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, 2008£
            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 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, 2008, there were 12,767,462 common units and 6,325,000
subordinated units outstanding.










TABLE
OF CONTENTS





PagePART
      I. UNAUDITED FINANCIAL INFORMATIONItem
      1. Financial StatementsCondensed
      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
            17Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            28Item
      4. Controls and Procedures
            29PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
            30Item
      1A. Risk Factors
            30Item
      6. Exhibits
            32SIGNATURES
            33













2


PART
I. UNAUDITED FINANCIAL INFORMATION





ITEM
1. Financial
Statements





EXTERRAN
PARTNERS, L.P.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except for unit amounts)


(unaudited)





September  30,
      2008
            
            
            December
      31, 2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            830
            
            
            $
            2,835Accounts
      receivable, net of allowance of $113 and $86, respectively
            
            
            27,521
            
            
            
            13,434Due
      from affiliates, net
            
            
            3,948
            
            
            
            —Total
      current assets
            
            
            32,299
            
            
            
            16,269Compression
      equipment
            
            
            553,346
            
            
            
            393,906Accumulated
      depreciation
            
            
            (123,593)
            
            
            
            (92,938
            )Net
      compression equipment
            
            
            429,753
            
            
            
            300,968Goodwill
            
            
            124,019
            
            
            
            67,152Intangibles
      and other assets, net
            
            
            6,169
            
            
            
            1,699Total
      assets
            
            $
            592,240
            
            
            $
            386,088LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      liabilities:Accounts
      payable, trade
            
            $
            459
            
            
            $
            481Due
      to affiliates, net
            
            
            —
            
            
            
            8,377Accrued
      liabilities
            
            
            5,723
            
            
            
            1,991Accrued
      interest
            
            
            1,772
            
            
            
            3,142Current
      portion of interest rate swaps
            
            
            2,190
            
            
            
            2,170Total
      current liabilities
            
            
            10,144
            
            
            
            16,161Long-term
      debt
            
            
            399,750
            
            
            
            217,000Interest
      rate swaps
            
            
            7,065
            
            
            
            7,768Other
      long-term liabilities
            
            
            130
            
            
            
            —Total
      liabilities
            
            
            417,089
            
            
            
            240,929Commitments
      and contingencies (Note 11)Partners’
      capital:Limited
      partner units:Common
      units, 12,767,462 and 10,353,790 units issued and outstanding,
      respectively
            
            
            217,923
            
            
            
            197,903Subordinated
      units, 6,325,000 units issued and outstanding
            
            
            (41,054)
            
            
            
            (49,411
            )General
      partner units, 2% interest with 389,642 and 340,383 units issued and
      outstanding, respectively
            
            
            6,759
            
            
            
            5,827Accumulated
      other comprehensive loss
            
            
            (8,477)
            
            
            
            (9,160
            )Total
      partners’ capital
            
            
            175,151
            
            
            
            145,159Total
      liabilities and partners’ capital
            
            $
            592,240
            
            
            $
            386,088





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
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            44,390
            
            
            $
            34,711
            
            
            $
            114,656
            
            
            $
            71,100Costs
      and expenses:Cost
      of sales (excluding depreciation and amortization)
            
            
            19,900
            
            
            
            14,986
            
            
            
            51,980
            
            
            
            30,555Depreciation
      and amortization
            
            
            7,542
            
            
            
            5,160
            
            
            
            19,027
            
            
            
            10,910Selling,
      general and administrative
            
            
            2,423
            
            
            
            3,400
            
            
            
            10,169
            
            
            
            9,596Interest
      expense
            
            
            4,967
            
            
            
            3,560
            
            
            
            12,213
            
            
            
            7,786Other
      (income) expense, net
            
            
            —
            
            
            
            (9)
            
            
            
            (1,139)
            
            
            
            (18)Total
      costs and expenses
            
            
            34,832
            
            
            
            27,097
            
            
            
            92,250
            
            
            
            58,829Income
      before income taxes
            
            
            9,558
            
            
            
            7,614
            
            
            
            22,406
            
            
            
            12,271Income
      tax expense
            
            
            147
            
            
            
            132
            
            
            
            369
            
            
            
            182Net
      income
            
            $
            9,411
            
            
            $
            7,482
            
            
            $
            22,037
            
            
            $
            12,089General
      partner interest in net income
            
            $
            432
            
            
            $
            150
            
            
            $
            805
            
            
            $
            242Limited
      partner interest in net income
            
            $
            8,979
            
            
            $
            7,332
            
            
            $
            21,232
            
            
            $
            11,847Weighted
      average limited partners units outstanding:Basic
            
            
            18,305
            
            
            
            16,285
            
            
            
            17,225
            
            
            
            13,875Diluted
            
            
            18,320
            
            
            
            16,334
            
            
            
            17,288
            
            
            
            13,959Earnings
      per limited partner unit—Basic
            
            $
            0.49
            
            
            $
            0.45
            
            
            $
            1.23
            
            
            $
            0.85Earnings
      per limited partner unit—Diluted
            
            $
            0.49
            
            
            $
            0.45
            
            
            $
            1.23
            
            
            $
            0.85





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,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income
            
            $
            9,411
            
            
            $
            7,482
            
            
            $
            22,037
            
            
            $
            12,089Other
      comprehensive income:Interest
      rate swap gain (loss)
            
            
            (182)
            
            
            
            (4,920)
            
            
            
            683
            
            
            
            (3,056)Comprehensive
      income
            
            $
            9,229
            
            
            $
            2,562
            
            
            $
            22,720
            
            
            $
            9,033





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
      30,2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            22,037
            
            
            $
            12,089Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            19,027
            
            
            
            10,910Amortization
      of debt issuance cost
            
            
            246
            
            
            
            171Amortization
      of fair value of acquired interest rate swaps
            
            
            150
            
            
            
            —Unit
      based compensation expense
            
            
            (2,142
            )
            
            
            2,683Gain
      on sale of compression equipment
            
            
            (1,119
            )
            
            
            —Changes
      in assets and liabilities:Accounts
      receivable, trade
            
            
            (14,087
            )
            
            
            (4,248
            )Other
      assets
            
            
            25
            
            
            
            (13
            )Accounts
      payable, trade
            
            
            (257
            )
            
            
            (1,569
            )Other
      liabilities
            
            
            2,246
            
            
            
            4,862Net
      cash provided by operating activities
            
            
            26,126
            
            
            
            24,885Cash
      flows from investing activities:Capital
      expenditures
            
            
            (16,362
            )
            
            
            (23,777
            )Proceeds
      from the sale of compression equipment
            
            
            5,275
            
            
            
            —Increase
      in amounts due from affiliates, net
            
            
            (4,391)
            
            
            
            —Net
      cash used in investing activities
            
            
            (15,478
            )
            
            
            (23,777
            )Cash
      flows from financing activities:Borrowings
      under revolving credit facility
            
            
            74,250
            
            
            
            99,000Repayments
      under revolving credit facility
            
            
            (184,325
            )
            
            
            (163,600
            )Borrowings
      under term loan facility
            
            
            117,500
            
            
            
            —Distributions
      to unitholders
            
            
            (22,928
            )
            
            
            (14,062
            )Net
      proceeds from private placement of common units
            
            
            —
            
            
            
            68,982Debt
      issuance costs
            
            
            (309
            )
            
            
            (184
            )Capital
      contribution from limited and general partner
            
            
            10,662
            
            
            
            6,195Decrease
      in amounts due to affiliates, net
            
            
            (7,503
            )
            
            
            5,982Net
      cash provided by (used in) financing activities
            
            
            (12,653
            )
            
            
            2,313Net
      increase (decrease) in cash and cash equivalents
            
            
            (2,005
            )
            
            
            3,421Cash
      and cash equivalents at beginning of period
            
            
            2,835
            
            
            
            2,430Cash
      and cash equivalents at end of period
            
            $
            830
            
            
            $
            5,851Supplemental
      disclosure of non-cash transactions:Contract
      operations equipment acquired/exchanged, net
            
            $
            133,591
            
            
            $
            134,475Goodwill
      allocated in acquisitions
            
            $
            56,867
            
            
            $
            30,603Intangible
      assets allocated in acquisition
            
            $
            4,592
            
            
            $
            —Debt assumed in acquisition
            
            $
            175,325
            
            
            $
            159,600Common units issued to limited
    partner
            
            $
            19,522
            
            
            $
            2,626General partner units issued to general
      partner
            
            $
            398
            
            
            $
            46





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, which
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, 2007. That report contains a more
comprehensive summary of our accounting policies.  These interim results
are not necessarily indicative of results for a full year.





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 from our
predecessor, Exterran Partners Predecessor (the “Predecessor”). The
Predecessor’s operations were owned by Universal Compression Holdings, Inc. and
its subsidiaries (“Universal Compression Holdings”).





