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 March 31, 2009£
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE TRANSITION PERIOD
  FROM____________TO____________.
 
 Commission
File No. 001-33078
 
 EXTERRAN
PARTNERS, L.P.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                22-3935108(State
      or Other Jurisdiction of
                (I.R.S.
      EmployerIncorporation
      or Organization)
                Identification
      No.)
 
 16666
      Northchase DriveHouston,
      Texas
                77060(Address
      of principal executive offices)
                (Zip
      Code)
 
 (281)
836-7000
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes £ No £
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer £
                Accelerated
      filer R
                Non-accelerated
      filer £
                Smaller
      reporting company £(Do
      not check if a smaller reporting
company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
 
 As of
April 30, 2009, there were 12,781,581 common units and 6,325,000 subordinated
units outstanding.
 
  
  TABLE
OF CONTENTS
 
 PagePART
      I. UNAUDITED FINANCIAL INFORMATIONItem
      1. Financial Statements
                
                
                3Condensed
      Consolidated Balance Sheets
                
                
                3Condensed
      Consolidated Statements of Operations
                
                
                4Condensed
      Consolidated Statements of Comprehensive Income (Loss)
                
                
                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
                
                
                26Item
      4. Controls and Procedures
                
                
                26PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                
                
                27Item
      1A. Risk Factors
                
                
                27Item
      6. Exhibits
                
                
                29SIGNATURES
                
                
                30
 
  2
  PART
I. FINANCIAL INFORMATION
 
 ITEM 1.Financial
Statements
 
 EXTERRAN
PARTNERS, L.P.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands, except for unit amounts)
 (unaudited)
 
 March 31, 2009
                
                
                December 31, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                774
                
                
                $
                3,244Accounts
      receivable, trade, net of allowance of $357 and $230,
      respectively
                
                
                29,874
                
                
                
                25,958Due
      from affiliates, net
                
                
                7,825
                
                
                
                6,445Total
      current assets
                
                
                38,473
                
                
                
                35,647Compression
      equipment
                
                
                575,914
                
                
                
                566,286Accumulated
      depreciation
                
                
                (140,527
                )
                
                
                (131,973
                )Net
      compression equipment
                
                
                435,387
                
                
                
                434,313Goodwill
                
                
                124,019
                
                
                
                124,019Intangibles
      and other assets, net
                
                
                5,582
                
                
                
                5,965Total
      assets
                
                $
                603,461
                
                
                $
                599,944LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      liabilities:Accounts
      payable, trade
                
                $
                33
                
                
                $
                297Accrued
      liabilities
                
                
                5,569
                
                
                
                5,703Accrued
      interest
                
                
                1,881
                
                
                
                1,880Current
      portion of interest rate swaps
                
                
                7,178
                
                
                
                5,483Total
      current liabilities
                
                
                14,661
                
                
                
                13,363Long-term
      debt
                
                
                400,250
                
                
                
                398,750Interest
      rate swaps
                
                
                11,037
                
                
                
                12,204Other
      long-term liabilities
                
                
                —
                
                
                
                159Total
      liabilities
                
                
                425,948
                
                
                
                424,476Commitments
      and contingencies (Note 11)Partners’
      capital:Limited
      partner units:Common
      units, 12,781,581 and 12,767,462 units issued and
    outstanding
                
                
                221,715
                
                
                
                221,090Subordinated
      units, 6,325,000 units issued and outstanding
                
                
                (33,658
                )
                
                
                (35,518
                )General
      partner units, 2% interest with 389,642 units issued and
      outstanding
                
                
                6,893
                
                
                
                6,805Accumulated
      other comprehensive loss
                
                
                (17,437
                )
                
                
                (16,909
                )Total
      partners’ capital
                
                
                177,513
                
                
                
                175,468Total
      liabilities and partners’ capital
                
                $
                603,461
                
                
                $
                599,944
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  3
  EXTERRAN
PARTNERS, L.P.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except per unit amounts)
 (unaudited)
 
 Three Months Ended March
31,2009
                
                
                2008Revenue
                
                $
                48,233
                
                
                $
                35,267Costs
      and expenses:Cost
      of sales (excluding depreciation and amortization expense)
                
                
                22,182
                
                
                
                16,143Depreciation
      and amortization
                
                
                8,334
                
                
                
                5,674Selling,
      general and administrative
                
                
                6,001
                
                
                
                3,001Interest
      expense
                
                
                4,819
                
                
                
                3,801Other
      (income) expense, net
                
                
                27
                
                
                
                (10
                )Total
      costs and expenses
                
                
                41,363
                
                
                
                28,609Income
      before income taxes
                
                
                6,870
                
                
                
                6,658Income
      tax expense
                
                
                149
                
                
                
                111Net
      income
                
                $
                6,721
                
                
                $
                6,547General
      partner interest in net income
                
                $
                383
                
                
                $
                187Common
      units interest in net income
                
                $
                4,239
                
                
                $
                3,959Subordinated
      units interest in net income
                
                $
                2,099
                
                
                $
                2,401Weighted
      average common units outstanding:Basic
                
                
                12,776
                
                
                
                10,354Diluted
                
                
                12,778
                
                
                
                10,466Weighted
      average subordinated units outstanding:Basic
                
                
                6,325
                
                
                
                6,325Diluted
                
                
                6,325
                
                
                
                6,325Earnings
      per common unit:Basic
                
                $
                0.33
                
                
                $
                0.38Diluted
                
                $
                0.33
                
                
                $
                0.38Earnings
      per subordinated unit:Basic
                
                $
                0.33
                
                
                $
                0.38Diluted
                
                $
                0.33
                
                
                $
                0.38
 
 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 (LOSS)
 (in
thousands)
 (unaudited)
 
 Three Months Ended March
31,2009
                
                
                2008Net
      income
                
                $
                6,721
                
                
                $
                6,547Other
      comprehensive loss:Interest
      rate swap loss
                
                
                (528
                )
                
                
                (7,288
                )Comprehensive
      income (loss)
                
                $
                6,193
                
                
                $
                (741
                )
 
 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)
 
 Three Months Ended March
31,2009
                
                
                2008Cash
      flows from operating activities:Net
      income
                
                $
                6,721
                
                
                $
                6,547Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
                
                
                8,334
                
                
                
                5,674Amortization
      of debt issuance cost
                
                
                95
                
                
                
                64Amortization
      of fair value of acquired interest rate swaps
                
                
                38
                
                
                
                41Unit
      based compensation expense (income)
                
                
                90
                
                
                
                (546
                )Changes
      in assets and liabilities:Accounts
      receivable, trade
                
                
                (3,916
                )
                
                
                (8,066
                )Other
      assets
                
                
                94
                
                
                
                25Accounts
      payable, trade
                
                
                (90
                )
                
                
                60Other
      liabilities
                
                
                (144
                )
                
                
                192Net
      cash provided by operating activities
                
                
                11,222
                
                
                
                3,991Cash
      flows from investing activities:Capital
      expenditures
                
                
                (7,201
                )
                
                
                (4,469
                )Increase
      in amounts due from affiliates, net
                
                
                (1,380
                )
                
                
                —Net
      cash used in investing activities
                
                
                (8,581
                )
                
                
                (4,469
                )Cash
      flows from financing activities:Borrowings
      under revolving credit facility
                
                
                6,500
                
                
                
                —Repayments
      under revolving credit facility
                
                
                (5,000
                )
                
                
                —Distributions
      to unitholders
                
                
                (9,264
                )
                
                
                (7,292
                )Capital
      contribution from limited and general partner
                
                
                2,653
                
                
                
                3,574Decrease
      in amounts due to affiliates, net
                
                
                —
                
                
                
                1,647Net
      cash used in financing activities
                
                
                (5,111
                )
                
                
                (2,071
                )Net
      decrease in cash and cash equivalents
                
                
                (2,470
                )
                
                
                (2,549
                )Cash
      and cash equivalents at beginning of period
                
                
                3,244
                
                
                
                2,835Cash
      and cash equivalents at end of period
                
                $
                774
                
                
                $
                286Supplemental
      disclosure of cash flow information:Non-cash capital contribution from limited and general
    partner
                
                $
                2,184
                
                
                $
                —
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  6
  EXTERRAN
PARTNERS, L.P.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 Organization
 
 The
accompanying unaudited condensed consolidated financial statements of Exterran
Partners, L.P. (“we,” “us” or “our”) included herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S.”) for interim financial information and the rules and regulations
of the Securities and Exchange Commission (“SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the U.S. (“GAAP”)
are not required in these interim financial statements and have been condensed
or omitted. It is the opinion of management that the information furnished
includes all adjustments, consisting only of normal recurring adjustments, that
are necessary to present fairly our consolidated financial position, results of
operations and cash flows for the periods indicated.  The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements presented in our Annual
Report on Form 10-K for the year ended December 31, 2008.  That report
contains a more comprehensive summary of our accounting policies.  These
interim results are not necessarily indicative of results for a full
year.
 
 Exterran
General Partner, L.P. is our general partner and an indirect wholly-owned
subsidiary of Exterran Holdings, Inc. (individually, and together with its
wholly-owned subsidiaries “Exterran Holdings”). As Exterran General Partner,
L.P. is a limited partnership, its general partner, Exterran GP LLC, conducts
our business and operations, and the board of directors and officers of Exterran
GP LLC make decisions on our behalf.
 
