of Exterran Holdings and its subsidiaries that provide services to
us. Because we grant unit options and phantom units to non-employees, we are
required to re-measure the fair value of the unit options and certain phantom
units each period and to record a cumulative adjustment of the expense
previously recognized.
 
 Interest
Expense.  The increase in interest expense was primarily due to
a higher average balance of long-term debt for the third quarter of 2009
resulting from the additional debt incurred for the July 2008 Contract
Operations Acquisition. This increase was partially offset by a decrease in
our weighted average effective interest rate, including the impact of interest
rate swaps, to 5.0% for the three months ended September 30, 2009 from 6.3% for
the three months ended September 30, 2008.
 
 Other (Income) Expense,
Net.The increase in other (income) expense, net was due to
$0.3 million of transaction costs associated with the November 2009 Contract
Operations Acquisition recorded in the current year period.
 
 Income Tax
Expense.  Income tax expense primarily reflects taxes recorded
under the Texas margins tax and the Michigan business tax on revenue earned
within the states of Texas and Michigan.
 
 The
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008
 
 The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income (dollars in thousands):
 
 Nine Months Ended September 30,2009
              
              
              2008Revenue
              
              $
              134,627
              
              
              $
              114,656Gross
      margin (1)
              
              
              72,467
              
              
              
              62,676Gross
      margin percentage
              
              
              54
              %
              
              
              55
              %Expenses:Depreciation
      and amortization
              
              $
              26,054
              
              
              $
              19,027Fleet
      impairment
              
              
              2,995
              
              
              
              —Selling,
      general and administrative
              
              
              16,513
              
              
              
              10,169Interest
      expense
              
              
              14,663
              
              
              
              12,213Other
      (income) expense, net
              
              
              351
              
              
              
              (1,139
              )Income
      tax expense
              
              
              424
              
              
              
              369Net
      income
              
              $
              11,467
              
              
              $
              22,037
 ____________
 
 (1)
              For a reconciliation of gross
      margin to net income, its most directly comparable financial measure,
      calculated and presented in accordance with GAAP, please read Part I, Item
      2 (“Management’s Discussion and Analysis of Financial Condition and
      Results of Operations – Non-GAAP Financial Measure”) of this
      report.
 
 Revenue.Average
monthly operating horsepower was 858,567 and 708,010 for the nine months ended
September 30, 2009 and 2008, respectively. The increase in revenue and average
monthly operating horsepower was primarily due to the inclusion of the results
from the assets acquired in the July 2008 Contract Operations Acquisition. The
inclusion of the results from the assets acquired in the July 2008 Contract
Operations Acquisition accounted for approximately $35.9 million of the
increase in revenue, partially offset by a decrease in horsepower utilization
and lower pricing, for the nine months ended September 30, 2009 compared to the
nine months ended September 30, 2008. The decrease in horsepower utilization was
due to a deterioration in the economic climate and natural gas energy conditions
in the U.S.
 
 23
 
 Gross Margin.  The
increase in gross margin (defined as revenue less cost of sales, excluding
depreciation and amortization expense) for the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008 was primarily due to
the inclusion of the results from the assets acquired in the July 2008 Contract
Operations Acquisition, partially offset by a decrease in horsepower utilization
and lower pricing, for the nine months ended September 30, 2009 compared to the
nine months ended September 30, 2008.
 
 Depreciation and
Amortization.The increase in depreciation and amortization
expense was primarily due to the additional depreciation on compression
equipment additions, including the assets acquired in the July 2008 Contract
Operations Acquisition.
 
 Fleet Impairment.As a result
of a decline in market conditions and operating horsepower, during the second
quarter of 2009, we reviewed the idle compression assets used in our
business for units that are not of the type, configuration, make or model that
are cost efficient to maintain and operate. As a result of that review, we
decided that 50 units representing 8,700 horsepower would be retired from the
fleet.
 