On August
20, 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. In connection
with the merger, Universal Compression Holdings and Hanover became wholly-owned
subsidiaries of Exterran Holdings, Inc. (“Exterran Holdings”), a new company
formed in anticipation of the merger, and thereafter Universal Compression
Holdings, Inc. was merged with and into Exterran Holdings.





Exterran
General Partner, L.P. is our general partner and an indirect wholly-owned
subsidiary of 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.





Unit-Based
Compensation





Effective
June 22, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” which requires
that compensation cost relating to share-based payment transactions be
recognized in the financial statements. That cost is measured based on the fair
value of the equity or liability instruments issued.





Segment
Reporting





SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information,”
established standards for entities to report information about the operating
segments and geographic areas in which they operate. We only operate in one
segment and all of our operations are located in the U.S.





Earnings
Per Limited Partner Unit





The
computation of earnings per limited partner unit is based on the weighted
average number of common and subordinated units outstanding during the
applicable period. When computing earnings per common unit, if there are any
incentive distribution rights (“IDR”) in the period the earnings per common unit
calculation relates to, the amount of the IDR is deducted from net income and
allocated to the general partner.  The remaining amount of net income,
after deducting the IDR, is allocated between the general partner and the
limited




7


partners
based on the percentage of total units owned by each group.  Basic
earnings per limited partner unit is determined by dividing net income, after
deducting the amount allocated to the general partner interest (including any
incentive distribution), by the weighted average number of outstanding limited
partner units during the 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. Under the two-class method, earnings per unit is calculated as if all
of the earnings for the period were distributed under the terms of the
partnership agreement, regardless of whether our general partner has discretion
over the amount of distributions to be made in any particular
period.  This allocation of net income does not impact our total net
income or financial results; however, in periods in which aggregate net income
exceeds distributions, our general partner could be allocated additional
incentive distributions.  For purposes of our earnings per unit
calculation, this could have the impact of reducing net income per limited
partner unit.  However, we make distributions on the basis of
available cash, as defined in our partnership agreement, and determine the
actual incentive distributions allocable to our general partner based on actual
distributions.





Our
common and subordinated units have had the same earnings per unit since our
inception.  If our quarterly earnings per limited partner unit is less
than $0.35 per unit, earnings per subordinated unit will be less than the
earnings per common unit.





The only
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 dilutive effects of unit option and
phantom unit grants outstanding for the three and nine months ended September
30, 2008 were 15,017 units and 63,443 units, respectively. The dilutive effects
of unit option and phantom unit grants outstanding for the three and nine months
ended September 30, 2007 were 49,625 and 84,375 units,
respectively.





Due
To/From Affiliates, Net
  We
have receivables and payables with Exterran Holdings and its subsidiaries. 
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 the
balance sheet.  A reclassification to the December 31, 2007 balance sheet
has been made to provide for a consistent presentation of such
balances.




Reclassifications





Certain
amounts in the prior periods’ financial statements have been reclassified to
conform to the 2008 financial statement classification. These reclassifications
have no impact on our consolidated results of operations, cash flows or
financial position.




2.
RECENT ACCOUNTING PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (the “FASB”) issued
SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair
value, establishes a framework for measuring fair value in accordance with GAAP
and expands disclosures about fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007; however, in February 2008,
the FASB issued a FASB Staff Position that defers 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. We adopted the required
undeferred provisions of SFAS No. 157 on January 1, 2008, and the adoption of
SFAS No. 157 did not have a material impact on our consolidated financial
statements. We do not expect the adoption of the deferred provisions of SFAS No.
157 will have a material impact on our consolidated financial
statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
provided entities the one-time election to measure financial instruments and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis under a fair value option. SFAS No. 159 is
effective for financial statements as of the beginning of the first fiscal year
that begins after November 15, 2007. Its provisions may be applied to an earlier
period only if the following conditions are met: (i) the decision to adopt is
made after the issuance of SFAS No. 159 but within 120 days after the first day
of the fiscal year of adoption, and no financial statements, including
footnotes, for any interim period of the adoption year have yet been issued and
(ii) the requirements of SFAS No. 157 are adopted concurrently with or prior to
the adoption of SFAS No. 159. We adopted SFAS No. 159 on January 1, 2008, and
the adoption of SFAS No. 159 did not impact our consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141 and 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. SFAS No. 141(R) 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 the
exception for the accounting for valuation




8


allowances
on deferred taxes and acquired tax contingencies associated with
acquisitions.  SFAS No. 141(R) amends SFAS No. 109 “Accounting For
Income Taxes” such that adjustments made to valuation allowances on deferred
taxes and acquired tax contingencies associated with acquisitions that closed
prior to the effective date of SFAS No. 141(R) would also apply the provisions
of SFAS No. 141(R). We are currently evaluating the impact that the adoption of
SFAS No. 141(R) will have on our consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS No. 160”).
SFAS No. 160 changes the accounting and reporting for minority interests such
that minority interests will be recharacterized as noncontrolling interests and
will be required to be reported as a component of equity, and requires that
purchases or sales of equity interests that do not result in a change in control
be accounted for as equity transactions and, upon a loss of control, requires
the interest sold, as well as any interest retained, to be recorded at fair
value, with any gain or loss recognized in earnings. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008, with early adoption
prohibited. We do not expect the adoption of SFAS No. 160 will have a material
impact on our consolidated financial statements.





In March
2008, the FASB’s Emerging Issues Task Force reached a consensus on Issue 07-04,
“Application of the Two-Class Method Under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships” (“EITF 07-04”). EITF 07-04 provides
guidance on the accounting treatment of cash distributions in excess of earnings
and earnings in excess of cash distributions. EITF 07-04 concluded 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 incentive distribution rights (“IDR”) holder determined in accordance with
the contractual terms of the partnership agreement. The remaining undistributed
earnings should be allocated to the general partner, limited partners and IDR
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 IDR holder if the IDR holder
has a contractual obligation to share in losses on a basis that is objectively
determinable. EITF 07-04 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. We are currently
evaluating the impact that the adoption of EITF 07-04 will have on our
consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No.
161”). This new standard requires enhanced disclosures for derivative
instruments, including those used in hedging activities. SFAS No. 161 is
effective for fiscal years beginning on or after November 15, 2008. We are
currently evaluating the impact that the adoption of SFAS No. 161 will have on
our consolidated financial statements.





3.
JULY 2007 AND JULY 2008 CONTRACT OPERATIONS ACQUISITIONS





In July
2007, we acquired from Universal Compression Holdings contract operations
customer service agreements with eight customers and a fleet of 722 compressor
units used to provide compression services under those agreements having a net
book value of $132.1 million, net of accumulated depreciation of $37.5 million,
and comprising 281,992 horsepower, or 13% (by then available horsepower) of the
combined U.S. contract operations business relating to natural gas compression
of Universal Compression Holdings and us (the “July 2007 Contract Operations
Acquisition”).  The acquisition also included the allocation of $30.7
million of goodwill associated with the acquired business. Goodwill recorded by
us in connection with the July 2007 Contract Operations Acquisition of $30.7
million was an allocation of Universal Compression Holdings’ goodwill related to
its U.S. contract operations segment. The amount allocated was based on the fair
value of the net assets of Universal Compression Holdings’ U.S. contract
operations segment that were transferred to us compared to the total fair value
of the net assets of Universal Compression Holdings’ U.S. contract operations
segment.




In
connection with the July 2007 Contract Operations Acquisition, we assumed $159.6
million in debt from Universal Compression Holdings and issued to Universal
Compression Holdings’ wholly-owned subsidiaries approximately 2.0 million common
units and 82,220 general partner units. Additionally, we issued approximately
2.0 million common units for proceeds of $69.0 million (net of private placement
fees of $1.0 million) to institutional investors in a private placement. We used
the proceeds from the private placement to repay a portion of the debt assumed
from Universal Compression Holdings.





Additionally,
in connection with the July 2007 Contract Operations Acquisition, we expanded
our revolving credit facility from $225 million to $315 million and borrowed an
additional $90 million under that facility, which we used, along with available
cash, to repay the remainder of the debt assumed from Universal Compression
Holdings in conjunction with this




9


acquisition.
In July 2007, we entered into two interest rate swap agreements related to our
revolving credit facility. Each swap agreement has a notional amount of $40
million. These swap agreements terminate in October 2011 and have a weighted
average fixed rate of 5.33%.