 Earnings
Per Common and Subordinated Unit
 
 The
computations of earnings per common and subordinated unit are based on the
weighted average number of common and subordinated units, respectively,
outstanding during the applicable period. Our subordinated units meet the
definition of a participating security and therefore we are required to use the
two-class method in the computation of basic earnings per unit. Basic earnings
per common and subordinated unit are determined by dividing net income allocated
to the common units and subordinated units, respectively, after deducting the
amount allocated to our general partner (including distributions to our general
partner on its incentive distribution rights), by the weighted average number of
outstanding common and subordinated units, respectively, during the
period.
 
 When
computing earnings per common and subordinated unit under the two-class method
in periods when earnings are greater than distributions, earnings are allocated
to the general partner, common and subordinated units based on how our
partnership agreement would allocate earnings if the full amount of earnings for
the period had been distributed. This allocation of net income does not impact
our total net income, consolidated results of operations or total cash
distributions; however, it may result in our general partner being allocated
additional incentive distributions for purposes of our earnings per unit
calculation, which could reduce net income per common and subordinated unit.
However, as defined in our partnership agreement, we determine cash
distributions based on available cash and determine the actual incentive
distributions allocable to our general partner based on actual distributions.
When computing earnings per common and subordinated unit, the amount of the
assumed incentive distribution rights is deducted from net income and allocated
to our general partner for the period to which the calculation relates. The
remaining amount of net income, after deducting the assumed incentive
distribution rights, is allocated between the general partner, common and
subordinated units based on how our partnership agreement allocates net
income.
 
 When
computing earnings per common and subordinated unit under the two-class method
in periods when distributions are greater than earnings, the excess of
distributions over earnings are allocated to the general partner, common and
subordinated units based on how our partnership agreement allocates net losses.
The amount of the incentive distribution rights is deducted from net income and
allocated to our general partner for the period the calculation relates to. The
remaining amount of net income, after deducting the incentive distribution
rights, is allocated between the general partner, common and subordinated units
based on how our partnership agreement allocates net losses.
 
 The
potentially dilutive securities issued by us are unit options and phantom units,
neither of which requires an adjustment to the amount of net income used for
dilutive earnings per unit purposes. The aggregate dilutive effects of unit
options and phantom units to our earnings per common unit for the three months
ended March 31, 2009 and 2008 were 2,333 and 111,959 units, respectively.
For the three months ended March 31, 2009, 580,715 unit options and 3,825
phantom units were excluded from the calculation of diluted earnings per common
and subordinated unit because they were anti-dilutive. For the three months
ended March 31, 2008, zero unit
  7
  options
and phantom units were excluded from the calculation of diluted earnings per
common and subordinated unit because they were anti-dilutive.
 
 Due
To/From Affiliates, Net
  We have
receivables and payables with Exterran Holdings.  A valid right of offset
exists related to the receivables and payables with these affiliates and as a
result, we present such amounts on a net basis on our consolidated balance
sheets.
 
 The
transactions reflected in due to/from affiliates, net primarily consist of
centralized cash management activities between us and Exterran Holdings. Because
these balances are treated as short-term borrowings between us and Exterran
Holdings, serve as a financing and cash management tool to meet our short-term
operating needs, are large, turn over quickly and are payable on demand, we
present borrowings and repayments with our affiliates on a net basis within the
consolidated statements of cash flows. Net receivables from our affiliate are
considered advances and changes are presented as investing activities in the
consolidated statements of cash flows. Net payables due to our affiliate are
considered borrowings and changes are presented as financing activities in the
consolidated statements of cash flows.
 
 Reclassifications
 
 Certain
amounts in the prior financial statements have been reclassified to conform to
the 2009 financial statement classification. These reclassifications have no
impact on our consolidated results of operations, cash flows or financial
position.
 
 2.
RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“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 deferred the effective
date to fiscal years beginning after November 15, 2008 for all nonfinancial
assets and liabilities, except those that are recognized or disclosed in the
financial statements at fair value on at least an annual basis. We adopted the
required undeferred provisions of SFAS No. 157 on January 1,
2008, and the adoption of the undeferred provisions of SFAS No. 157
did not have a material impact on our consolidated financial statements. We
adopted the deferred provisions of SFAS No. 157 on January 1,
2009, and the adoption of the deferred provisions of SFAS No. 157 did
not have a material impact on 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 an exception for the
accounting for valuation 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 adopted the provisions of
SFAS No. 141(R) on January 1, 2009, and the adoption of
SFAS No. 141(R) did not have a material impact on our consolidated
financial statements, although we are not able to predict its impact on future
potential acquisitions.
 
 In March
2008, the FASB’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 the incentive
distribution rights 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 the incentive
distribution rights holder using the distribution waterfall for available cash.
When cash distributions are in excess of earnings, the excess should be
allocated to the general partner and limited partners on the basis of their
respective sharing of losses. The excess will also be allocated to the incentive
distribution rights holder if the incentive distribution rights holder has a
contractual obligation to share in losses on a basis that is objectively
determinable. 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
  8
  financial
statements presented. We adopted the provisions of EITF 07-04 on
January 1, 2009, and the adoption of EITF 07-04 did not have a
material impact 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 adopted the provisions of SFAS No. 161 on
January 1, 2009, and the adoption of SFAS No. 161 did not have a material
impact on our consolidated financial statements; however, we have expanded
disclosures regarding our derivative instruments.
 
 In April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under
SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).
The intent of FSP FAS 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R), in accordance with GAAP. FSP FAS 142-3
requires an entity to disclose information for a recognized intangible asset
that enables users of the financial statements to assess the extent to which the
expected future cash flows associated with the asset are affected by the
entity’s intent and/or ability to renew or extend the arrangement. FSP
FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. We adopted the provisions of FSP FAS 142-3 on January 1, 2009,
and the adoption of FSP FAS 142-3 did not have a material impact on our
consolidated financial statements.
 
 3.  JULY
2008 CONTRACT OPERATIONS ACQUISITION
 
 In July
2008, we acquired from Exterran Holdings contract operations customer service
agreements with 34 customers and a fleet of approximately 620 compressor
units used to provide compression services under those agreements having a net
book value of $133.9 million, net of accumulated depreciation of
$16.5 million, and comprising approximately 254,000 horsepower, or 6% (by
then available horsepower) of the combined U.S. contract operations
business of Exterran Holdings and us (the “July 2008 Contract Operations
Acquisition”). In connection with this acquisition, we assumed
$175.3 million of debt from Exterran Holdings and issued to Exterran
Holdings’ wholly-owned subsidiaries approximately 2.4 million common units
and approximately 49,000 general partner units. Concurrent with the closing of
the July 2008 Contract Operations Acquisition, we borrowed $117.5 million
under our term loan and $58.3 million under our revolving credit facility,
which together were used to repay the debt assumed from Exterran Holdings in the
acquisition and to pay other costs incurred in the acquisition.
 
 In
connection with this acquisition, we were allocated $56.9 million
historical cost goodwill and $4.6 million finite life intangible assets of
Exterran Holdings’ North America contract operations segment. The amounts
allocated were based on the ratio of fair value of the net assets transferred to
us to the total fair value of Exterran Holdings’ North America contract
operations segment. The amount of finite life intangible assets included in the
July 2008 Contract Operations Acquisition is comprised of $3.5 million
associated with customer relationships and $1.1 million associated with
customer contracts. These intangible assets are being amortized through 2024 and
2016, respectively, based on the present value of expected income to be realized
from these assets.
 
 An
acquisition of a business from an entity under common control is generally
accounted for under GAAP by the acquirer with retroactive application as if the
acquisition date was the beginning of the earliest period included in the
financial statements. Retroactive effect to the July 2008 Contract Operations
Acquisition was impracticable because such retroactive application would have
required significant assumptions in a prior period that can not be
substantiated.  Accordingly, our financial statements include the
assets acquired, liabilities assumed, revenues and operating expenses associated
with the acquisition beginning on the date of such acquisition. However, the
preparation of pro forma financial information allows for certain assumptions
that do not meet the standards of financial statements prepared in accordance
with GAAP.
 
  9
  Unaudited
Pro Forma Financial Information
 
 Pro forma
financial information for the three months ended March 31, 2008 has been
included to give effect to the significant expansion of our compressor fleet and
service contracts as the result of the July 2008 Contract Operations
Acquisition. The transactions are presented in the pro forma financial
information as though the transactions had occurred as of January 1,
2008.
 
 The
unaudited pro forma financial information for the three months ended March 31,
2008 reflects the following transactions:
 
 •
                the
      contribution of customer contracts and equipment used to provide
      compression services under those contracts transferred in the July 2008
      Contract Operations Acquisition from Exterran Holdings to
    us;
 
 •
                our
      assumption of $175.3 million of Exterran Holdings’
    debt;
 
 •
                the
      issuance of our common units and general partner units to Exterran
      Holdings’ wholly-owned
subsidiaries; and
 
 •
                our
      borrowing of $175.8 million under our senior secured credit facility
      and use of those proceeds to repay the debt assumed from Exterran
      Holdings.
 
 The
unaudited pro forma financial information below is presented for informational
purposes only and is not necessarily indicative of the results of operations
that would have occurred had the transaction been consummated at the beginning
of the period presented, nor is it necessarily indicative of future results. The
unaudited pro forma consolidated financial information was derived by adjusting
our historical financial statements.
 
