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 June 30, 2008£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE TRANSITION PERIOD
  FROM____________TO____________.





Commission
File No. 001-33078





EXTERRAN
PARTNERS, L.P.


(Exact
name of registrant as specified in its charter)





Delaware
            22-3935108(State
      or Other Jurisdiction of
            (I.R.S.
      EmployerIncorporation
      or Organization)
            Identification
      No.)





16666
      Northchase DriveHouston,
      Texas
            77060(Address
      of principal executive offices)
            (Zip
      Code)





(281)
836-7000


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes R No £





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





Large
      accelerated filer £
            Accelerated
      filer R
            Non-accelerated
      filer £
            Smaller
      reporting company £(Do
      not check if a smaller reporting company)





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




As of
July 31, 2008, there were 12,767,462 common units and 6,325,000 subordinatedunits outstanding.








TABLE
OF CONTENTS





PagePART
      I. UNAUDITED FINANCIAL INFORMATIONItem
      1. Financial StatementsCondensed
      Consolidated Balance Sheets
            3Condensed
      Consolidated Statements of Operations
            4Condensed
      Consolidated Statements of Comprehensive Income
            5Condensed
      Consolidated Statements of Cash Flows
            6Notes
      to Unaudited Condensed Consolidated Financial Statements
            7Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            15Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            25Item
      4. Controls and Procedures
            25PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
            26Item
      1A. Risk Factors
            26Item
      6. Exhibits
            27SIGNATURES
            28





2


PART
I. UNAUDITED FINANCIAL INFORMATION





ITEM 1.Financial
Statements





EXTERRAN
PARTNERS, L.P.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except for unit amounts)


(unaudited)





June 30, 2008
            
            
            December 31, 2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,018
            
            
            $
            2,835Accounts
      receivable, trade, net of allowance of $92 and $86,
      respectively
            
            
            21,169
            
            
            
            13,434Accounts
      receivable, affiliate
            
            
            6,092
            
            
            
            36,941Total
      current assets
            
            
            28,279
            
            
            
            53,210Compression
      equipment
            
            
            396,279
            
            
            
            393,906Accumulated
      depreciation
            
            
            (99,635
            )
            
            
            (92,938
            )Net
      compression equipment
            
            
            296,644
            
            
            
            300,968Goodwill
            
            
            67,273
            
            
            
            67,152Other
      assets
            
            
            1,798
            
            
            
            1,699Total
      assets
            
            $
            393,994
            
            
            $
            423,029LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      liabilities:Accounts
      payable, trade
            
            $
            463
            
            
            $
            481Accounts
      payable, affiliate
            
            
            11,056
            
            
            
            45,318Accrued
      liabilities
            
            
            3,355
            
            
            
            1,991Accrued
      interest
            
            
            1,674
            
            
            
            3,142Current
      portion of interest rate swaps
            
            
            3,195
            
            
            
            2,170Total
      current liabilities
            
            
            19,743
            
            
            
            53,102Long-term
      debt
            
            
            217,000
            
            
            
            217,000Interest
      rate swaps
            
            
            5,878
            
            
            
            7,768Other
      long-term liabilities
            
            
            159
            
            
            
            —Total
      liabilities
            
            
            242,780
            
            
            
            277,870Commitments
      and contingencies (Note 11)Partners’
      capital:Limited
      partner units:Common
      units, 10,353,790 units issued and outstanding
            
            
            198,859
            
            
            
            197,903Subordinated
      units, 6,325,000 units issued and outstanding
            
            
            (45,400
            )
            
            
            (49,411
            )General
      partner units, 2% interest with 340,383 units issued and
      outstanding
            
            
            6,050
            
            
            
            5,827Accumulated
      other comprehensive loss
            
            
            (8,295
            )
            
            
            (9,160
            )Total
      partners’ capital
            
            
            151,214
            
            
            
            145,159Total
      liabilities and partners’ capital
            
            $
            393,994
            
            
            $
            423,029





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 of dollars)
 (unaudited)
 Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenue
                  
                  $
                  34,999
                  
                  
                  $
                  18,804
                  
                  
                  $
                  70,266
                  
                  
                  $
                  36,389Costs
      and expenses:Cost
      of sales (excluding depreciation)
                  