On July
30, 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 49,259 general partner
units.  Concurrent with the closing of the July 2008 Contract
Operations Acquisition, we borrowed $117.5 million under the term loan (see Note
6) 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
connection with this acquisition, we were allocated historical cost goodwill and
finite life intangible assets of Exterran Holdings’ North America contract
operations segment.  The amounts allocated were based on the
preliminary determination of 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 preliminary amount of goodwill allocated to us
in the July 2008 Contract Operations Acquisition was $56.8 million. The
preliminary 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. The preliminary amount of goodwill and finite life intangible
assets allocated to us in connection with the July 2008 Contract Operations
Acquisition is based on preliminary valuations, and our estimates and
assumptions are subject to change upon the completion of management’s review of
final valuations. The final valuation of goodwill and finite life intangible
assets is expected to be completed as soon as practicable, but no later than one
year from the acquisition date, in accordance with GAAP.





Pro
Forma Financial Information





Pro forma
financial information has been included to give effect to the significant
expansion of our compressor fleet and service contracts as the result of
the July 2007 and July 2008 Contract Operations Acquisitions.  The
transactions are presented in the pro forma financial information as though the
transactions had occurred at the beginning of each of the periods presented. The
pro forma financial information 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 pro forma
consolidated financial information was derived by adjusting our historical
financial statements.




The pro
forma financial information reflects the following transactions:




·
            the
      contribution of customer contracts and equipment used to provide
      compression services under those transferred contracts in the July
      2007 Contract Operations Acquisition from Universal Compression Holdings
      to us and the contribution of customer contracts and equipment used to
      compression services under those transferred contracts in the July
      2008 Contract Operations
      Acquisition from Exterran Holdings to
us;







·
            our
      assumption of $159.6 million and $175.3 million of Universal Compression
      Holdings’ debt and Exterran Holdings debt,
  respectively;





·
            the
      issuance of our common units in a private placement, payment of private
      placement fees and use of the proceeds received from the private placement
      to repay a portion of the debt assumed from Universal Compression
      Holdings; and





·
            our
      borrowing of $117.5 million under our term loan and $148.3 million under
      our revolving credit facility and use of those proceeds to repay the debt
      assumed from Universal Compression Holdings and Exterran
      Holdings.








10







Three
      Months Ended
            
            
            Nine
      Months Ended
            
            
            Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2008
            
            
            September
      30, 2007(In
      thousands, except per unit amounts)Total
      revenues
            
            $
            48,084
            
            
            $
            144,530
            
            
            $
            46,338
            
            
            $
            134,619Net
      income
            
            $
            9,498
            
            
            $
            26,988
            
            
            $
            9,123
            
            
            $
            25,351Earnings
      per limited partner unit—Basic
            
            $
            0.46
            
            
            $
            1.35
            
            
            $
            0.46
            
            
            $
            1.29Earnings
      per limited partner unit—Diluted
            
            $
            0.46
            
            
            $
            1.34
            
            
            $
            0.46
            
            
            $
            1.28





Pro forma
net income 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 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
January 1, 2007. Pursuant to the partnership agreement, to the extent that
the quarterly distributions exceed certain targets, the general partner is
entitled to receive certain incentive distributions that will result in more net
income proportionately being allocated to the general partner than to the
holders of common and subordinated units. The pro forma net earnings per unit
calculations reflect the incentive distributions made to the general partner and
a reduction of net income allocable to the limited partners of $0.2 million and
$0.3 million for the three and nine months ended September 30, 2008,
respectively, which reflects 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.  For the three and nine months
ended September 30, 2007, the pro forma net income per unit calculations reflect
the incentive distributions made to the general partner and a reduction of net
income allocable to the limited partners of approximately $0.2 million for both
the three and nine months ended September 30, 2007, which reflects the amount of
additional incentive distributions that would have occurred if the excess of net
income over actual distributions for the period had been
distributed.





4.
MERGER BETWEEN UNIVERSAL COMPRESSION HOLDINGS AND HANOVER





On August
20, 2007, Universal Compression Holdings and Hanover completed their merger
transaction. In connection with the merger, Universal Compression Holdings and
Hanover became wholly-owned subsidiaries of Exterran Holdings, and Universal
Compression Holdings 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, 2008, owned 389,642 general partner units,
representing a 2% general partner interest, and all the incentive distribution
rights in us.  In addition, as of September 30, 2008, Exterran
Holdings owned 4,428,067 common units and 6,325,000 subordinated units,
collectively representing a 55% limited partner interest in us.





5.
RELATED PARTY TRANSACTIONS





We are a
party to an omnibus agreement with Exterran Holdings and others, and prior to
the merger between Universal Compression Holdings and Hanover, with Universal
Compression 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.




In May
2008, pursuant to the terms of the Omnibus Agreement, we transferred ownership
of 52 compressor units, totaling approximately 24,600 horsepower with a net book
value of approximately $11.3 million to EI Leasing LLC, an indirect wholly-owned
subsidiary of Exterran Holdings. On that date, EI Leasing LLC transferred
ownership to us of 133 compressor units totaling approximately 27,100 horsepower
with a net book value of approximately $11.3 million. On September 1, 2008,
pursuant to the terms of the Omnibus Agreement, we transferred ownership of 34
compressor units, totaling approximately 17,400 horsepower with a net book value
of approximately $9.0 million to EI Leasing LLC. On that date, EI Leasing LLC
transferred ownership to us of 80 compressor units totaling approximately 18,700
horsepower with a net book value of approximately $8.7 million.  No
customer contracts were included in either of the transfers discussed above.
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 EI Leasing LLC in each
of the transfers. We recorded the compressor units received at the historical
book basis of EI Leasing LLC.  The units we received from EI Leasing
LLC were being utilized to provide services to our customers on the date of the
transaction, and prior to the transaction, had been leased by us from EI Leasing
LLC.  The units we transferred to EI Leasing LLC were being utilized
to provide services to customers of EI Leasing LLC on the date of the
transaction, and prior to the transaction had been leased by EI Leasing LLC from
us.





In
connection with the closing of the July 2008 Contract Operations Acquisition, we
entered into an amendment to our existing Omnibus Agreement with Exterran
Holdings.  The amendment, among other things, increased the cap on our
reimbursement of  selling, general and administrative (“SG&A”)
expenses allocable from Exterran Holdings to us based on such costs incurred by
Exterran Holdings on our behalf from $4.75 million per quarter to $6.0 million
per quarter (after taking into account such costs that we incur and pay
directly) and increased the cap on our reimbursement of cost of sales allocable
from Exterran Holdings to us based on such costs incurred by Exterran Holdings
on our behalf from $18.00 per operating horsepower per quarter to $21.75 per
operating horsepower per quarter (after taking into account such costs that we
incur and pay directly).  The amendment also extends these caps for an
additional year such that the caps will now terminate on December 31,
2009.





For the
three months ended September 30, 2008 and 2007, our cost of sales exceeded the
cap provided in the Omnibus Agreement by $3.6 million and $2.8 million,
respectively. For the nine months ended September 30, 2008 and 2007, our cost of
sales exceeded the cap provided in the Omnibus Agreement by $10.7 million and
$5.9 million, respectively. For the three months ended September 30, 2008 and
2007, our SG&A expense exceeded the cap provided in the Omnibus Agreement by
approximately $16,000 and zero, respectively. For the nine months ended
September 30, 2008 and 2007, our SG&A expense exceeded the cap provided in
the Omnibus Agreement by approximately $16,000 and $0.3 million,
respectively.




During
the nine months ended September 30, 2008 and 2007, we purchased $8.1 million and
$18.7 million, respectively, of new compression equipment from Exterran
Holdings. The equipment purchased during the nine months ended September 30,
2008 and 2007 was recorded in our consolidated balance sheet as property, plant
and equipment of $7.3 million and $16.8 million, respectively, which represents
the carrying value of the equipment from the Exterran Holdings affiliates that
sold it to us, and as a distribution of equity of $0.8 million and $1.9 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, 2008 and 2007, Exterran Holdings contributed $3.2 million and $2.8
million, respectively, of cost to overhaul compression equipment owned
by us. These costs related to in-progress overhauls on equipment that was
contributed to us on the dates of our initial public offering, the July 2007
Contract Operations Acquisition and the July 2008 Contract Operations
Acquisition.




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, 2008, we had equipment
on lease to Exterran Holdings with an aggregate cost and accumulated
depreciation of $13.8 million and $1.8 million, respectively.




12


For the
three months ended September 30, 2008 and 2007, we had revenue of $0.3 million
and $0.4 million, respectively, related to the lease of our compression
equipment to Exterran Holdings. For the three months ended September 30,
2008 and 2007, we had cost of sales of $1.8 million and $1.6 million,
respectively, related to the lease of compression equipment from Exterran
Holdings.





For the
nine months ended September 30, 2008 and 2007, we had revenue of $1.2 million
and $0.9 million, respectively, related to the lease of our compression
equipment to Exterran Holdings. For the nine months ended September 30,
2008 and 2007, we had cost of sales of $5.5 million and $3.0 million,
respectively, related to the lease of compression equipment from Exterran
Holdings.