 The
following table presents pro forma financial information for the three months
ended March 31, 2008 (in thousands, except per unit amounts):
 
 Three
      Months
                  Ended
                  March 31, 2008Total
      revenues
                
                $
                48,392Net
      income
                
                $
                9,160Basic
      earnings per common and subordinated limited partner unit
                
                $
                0.46Diluted
      earnings per common and subordinated limited partner unit
                
                $
                0.46
 
 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 weighted average number of common and subordinated units expected to be
outstanding after the completion of the transactions included in the pro forma
consolidated financial statements. All units were assumed to have been
outstanding since the beginning of the periods presented. Pursuant to 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 pro forma
incentive distributions to the general partner, including an additional
reduction of net income allocable to the limited partners of approximately
$0.2 million for the three months ended March 31, 2008, which includes the
amount of additional incentive distributions that would have occurred if the
excess of net earnings over actual distributions for the period had been
distributed.
 
 4.
MERGER BETWEEN UNIVERSAL AND HANOVER
 
 On
August 20, 2007, Universal Compression Holdings, Inc. (“Universal”) and
Hanover Compressor Company (“Hanover”) completed their merger transaction. In
connection with the merger, Universal and Hanover became wholly-owned
subsidiaries of Exterran Holdings, and Universal then merged with and into
Exterran Holdings. As a result of the merger, Exterran Holdings became the
indirect owner of our general partner, which as of March 31, 2009, owned 389,642
general partner units, representing a 2% general partner interest, and all the
incentive distribution rights in us. In addition, as of March 31, 2009, Exterran
Holdings owned 4,428,067 common units and 6,325,000 subordinated units which,
together with the general partner interest, represent a 57% total ownership
interest in us.
 
  10
  5.
RELATED PARTY TRANSACTIONS
 
 We are a
party to an omnibus agreement with Exterran Holdings and others (as amended and
restated, the “Omnibus Agreement”), the terms of which include, among other
things:
 
 •
                certain
      agreements not to compete between Exterran Holdings and its affiliates, on
      the one hand, and us and our affiliates, on the other
  hand;
 
 •
                Exterran
      Holdings’ obligation to provide all operational staff, corporate staff and
      support services reasonably necessary to operate our business and our
      obligation to reimburse Exterran Holdings for the provision of such
      services, subject to certain limitations and the cost caps discussed
      below;
 
 •
                the
      terms under which we, Exterran Holdings, and our respective affiliates may
      transfer compression equipment among one another to meet our respective
      contract operations services
obligations;
 
 •
                the
      terms under which we may purchase newly-fabricated contract operations
      equipment from Exterran Holdings’
affiliates;
 
 •
                Exterran
      Holdings’ grant of a license of certain intellectual property to us,
      including our logo; and
 
 •
                Exterran
      Holdings’ obligation to indemnify us for certain liabilities and our
      obligation to indemnify Exterran Holdings for certain
      liabilities.
 
 The
Omnibus Agreement will terminate upon a change of control of our general partner
or the removal or withdrawal of our general partner, and certain provisions of
the Omnibus Agreement will terminate upon a change of control of Exterran
Holdings.
 
 During
the three months ended March 31, 2009, pursuant to the terms of the Omnibus
Agreement, we transferred ownership of 20 compressor units, totaling
approximately 10,000 horsepower with a net book value of approximately
$4.2 million to Exterran Holdings. In exchange, Exterran Holdings
transferred ownership to us of 53 compressor units totaling approximately 10,000
horsepower with a net book value of approximately $5.7 million. During the three
months ended March 31, 2009, we recorded an equity contribution of approximately
$1.5 million related to the difference in net book value on the compression
equipment that was exchanged with us. No customer contracts were included in the
transfers. Under the terms of the Omnibus Agreement, such transfers must be of
equal appraised value, as defined in the Omnibus Agreement, with any difference
being settled in cash. As a result, we paid a nominal amount to Exterran
Holdings for the difference in fair value of the equipment in connection with
the transfers.  We recorded the compressor units received at the
historical book basis of Exterran Holdings. The units we received from Exterran
Holdings were being utilized to provide services to our customers on the date of
the transfers and, prior to the transfers, had been leased by us from Exterran
Holdings. The units we transferred to Exterran Holdings were being utilized to
provide services to customers of Exterran Holdings on the date of the transfers,
and prior to the transfers had been leased by Exterran Holdings from
us.
 
 Under the
Omnibus Agreement, Exterran Holdings agreed that, for a period that will
terminate on December 31, 2009, our obligation to reimburse Exterran
Holdings for (i) any cost of sales that it incurs in the operation of our
business will be capped (after taking into account any such costs we incur and
pay directly); and (ii) any selling, general and administrative
(“SG&A”) costs allocated to us will be capped (after taking into account any
such costs we incur and pay directly). From July 9, 2007 through
July 29, 2008, cost of sales were capped at $18.00 per operating horsepower
per quarter.  From July 30, 2008 through March 31, 2009,
cost of sales were capped at $21.75 per operating horsepower per quarter. From
July 9, 2007 through July 29, 2008, SG&A costs were capped at
$4.75 million per quarter. From July 30, 2008 through March 31,
2009, SG&A costs were capped at $6.0 million per quarter. These caps
may be subject to future adjustment in connection with expansions of our
operations through the acquisition or construction of new assets or
businesses.
 
 For the
three months ended March 31, 2009 and 2008, our cost of sales exceeded the cap
provided in the Omnibus Agreement by $2.7 million and $3.6 million,
respectively. For the three months ended March 31, 2009 and 2008, our SG&A
expenses did not exceed the cap provided in the Omnibus
Agreement.  The excess amounts over the caps are included in the
consolidated statements of operations as cost of sales or SG&A expense. The
cash received for the amounts over the caps has been accounted for as a capital
contribution in our consolidated balance sheets and consolidated statements of
cash flows.
 
 Pursuant
to the Omnibus Agreement, we will be permitted to purchase newly fabricated
compression equipment from Exterran Holdings or its affiliates at Exterran
Holdings’ cost to fabricate such equipment plus a fixed margin of 10%, which may
be modified with the approval of Exterran Holdings and the conflicts committee
of our general partner’s board of directors. During the three
  11
  months
ended March 31, 2009 and 2008, we purchased $1.3 million and $1.9 million,
respectively, of new compression equipment from Exterran Holdings. Under GAAP,
transfers of assets and liabilities between entities under common control are to
be initially recorded on the books of the receiving entity at the carrying value
of the transferor. Any difference between consideration given and the carrying
value of the assets or liabilities is treated as an equity distribution or
contribution. Transactions between us and Exterran Holdings and its affiliates
are transactions between entities under common control. As a result, the
equipment purchased during the three months ended March 31, 2009 and 2008 was
recorded in our consolidated balance sheet as property, plant and equipment of
$1.2 million and $1.7 million, respectively, which represents the carrying
value of the Exterran Holdings affiliates that sold it to us, and as a
distribution of equity of $0.1 million and $0.2 million, respectively, which
represents the fixed margin we paid above the carrying value in accordance with
the Omnibus Agreement. During the three months ended March 31, 2009 and 2008,
Exterran Holdings contributed $0.8 million and zero, respectively, related to
the completion of overhauls on compression equipment that were exchanged with us
or contributed to us and were in progress on the date of exchange or
contribution.
 
 Pursuant
to the Omnibus Agreement, in the event that Exterran Holdings determines in good
faith that there exists a need on the part of Exterran Holdings’ contract
operations services business or on our part to lease compression equipment
between Exterran Holdings and us so as to fulfill the compression services
obligations of either Exterran Holdings or us, such equipment may be leased if
it will not cause us to breach any existing compression services contracts or to
suffer a loss of revenue under an existing compression services contract or
incur any unreimbursed costs. At March 31, 2009, we had equipment on lease
to Exterran Holdings with an aggregate cost and accumulated depreciation of $8.6
million and $1.3 million, respectively.
 
 For the
three months ended March 31, 2009 and 2008, we had revenues of $0.3 million and
$0.5 million, respectively, from Exterran Holdings related to the lease of our
compression equipment. For the three months ended March 31, 2009 and 2008, we
had cost of sales of $2.7 million and $1.9 million, respectively, with
Exterran Holdings related to the lease of Exterran Holding’s compression
equipment.
 
 6.
DEBT
 
 Long-term
debt consisted of the following (in thousands):
 
 March
      31, 2009
                
                
                December
      31, 2008Revolving
      credit facility due October 2011
                
                $
                282,750
                
                
                $
                281,250Term
      loan facility due October 2011
                
                
                117,500
                
                
                
                117,500Long-term
      debt
                
                $
                400,250
                
                
                $
                398,750
 
 Our
senior secured credit facility contains various covenants with which we must
comply, including restrictions on the use of proceeds from borrowings and
limitations on our ability to: incur additional debt or sell assets, make
certain investments and acquisitions, grant liens and pay dividends and
distributions. We must maintain various consolidated financial ratios, including
a ratio of EBITDA (as defined in the credit agreement) to Total Interest Expense
(as defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of
total debt to EBITDA of not greater than 5.0 to 1.0. As of March 31, 2009, we
maintained a 4.9 EBITDA to Total Interest Expense ratio and a 4.1 total debt to
EBITDA ratio. As of March 31, 2009, we were in compliance with all
financial covenants under the credit agreement.
 