 We
performed a cash flow analysis of the expected proceeds from the disposition of
these units to determine the fair value of the fleet assets we will no longer
utilize in our operations. The net book value of these assets exceeded the fair
value by $3.0 million, and the difference was recorded as a long-lived
asset impairment in the second quarter of 2009. The impairment is recorded in
Fleet impairment expense in the consolidated statements of
operations.
 SG&A.  SG&A
expenses are primarily comprised of an allocation of expenses, including costs
for personnel support and related expenditures, from Exterran Holdings. The
increase in SG&A expense was primarily due to the impact of re-measuring the
fair value of our phantom units and increased costs associated with the increase
in revenues after the July 2008 Contract Operations Acquisition. SG&A
expenses represented 12% and 9% of revenues for the nine months ended September
30, 2009 and 2008, respectively. The increase in SG&A expense as a
percentage of revenue was primarily due to the difference in the impact of the
re-measurement of fair value of our unit options and phantom units. We recorded
$0.1 million in SG&A expense related to the re-measurement of fair value of
the phantom units for the nine months ended September 30, 2009 and we recorded a
reduction to SG&A expense of $3.8 million related to the re-measurement of
fair value of the unit options and phantom units for the nine months ended
September 30, 2008. We have granted unit options and phantom units to
individuals who are not our employees, but who are employees of Exterran
Holdings and its subsidiaries that provide services to us. Because we grant unit
options and phantom units to non-employees, we are required to re-measure the
fair value of the unit options and certain phantom units each period and to
record a cumulative adjustment of the expense previously
recognized.
 
 Interest
Expense.  The increase in interest expense was primarily due to
a higher average balance of long-term debt for the nine months ended September
30, 2009 resulting from the additional debt incurred for the July 2008 Contract
Operations Acquisition. This increase was partially offset by a decrease in
our weighted average effective interest rate, including the impact of interest
rate swaps, to 4.8% for the nine months ended September 30, 2009, from 5.1% for
the nine months ended September 30, 2008.
 
 Other (Income) Expense, Net.The change in other (income) expense, net was due to a $1.1 million gain
on the sale of used compression equipment during the nine months ended September
30, 2008 and by $0.3 million of transaction costs associated with the November
2009 Contract Operations Acquisition recorded in the current year
period.
 
 Income Tax
Expense.  Income tax expense primarily reflects taxes recorded
under the Texas margins tax and the Michigan business tax. The increase in
income tax expense for the nine months ended September 30, 2009 was primarily
due to an increase in our revenue earned within the states of Texas and
Michigan.
 
  24
  LIQUIDITY
AND CAPITAL RESOURCES
 
 The
following tables summarize our sources and uses of cash for the nine months
ended September 30, 2009 and 2008, and our cash and working capital as of the
end of the periods presented (in thousands):
 
 Nine Months Ended September 30,2009
              
              
              2008Net
      cash provided by (used in):Operating
      activities
              
              $
              50,177
              
              
              $
              26,126Investing
      activities
              
              
              (17,119
              )
              
              
              (15,478
              )Financing
      activities
              
              
              (35,972
              )
              
              
              (12,653
              )Net
      change in cash and cash equivalents
              
              $
              (2,914
              )
              
              $
              (2,005
              )
 
 September
      30,
                  2009
              
              
              December
      31,
                  2008Cash
      and cash equivalents
              
              $
              330
              
              
              $
              3,244Working
      capital
              
              
              9,113
              
              
              
              22,284
 
 Operating
Activities.  The increase in net cash provided by operating
activities was primarily the result of improvements in working capital due to
accounts receivable, trade collections in the nine months ended September 30,
2009 compared to an increase in accounts receivable, trade for the nine months
ended September 30, 2008.
 
 Investing Activities.The increase in cash used in investing activities during the nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008 was primarily attributable to $5.3 million in proceeds from the sale of
used compression equipment in the nine months ended September 30, 2008. This
increase was partially offset by a decrease capital expenditures and amounts due
from affiliates, net in the nine months ended September 30, 2009. Capital
expenditures for the nine months ended September 30, 2009 were $14.7 million,
consisting of $3.4 million for fleet growth capital and $11.3 million for
compressor maintenance activities. Included in our fleet growth capital
expenditures for the nine months ended September 30, 2009 were new compression
equipment purchases of $1.3 million from Exterran
Holdings.
 
 Financing
Activities.  The increase in cash used in financing activities
during the nine months ended September 30, 2009 compared to the nine months
ended September 30, 2008 was primarily the result of an increase in net
repayments under our debt facility.
 
 Capital
Requirements.  The natural gas compression business is capital
intensive, requiring significant investment to maintain and upgrade existing
operations. Our capital spending is dependent on the demand for our services and
the availability of the type of compression equipment required for us to render
those services to our customers. Our capital requirements have consisted
primarily of, and we anticipate that our capital requirements will continue to
consist of, the following:
 
 •
              maintenance
      capital expenditures, which are capital expenditures made to maintain the
      existing operating capacity of our assets and related cash flows further
      extending the useful lives of the
  assets; and
 
 •
              expansion
      capital expenditures, which are capital expenditures made to expand or to
      replace partially or fully depreciated assets or to expand the operating
      capacity or revenue generating capabilities of existing or new assets,
      whether through construction, acquisition or
  modification.
 