6.
LONG-TERM DEBT





On
October 20, 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
five-year $225 million revolving credit facility. We expanded our revolving
credit facility to $315 million in connection with the July 2007 Contract
Operations Acquisition as described in Note 3.





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, 2008, all amounts outstanding were LIBOR loans and the applicable
margin was 1.0%. The weighted average interest rate on the outstanding balance
at September 30, 2008, excluding the effect of related cash flow hedges, was
4.1%.





In May
2008, we entered into an amendment to our senior secured credit agreement that
increased the aggregate commitments under that facility to provide for a $117.5
million term loan facility which matures in October 2011.  Concurrent
with the closing of the July 2008 Contract Operations Acquisition, the $117.5
million term loan was funded (see Note 3).  The $117.5 million
term loan is non-amortizing but must be repaid with the net proceeds from any
future equity offerings until paid in full. All amounts outstanding under the
credit facility mature in October 2011.





The term
loan bears interest at a base rate or LIBOR, at our option, plus an applicable
margin. The applicable margin, depending on our leverage ratio, varies (i) in
the case of LIBOR loans, from 1.5% to 2.5% or (ii) in the case of base rate
loans, from 0.5% to 1.5%. 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, 2008, excluding the effect of related cash flow hedges, was
5.8%.





As of
September 30, 2008, we had $399.8 million of long-term debt outstanding and
$32.7 million available under our senior secured credit facility. 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.




As of
September 30, 2008, we were in compliance with all financial covenants under the
credit agreement.


13


7.
CASH DISTRIBUTIONS




Period
      Covering
            
            Payment
      Date
            
            Distribution
      per Limited Partner Unit
            
            Total
      Distribution10/20/2006
      – 12/31/2006
            
            February
      14, 2007
            
            $    
         0.278
            (1)
            
            $        3.6
            million1/1/2007
      – 3/31/2007
            
            May
      15, 2007
            
            $        0.350
            
            
            $        4.5
            million4/1/2007
      – 6/30/2007
            
            August
      14, 2007
            
            $        0.350
            
            
            $        6.0
            million7/1/2007
      – 9/30/2007
            
            November
      14, 2007
            
            $  
           0.400
            
            
            $        6.8
            million10/1/2007
      – 12/31/2007
            
            February
      14, 2008
            
            $    
         0.425
            
            
            $     
        7.3
            million
      (2)1/1/2008
      – 3/31/2008
            
            May
      14, 2008
            
            $   
          0.425
            
            
            $        7.3
            million
      (2)4/1/2008
      – 6/30/2008
            
            August
      14, 2008
            
            $    
         0.425
            
            
            $     
        8.3
            million
      (2)




(1)
            Reflects
      the pro rata portion of the minimum quarterly distribution rate of $0.35,
      covering the period from the closing of the initial public offering on
      October 20, 2006 through December 31,
2006.




(2)
            Including
      distributions to our general partner on its incentive distribution
      rights.





On
October 28, 2008, 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, 2008 through
September 30, 2008. The record date for this distribution is November 7, 2008
and payment is expected to occur on November 14, 2008.





8.
UNIT-BASED COMPENSATION





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 the general partner of our
general partner 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. The cumulative effect recognized in SG&A expense as a result of
the re-measurement of fair value of the unit options and phantom units was a
reduction of expense of $3.6 million and $0.2 million for the three months ended
September 30, 2008 and 2007, respectively, and a reduction of expense of $3.8
million and an expense of $1.4 million for the nine months ended September 30,
2008 and 2007, respectively. We expect to settle the phantom units granted to
employees of Exterran Holdings in cash instead of common units and therefore the
cumulative expense recognized related to these grants is recorded as a
liability.





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, in 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.




14





Unit
Options





As of
September 30, 2008, we had 591,429 outstanding unit options. During the nine
months ended September 30, 2008 and 2007, no unit options were granted or
exercised. During the nine months ended September 30, 2008, 2,143 unit options
were cancelled.





Phantom
Units





During
the nine months ended September 30, 2008, we granted 44,310 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. No phantom units vested during the nine months
ended September 30, 2008.





Phantom Units
            
            
            Weighted Average Grant-Date Fair Value per UnitPhantom
      units outstanding, December 31, 2007
            
            
            9,432
            
            
            $
            25.87Granted
            
            
            44,310
            
            
            
            32.22Forfeited
            
            
            (5,590)
            
            
            
            32.22Phantom
      units outstanding, September 30, 2008
            
            
            48,152
            
            
            $
            30.98





As of
September 30, 2008, $1.0 million of unrecognized compensation cost related to
non-vested phantom units is expected to be recognized over the weighted-average
period of 2.1 years.





9.
ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS





We use
derivative financial instruments to minimize the risks and/or 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. Cash flows from hedges
are classified in our consolidated statements of cash flows under the same
category as the cash flows from the underlying assets, liabilities or
anticipated transactions.





The
following table summarizes, by individual hedge instrument, our interest rate
swaps as of September 30, 2008 (in thousands):





Fixed
      Rate to be Paid
            
            Maturity
      Date
            
            Floating
      Rate to be
              Received
            
            Notional
              Amount
            
            
            Fair
      Value of
              Swap
      at
              September
      30, 20085.275
            %
            December
      1, 2011
            
            Three
      Month LIBOR
            
            $
            125,000
            
            
            $
            (5,519)5.343
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,883)5.315
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,853)$
            205,000
            
            
            $
            (9,255)





We
designated these swaps as cash flow hedging instruments pursuant to the criteria
of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
so that any change in their fair values is recognized as a component of
comprehensive income or loss and is included in accumulated other comprehensive
income or 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. We perform quarterly calculations to determine if the swap agreements
are still effective and to calculate any ineffectiveness. For the three and nine
months ended September 30, 2008, there was no ineffectiveness.  For
the three months ended September 30, 2007, we recorded no ineffectiveness and
for the nine months ended September 30, 2007, we recorded approximately $36,000
of ineffectiveness.  This amount was recorded as a reduction to
interest expense.





15


The
counterparties to our interest rate swap 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.





10.
FAIR VALUE OF INTEREST RATE SWAPS





SFAS No.
157 establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. We have performed an analysis of our interest rate
swaps to determine the significance and character of all inputs to our fair
value determination. Based on this assessment, the adoption of the required
portions of this standard did not have any material effect on our net asset
value. However, the adoption of the standard does require us to provide
additional disclosures about the inputs we use to develop the measurements and
the effect of certain measurements on changes in net assets for the reportable
periods as contained in our periodic filings.





SFAS No.
157 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.





The
following table summarizes the valuation of our interest rate swaps under SFAS
No. 157 pricing levels as of September 30, 2008 (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 liability
            
            $
            (9,255)
            
            
            $
            —
            
            
            $
            (9,255)
            
            
            $
            —




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.
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.


16


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. 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;





•
            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.
      (“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
this report in Part II, Item 1A. “Risk Factors,” those described in our Annual
Report on Form 10-K for the year ended December 31, 2007 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 Electronic Data Gathering and Retrieval System 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
      IRS challenge to our valuation methodologies, which may result in a shift
      of income, gain, loss and deduction between the general partner and the
      unitholders;




17




•
              the
      risk that counterparties will not perform their obligations under our
      financial instruments;


•
            the
      creditworthiness of our customers;





•
            our
      inability 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; 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 and 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 from our
predecessor, Exterran Partners Predecessor. In October 2006, we completed an
initial public offering of 6,325,000 of our common units at a price of $21.00
per unit, including 825,000 common units sold pursuant to the exercise of the
underwriters’ overallotment option.




On August
20, 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 Compression Holdings”). In connection with the merger, Universal
Compression Holdings and Hanover became wholly-owned subsidiaries of Exterran
Holdings, a new company formed in anticipation of the merger, and thereafter
Universal Compression Holdings was merged with and into Exterran
Holdings.





July
2007 Contract Operations Acquisition





In July
2007, we acquired from Universal Compression Holdings contract operations
customer service agreements with eight customers and a fleet of 722 compressor
units used to provide compression services under those agreements having a net
book value of $132.1 million, net of accumulated depreciation of $37.5 million,
and comprising 281,992 horsepower, or 13% (by then available horsepower), of the
combined U.S. contract operations business relating to natural gas compression
of Universal Compression Holdings and us (the “July 2007 Contract Operations
Acquisition”).  In connection with this acquisition, we assumed $159.6
million in debt from Universal Compression Holdings and issued to Universal
Compression Holdings’ wholly-owned subsidiaries approximately 2.0 million common
units and 82,220 general partner units. Additionally, we issued
approximately 2.0 million common units for proceeds of $69.0 million (net of
private placement fees of $1.0 million) to institutional investors in a private
placement. We used the proceeds from the private placement to repay a portion of
the debt assumed from Universal Compression Holdings.