 7.
CASH DISTRIBUTIONS
 
 We will
make distributions of available cash (as defined in our partnership agreement)
from operating surplus for any quarter during any subordination period in the
following manner:
 
 •
                first, 98% to the
      common unitholders, pro rata, and 2% to our general partner, until we
      distribute for each outstanding common unit an amount equal to the minimum
      quarterly distribution for that
quarter;
 
 •
                second, 98% to the
      common unitholders, pro rata, and 2% to our general partner, until we
      distribute for each outstanding common unit an amount equal to any
      arrearages in payment of the minimum quarterly distribution on the common
      units for any prior quarters during the subordination
    period;
 
 •
                third, 98% to the
      subordinated unitholders, pro rata, and 2% to our general partner, until
      we distribute for each subordinated unit an amount equal to the minimum
      quarterly distribution for that
quarter;
  12
  
 •
                fourth, 85% to all
      common and subordinated unitholders, pro rata, and 15% to our general
      partner, until each unit has received a distribution of
      $0.4375;
 
 •
                fifth, 75% to all
      common and subordinated unitholders, pro rata, and 25% to our general
      partner, until each unit has received a total of
      $0.525; and
 
 •
                thereafter, 50% to all
      common and subordinated unitholders, pro rata, and 50% to our general
      partner.
 
 The
following table summarizes our distributions per unit for 2007 and
2008:
 Period
      Covering
                Payment
      Date
                
                Distribution
      per
                    Limited
      Partner Unit
                
                Total
      Distribution1/1/2007
      - 3/31/2007
                May 15,
      2007
                
                $
                0.3500
                
                $                   4.5 million4/1/2007
      - 6/30/2007
                August 14,
      2007
                
                
                0.3500
                
                6.0 million7/1/2007
      - 9/30/2007
                November 14,
      2007
                
                
                0.4000
                
                6.8 million10/1/2007
      - 12/31/2007
                February 14,
      2008
                
                
                0.4250
                
                7.3 million
      (1)1/1/2008
      - 3/31/2008
                May 14,
      2008
                
                
                0.4250
                
                7.3 million
(1)4/1/2008
      - 6/30/2008
                August 14,
      2008
                
                
                0.4250
                
                8.3 million
  (1)7/1/2008
      - 9/30/2008
                November 14,
      2008
                
                
                0.4625
                
                9.3 million
      (1)10/1/2008
      - 12/31/2008
                February 13,
      2009
                
                
                0.4625
                
                9.3 million
  (1)
 ____________
 
 (1)
                Including
      distributions to our general partner on its incentive distribution
      rights.
 
 On April
30, 2009, the board of directors of Exterran GP LLC approved a cash distribution
of $0.4625 per limited partner unit, or approximately $9.3 million, including
distributions to our general partner on its incentive distribution rights. The
distribution covers the time period from January 1, 2009 through March 31, 2009.
The record date for this distribution is May 11, 2009 and payment is expected to
occur on May 15, 2009.
 
 8.
UNIT-BASED COMPENSATION
 
 Long-Term
Incentive Plan
 
 We have a
long-term incentive plan that was adopted by Exterran GP LLC, the general
partner of our general partner, in October 2006 for employees, directors and
consultants of us, Exterran Holdings or our respective affiliates. The long-term
incentive plan currently permits the grant of awards covering an aggregate of
1,035,378 common units, common unit options, restricted units and phantom units.
The long-term incentive plan is administered by the board of directors of
Exterran GP LLC or a committee thereof (the “Plan Administrator”).
 
 Unit
options will have an exercise price that is not less than the fair market value
of the units on the date of grant and will become exercisable over a period
determined by the Plan Administrator. Phantom units are notional units that
entitle the grantee to receive a common unit upon the vesting of the phantom
unit or, at the discretion of the Plan Administrator, cash equal to the fair
value of a common unit.
 
 In
October 2008, our long-term incentive plan was amended to allow us the option to
settle any exercised unit options in a cash payment equal to the fair market
value of the number of common units that we would otherwise issue upon exercise
of such unit option less the exercise price and any amounts required to meet
withholding requirements.
 
 We have
granted unit options to individuals who are not our employees, but who are
employees of Exterran Holdings who provide services to us. We have also granted
phantom units to directors of Exterran GP LLC and to employees of Exterran
Holdings. Because we grant unit options and phantom units to non-employees, we
are required to re-measure the fair value of these unit options and phantom
units each period and record a cumulative adjustment of the expense previously
recognized.  We recorded $2,000 in SG&A expense related to the
re-measurement of fair value of the phantom units for the three months ended
March 31, 2009. We recorded a reduction of $1.1 million in SG&A expense
related to the re-measurement of fair value of the unit options and phantom
units for the three months ended March 31, 2008.
 
  13
  Unit
Options
 
 As of
March 31, 2009, we had 580,715 outstanding unit options. The unit options
vested and became exercisable on January 1, 2009.  The unit
options expire on December 31, 2009.
 
 The
following table presents unit option activity for the three months ended March
31, 2009 (remaining life in years, intrinsic value in thousands):
 
 UnitOptions
                
                
                WeightedAverage
                    ExercisePrice
                
                
                WeightedAverage
                    RemainingLife
                
                
                Aggregate
                    IntrinsicValueUnit
      options outstanding, December 31, 2008
                
                
                591,429
                
                
                $
                23.77Cancelled
                
                
                (10,714
                )
                
                
                25.94Unit
      options outstanding, March 31, 2009
                
                
                580,715
                
                
                $
                23.73
                
                
                
                0.8
                
                
                $
                —Unit
      options exercisable, March 31, 2009
                
                
                580,715
                
                
                $
                23.73
                
                
                
                0.8
                
                
                $
                —
 
 Intrinsic
value is the difference between the market value of our units and the exercise
price of each unit option multiplied by the number of unit options outstanding
for those unit options where the market value exceeds their exercise
price.
 
 Phantom
Units
 
 During
the three months ended March 31, 2009, we granted 80,624 phantom units to
officers and directors of Exterran GP LLC and certain employees of Exterran
Holdings and its subsidiaries, which settle 33 1/3% on each of the first three
anniversaries of the grant date.
 
 The
following table presents phantom unit activity for the three months ended March
31, 2009:
 
 Phantom
                    Units
                
                
                WeightedAverage
                    Grant-Date
                    Fair
      Valueper
      UnitPhantom
      units outstanding, December 31, 2008
                
                
                48,152
                
                
                $
                30.98Granted
                
                
                80,624
                
                
                
                11.65Vested
                
                
                (17,640
                )
                
                
                32.22Phantom
      units outstanding, March 31, 2009
                
                
                111,136
                
                
                $
                17.32
 
 As of
March 31, 2009, $1.5 million of unrecognized compensation cost related to
unvested phantom units is expected to be recognized over the weighted-average
period of 2.6 years.
 
 9.
ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS
 
 We are
exposed to market risks primarily associated with changes in interest
rates.  We use derivative financial instruments to minimize the risks
and/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.
 
 Interest
Rate Risk
 
 At March
31, 2009, we were party to three interest rate swaps in which we pay fixed
payments and receive floating payments on a notional value of $205.0
million.  We entered into these swaps to offset changes in expected
cash flows due to fluctuations in the associated variable interest rates. Our
interest rate swaps expire over varying dates through December 2011. The
weighted average effective fixed interest rate payable on our interest rate
swaps was 5.3% as of March 31, 2009. We have designated these interest rate
swaps as cash flow hedging instruments pursuant to the criteria of
SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”), so that any change in their fair values
is recognized as a component of comprehensive income (loss) and is included in
accumulated other comprehensive income (loss) to the extent the hedge is
effective. The swap terms substantially coincide with the hedged item and are
expected to offset changes in expected cash flows due to fluctuations in the
variable rate, and therefore we currently do not expect a significant amount of
ineffectiveness on these hedges. We perform quarterly calculations to determine
if the swap agreements are still effective
  14
  and to
calculate any ineffectiveness. For the three months ended March 31, 2009 and
2008, there was no ineffectiveness related to these swaps. We estimate that $7.2
million of deferred pre-tax losses from the interest rate swaps will be realized
as an expense during the next twelve months.  Cash flows from
derivatives designated as hedges are classified in our condensed consolidated
statements of cash flows under the same category as the cash flows from the
underlying assets, liabilities or anticipated transactions.
 
 The
following tables present the effect of derivative instruments on our
consolidated financial position and results of operations (in
thousands):
 
 March
      31, 2009Balance
      Sheet Location
                
                Fair
      Value
                    Asset
      (Liability)Derivatives
      designated as hedging instruments under SFAS No. 133:Interest
      rate hedges
                Current
      portion of interest rate swaps
                
                $
                (7,178
                )Interest
      rate hedges
                Interest
      rate swaps
                
                
                (11,037
                )Total
      derivatives
                
                
                $
                (18,215
                )
 
 Three
      Months Ended March 31, 2009Gain
      (Loss) Recognized in Other Comprehensive Income (Loss) on
      Derivatives
                
                Location
      of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income
      (Loss) into Income (Loss)
                
                Gain
      (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
      into Income (Loss)Derivatives
      designated as cash flow hedges under SFAS No. 133:Interest
      rate
      hedges
                
                $
                (528
                )
                Interest
      expense
                
                $
                (1,781
                )
 
 The
counterparties to our derivative agreements are major international financial
institutions. We monitor the credit quality of these financial institutions and
do not expect non-performance by any counterparty, although such non-performance
could have a material adverse effect on us. We have no specific collateral
posted for our derivative instruments.  The counterparties to our
interest rate swaps are also lenders under our credit facility and, in that
capacity, share proportionally in the collateral pledged under the credit
facility.
 