 We
currently plan to spend approximately $19 million to $22 million in net
capital expenditures during 2009 including (1) $4 million to
$5 million on growth capital for fleet equipment and (2) approximately
$15 million to $17 million on equipment maintenance capital.
 
 In
addition, our capital requirements include funding distributions to our
unitholders. We anticipate such distributions will be funded through cash
provided by operating activities and borrowings under our credit facility and
that we have the ability to generate adequate amounts of cash to meet our
short-term and long-term needs. Given our objective of long-term growth through
acquisitions, expansion capital expenditure projects and other internal growth
projects, we anticipate that over time we will continue to invest capital to
grow and acquire assets. We will actively consider a variety of assets for
potential acquisitions and expansion projects. We expect to fund future capital
expenditures with borrowings under our credit facility, the issuance of
additional partnership units, and future debt offerings as appropriate, given
market conditions. The timing of future capital expenditures will be based on
the economic environment, including the availability of debt and equity
capital.
 
 25
 
 Our Ability to Grow Depends on Our
Ability to Access External Expansion Capital.  We expect
that we will rely primarily upon external financing sources, including our
revolving credit facility and our new $150 million asset-backed securitization
facility (the “2009 ABS Facility”) and the issuance of debt and equity
securities, rather than cash reserves established by our general partner, to
fund our acquisitions and expansion capital expenditures. As a result of the
tightening of the credit markets and the economic slowdown, our ability to
access the capital markets may be restricted at a time when we would like, or
need, to do so, which could have an impact on our ability to grow. Additionally,
our ability to utilize the issuance of equity securities as a source of
expansion capital is currently limited by our credit agreement, which requires
us to use the cash proceeds from any equity offering first to repay our $117.5
million term loan facility in full.We expect that we will
distribute all of our available cash to our unitholders. Available cash is
reduced by cash reserves established by our general partner to provide for the
proper conduct of our business, including future capital expenditures. To the
extent we are unable to finance growth externally and we are unwilling to
establish cash reserves to fund future acquisitions, our cash distribution
policy will significantly impair our ability to grow. Because we distribute all
of our available cash, we may not grow as quickly as businesses that reinvest
their available cash to expand ongoing operations. To the extent we issue
additional units in connection with any acquisitions or expansion capital
expenditures, the payment of distributions on those additional units may
increase the risk that we will be unable to maintain or increase our per unit
distribution level, which in turn may impact the available cash that we have to
distribute for each unit. There are no limitations in our partnership agreement
or in the terms of our revolving credit facility or the 2009 ABS Facility on our
ability to issue additional units, including units ranking senior to our common
units.
 
 Long- term
Debt.  In October 2006, we, as guarantor, and EXLP Operating
LLC, our wholly-owned subsidiary, entered into a five-year senior secured credit
agreement. The revolving credit facility under the credit agreement initially
consisted of a $225.0 million revolving credit facility that was expanded
to $315.0 million in July 2007.
 
 Our
revolving credit facility bears interest at a base rate, or LIBOR, at our
option, plus an applicable margin, as defined in the credit agreement. At
September 30, 2009, all amounts outstanding were LIBOR loans and the applicable
margin was 1.75%. The weighted average interest rate on the outstanding balance
at September 30, 2009, excluding the effect of interest rate swaps, was
2.2%.
 
 In May
2008, we entered into an amendment to our senior secured credit facility that
increased the aggregate commitments under that facility to provide for a
$117.5 million term loan facility that matures in October 2011. Concurrent
with the closing of the July 2008 Contract Operations Acquisition, the
$117.5 million term loan was funded and $58.3 million was drawn on our
revolving credit facility, which together were used to repay the debt assumed
from Exterran Holdings in the acquisition and to pay other costs incurred in the
acquisition. The $117.5 million term loan is non-amortizing but must be
repaid with the net cash proceeds from any future equity offerings until paid in
full. Subject to certain conditions, at our request, and with the approval of
the lenders, the aggregate commitments under the senior secured credit facility
may be increased by an additional $17.5 million. This amount will be
increased on a dollar-for-dollar basis with each repayment under the term loan
facility.
 