18


Additionally,
in connection with this acquisition, we expanded our revolving credit facility
from $225 million to $315 million and borrowed an additional $90 million under
that facility, which we used, along with available cash, to repay the remainder
of the debt assumed from Universal Compression Holdings in conjunction with this
acquisition. In July 2007, we entered into two interest rate swap agreements
related to our revolving credit facility. Each swap agreement has a notional
amount of $40 million. These swap agreements terminate in October 2011 and have
a weighted average fixed rate of 5.33%.





Merger
Between Universal Compression Holdings and Hanover





On August
20, 2007, Universal Compression Holdings and Hanover completed their merger
transaction. As a result of the merger, Exterran Holdings became the owner of
our general partner, which as of September 30, 2008, owned 389,642 general
partner units, representing a 2% general partner interest, and all the incentive
distribution rights in us.  In addition, as of September 30, 2008,
Exterran Holdings owned 4,428,067 common units and 6,325,000 subordinated units,
collectively representing a 55% limited partner interest in us.





Since the
merger, Exterran Holdings has undertaken various internal restructuring
transactions to streamline its business and simplify its financial and tax
reporting.  We believe that one of these internal restructuring
transactions, which occurred on May 31, 2008, represented a sale or exchange of
50% or more of our capital and profits interests and therefore resulted in a
technical termination of us for U.S. federal income tax purposes on such
date.  The technical termination does not affect our consolidated
financial statements nor does it affect our classification as a partnership or
otherwise affect the nature or extent of our “qualifying income” for U.S.
federal income tax purposes.  However, our taxable year for all
unitholders ended on May 31, 2008 and will result in a deferral of depreciation
deductions that were otherwise allowable in computing the taxable income of our
unitholders.  We believe that the deferral of depreciation deductions
will result in increased taxable income to certain unitholders in 2008, although
the exact increase for each unitholder cannot be estimated at this time. We
anticipated the technical termination and previously disclosed it in our Annual
Report on Form 10-K for the year ended December 31, 2007, our Quarterly Report
on Form 10-Q for the quarter ended March 31, 2008 and our Current Report on Form
8-K filed on June 3, 2008.





July
2008 Contract Operations Acquisition




On July
30, 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 49,259 general partner units. Concurrent with the
closing of the July 2008 Contract Operations Acquisition, we borrowed $117.5
million under our term loan facility (see Note 6 to the Consolidated Financial
Statements included in Part I, Item 1 (“Financial Statements”) of this report)
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.





Also, in
connection with the closing of the July 2008 Contract Operations Acquisition, we
entered into an amendment to our existing Omnibus Agreement with Exterran
Holdings.  For further discussion of the Omnibus Agreement, please see
the section entitled “Omnibus Agreement” below.





Omnibus
Agreement





We are a
party to an omnibus agreement with Exterran Holdings, and others, and prior to
the merger between Universal Compression Holdings and Hanover, with Universal
Compression 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;




19





•
            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.




The
Omnibus Agreement was amended in connection with the July 2008 Contact
Operations Acquisition to increase the cap on our reimbursement of selling,
general and administrative (“SG&A”) expenses allocable from Exterran
Holdings to us based on such costs incurred by Exterran Holdings on behalf of us
from $4.75 million per quarter to $6.0 million per quarter (after taking into
account any such costs that we incur and pay directly) and to increase the cap
on our reimbursement of cost of sales allocable from Exterran Holdings to us
based on such costs incurred by Exterran Holdings on our behalf from $18.00 per
operating horsepower per quarter to $21.75 per operating horsepower per quarter
(after taking into account any such costs that we incur and pay directly). This
amendment also extended the date on which the caps expire from December 31, 2008
to December 31, 2009.  For further discussion of the Omnibus
Agreement, please see Note 5 to the Financial Statements.





OVERVIEW





Industry
Conditions





Natural
gas consumption in the United States of America (“U.S.”) for the twelve months
ended August 31, 2008 increased by approximately 4% over the twelve months ended
August 31, 2007 and is expected to increase by 0.7% per year until 2030,
according to the Energy Information Administration. For 2007, the U.S. accounted
for an estimated annual production of approximately 19 trillion cubic feet of
natural gas.  Industry sources estimate that the U.S.’s natural gas
production level will be approximately 21 trillion cubic feet in calendar year
2030.





The
natural gas compression services industry has experienced a significant increase
in the demand for its products and services since the early 1990s, and 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





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





Our
Performance Trends and Outlook




During
the fourth quarter of 2008, we expect the overall market demand for contract
operations services to be good. Given our recent declines in working horsepower
utilization; however, we expect less growth in our contract operations business
than for the overall market. 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 third quarter 2008 revenue and gross margin (defined as
revenue less cost of sales, excluding depreciation and amortization expense) by
approximately $0.4 million and $0.2 million, respectively.





Currently,
we believe the recent decline in commodity prices and the impact of uncertain
credit and capital market conditions resulting from the global financial crisis
could negatively impact the level of capital spending by our customers in 2009.
 The effects on our business of lower capital spending by our customers are
difficult to predict for a variety of reasons.  First, we believe our
contract operations business is more closely tied to natural gas production than
drilling activities and, therefore, it has historically experienced more stable
demand than that for other energy service products and
services.  Second, some of our customers may have less access to
external capital sources than in the recent past,




20


which we
believe could result in their desire to seek to outsource a greater amount of
their compression services.  Although we are not able at this time to
predict the final impact of the current financial market and industry conditions
on our businesses in 2009, we believe we are well positioned both from a capital
and competitive perspective to take advantage of opportunities that may become
available during this period of uncertainty.  We will continue to
evaluate the impact of these trends on our business as the market and industry
environment continue to evolve.





Our
revenue, earnings and financial position are affected by, among other things,
(i) market conditions that impact demand for compression, (ii) our customers’
decisions to utilize our services rather than purchase equipment or utilize our
competitors, (iii) our customers’ decisions whether to renew service agreements
with us, and (iv) 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, and we cannot be sure that such contracts for these
services will be renewed after the end of the initial contractual term; any such
nonrenewal could adversely impact our results of operations and cash available
for distribution.  Our level of capital spending depends on the demand
for our services and the equipment we require to render those services to
our customers.  For further information regarding material
uncertainties to which our business is exposed, see Item 1A. (“Risk Factors”),
included in Part II of this report, and Item 1A. (“Risk Factors”), included in
Part I of our Annual Report on Form 10-K for the year ended December 31,
2007.





We expect
that operating costs will moderate during the fourth quarter of 2008; however,
pursuant to the Omnibus Agreement between us and Exterran Holdings, our
obligation to reimburse Exterran Holdings for any costs of sales is capped
through December 31, 2009 (see Note 5 to the Financial
Statements).  During 2007 and the first nine months of 2008, our costs
of sales exceeded this cap.





Exterran
Holdings currently intends for us to be the primary growth vehicle for its U.S.
contract operations business over time. To this end, Exterran Holdings may
contribute additional U.S. contract operations customer contracts and equipment
to us in exchange for cash and/or additional interests in us. Such transactions
would depend on, among other things, reaching agreement with Exterran Holdings
regarding the terms of any purchase, which will require approval of the
conflicts committee of the board of directors of our general partner, and our
ability to finance any such purchase. Future contributions of assets to us upon
consummation of a transaction with Exterran Holdings may increase or decrease
our operating performance, financial position and liquidity.  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 our total available horsepower, average operating
horsepower and horsepower utilization percentages for the periods
presented.





Three
      Months Ended
            
            
            Nine
      Months Ended
            
            
            Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2008
            
            
            September  30,
      2007Total
      Available Horsepower (at period end)
            
            
            1,017,417
            
            
            
            1,017,417
            
            
            
            702,662
            
            
            
            702,662Total
      Operating Horsepower (at period end)
            
            
            909,011
            
            
            
            909,011
            
            
            
            664,049
            
            
            
            664,049Average
      Operating Horsepower
            
            
            816,420
            
            
            
            704,357
            
            
            
            632,492
            
            
            
            438,844Horsepower
      Utilization:Spot
      (at period end)
            
            
            89%
            
            
            
            89%
            
            
            
            95%
            
            
            
            95%Average
            
            
            89%
            
            
            
            90%
            
            
            
            95%
            
            
            
            96%





21


FINANCIAL
RESULTS OF OPERATIONS





THREE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
2007





The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income for the periods presented.