 10.
FAIR VALUE OF INTEREST RATE SWAP AGREEMENTS
 
 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.
 
  15
  The
following table summarizes the valuation of our interest rate swaps under
SFAS No. 157 pricing levels as of March 31, 2009 (in
thousands):
 
 Total
                
                
                Quoted
      Market
                  Prices
      in
                  ActiveMarkets
                  (Level 1)
                
                
                Significant
      Other
                  Observable
      Inputs(Level 2)
                
                
                Significant
                  UnobservableInputs
                  (Level 3)Interest
      rate swaps asset (liability)
                
                $
                (18,215
                )
                
                $
                —
                
                
                $
                (18,215
                )
                
                $
                —
 
 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 (the “Exchange Act”). All
statements other than statements of historical fact contained in this report are
forward-looking statements, including, without limitation, statements regarding
future financial position, business strategy, proposed acquisitions, budgets,
litigation, projected costs and plans and objectives of management for future
operations. You can identify many of these statements by looking for words such
as “believes,” “expects,” “intends,” “projects,” “anticipates,” “estimates” or
similar words or the negative thereof.
 
 Such
forward-looking statements in this report include, without limitation,
statements regarding:
 
 •
                our
      business growth strategy and projected
costs;
 
 •
                our
      future financial position;
 
 •
                the
      sufficiency of available cash flows to make cash
      distributions;
 
 •
                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
our Annual Report on Form 10-K for the year ended December 31, 2008, and those
set forth from time to time in our filings with the Securities and Exchange
Commission (“SEC”), which are available through our website at www.exterran.com
and through the SEC’s 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
      Internal Revenue Service challenge to our valuation methodologies, which
      may result in a shift of income, gains, losses and/or deductions between
      our general partner and our
unitholders;
 
 •
                the
      risk that counterparties will not perform their obligations under our
      financial instruments;
  17
  
 •
                the
      creditworthiness of our customers;
 
 •
                our
      ability to implement certain business and financial objectives, such
      as:
 
 •
                growing
      our asset base, particularly our fleet of
  compressors;
 
 •
                integrating
      acquired businesses;
 
 •
                generating
      sufficient cash;
 
 •
                accessing
      the capital markets at an acceptable
cost;
 
 •
                purchasing
      additional contract operation contracts and equipment from Exterran
      Holdings; and
 
 •
                refinancing
      existing or incurring additional indebtedness to fund our
      business;
 
 •
                liability
      related to the use of our products and
services;
 
 •
                changes
      in governmental safety, health, environmental or other regulations, which
      could require us to make significant
  expenditures; and
 
 •
                our
      level of indebtedness and ability to fund our
  business.
 
 All
forward-looking statements included in this report are based on information
available to us on the date of this report. Except as required by law, we
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this report.
 
 GENERAL
 
 We are a
publicly held Delaware limited partnership formed on June 22, 2006 to
acquire certain contract operations customer service agreements and a compressor
fleet used to provide compression services under those agreements. In October
2006, we completed an initial public offering of approximately 6.3 million
common units at a price of $21.00 per unit.
  In August
2007, we changed our name from Universal Compression Partners, L.P. to Exterran
Partners, L.P. concurrent with the closing of the merger of Hanover Compressor
Company (“Hanover”) and Universal Compression Holdings, Inc. (“Universal”). In
connection with the merger, Universal and Hanover became wholly-owned
subsidiaries of Exterran Holdings, a new company formed in anticipation of the
merger, and Universal was merged with and into Exterran Holdings. As of
March 31, 2009, public unitholders held a 43% ownership interest in us and
Exterran Holdings owned our remaining equity interests, including the general
partner interests and all of our incentive distribution rights.
 
 July
2008 Contract Operations Acquisition
  In July
2008, we acquired from Exterran Holdings contract operations customer service
agreements with 34 customers and a fleet of approximately 620 compressor units
used to provide compression services under those agreements having a net book
value of $133.9 million, net of accumulated depreciation of
$16.5 million, and comprising approximately 254,000 horsepower, or 6% (by
then available horsepower) of the combined U.S. contract operations
business of Exterran Holdings and us (the “July 2008 Contract Operations
Acquisition”). In connection with this acquisition, we assumed
$175.3 million of debt from Exterran Holdings and issued to Exterran
Holdings’ wholly-owned subsidiaries approximately 2.4 million common units
and approximately 49,000 general partner units. Concurrent with the closing of
the July 2008 Contract Operations Acquisition, we borrowed $117.5 million
under our term loan and $58.3 million under our revolving credit facility,
which together were used to repay the debt assumed from Exterran Holdings in the
acquisition and to pay other costs incurred in the acquisition.
 
  18
  Omnibus
Agreement
 
 We are a
party to an omnibus agreement with Exterran Holdings, our general partner, and
others (as amended, 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; 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 Contract
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 Condensed
Consolidated Financial Statements included in Part I, Item 1 (“Financial
Statements”) of this report.
 
 OVERVIEW
 
 Industry
Conditions and Trends
 
 Our
business environment and corresponding operating results are affected by the
level of energy industry spending for the exploration, development and
production of natural gas reserves. Spending by natural gas exploration and
production companies is dependent upon these companies’ forecasts regarding the
expected future supply and future pricing and demand for oil and natural gas
products and their estimates of risk-adjusted costs to find, develop and produce
reserves. Although we believe our business is less impacted by commodity prices
than certain other oil and natural gas service providers, changes in natural gas
exploration and production spending will normally result in increased or
decreased demand for our products and services.
 
 Natural
gas consumption in the United States of America (“U.S.”) for the twelve months
ended January 31, 2009 decreased by approximately 0.4% over the twelve months
ended January 31, 2008 and is expected to increase by 0.7% per year until 2030,
according to the Energy Information Administration (“EIA”). Additionally, total
natural gas consumption is projected by the EIA to decline by 1.8% in 2009 and
remain relatively unchanged in 2010. 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 20 trillion cubic feet in calendar year
2030.
 
 We
believe the contract compression services industry in the U.S. will
continue to have growth opportunities due to the following factors, among
others:
 
 •
                aging
      producing natural gas fields will require more compression to continue
      producing the same volume of natural
  gas; and
 
 •
                increased
      production from unconventional sources, which include tight sands, shales
      and coal beds, generally requires more compression than production from
      conventional sources to produce the same volume of natural
      gas.
 
 
  19
  Our
Performance Trends and Outlook
 
 Beginning
in the second half of 2008, there have been severe disruptions in the credit and
capital markets and reductions in global economic activity which have had a
significant adverse impact on oil-and-gas-related commodity prices. Currently,
we believe the decline in commodity prices and the uncertain credit and capital
market conditions resulting from the global financial crisis will continue to
negatively impact the level of spending by our customers in 2009 compared with
2008 levels.
 
 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’ services, and (iii) the timing and consummation of
acquisitions of additional contract operations customer contracts and equipment
from Exterran Holdings. In particular, many of our contracts with customers have
short initial terms; we cannot be certain that these contracts will be renewed
after the end of the initial contractual term, and any such nonrenewal could
adversely impact our results of operations and cash available for
distribution.
 
 Given the
current economic environment in the U.S. and anticipated impact of lower
natural gas prices and capital spending by customers, we expect a further
reduction in demand and profitability in our business. We believe that lower
demand, in addition to the available supply of idle and underutilized
compression equipment owned by our customers and competitors will continue to
negatively impact our ability to maintain or improve our horsepower utilization
and revenues in the near term. In addition, because we initially purchased only
contracted equipment from Exterran Holdings, we anticipate that the average
utilization of our contract operations fleet will decrease over time as some
units become idle due to the termination of contract operations service
agreements. A 1% decrease in average utilization of our contract operations
fleet would result in a decrease in our revenue and gross margin (defined as
revenue less cost of sales, excluding depreciation and amortization expense) for
the three months ended March 31, 2009 of approximately $0.5 million and
$0.3 million, respectively.
 
 Our level
of capital spending depends on the demand for our services and the equipment we
require to render those services to our customers. While our contract operations
services business has historically experienced more stable demand than that for
certain other energy service products and services, our total operating
horsepower decreased by approximately 2.5% from December 31, 2008 to March 31,
2009, and we expect further horsepower declines during the remainder of 2009. We
will continue to evaluate the impact of these trends on our business as the
market and industry environment continue to evolve.  For further
information regarding material uncertainties to which our business is exposed,
see Risk Factors included in this report and in our Annual Report on
Form  10-K for the year ended December 31, 2008.
 
 Pursuant
to the Omnibus Agreement between us and Exterran Holdings, our obligation to
reimburse Exterran Holdings for cost of sales and SG&A expenses is capped
through December 31, 2009 (see Note 5 to the Financial Statements).
During the three months ended March 31, 2009 and 2008, our cost of sales
exceeded this cap.
 