 The term
loan bears interest at a base rate or LIBOR, at our option, plus an applicable
margin. At September 30, 2009, all amounts outstanding were LIBOR loans and
the applicable margin was 2.25%. Borrowings under the term loan are subject to
the same credit agreement covenants as our revolving credit facility, except for
an additional covenant requiring mandatory prepayment of the term loan from net
cash proceeds of any future equity offerings, on a dollar-for-dollar basis. The
weighted average interest rate on the outstanding balance of the term loan at
September 30, 2009, excluding the effect of interest rate swaps, was
2.5%.
 
 As of
September 30, 2009, we had approximately $267.0 million outstanding and $48.0
million available under our revolving credit facility. All amounts under the
revolving credit facility mature in October 2011.
 
 Our senior secured credit facility
contains various covenants with which we must comply, including restrictions on
the use of proceeds from borrowings and limitations on our ability to incur
additional debt or sell assets, make certain investments and acquisitions, grant
liens and pay dividends and distributions. We must maintain various consolidated
financial ratios, including a ratio of EBITDA (as defined in the credit
agreement) to Total Interest Expense (as defined in the credit agreement) of not
less than 2.5 to 1.0, and a ratio of Total Debt (as defined in the credit
agreement) to EBITDA of not greater than 5.0 to 1.0. As of September 30, 2009,
we maintained a 4.3 to 1.0 EBITDA to Total Interest Expense ratio and a 4.7 to
1.0 Total Debt to EBITDA ratio. If we continue to experience a significant
deterioration in the demand for our services due to the current economic
environment in the U.S., and we are unable to consummate further acquisitions
(including the November 2009 Contract Operations Acquisition) from Exterran
Holdings, amend our senior secured credit facility or restructure our debt,
we estimate that we could be in violation of the maximum Total Debt to
EBITDA covenant ratio contained in our senior secured credit facility as early
as the end of 2009. As of
September 30, 2009, we were in compliance with all financial covenants under the
credit agreement. For further information regarding the covenants of our senior
secured credit facility, see Part II, Item 1A (“Risk Factors”) of this
report.
 
 26
  In
connection with the transaction described above in the section entitled
“November 2009 Contract Operations Acquisition”, we entered into the 2009
ABS Facility, a portion of which is expected to be used to fund the November
2009 Contract Operations Acquisition. The 2009 ABS Facility notes are revolving
in nature and are payable in July 2013. Interest and fees payable to the
noteholders will accrue on these notes at a variable rate consisting of an
applicable margin of 3.5% plus, at our option, either LIBOR or a base rate.
Repayment of the 2009 ABS Facility notes has been secured by a pledge of all of
the assets of EXLP ABS 2009 LLC, and its subsidiaries consisting primarily
of compression services contracts and a fleet of natural gas compressor units.
As of November 5, 2009, none of the 2009 ABS Facility notes has been
issued.
 Distributions to
Unitholders.  Our partnership agreement requires us to
distribute all of our “available cash” quarterly. Under the partnership
agreement, available cash is defined generally to mean, for each fiscal quarter,
(i) our cash on hand at the end of the quarter in excess of the amount of
reserves our general partner determines is necessary or appropriate to provide
for the conduct of our business, to comply with applicable law, any of our debt
instruments or other agreements or to provide for future distributions to our
unitholders for any one or more of the upcoming four quarters, plus,
(ii) if our general partner so determines, all or a portion of our cash on
hand on the date of determination of available cash for the
quarter.
 
 On
October 30, 2009, the board of directors of Exterran GP LLC approved a cash
distribution of $0.4625 per limited partner unit, or approximately
$9.3 million, including distributions to our general partner on its
incentive distribution rights. The distribution covers the time period from
July 1, 2009 through September 30, 2009. The record date for this
distribution is November 9, 2009 and payment is expected to occur on November
13, 2009.
 
 NON-GAAP
FINANCIAL MEASURE
 
 We define
gross margin as total revenue less cost of sales (excluding depreciation and
amortization expense). Gross margin is included as a supplemental disclosure
because it is a primary measure used by our management as it represents the
results of revenue and cost of sales (excluding depreciation and amortization
expense), which are key components of our operations. We believe gross margin is
important because it focuses on the current operating performance of our
operations and excludes the impact of the prior historical costs of the assets
acquired or constructed that are utilized in those operations, the indirect
costs associated with our SG&A activities, the impact of our financing
methods and income tax expense. Depreciation and amortization expense may not
accurately reflect the costs required to maintain and replenish the operational
usage of our assets and therefore may not portray the costs from current
operating activity. As an indicator of our operating performance, gross margin
should not be considered an alternative to, or more meaningful than, net income
as determined in accordance with GAAP. Our gross margin may not be comparable to
a similarly titled measure of another company because other entities may not
calculate gross margin in the same manner.
 