Three
      Months Ended
              September
      30,2008
            
            
            2007(Dollars
      in thousands)Revenue
            
            $
            44,390
            
            
            $
            34,711Gross
      margin (1)
            
            
            24,490
            
            
            
            19,725Gross
      margin percentage
            
            
            55%
            
            
            
            57%Expenses:Depreciation
      and amortization
            
            $
            7,542
            
            
            $
            5,160Selling,
      general and administrative
            
            
            2,423
            
            
            
            3,400Interest
      expense
            
            
            4,967
            
            
            
            3,560Other
      (income) expense, net
            
            
            —
            
            
            
            (9)Income
      tax expense
            
            
            147
            
            
            
            132Net
      income
            
            $
            9,411
            
            
            $
            7,482


____________





(1)
            For
      a reconciliation of gross margin to its most directly comparable financial
      measure calculated and presented in accordance with accounting principles
      generally accepted in the U.S. (“GAAP”) see 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 816,420 and 632,492 for the three months ended
September 30, 2008 and 2007, respectively. The increase in revenue and average
monthly operating horsepower was primarily due to the inclusion of 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 $9.2 million of the increase
in revenue for the three months ended September 30, 2008 compared to the three
months ended September 30, 2007, but was partially offset by lower
utilization.





Gross
Margin.Gross margin (defined as revenue less cost of sales,
excluding depreciation and amortization expense) was $24.5 million and $19.7
million for the three months ended September 30, 2008 and 2007, respectively.
The increase in gross margin for the three 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 but was partially offset by lower
utilization.





Gross Margin
Percentage.Gross margin percentage (defined as gross margin
as a percentage of revenue) was 55% and 57% for the three months ended September
30, 2008 and 2007, respectively. The decrease in gross margin percentage was
primarily due to increased repair and maintenance costs.





Depreciation and
Amortization. The increase in depreciation and amortization
expense was primarily due to the additional depreciation on the assets acquired
in the July 2008 Contract Operations Acquisition and amortization of the
intangible assets acquired in the July 2008 Contract Operations
Acquisition.




SG&A.SG&A
expenses are primarily comprised of an allocation of expenses from Exterran
Holdings and Universal Compression Holdings, including costs for personnel
support and related expenditures.   SG&A expenses represented
5% and 10% of revenues for the three months ended September 30, 2008 and 2007,
respectively.  The decrease 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 the unit options and phantom units which
reduced SG&A expense by $3.6 million and $0.2 million for the three months
ended September 30, 2008 and 2007, respectively.  We have granted unit
options and phantom units to individuals




22


who are
not our employees, but who are employees of Exterran Holdings and its
subsidiaries who 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 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 on our revolving credit facility and the funding of our
term loan to fund the July 2008 Contract Operations Acquisition during the three
months ended September 30, 2008 compared to the three months ended September 30,
2007.





Income Tax
Expense.Income tax expense reflects income taxes recorded
under the Texas margins tax. The increase in income tax expense was primarily
due to an increase in revenue within the state of Texas.





NINE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2007





The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income for the periods presented.





Nine
      Months Ended
              September
      30,2008
            
            
            2007(Dollars
      in thousands)Revenue
            
            $
            114,656
            
            
            $
            71,100Gross
      margin (1)
            
            
            62,676
            
            
            
            40,545Gross
      margin percentage
            
            
            55%
            
            
            
            57%Expenses:Depreciation
      and amortization
            
            $
            19,027
            
            
            $
            10,910Selling,
      general and administrative
            
            
            10,169
            
            
            
            9,596Interest
      expense
            
            
            12,213
            
            
            
            7,786Other
      (income) expense, net
            
            
            (1,139)
            
            
            
            (18)Income
      tax expense
            
            
            369
            
            
            
            182Net
      income
            
            $
            22,037
            
            
            $
            12,089





(1)
            For
      a reconciliation of gross margin to its most directly comparable financial
      measure calculated and presented in accordance with accounting principles
      generally accepted in the U.S. (“GAAP”) see 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 704,357 and 438,844 for the nine months ended
September 30, 2008 and 2007, respectively. The increase in revenue and average
monthly operating horsepower was primarily due to the inclusion of the assets
acquired in the July 2007 Contract Operations Acquisition and the July 2008
Contract Operations Acquisition.  The inclusion of the results from
the assets acquired in the July 2007 Contract Operations Acquisition and the
July 2008 Contract Operations Acquisition accounted for approximately $28.3
million and $9.2 million, respectively, of the increase in revenue for the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007, but was partially offset by lower utilization.





Gross
Margin.Gross margin (defined as revenue less cost of sales,
excluding depreciation and amortization expense) was $62.7 million and $40.5
million for the nine months ended September 30, 2008 and 2007, respectively. The
increase in gross margin for the nine months ended September 30, 2008 was
primarily due to the inclusion of the results from the assets acquired in the
July 2007 Contract Operations Acquisition and the July 2008 Contract Operations
Acquisition but was partially offset by lower utilization.





Gross Margin
Percentage.Gross margin percentage (defined as gross margin
as a percentage of revenue) was 55% and 57% for the nine months ended September
30, 2008 and 2007, respectively. The decrease in gross margin percentage was
primarily due to increased repair and maintenance costs.





Depreciation and
Amortization. The increase in depreciation and amortization
expense was primarily due to the additional depreciation on the assets acquired
in the July 2007 Contract Operations Acquisition and the July 2008 Contract
Operations Acquisition and amortization of the intangible assets acquired in the
July 2008 Contract Operations Acquisition.





23


SG&A.SG&A expenses
are primarily comprised of an allocation of expenses from Exterran Holdings and
Universal Compression Holdings, including costs for personnel support and
related expenditures.  The increase in SG&A expense was primarily
due to the increased costs associated with the increase in revenues after the
July 2007 Contract Operations Acquisition and the July 2008 Contract Operations
Acquisition.  SG&A expenses represented 9% and 13% of revenues for
the nine months ended September 30, 2008 and 2007, respectively. The decrease 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 the unit options and
phantom units, which reduced SG&A expense by $3.8 million and increased
SG&A expense by $1.4 million for the nine months ended September 30, 2008
and 2007, respectively.  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 who 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 each period and to record a
cumulative adjustment of the expense previously recognized.





Interest
Expense.The increase in interest expense during the nine
months ended September 30, 2008, compared to the nine months ended September 30,
2007, was primarily due to a higher average balance on our revolving credit
facility and the funding of our term loan to fund the July 2007 Contract
Operations Acquisition and the July 2008 Contract Operations
Acquisition.





Other (Income) Expense,
Net.  The increase 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.





Income Tax
Expense.Income tax expense reflects income taxes recorded
under the Texas margins tax. The increase in income tax expense was primarily
due to an increase in revenue within the state of Texas.





LIQUIDITY
AND CAPITAL RESOURCES





The
following tables summarize our sources and uses of cash for the nine months
ended September 30, 2008 and 2007, and our cash and working capital as of
September 30, 2008 and December 31, 2007:





Nine
      Months Ended September 30,2008
            
            
            2007(in
      thousands)Net
      cash provided by (used in):Operating
      activities
            
            $
            26,126
            
            
            $
            24,885Investing
      activities
            
            
            (15,478)
            
            
            
            (23,777)Financing
      activities
            
            
            (12,653)
            
            
            
            2,313Net
      change in cash
            
            $
            (2,005)
            
            
            $
            3,421





September
      30, 2008
            
            
            December
      31, 2007(in
      thousands)Cash
      and cash equivalents
            
            $
            830
            
            
            $
            2,835Working
      capital
            
            
            22,155
            
            
            
            108





Operating
Activities.The increase in net cash provided by operating
activities for the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007 was primarily the result of additional
earnings generated from increased business after the July 2008 Contract
Operations Acquisition and the July 2007 Contract Operations Acquisition,
partially offset by an increase in accounts receivable.




Investing
Activities.The decrease in cash used in investing activities
during the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007 was primarily attributable to decreased capital
expenditures, proceeds from the sale of used compression equipment of $5.3
million in the current period and an increase in the amounts due from
affiliates, net.  Capital expenditures for the nine months ended
September 30, 2008 were $16.4 million, consisting of $10.4 million for fleet
additions and $6.0 million for compressor maintenance activities. Included in
our capital expenditures for the nine months ended September 30, 2008 were new
compression equipment purchases of $8.1 million from Exterran
Holdings.




24


Financing
Activities.The increase in cash used in financing activities
during the nine months ended September 30, 2008 compared to the nine months
ended September 30, 2007 was primarily the result of $69.0 million of net
proceeds from a private placement in the prior period, a decrease in the amounts
due to affiliates, net and an increase in distributions to our unitholders in
the current period, partially offset by higher net repayments of borrowings in
the prior year period.




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 $20 million to $25 million in net capital
expenditures during 2008 including (1) fleet equipment additions and (2)
approximately $10 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 growth
through acquisitions, expansion capital expenditure projects and other internal
growth projects, we anticipate that we will continue to invest significant
amounts of 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 revolving credit
facility, the issuance of additional partnership units, and future debt
offerings as appropriate, given market conditions.