 Exterran
Holdings intends for us to be the primary growth vehicle for its
U.S. contract operations business and intends to offer us the opportunity
to purchase the remainder of its U.S. contract operations business over
time, but is not obligated to do so. Likewise, we are not required to purchase
any additional portions of such business. The consummation of any future
purchase of additional portions of that business and the timing of any such
purchase will depend upon, among other things, our reaching an agreement with
Exterran Holdings regarding the terms of such purchase, which will require the
approval of the conflicts committee of our general partner’s board of directors.
The timing of such transactions would also depend on, among other things, market
and economic conditions and the availability to us of debt and equity capital.
Future contributions of assets to us upon consummation of transactions with
Exterran Holdings may increase or decrease our operating performance, financial
position and liquidity. 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.
 
  20
  Operating
Highlights
 
 The
following table summarizes total available horsepower, total operating
horsepower, average operating horsepower and horsepower utilization
percentages:
 
 Three Months EndedMarch 31, 2009
                
                
                December 31, 2008
                
                
                March 31, 2008Total
      Available Horsepower (at period end)
                
                
                1,040,865
                
                
                
                1,026,124
                
                
                
                719,989Total
      Operating Horsepower (at period end)
                
                
                886,558
                
                
                
                909,288
                
                
                
                652,216Average
      Operating Horsepower
                
                
                899,587
                
                
                
                908,318
                
                
                
                659,459Horsepower
      Utilization:Spot
      (at period end)
                
                
                85
                %
                
                
                89
                %
                
                
                91
                %Average
                
                
                87
                %
                
                
                89
                %
                
                
                91
                %
 
 FINANCIAL
RESULTS OF OPERATIONS
 
 The
three months ended March 31, 2009 compared to the three months ended March 31,
2008
 
 The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income (dollars in thousands):
 
 Three Months Ended March
31,2009
                
                
                2008Revenue
                
                $
                48,233
                
                
                $
                35,267Gross
      margin (1)
                
                
                26,051
                
                
                
                19,124Gross
      margin percentage
                
                
                54
                %
                
                
                54
                %Expenses:Depreciation
      and amortization
                
                $
                8,334
                
                
                $
                5,674Selling,
      general and administrative
                
                
                6,001
                
                
                
                3,001Interest
      expense
                
                
                4,819
                
                
                
                3,801Other
      (income) expense, net
                
                
                27
                
                
                
                (10
                )Income
      tax expense
                
                
                149
                
                
                
                111Net
      income
                
                $
                6,721
                
                
                $
                6,547
 ____________
 
 (1)
                For
      a reconciliation of gross margin to net income, its most directly
      comparable financial measure, calculated and presented in accordance with
      accounting principles generally accepted in the U.S. (“GAAP”), please read
      Part I, Item 2 (“Management’s Discussion and Analysis of Financial
      Condition and Results of Operations – Non-GAAP Financial Measure”) of this
      report.
 
 Revenue.Average
monthly operating horsepower was 899,587 and 659,459 for the three months ended
March 31, 2009 and 2008, 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 $16.6 million of the increase in
revenue, partially offset by a decrease in horsepower utilization, for the three
months ended March 31, 2009 compared to the three months ended March 31,
2008.
 
 Gross Margin.  The
increase in gross margin (defined as revenue less cost of sales, excluding
depreciation and amortization expense) for the three months ended March 31, 2009
compared to the three months ended March 31, 2008 was primarily due to the
inclusion of the results from the assets acquired in the July 2008 Contract
Operations Acquisition, partially offset by a decrease in horsepower
utilization, for the three months ended March 31, 2009 compared to the three
months ended March 31, 2008.
 
 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.
 
 SG&A.  SG&A
expenses are primarily comprised of an allocation of expenses, including costs
for personnel support and related expenditures, from Exterran Holdings. The
increase in SG&A expense was primarily due to the increased costs associated
with the increase in revenues after the July 2008 Contract Operations
Acquisition. SG&A expenses represented 12% and 9% of revenues for the three
months ended March 31, 2009 and 2008, respectively. The increase in SG&A
expense as a percentage of revenue was primarily due to the difference in the
impact of the re-measurement of fair value of our unit options and phantom
units. We recorded $2,000 in SG&A expense related to the re-measurement of
fair value of the phantom units for the three months ended March 31,
2009.
  21
  We
recorded a reduction of $1.1 million in SG&A expense related to the
re-measurement of the fair value of the unit options and phantom units for the
three months ended March 31, 2008. We have granted unit options and phantom
units to individuals who are not our
employees, but who are employees of Exterran Holdings and its subsidiaries that
provide services to us. Because we grant unit options and phantom units to
non-employees, we are required to re-measure the fair value of the unit options
and certain phantom units each period and to record a cumulative adjustment of
the expense previously recognized.
 
 Interest
expense.  The increase in interest expense was primarily due to
a higher average balance of long-term debt for the first quarter of 2009
resulting from our funding of the July 2008 Contract Operations Acquisition in
the prior year.  The increase in interest expense was partially offset
by a decrease in our weighted average effective interest rate, including the
impact of interest rate swaps, to 4.6% for the three months ended March 31, 2009
from 6.6% for the three months ended March 31, 2008.
 
 Income Tax
Expense.  Income tax expense primarily reflects taxes recorded
under the Texas margins tax. The increase in income tax expense for the three
months ended March 31, 2009 was primarily due to an increase in our revenue
earned within the state of Texas.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 The
following tables summarize our sources and uses of cash for the three months
ended March 31, 2009 and 2008, and our cash and working capital as of the
end of the periods presented (in thousands):
 
 Three Months Ended March
31,2009
                
                
                2008Net
      cash provided by (used in):Operating
      activities
                
                $
                11,222
                
                
                $
                3,991Investing
      activities
                
                
                (8,581
                )
                
                
                (4,469
                )Financing
      activities
                
                
                (5,111
                )
                
                
                (2,071
                )Net
      change in cash and cash equivalents
                
                $
                (2,470
                )
                
                $
                (2,549
                )
 
 March
      31, 2009
                
                
                December
      31, 2008Cash
      and cash equivalents
                
                $
                774
                
                
                $
                3,244Working
      capital
                
                
                23,812
                
                
                
                22,284
 
 Operating
Activities.  The increase in net cash provided by operating
activities was primarily the result of a smaller increase in accounts receivable
for the three months ended March 31, 2009 compared to the three months ended
March 31, 2008 and additional cash flow from operations generated from increased
activity after the July 2008 Contract Operations Acquisition.
 
 Investing
Activities.The increase in cash used in investing activities
during the three months ended March 31, 2009 compared to the three months ended
March 31, 2008 was primarily attributable to increased capital expenditures in
the current period. Capital expenditures for the three months ended March 31,
2009 were $7.2 million, consisting of $2.5 million for fleet additions and $4.7
million for compressor maintenance activities. Included in our capital
expenditures for the three months ended March 31, 2009 were new compression
equipment purchases of $1.3 million from Exterran Holdings.
 
 Financing
Activities.  The increase in cash used in financing activities
during the three months ended March 31, 2009 compared to the three months ended
March 31, 2008 was primarily the result of an increase in distributions to our
unitholders in the first quarter of 2009 and repayment of amounts due to
affiliates in the current year period.  These increases were partially
offset by higher net borrowings under our revolving credit facility in the three
months ended March 31, 2009.
 
 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.
  22
  We
currently plan to spend approximately $30 million to $35 million in
net capital expenditures during 2009 including (1) $10 million to
$15 million on growth capital for fleet equipment and
(2) approximately $20 million on equipment maintenance
capital.
 
 In
addition, our capital requirements include funding distributions to our
unitholders. We anticipate such distributions will be funded through cash
provided by operating activities and borrowings under our credit facility and
that we have the ability to generate adequate amounts of cash to meet our
short-term and long-term needs. Given our objective of long-term growth through
acquisitions, expansion capital expenditure projects and other internal growth
projects, we anticipate that over time we will continue to invest capital to
grow and acquire assets. We will actively consider a variety of assets for
potential acquisitions and expansion projects. We expect to fund future capital
expenditures with borrowings under our credit facility, the issuance of
additional partnership units, and future debt offerings as appropriate, given
market conditions. The timing of future capital expenditures will be based on
the economic environment, including the availability of debt and equity
capital.
 
 Our Ability to Grow Depends on Our
Ability to Access External Expansion Capital.  We expect
that we will rely primarily upon external financing sources, including our
revolving credit facility and 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 credit crisis 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. We expect that we will distribute all of our available cash
to our unitholders. Available cash is reduced by cash reserves established by
our general partner to provide for the proper conduct of our business, including
future capital expenditures. To the extent we are unable to finance growth
externally and we are unwilling to establish cash reserves to fund future
acquisitions, our cash distribution policy will significantly impair our ability
to grow. Because we distribute all of our available cash, we may not grow as
quickly as businesses that reinvest their available cash to expand ongoing
operations. To the extent we issue additional units in connection with any
acquisitions or expansion capital expenditures, the payment of distributions on
those additional units may increase the risk that we will be unable to maintain
or increase our per unit distribution level, which in turn may impact the
available cash that we have to distribute 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. If any 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.
 
 The
financial crisis could also have an impact on our remaining interest rate swap
agreements if the counterparties are unable to perform their obligations under
those agreements. At March 31, 2009, the combined liability related to our
outstanding swap agreements was $18.2 million and was all in favor of our
counterparties.
 