 Gross
margin has certain material limitations associated with its use as compared to
net income. These limitations are primarily due to the exclusion of interest
expense, depreciation and amortization expense and SG&A expense. Each of
these excluded expenses is material to our consolidated results of operations.
Because we intend to finance a portion of our operations through borrowings,
interest expense is a necessary element of our costs and our ability to generate
revenue. Additionally, because we use capital assets, depreciation expense is a
necessary element of our costs and our ability to generate revenue, and SG&A
expenses are necessary costs to support our operations and required corporate
activities. To compensate for these limitations, management uses this non-GAAP
measure as a supplemental measure to other GAAP results to provide a more
complete understanding of our performance.
 
  27
  The
following table reconciles our net income to gross margin (in
thousands):
 
 Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      income
              
              $
              2,008
              
              
              $
              9,411
              
              
              $
              11,467
              
              
              $
              22,037Depreciation
      and amortization
              
              
              9,042
              
              
              
              7,542
              
              
              
              26,054
              
              
              
              19,027Fleet
      impairment
              
              
              —
              
              
              
              —
              
              
              
              2,995
              
              
              
              —Selling,
      general and administrative
              
              
              4,961
              
              
              
              2,423
              
              
              
              16,513
              
              
              
              10,169Interest
      expense
              
              
              5,039
              
              
              
              4,967
              
              
              
              14,663
              
              
              
              12,213Other
      (income) expense, net
              
              
              324
              
              
              
              —
              
              
              
              351
              
              
              
              (1,139
              )Income
      tax expense
              
              
              141
              
              
              
              147
              
              
              
              424
              
              
              
              369Gross
      margin
              
              $
              21,515
              
              
              $
              24,490
              
              
              $
              72,467
              
              
              $
              62,676
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We have
no material off-balance sheet arrangements.
 
  28
  ITEM
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Variable
Rate Debt
 
 We are
exposed to market risk due to variable interest rates under our financing
arrangements.
 
 As of
September 30, 2009, after taking into consideration interest rate swaps, we had
approximately $129.5 million of outstanding indebtedness that was
effectively subject to floating interest rates. A 1.0% increase in interest
rates would result in an annual increase in our interest expense of
approximately $1.3 million.
 
 For
further information regarding our use of interest rate swap agreements to manage
our exposure to interest rate fluctuations on a portion of our debt obligations,
see Notes 9 and 10 to the Financial Statements.
 
 ITEM
4. Controls and Procedures
 
 Management’s
Evaluation of Disclosure Controls and Procedures
 
 As
required by Rule 13a-15(b) under the Exchange Act, the management of
Exterran GP LLC, the general partner of our general partner, including the Chief
Executive Officer and Chief Financial Officer, evaluated as of the end of the
period covered by this report the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures, as of the end of the period covered
by this report, were effective for the purpose of ensuring that information
required to be disclosed by us in this report is recorded, processed, summarized
and reported within the time periods specified by the rules and forms under the
Exchange Act and is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in our internal control over financial reporting during the last
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
 
 
  29
  PART
II.  OTHER INFORMATION
 
 ITEM
1.  Legal Proceedings
 
 In the
ordinary course of business, we are involved in various pending or threatened
legal actions. While management is unable to predict the ultimate outcome of
these actions, it believes that any ultimate liability arising from these
actions will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows; however, because of the inherent
uncertainty of litigation, we cannot provide assurance that the resolution of
any particular claim or proceeding to which we are a party will not have a
material adverse effect on our financial position, results of operations or cash
flows for the period in which the resolution occurs.
 
 ITEM
1A. Risk Factors
 
 There
have been no material changes or updates in our risk factors that were
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2008, except as follows:
 
 Covenants
in our senior secured credit facility may impair our ability to operate our
business.
 
 Our
senior secured credit facility includes covenants limiting our ability to make
distributions, incur indebtedness, grant liens, merge, make loans, acquisitions,
investments or dispositions and engage in transactions with affiliates. We must
maintain various consolidated financial ratios, including a ratio of EBITDA (as
defined in the credit agreement) to Total Interest Expense (as defined in the
credit agreement) of not less than 2.5 to 1.0, and a ratio of Total Debt (as
defined in the credit agreement) to EBITDA of not greater than 5.0 to 1.0. As of
September 30, 2009, we maintained a 4.3 to 1.0 EBITDA to Total Interest Expense
ratio and a 4.7 to 1.0 Total Debt to EBITDA ratio. As of September 30, 2009, we
were in compliance with all financial covenants under our credit
agreement.
 