Our Ability to Grow Depends on Our
Ability to Access External Expansion Capital.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 for future capital expenditures).
However, we expect that we will rely primarily upon external financing sources,
including our revolving credit 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 capital market declines 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. To the extent
we are unable to finance growth externally and we are unwilling or unable to
establish sufficient cash reserves to fund future acquisitions, our cash
distribution policy will significantly impair our ability to grow. In addition,
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 on each unit. There are no limitations in our partnership
agreement or in the terms of our revolving credit facility on our ability to
issue additional units, including units ranking senior to the common
units.





Credit and Financial Industry
Environment.The continuing credit crisis and related turmoil in the
global financial system may have an impact on our business and our financial
condition.  For example, Wachovia Bank, National Association, the
administrative agent under our revolving credit facility, has announced its
agreement to be acquired by Wells Fargo.  If Wachovia or its
successor, or any other lender under our revolving credit facility, is not able
to perform its obligations under our revolving credit facility, our borrowing
capacity under this facility would be reduced by such lender’s pro rata portion
of the unfunded commitments.





In
addition, Wachovia is a counterparty to one of our interest rate swap
agreements.  If this swap agreement is settled in our favor, and if
Wachovia, or its successor, is unable to perform its obligations under these
agreements, we could lose the amounts we are owed under this agreement. At
September 30, 2008 the interest rate swap with Wachovia was in Wachovia’s favor.
The credit crisis could have an impact on our remaining interest rate swap
agreements if other counterparties are unable to perform their obligations under
those agreements. At September 30, 2008, we owed counterparties approximately
$9.3 million related to our interest rate swap agreements.


25


We
currently believe that the pending acquisition by Wells Fargo of Wachovia will
not have a material adverse effect on our financial position, results of
operations or cash flows.  However, we continue to closely monitor this
situation and our legal rights under our contractual relationships with
Wachovia.





Long-term Debt. 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 which 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.  The $117.5 million term loan is non-amortizing
but must be repaid with the net 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.




In July
2007, we expanded our revolving credit facility from $225 million to $315
million. As of September 30, 2008, we had $399.8 million of long-term debt
outstanding and $32.7 million available under our senior secured 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 also maintain various consolidated financial ratios. As
of September 30, 2008, we were in compliance with all financial
covenants.





Distributions to
Unitholders.Our partnership agreement requires us to
distribute all of our “available cash” quarterly. Under the partnership
agreement, available cash is defined to generally 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 28, 2008, 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, 2008 through
September 30, 2008. The record date for this distribution is November 7, 2008
and payment is expected to occur on November 14, 2008.




Contractual
obligations.  The following summarizes our contractual
obligations at September 30, 2008 and the effects such obligations are expected
to have on our liquidity and cash flow in future periods:




Total
            
            
            2008
            
            
            
            2009-2010
            
            
            
            2011-2012
            
            
            Thereafter(in
      thousands)Long
      term debt (1)Revolving
      credit facility
            
            $
            282,250
            
            
            $
            —
            
            
            $
            —
            
            
            $
            282,250
            
            
            $
            —Term
      loan
            
            
            117,500
            
            
            
            —
            
            
            
            —
            
            
            
            117,500
            
            
            
            —Total
      long-term
      debt
            
            
            399,750
            
            
            
            —
            
            
            
            —
            
            
            
            399,750
            
            
            
            —Interest
      on long-term debt (2)
            
            
            58,808
            
            
            
            4,524
            
            
            
            36,189
            
            
            
            18,095
            
            
            
            —Total
      contractual obligations
            
            $
            458,558
            
            
            $
            4,524
            
            
            $
            36,189
            
            
            $
            417,845
            
            
            $




(1)
            For
      more information on our long-term debt, see Note 6 to the Financial
      Statements.(2)
            Interest
      amounts calculated using interest rates in effect as of September 30,
      2008, including the effect of interest rate
  swaps.





26


NEW
ACCOUNTING PRONOUNCEMENTS





For a
discussion of recent accounting pronouncements that may affect us, please see
Note 2 to the Financial Statements.




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 taxes. 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 revenues 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.





The
following table reconciles our net income to gross margin:




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Dollars
      in thousands)Net
      income
            
            $
            9,411
            
            
            $
            7,482
            
            
            $
            22,037
            
            
            $
            12,089Depreciation
      and amortization
            
            
            7,542
            
            
            
            5,160
            
            
            
            19,027
            
            
            
            10,910Selling,
      general and administrative
            
            
            2,423
            
            
            
            3,400
            
            
            
            10,169
            
            
            
            9,596Interest
      expense
            
            
            4,967
            
            
            
            3,560
            
            
            
            12,213
            
            
            
            7,786Other
      (income) expense, net
            
            
            —
            
            
            
            (9)
            
            
            
            (1,139)
            
            
            
            (18)Income
      tax expense
            
            
            147
            
            
            
            132
            
            
            
            369
            
            
            
            182Gross
      margin
            
            $
            24,490
            
            
            $
            19,725
            
            
            $
            62,676
            
            
            $
            40,545





OFF-BALANCE
SHEET ARRANGEMENTS





We have
no material off-balance sheet arrangements.





27


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, 2008, after taking into consideration interest rate swaps, we had
approximately $194.8 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 $1.9
million.





Interest
Rate Swap Arrangements





We are a
party to interest rate swap agreements that are recorded at fair value in our
consolidated financial statements. We do not use derivative financial
instruments for trading or other speculative purposes. A change in the
underlying interest rates may also result in a change in their recorded
value.





The
following table summarizes, by individual hedge instrument, our interest rate
swaps as of September 30, 2008 (dollars in thousands):





Fixed
      Rate to be Paid
            
            Maturity
      Date
            
            Floating
      Rate to be Received
            
            Notional
              Amount
            
            
            Fair
      Value of
              Swap
      at
              September  30,
      20085.275
            %
            December
      1, 2011
            
            Three
      Month LIBOR
            
            $
            125,000
            
            
            $
            (5,519)5.343
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,883)5.315
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,853)$
            205,000
            
            
            $
            (9,255)





We have
designated these swaps as cash flow hedging instruments pursuant to the criteria
of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
so that any change in their fair values is recognized as a component of
comprehensive income or loss and is included in accumulated other comprehensive
income or loss to the extent that 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. We perform quarterly calculations to determine if the swap agreements
are still effective and to calculate any ineffectiveness. For the three and nine
months ended September 30, 2008, there was no ineffectiveness.  For
the three months ended September 30, 2007, we recorded no ineffectiveness and
for the nine months ended September 30, 2007, we recorded approximately $36,000
of ineffectiveness.  This amount was recorded as a reduction to
interest expense.





Stock
Compensation Costs





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 who 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 these unit
options and phantom units each period and to record a cumulative adjustment of
the expense previously recognized.  A 10% change in our unit price
from September 30, 2008 would result in an increase or decrease in SG&A
expense for three months ended September 30, 2008, of approximately
$21,000.




28


ITEM
4. Controls and Procedures





Management’s
Evaluation of Disclosure Controls and Procedures





As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (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 was
no change in our internal control over financial reporting during our third
quarter of fiscal 2008 that has materially affected, or is 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 operation or cash
flows for the period in which the resolution occurs.





ITEM
1A. Risk Factors





“Item
1.A. Risk Factors” of our Annual Report on Form 10-K for the year ended December
31, 2007 includes a discussion of our risk factors. The information presented
below updates, and should be read in conjunction with, the risk factors and
information disclosed in our Form 10-K. Except as presented below, there have
been no material changes from the risk factors described in our Form
10-K.





Theglobal financial
crisis may have an impact on our business and financial condition in ways that
we currently cannot predict.




The
continuing credit crisis and related turmoil in the global financial system may
have an impact on our business and our financial condition.  For
example, Wachovia Bank, National Association, the administrative agent under our
revolving credit facility, has announced its agreement to be acquired by Wells
Fargo.  If Wachovia or its successor is not able to perform its
obligations under our revolving credit facility, our ability to borrow under
this facility may be reduced by Wachovia’s pro rata portion of the $32.7 million
in unfunded commitments that, as of September 30, 2008, was available under our
revolving credit facility.  If other lenders become unable to perform
their obligations under our revolving credit facility, our borrowing capacity
under this facility could be further reduced.  Inability to borrow
additional amounts under our revolving credit facility could limit our ability
to fund our future growth and operations.





In
addition, Wachovia is a counterparty to one of our interest rate swap
agreements.  If this swap agreement is settled in our favor, and if
Wachovia, or its successor, is unable to perform its obligations under this
agreement, we could lose the amounts we are owed under this agreement. The
credit crisis could have an impact on our remaining interest rate swap
agreements if other counterparties are unable to perform their obligations under
those agreements.





The securities
market declines and economic slowdown may have an impact on our ability to fund
purchases of additional compression contracts and
equipment.