 Long- term
Debt.  In October 2006, we, as guarantor, and EXLP Operating
LLC, our wholly-owned subsidiary, entered into a five-year senior secured credit
agreement. The revolving credit facility under the credit agreement initially
consisted of a $225 million revolving credit facility that was expanded to
$315 million in July 2007.
 
 Our
revolving credit facility bears interest at a base rate, or LIBOR, at our
option, plus an applicable margin, as defined in the credit
agreement.  At March 31, 2009, all amounts outstanding were LIBOR
loans and the applicable margin was 1.5%. The weighted average interest rate on
the outstanding balance at March 31, 2009, excluding the effect of interest
rate swaps, was 2.6%.
 
 In May
2008, we entered into an amendment to our senior secured credit facility that
increased the aggregate commitments under that facility to provide for a
$117.5 million term loan facility that matures in October 2011. Concurrent
with the closing of the July 2008 Contract Operations Acquisition, the
$117.5 million term loan was funded and $58.3 million was drawn on our
revolving credit facility, which together were used to repay the debt assumed
from Exterran Holdings in the acquisition and to pay other costs incurred in the
acquisition. The $117.5 million term loan is non-amortizing but must be
repaid with the net 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.
 
  23
  The term
loan bears interest at a base rate or LIBOR, at our option, plus an applicable
margin.  At March 31, 2009, all amounts outstanding were LIBOR
loans and the applicable margin was 2.0%. 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 March 31, 2009, excluding the effect of
interest rate swaps, was 2.6%.
 
 As of
March 31, 2009, we had approximately $282.8 million outstanding and
$32.2 million available under our revolving credit facility. All amounts
under the revolving credit facility mature in October 2011.
 
 Our
senior secured credit facility contains various covenants with which we must
comply, including restrictions on the use of proceeds from borrowings and
limitations on our ability to: incur additional debt or sell assets, make
certain investments and acquisitions, grant liens and pay dividends and
distributions. We must maintain various consolidated financial ratios, including
a ratio of EBITDA (as defined in the credit agreement) to Total Interest Expense
(as defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of
total debt to EBITDA of not greater than 5.0 to 1.0. As of March 31, 2009, we
maintained a 4.9 to 1.0 EBITDA to Total Interest Expense ratio and a 4.1 to 1.0
total debt to EBITDA ratio. As of March 31, 2009, we were in compliance
with all financial covenants under the credit agreement. For further information
regarding the covenants of our senior secured credit facility, see Part II, Item
1A “Risk Factors” of this report.
 
 Distributions to
Unitholders.  Our partnership agreement requires us to
distribute all of our “available cash” quarterly. Under the partnership
agreement, available cash is defined generally to mean, for each fiscal quarter,
(i) our cash on hand at the end of the quarter in excess of the amount of
reserves our general partner determines is necessary or appropriate to provide
for the conduct of our business, to comply with applicable law, any of our debt
instruments or other agreements or to provide for future distributions to our
unitholders for any one or more of the upcoming four quarters, plus,
(ii) if our general partner so determines, all or a portion of our cash on
hand on the date of determination of available cash for the
quarter.
 
 On April
30, 2009, the board of directors of Exterran GP LLC approved a cash distribution
of $0.4625 per limited partner unit, or approximately $9.3 million,
including distributions to our general partner on its incentive distribution
rights. The distribution covers the time period from January 1, 2009
through March 31, 2009. The record date for this distribution is May 11, 2009
and payment is expected to occur on May 15, 2009.
 
 NON-GAAP
FINANCIAL MEASURE
 
 We define
gross margin as total revenue less cost of sales (excluding depreciation and
amortization expense). Gross margin is included as a supplemental disclosure
because it is a primary measure used by our management as it represents the
results of revenue and cost of sales (excluding depreciation and amortization
expense), which are key components of our operations. We believe gross margin is
important because it focuses on the current operating performance of our
operations and excludes the impact of the prior historical costs of the assets
acquired or constructed that are utilized in those operations, the indirect
costs associated with our SG&A activities, the impact of our financing
methods and income tax expense. Depreciation and amortization expense may not
accurately reflect the costs required to maintain and replenish the operational
usage of our assets and therefore may not portray the costs from current
operating activity. As an indicator of our operating performance, gross margin
should not be considered an alternative to, or more meaningful than, net income
as determined in accordance with GAAP. Our gross margin may not be comparable to
a similarly titled measure of another company because other entities may not
calculate gross margin in the same manner.
 
 Gross
margin has certain material limitations associated with its use as compared to
net income. These limitations are primarily due to the exclusion of interest
expense, depreciation and amortization expense and SG&A expense. Each of
these excluded expenses is material to our consolidated results of operations.
Because we intend to finance a portion of our operations through borrowings,
interest expense is a necessary element of our costs and our ability to generate
revenue. Additionally, because we use capital assets, depreciation expense is a
necessary element of our costs and our ability to generate revenue, and SG&A
expenses are necessary costs to support our operations and required corporate
activities. To compensate for these limitations, management uses this non-GAAP
measure as a supplemental measure to other GAAP results to provide a more
complete understanding of our performance.
 
  24
  The
following table reconciles our net income to gross margin:
 
 Three Months Ended March
31,2009
                
                
                2008(In
      thousands)Net
      income
                
                $
                6,721
                
                
                $
                6,547Depreciation
      and amortization
                
                
                8,334
                
                
                
                5,674Selling,
      general and administrative
                
                
                6,001
                
                
                
                3,001Interest
      expense
                
                
                4,819
                
                
                
                3,801Other
      (income) expense, net
                
                
                27
                
                
                
                (10
                )Income
      tax expense
                
                
                149
                
                
                
                111Gross
      margin
                
                $
                26,051
                
                
                $
                19,124
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We have
no material off-balance sheet arrangements.
 
  25
  
 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
March 31, 2009, after taking into consideration interest rate swaps, we had
approximately $195.3 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 $2.0 million.
 
 For
further information regarding our use of interest rate swap agreements to manage
our exposure to interest rate fluctuations on a portion of our debt obligations,
see Note 9 to the Financial Statements.
  ITEM
4. Controls and Procedures
 
 Management’s Evaluation of Disclosure
Controls and Procedures
 
 As
required by Rule 13a-15(b) under the Exchange Act, the management of
Exterran GP LLC, the general partner of our general partner, including the Chief
Executive Officer and Chief Financial Officer, evaluated as of the end of the
period covered by this report the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures, as of the end of the period covered
by this report, were effective for the purpose of ensuring that information
required to be disclosed by us in this report is recorded, processed, summarized
and reported within the time periods specified by the rules and forms under the
Exchange Act and is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in our internal control over financial reporting during the last
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
 
  26
  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
 
 There
have been no material changes or updates in our risk factors that were
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2008, except as follows:
  Covenants
in our debt agreements may impair our ability to operate our
business.
 
 Our
credit facility includes covenants limiting our ability to make distributions,
incur indebtedness, grant liens, merge, make loans, acquisitions, investments or
dispositions and engage in transactions with affiliates. We must maintain
various consolidated financial ratios, including a ratio of EBITDA (as defined
in the Partnership Credit Agreement) to total interest expense (as defined in
the Partnership Credit Agreement) of not less than 2.5 to 1.0, and a ratio of
total debt to EBITDA of not greater than 5.0 to 1.0. As of March 31, 2009, we
maintained a 4.9 to 1.0 EBITDA to total interest expense ratio and a 4.1 to 1.0
total debt to EBITDA ratio. As of March 31, 2009, we were in compliance
with all financial covenants under our Credit Agreement.
  If
we were to experience a significant deterioration in the demand for our
services, we may not be able to comply with certain of the covenants associated
with our indebtedness. The
breach of any of our covenants could cause our indebtedness under our Credit
Agreement to become due and payable.  If the repayment obligations on
any of our indebtedness were to be so accelerated, we may not be able to repay
the debt or refinance the debt on acceptable terms, and our financial position
would be materially adversely
affected.
 The
tax treatment of publicly traded partnerships or an investment in our common
units could be subject to potential legislative, judicial or administrative
changes and differing interpretations, possibly on a retroactive
basis.
 
 The
present U.S. federal income tax treatment of publicly traded partnerships,
including us, or an investment in our common units may be modified by
administrative, legislative or judicial interpretation at any time. For example,
judicial interpretations of the U.S. federal income tax laws may have a direct
or indirect impact on our status as a partnership and, in some instances, a
court’s conclusions may heighten the risk of a challenge regarding our status as
a partnership.  Moreover, members of Congress have considered
substantive changes to the existing U.S. federal income tax laws that would have
affected publicly traded partnerships. Any modification to the U.S. federal
income tax laws and interpretations thereof may or may not be applied
retroactively. Although the legislation considered would not have appeared to
affect our tax treatment as a partnership, we are unable to predict whether
any of these changes, or other proposals, will be reconsidered or will
ultimately be enacted. Any such changes or differing judicial interpretations of
existing laws could negatively impact the value of an investment in our common
units.
  New
proposed regulations under the Clean Air Act, if implemented, could result in
increased compliance costs.
  In
March 2009, the Environmental Protection Agency (“EPA”) formally proposed new
regulations under the Clean Air Act (“CAA”) to control emissions of hazardous
air pollutants from existing stationary reciprocal internal combustion engines.
The rule, if and when finalized by the EPA, may require us to undertake
significant expenditures, including expenditures for installing pollution
control equipment such as oxidation catalysts or non-selective catalytic
reduction equipment, imposing more stringent maintenance practices, and
implementing additional monitoring practices on a significant percentage of our
natural gas compressor engine fleet. At this point, we cannot predict the final
regulatory requirements or the cost to comply with such requirements. The
comment period on the proposed regulation ends on June 3, 2009. Under the
proposal, compliance will be required by three years from the effective date of
the final rule. This proposed rule and any other new regulations requiring the
installation of more sophisticated emission control equipment could have a
material adverse impact on our business, financial condition, results of
operations or cash flows.
  27
  Climate
change legislation and regulatory initiatives could result in increased
compliance costs.
 