 If we continue to experience a
significant deterioration in the demand for our services due to the current
economic environment in the U.S., and we are unable to consummate further
acquisitions (including the November 2009 Contract Operations Acquisition) from
Exterran Holdings, amend our senior secured credit facility or restructure our
debt, we estimate that we could be in violation of the maximum
Total Debt to EBITDA covenant ratio contained in our senior secured credit
facility as early as the end of 2009. The breach of any of our covenants
could result in a default under our credit agreement which could cause our
indebtedness under our credit agreement to become due and payable. If the
repayment obligations on any of our indebtedness were to be so accelerated, we
may not be able to repay the debt or refinance the debt on acceptable terms, and
our financial position would be materially adversely
affected.
 
 The
tax treatment of publicly traded partnerships or an investment in our common
units could be subject to potential legislative, judicial or administrative
changes and differing interpretations, possibly on a retroactive
basis.
 
 The
present U.S. federal income tax treatment of publicly traded partnerships,
including us, or an investment in our common units may be modified by
administrative, legislative or judicial interpretation at any time. For example,
judicial interpretations of the U.S. federal income tax laws may have a direct
or indirect impact on our status as a partnership and, in some instances, a
court’s conclusions may heighten the risk of a challenge regarding our status as
a partnership. Moreover, members of Congress have considered substantive
changes to the existing U.S. federal income tax laws that would have affected
publicly traded partnerships. Any modification to the U.S. federal income tax
laws and interpretations thereof may or may not be applied retroactively.
Although the legislation considered would not have appeared to affect our tax
treatment as a partnership, we are unable to predict whether any of these
changes, or other proposals, will be reconsidered or will ultimately be enacted.
Any such changes or differing judicial interpretations of existing laws could
negatively impact the value of an investment in our common units.
 
 New
proposed regulations under the Clean Air Act, if implemented, could result in
increased compliance costs.
 
 In March
2009, the Environmental Protection Agency (“EPA”) formally proposed new
regulations under the Clean Air Act (“CAA”) to control emissions of hazardous
air pollutants from existing stationary reciprocal internal combustion engines.
The rule, if and when finalized by the EPA, may require us to undertake
significant expenditures, including expenditures for installing pollution
control equipment such as oxidation catalysts or non-selective catalytic
reduction equipment, imposing more stringent maintenance practices, and
implementing additional monitoring practices on a significant percentage of our
natural gas compressor engine fleet. At this point, we cannot predict the final
regulatory requirements or the cost to comply with such requirements. The
comment period on the proposed regulation ended on June 3, 2009. Under the
proposal, compliance will be required by three years from the effective
 
 30
 
 date of
the final rule. This proposed rule and any other new regulations requiring the
installation of more sophisticated emission control equipment could have a
material adverse impact on our business, financial condition, results of
operations and cash flows.
 
 Climate
change legislation and regulatory initiatives could result in increased
compliance costs.
 
 Scientific
studies suggest that emissions of certain gases, commonly referred to as
“greenhouse gases,” such as carbon dioxide and methane, may be contributing to
climatic changes in the Earth’s atmosphere. In response to such studies,
President Obama has expressed support for, and it is anticipated that the U.S.
Congress will continue actively to consider, legislation to restrict or regulate
emissions of greenhouse gases. The American Clean Energy and Security Act of
2009, narrowly approved by the U.S. House of Representatives on June 26, 2009,
could if enacted by the full Congress require greenhouse gas emissions
reductions by covered sources of as much as 17% from 2005 levels by 2020 and by
as much as 83% by 2050. The debate over federal climate legislation has
moved on to the Senate, which is considering the Clean Energy Jobs and American
Power Act, similar but somewhat more stringent legislation that was introduced
in late September 2009. In addition, more than one-third of the states,
either individually or through multi-state regional initiatives, have begun to
address greenhouse gas emissions, primarily through the planned development of
emission inventories or regional greenhouse gas cap and trade programs. Although
most of the state-level initiatives have to date been focused on large sources
of greenhouse gas emissions, such as electric power plants, it is possible that
small sources such as gas-fired compressors could be subject to greenhouse
gas-related regulation. Depending on the particular program, we could be
required to control emissions or to purchase and surrender allowances for
greenhouse gas emissions resulting from our operations.
 