We intend
to fund our growth capital expenditures and acquisitions, including future
acquisitions of compression contracts and equipment from Exterran Holdings, with
external sources of capital, including additional borrowings under our credit
agreement and/or offerings of equity or debt in the capital
markets.  As a result of the economic slowdown and the declines in
both our unit price and the availability of equity capital in the public
markets, our ability to access the capital markets may be restricted, which
could have an impact on our ability to grow our asset and customer
base.  Our inability to fund purchases of additional compression
contracts and equipment could adversely impact our results of perations and cash
available for distribution to our unitholders.


30


We depend on
demand for and production of natural gas in theU.S., and a reduction
in this demand or production could adversely affect the demand or the prices we
charge for our services which could cause our revenue and cash available for
distribution to decrease.


Natural
gas contract operations in the U.S. are significantly dependent upon the
demand for and production of natural gas in the U.S. Demand may be affected
by, among other factors, natural gas prices, weather, demand for energy and
availability and price of alternative energy sources. A reduction in
U.S. demand could force us to reduce our pricing substantially.
Additionally, compression services for our customers’ production from
unconventional natural gas sources such as tight sands, shales and coalbeds
constitute an increasing percentage of our business. Such unconventional sources
are generally less economically feasible to produce in lower natural gas price
environments. A reduction in natural gas demand may cause such unconventional
sources of natural gas to be uneconomic to drill and produce. These factors
could in turn negatively impact the demand for our services.  Any
prolonged, substantial reduction in the U.S. demand for natural gas would,
in all likelihood, depress the level of production activity and result in a
decline in the demand for our contract operations services and products, which
could reduce our cash available for distribution.


The
impact of the global financial crisis on our customers’ level of demand, and
ability to pay,  for our products and services could adversely affect
our business.




Erosion
of the financial condition of our customers could have an adverse effect on our
business. During times when the oil or natural gas markets weaken, our customers
are more likely to experience a downturn in their financial condition. In
addition, many of our customers finance their exploration and development
activities through cash flow from operations, the incurrence of debt or the
issuance of equity. Recently, there has been a significant decline in the credit
markets and availability of credit. Similarly, many of our customers’ equity
values have substantially declined, and the equity capital markets have been
unavailable as a source of financing. The combination of a reduction of cash
flow resulting from declines in commodity prices, a reduction in borrowing bases
under reserve-based credit facilities and the lack of availability of debt or
equity financing may result in a significant reduction in our customers’
spending for our services. For example, our customers could seek to preserve
capital by canceling any month-to-month contracts or determining not to enter
into any new natural gas compression service contracts, thereby reducing demand
for our services. Some of our customers already have announced reduced capital
expenditure budgets for the remainder of 2008 and 2009. The reduced demand for
our services as described above could adversely affect our business, financial
condition, results of operations and cash flow. In addition, in the event of the
financial failure of a customer, we could experience a loss associated with the
unsecured portion of any of our outstanding accounts receivable associated with
that customer.






31


ITEM 6. Exhibits





Exhibit
      No.
            
            Description2.1
            
            Amended and Restated Contribution
      Conveyance and Assumption Agreement, dated July 6, 2007, by and among
      Universal Compression Partners, L.P., Universal Compression, Inc., UCO
      Compression 2005 LLC, UCI Leasing LLC, UCO GP, LLC, UCI GP LP LLC, UCO
      General Partner, LP, UCI MLP LP LLC, UCLP Operating LLC and UCLP Leasing
      LLC., incorporated by reference to Exhibit 2.1 to the Registrant’s Current
      Report on Form 8-K filed July 11, 2007.2.2
            
            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, Exterran General Partner, L.P., EXLP Operating LLC,
      EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to
      Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed June 26,
      2008.3.1
            
            Certificate of Limited
      Partnership of Universal Compression Partners, L.P. (now Exterran
      Partners, L.P.), incorporated by reference to Exhibit 3.1 to the
      Registrant’s Registration Statement on Form S-1 filed June 27,
      2006.3.2
            
            Certificate of Amendment to
      Certificate of Limited Partnership of Universal Compression Partners, L.P.
      (now Exterran Partners, L.P.), dated as of August 20, 2007, incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed August 24, 2007.3.3
            
            First Amended and Restated
      Limited Partnership Agreement of Exterran Partners, L.P., as amended,
      incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly
      Report on form 10-Q filed May 8, 2008.3.4
            
            Certificate of Partnership of UCO
      General Partner, LP (now Exterran General Partner, L.P.), incorporated by
      reference to Exhibit 3.3 to the Registrant’s Registration Statement on
      Form S-1 filed June 27, 2006.3.5
            
            Amended and Restated Limited
      Partnership Agreement of UCO General Partner, LP (now Exterran General
      Partner, L.P.), incorporated by reference to Exhibit 3.2 to the
      Registrant’s Current Report on Form 8-K filed October 26,
      2006.3.6
            
            Certificate of Formation of UCO
      GP, LLC (now Exterran GP LLC), incorporated by reference to Exhibit 3.5 to
      the Registrant’s Registration Statement on Form S-1 filed June 27,
      2006.3.7
            
            Amended and Restated Limited
      Liability Company Agreement of UCO GP, LLC (now Exterran GP LLC),
      incorporated by reference to Exhibit 3.3 to the Registrant’s Current
      Report on Form 8-K filed October 26, 2006.10.1*
            
            Amendment
      No. 1, dated as of July 30, 2008, to First Amended and Restated Omnibus
      Agreement, dated as of August 20, 2007, by and among Exterran Holdings,
      Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General
      Partner, L.P., EXLP Operating LLC and Exterran Partners,
    L.P.31.1*
            
            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 1934.31.2*
            
            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 1934.32.1*
            
            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
      2002.32.2*
            
            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.





November
6,
2008


By:
EXTERRAN GENERAL PARTNER, L.P.


its
General Partner





By:
EXTERRAN GP LLC


its
General Partner





By: /s/ DANIEL K.
SCHLANGER


Daniel K.
Schlanger


Senior
Vice President and Chief Financial Officer


(Principal
Financial Officer)





By: /s/ KENNETH R.
BICKETT


Kenneth
R. Bickett


Vice
President and Controller


(Principal
Accounting Officer)







33


Index
to Exhibits





Exhibit
      No.
            
            Description2.1
            
            Amended and Restated Contribution
      Conveyance and Assumption Agreement, dated July 6, 2007, by and among
      Universal Compression Partners, L.P., Universal Compression, Inc., UCO
      Compression 2005 LLC, UCI Leasing LLC, UCO GP, LLC, UCI GP LP LLC, UCO
      General Partner, LP, UCI MLP LP LLC, UCLP Operating LLC and UCLP Leasing
      LLC., incorporated by reference to Exhibit 2.1 to the Registrant’s Current
      Report on Form 8-K filed July 11, 2007.2.2
            
            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, Exterran General Partner, L.P., EXLP Operating LLC,
      EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to
      Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed June 26,
      2008.3.1
            
            Certificate of Limited
      Partnership of Universal Compression Partners, L.P. (now Exterran
      Partners, L.P.), incorporated by reference to Exhibit 3.1 to the
      Registrant’s Registration Statement on Form S-1 filed June 27,
      2006.3.2
            
            Certificate of Amendment to
      Certificate of Limited Partnership of Universal Compression Partners, L.P.
      (now Exterran Partners, L.P.), dated as of August 20, 2007, incorporated
      by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K
      filed August 24, 2007.3.3
            
            First Amended and Restated
      Limited Partnership Agreement of Exterran Partners, L.P., as amended,
      incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly
      Report on form 10-Q filed May 8, 2008.3.4
            
            Certificate of Partnership of UCO
      General Partner, LP (now Exterran General Partner, L.P.), incorporated by
      reference to Exhibit 3.3 to the Registrant’s Registration Statement on
      Form S-1 filed June 27, 2006.3.5
            
            Amended and Restated Limited
      Partnership Agreement of UCO General Partner, LP (now Exterran General
      Partner, L.P.), incorporated by reference to Exhibit 3.2 to the
      Registrant’s Current Report on Form 8-K filed October 26,
      2006.3.6
            
            Certificate of Formation of UCO
      GP, LLC (now Exterran GP LLC), incorporated by reference to Exhibit 3.5 to
      the Registrant’s Registration Statement on Form S-1 filed June 27,
      2006.3.7
            
            Amended and Restated Limited
      Liability Company Agreement of UCO GP, LLC (now Exterran GP LLC),
      incorporated by reference to Exhibit 3.3 to the Registrant’s Current
      Report on Form 8-K filed October 26, 2006.10.1*
            
            Amendment
      No. 1, dated as of July 30, 2008, to First Amended and Restated Omnibus
      Agreement, dated as of August 20, 2007, by and among Exterran Holdings,
      Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General
      Partner, L.P., EXLP Operating LLC and Exterran Partners,
    L.P.31.1*
            
            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 1934.31.2*
            
            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 1934.32.1*
            
            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
      2002.32.2*
            
            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.






34