 Scientific
studies suggest that emissions of certain gases, commonly referred to as
“greenhouse gases,” such as carbon dioxide and methane, may be contributing to
climatic changes in the Earth’s atmosphere. In response to such studies,
President Obama has expressed support for, and it is anticipated that the U.S.
Congress will continue actively to consider, legislation to restrict or regulate
emissions of greenhouse gases. The legislation currently under consideration by
Congress could require greenhouse gas emissions reductions of as much as 20%
from present levels by 2020 and by as much as 80% by 2050.  In
addition, more than one-third of the states, either individually or through
multi-state regional initiatives, have begun to address greenhouse gas
emissions, primarily through the planned development of emission inventories or
regional greenhouse gas cap and trade programs. Although most of the state-level
initiatives have to date been focused on large sources of greenhouse gas
emissions, such as electric power plants, it is possible that small sources such
as gas-fired compressors could be subject to greenhouse gas-related
regulation.  Depending on the particular program, we could be required
to control emissions or to purchase and surrender allowances for greenhouse gas
emissions resulting from our operations.
  Also, as
a result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts, et al. v. EPA,
the EPA may regulate greenhouse gas emissions from mobile sources such as new
motor vehicles, even if Congress does not adopt new legislation specifically
addressing emissions of greenhouse gases. The Court’s holding in Massachusettsthat greenhouse
gases including carbon dioxide fall under the CAA’s definition of “air
pollutant” may also result in future regulation of carbon dioxide and other
greenhouse gas emissions from stationary sources. In July 2008, the EPA released
an “Advance Notice of Proposed Rulemaking” regarding possible future regulation
of greenhouse gas emissions under the CAA, in response to the Supreme Court’s
decision in Massachusetts. In the notice,
the EPA evaluated the potential regulation of greenhouse gases under several
different provisions of the CAA, but did not propose any specific, new
regulatory requirements for greenhouse gases. The notice and two recent
developments suggest that the EPA is beginning to pursue a path toward the
regulation of greenhouse gas emissions under its existing CAA authority. First,
in April 2009, the EPA proposed a new rule requiring approximately 13,000
facilities comprising a substantial percentage of annual U.S. greenhouse gas
emissions to inventory and report their greenhouse gas emissions to the EPA
beginning in 2011. Second, also in April 2009, the EPA responded to the Massachusetts case by issuing
a proposed “endangerment finding” under section 202(a)(1) of the CAA concluding
that greenhouse gas emissions from new motor vehicles are reasonably anticipated
to endanger public health and welfare. If finalized, this finding may trigger a
variety of regulatory consequences including obligations on the EPA to impose
limits on greenhouse gas emissions from new motor vehicles.  Further, the
endangerment finding could be used by the EPA as a basis to impose limits on
greenhouse gas emissions from certain categories of stationary sources. Both
proposals are subject to a period of public comment, may or may not be adopted
in the form proposed, and may be subject to judicial challenges upon adoption.
Although it is not possible at this time to predict how Congressional or state
legislation that may be enacted or new EPA or other regulations that may be
adopted to address greenhouse gas emissions would impact our business, any such
new federal, state or local regulation of carbon dioxide or other greenhouse gas
emissions that may be imposed in areas in which we conduct business could result
in increased compliance costs or additional operating restrictions, and could
have a material adverse effect on our business, financial condition, results of
operations and cash flows.
 28
 ITEM 6. Exhibits
 
 Exhibit No.
                
                Description2.1
                
                Contribution,
      Conveyance and Assumption Agreement, dated June 25, 2008, by and
      among Exterran Holdings, Inc., Hanover Compressor Company, Hanover
      Compression General Holdings, LLC, Exterran Energy Solutions, L.P.,
      Exterran ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH
      GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner,
      L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P.,
      incorporated by reference to Exhibit 2.1 to the Registrant’s Current
      Report on Form 8-K filed on June 26, 20083.1
                
                Certificate
      of Limited Partnership of Universal Compression Partners, L.P.,
      incorporated by reference to Exhibit 3.1 to the Registrant’s
      Registration Statement on Form S-1 filed on June 27,
      20063.2
                
                Certificate
      of Amendment to Certificate of Limited Partnership of Universal
      Compression Partners, L.P. (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 on August 24,
      20073.3
                
                First
      Amended and Restated Agreement of Limited Partnership of Exterran
      Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to
      the Registrant’s Quarterly Report on form 10-Q for the quarter ended March
      31, 20083.4
                
                Certificate
      of Partnership of UCO General Partner, LP, incorporated by reference to
      Exhibit 3.3 to the Registrant’s Registration Statement on
      Form S-1 filed on June 27, 20063.5
                
                Amended
      and Restated Limited Partnership Agreement of UCO General Partner, LP,
      incorporated by reference to Exhibit 3.2 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 20063.6
                
                Certificate
      of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5
      to the Registrant’s Registration Statement on Form S-1 filed
      June 27, 20063.7
                
                Amended
      and Restated Limited Liability Company Agreement of UCO GP, LLC,
      incorporated by reference to Exhibit 3.3 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 200610.1
                †*
                Form
      of Exterran Partners, L.P. Award Notice for Phantom Units with
      DERs10.2
                †*
                Form
      of Exterran Partners, L.P. Award Notice for Phantom Units with DERs for
      Directors10.3
                †*
                Exterran
      Partners, L.P. Award Notice for Phantom Units with DERs for Stephen A.
      Snider31.1
                *
                Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of
  193431.2
                *
                Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of
  193432.1
                *
                Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
                *
                Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 ____________
 
 †
                Management
      contract or compensatory plan or arrangement.*
                Filed
      herewith.
 
  29
  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.
 
 May 7,
2009                                                                               
By: EXTERRAN GENERAL PARTNER, L.P.
 its General Partner
 
 By: EXTERRAN GP LLC
 its General Partner
 
 By: /s/ DAVID S.
MILLER
 David S. Miller
 Vice President and Chief Financial
Officer
 (Principal Financial
Officer)
 By: /s/ KENNETH R.
BICKETT
 Kenneth R. Bickett
 Vice President - Finance and
Accounting
 (Principal Accounting
Officer)
  30
  Index
to Exhibits
 
 Exhibit No.
                
                Description2.1
                
                Contribution,
      Conveyance and Assumption Agreement, dated June 25, 2008, by and
      among Exterran Holdings, Inc., Hanover Compressor Company, Hanover
      Compression General Holdings, LLC, Exterran Energy Solutions, L.P.,
      Exterran ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH
      GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner,
      L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P.,
      incorporated by reference to Exhibit 2.1 to the Registrant’s Current
      Report on Form 8-K filed on June 26, 20083.1
                
                Certificate
      of Limited Partnership of Universal Compression Partners, L.P.,
      incorporated by reference to Exhibit 3.1 to the Registrant’s
      Registration Statement on Form S-1 filed on June 27,
      20063.2
                
                Certificate
      of Amendment to Certificate of Limited Partnership of Universal
      Compression Partners, L.P. (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 on August 24,
      20073.3
                
                First
      Amended and Restated Agreement of Limited Partnership of Exterran
      Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to
      the Registrant’s Quarterly Report on form 10-Q for the quarter ended March
      31, 20083.4
                
                Certificate
      of Partnership of UCO General Partner, LP, incorporated by reference to
      Exhibit 3.3 to the Registrant’s Registration Statement on
      Form S-1 filed on June 27, 20063.5
                
                Amended
      and Restated Limited Partnership Agreement of UCO General Partner, LP,
      incorporated by reference to Exhibit 3.2 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 20063.6
                
                Certificate
      of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5
      to the Registrant’s Registration Statement on Form S-1 filed
      June 27, 20063.7
                
                Amended
      and Restated Limited Liability Company Agreement of UCO GP, LLC,
      incorporated by reference to Exhibit 3.3 to the Registrant’s Current
      Report on Form 8-K filed on October 26, 200610.1
                †*
                Form
      of Exterran Partners, L.P. Award Notice for Phantom Units with
      DERs10.2
                †*
                Form
      of Exterran Partners, L.P. Award Notice for Phantom Units with DERs for
      Directors10.3
                †*
                Exterran
      Partners, L.P. Award Notice for Phantom Units with DERs for Stephen A.
      Snider31.1
                *
                Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of
  193431.2
                *
                Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to
      Rule 13a-14 under the Securities Exchange Act of
  193432.1
                *
                Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
                *
                Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 ____________
 
 †
                Management
      contract or compensatory plan or arrangement.*
                Filed
      herewith.