 Also, as
a result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts, et al. v. EPA,
the EPA may regulate greenhouse gas emissions from mobile sources such as new
motor vehicles, even if Congress does not adopt new legislation specifically
addressing emissions of greenhouse gases. The Court’s holding in Massachusettsthat greenhouse
gases including carbon dioxide fall under the CAA’s definition of “air
pollutant” may also result in future regulation of carbon dioxide and other
greenhouse gas emissions from stationary sources. In July 2008, the EPA released
an “Advance Notice of Proposed Rulemaking” regarding possible future regulation
of greenhouse gas emissions under the CAA, in response to the Supreme Court’s
decision in Massachusetts. In the notice,
the EPA evaluated the potential regulation of greenhouse gases under several
different provisions of the CAA, but did not propose any specific, new
regulatory requirements for greenhouse gases. The notice and three other recent
regulatory developments, along with recent statements by the Administrator of
the EPA, suggest that the EPA is beginning to pursue a path toward the
regulation of greenhouse gas emissions under its existing CAA authority. First,
in April 2009, the EPA proposed a new rule requiring approximately 13,000
facilities comprising a substantial percentage of annual U.S. greenhouse gas
emissions to inventory and report their greenhouse gas emissions to the EPA
beginning in 2011. That rule was finalized in late September 2009 and, at least
for now, does not apply to oil and gas systems. Second, also in April 2009, the
EPA responded to the Massachusetts case by issuing
a proposed “endangerment finding” under section 202(a)(1) of the CAA concluding
that greenhouse gas emissions from new motor vehicles are reasonably anticipated
to endanger public health and welfare. If finalized, this finding may trigger a
variety of regulatory consequences including obligations on the EPA to impose
limits on greenhouse gas emissions from new motor vehicles. Further, the
endangerment finding could be used by the EPA as a basis to impose limits on
greenhouse gas emissions from certain categories of stationary sources. Both
proposals are subject to a period of public comment, may or may not be adopted
in the form proposed, and may be subject to judicial challenges upon adoption.
Third, the EPA in late September 2009 proposed a rule that would provide for the
tailored application of the agency's major air permitting programs to facilities
– generally large industrial facilities of the type covered by the inventory
rule described above – that annually emit over 25,000 tons of greenhouse gases.
Although it is not possible at this time to predict how Congressional or state
legislation that may be enacted or how these or other proposed regulations that
may be adopted to address greenhouse gas emissions would impact our business,
any such new federal, state or local regulation of carbon dioxide or other
greenhouse gas emissions that may be imposed in areas in which we conduct
business could result in increased compliance costs or additional operating
restrictions, and could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
 
  31
  ITEM 6. Exhibits
 
 ExhibitNo.
              
              Description2.1
              
              Contribution,
      Conveyance and Assumption Agreement, dated June 25, 2008, by and
      among Exterran Holdings,Inc.,
      Hanover Compressor Company, Hanover Compression General
                Holdings,
      LLC,Exterran
      Energy Solutions,L.P.,
      Exterran ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH
      GP LP LLC,Exterran
      GP LLC, EXH MLP LP
                LLC,
      ExterranGeneral
      Partner, L.P., EXLPOperating
      LLC, EXLP LeasingLLC
      and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to
      the Registrant’s Current
                Report
      onForm8-K
      filed on June 26, 20082.2
              
              Contribution,
      Conveyance and Assumption Agreement, dated October 2, 2009, by and
      among Exterran Holdings,Inc.,
      Exterran Energy Corp., Exterran General Holdings LLC,
                Exterran
      EnergySolutions,
      L.P., EES LeasingLLC,
      EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner,
      L.P., EXLP OperatingLLC,
      EXLP Leasing LLC and
                Exterran
      Partners, L.P.,incorporated
      by reference to Exhibit 2.1 to the Registrant’sCurrent
      Report on Form 8-K filed on October 5, 20093.1
              
              Certificate
      of Limited Partnership of Universal Compression Partners, L.P.,
      incorporated by  reference toExhibit 3.1
      to the Registrant’s Registration Statement on Form S-1
                filed
      on  June 27, 20063.2
              
              Certificate
      of Amendment to Certificate of Limited Partnership of Universal
      Compression Partners, L.P. (nowExterran
      Partners, L.P.), dated as of August 20, 2007, incorporated by
                referencetoExhibit 3.1
      to the Registrant’sCurrent
      Report on Form 8-K filed on August 24, 20073.3
              
              First
      Amended and Restated Agreement of Limited Partnership of Exterran
      Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to
      the Registrant’s Quarterly Report on form 10-Q for the quarter ended March
      31, 20083.4
              
              Certificate
      of Partnership of UCO General Partner, LP, incorporated by reference to
      Exhibit 3.3 to theRegistrant’s
      Registration Statement on Form S-1 filed on June 27,
      20063.5
              
              Amended
      and Restated Limited Partnership Agreement of UCO General Partner, LP,
      incorporated by reference to Exhibit 3.2 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 20063.6
              
              Certificate
      of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5
      to the Registrant’s Registration Statement on Form S-1 filed
      June 27, 20063.7
              
              Amended
      and Restated Limited Liability Company Agreement of UCO GP, LLC,
      incorporated by reference to Exhibit 3.3 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 200631.1
              *
              Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of 193431.2
              *
              Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of 193432.1
              *
              Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              *
              Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 ____________
 
 *
              Filed
      herewith.
 
  32
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 Exterran
      Partners, L.P.By:
      EXTERRAN GENERAL PARTNER, L.P.its
      General PartnerBy:
      EXTERRAN GP LLCits
      General PartnerDate:
      November 5, 2009
              By:
              /s/ DAVID S.
      MILLERDavid
      S. MillerVice
      President and Chief Financial Officer (Principal Financial
      Officer)By:
              /s/ KENNETH R.
      BICKETTKenneth
      R. BickettVice
      President — Finance and Accounting
                (Principal
      Accounting Officer)
 
  33
  Index
to Exhibits
 
 ExhibitNo.
              
              Description2.1
              
              Contribution,
      Conveyance and Assumption Agreement, dated June 25, 2008, by and
      among Exterran Holdings,Inc.,
      Hanover Compressor Company, Hanover Compression General
                Holdings,
      LLC, ExterranEnergy
      Solutions,L.P.,
      Exterran ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH
      GP LP LLC,Exterran
      GP LLC, EXH MLP LP
                LLC,
      ExterranGeneral
      Partner, L.P.,EXLP
      Operating LLC,EXLP
      LeasingLLC
      and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to
      the Registrant’s Current
                Report
      onForm8-K
      filed on June 26, 20082.2
              
              Contribution,
      Conveyance and Assumption Agreement, dated October 2, 2009, by and
      among Exterran Holdings,Inc.,
      Exterran Energy Corp., Exterran General Holdings LLC,
                Exterran
      Energy Solutions, L.P.,EES
      LeasingLLC,
      EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner,
      L.P., EXLP OperatingLLC,
      EXLP Leasing LLC and
                Exterran
      Partners, L.P.,incorporated
      by reference to Exhibit2.1
      to the Registrant’sCurrent
      Report on Form 8-K filed on October 5, 20093.1
              
              Certificate
      of Limited Partnership of Universal Compression Partners, L.P.,
      incorporated by  reference toExhibit 3.1
      to the Registrant’s Registration Statement on Form S-1
                filed
      on  June 27, 20063.2
              
              Certificate
      of Amendment to Certificate of Limited Partnership of Universal
      Compression Partners, L.P. (nowExterran
      Partners, L.P.), dated as of August 20, 2007, incorporated by
                referenceto
      Exhibit 3.1 to theRegistrant’sCurrent
      Report on Form 8-K filed on August 24, 20073.3
              
              First
      Amended and Restated Agreement of Limited Partnership of Exterran
      Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to
      the Registrant’s Quarterly Report on form 10-Q for the quarter ended March
      31, 20083.4
              
              Certificate
      of Partnership of UCO General Partner, LP, incorporated by reference to
      Exhibit 3.3 to theRegistrant’s
      Registration Statement on Form S-1 filed on June 27,
      20063.5
              
              Amended
      and Restated Limited Partnership Agreement of UCO General Partner, LP,
      incorporated by reference to Exhibit 3.2 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 20063.6
              
              Certificate
      of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5
      to the Registrant’s Registration Statement on Form S-1 filed
      June 27, 20063.7
              
              Amended
      and Restated Limited Liability Company Agreement of UCO GP, LLC,
      incorporated by reference to Exhibit 3.3 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 200631.1
              *
              Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of 193431.2
              *
              Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of 193432.1
              *
              Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              *
              Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 ____________
 
 *
              Filed
      herewith.