                  
                  15,937
                  
                  
                  
                  8,062
                  
                  
                  
                  32,080
                  
                  
                  
                  15,569Depreciation
                  
                  
                  5,811
                  
                  
                  
                  2,968
                  
                  
                  
                  11,485
                  
                  
                  
                  5,750Selling,
      general and administrative
                  
                  
                  4,745
                  
                  
                  
                  3,426
                  
                  
                  
                  7,746
                  
                  
                  
                  6,196Interest
      expense
                  
                  
                  3,445
                  
                  
                  
                  2,093
                  
                  
                  
                  7,246
                  
                  
                  
                  4,226Other
      (income) expense, net
                  
                  
                  (1,129
                  )
                  
                  
                  (3
                  )
                  
                  
                  (1,139
                  )
                  
                  
                  (9
                  )Total
      costs and expenses
                  
                  
                  28,809
                  
                  
                  
                  16,546
                  
                  
                  
                  57,418
                  
                  
                  
                  31,732Income
      before income taxes
                  
                  
                  6,190
                  
                  
                  
                  2,258
                  
                  
                  
                  12,848
                  
                  
                  
                  4,657Income
      tax expense (benefit)
                  
                  
                  111
                  
                  
                  
                  (6
                  )
                  
                  
                  222
                  
                  
                  
                  50Net
      income
                  
                  $
                  6,079
                  
                  
                  $
                  2,264
                  
                  
                  $
                  12,626
                  
                  
                  $
                  4,607General
      partner interest in net income
                  
                  $
                  186
                  
                  
                  $
                  45
                  
                  
                  $
                  373
                  
                  
                  $
                  92Limited
      partner interest in net income
                  
                  $
                  5,893
                  
                  
                  $
                  2,219
                  
                  
                  $
                  12,253
                  
                  
                  $
                  4,515Weighted
      average limited partners units outstanding:Basic
                  
                  
                  16,679
                  
                  
                  
                  12,650
                  
                  
                  
                  16,679
                  
                  
                  
                  12,650Diluted
                  
                  
                  16,779
                  
                  
                  
                  12,709
                  
                  
                  
                  16,776
                  
                  
                  
                  12,676Earnings
      per limited partner unit—Basic
                  
                  $
                  0.35
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.73
                  
                  
                  $
                  0.36Earnings
      per limited partner unit—Diluted
                  
                  $
                  0.35
                  
                  
                  $
                  0.17
                  
                  
                  $
                  0.73
                  
                  
                  $
                  0.36
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.





4


EXTERRAN
PARTNERS, L.P.


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (in
thousands of dollars)
 (unaudited)
 Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Net
      income
                  
                  $
                  6,079
                  
                  
                  $
                  2,264
                  
                  
                  $
                  12,626
                  
                  
                  $
                  4,607Other
      comprehensive income:Interest
      rate swap gain
                  
                  
                  8,153
                  
                  
                  
                  2,413
                  
                  
                  
                  865
                  
                  
                  
                  1,864Comprehensive
      income
                  
                  $
                  14,232
                  
                  
                  $
                  4,677
                  
                  
                  $
                  13,491
                  
                  
                  $
                  6,471
  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 of dollars)


(unaudited)





Six Months Ended June 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            12,626
            
            
            $
            4,607Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
            
            
            11,485
            
            
            
            5,750Amortization
      of debt issuance cost
            
            
            152
            
            
            
            112Amortization
      of fair value of acquired interest rate swaps
            
            
            112
            
            
            
            —Unit
      based compensation expense
            
            
            821
            
            
            
            1,891Gain
      on sale of compression equipment
            
            
            (1,119
            )
            
            
            —Changes
      in assets and liabilities:Accounts
      receivable, trade
            
            
            (7,735
            )
            
            
            1,321Other
      assets
            
            
            25
            
            
            
            (126
            )Accounts
      payable, trade
            
            
            (18
            )
            
            
            (1,197
            )Other
      liabilities
            
            
            (534
            )
            
            
            1,222Net
      cash provided by operating activities
            
            
            15,815
            
            
            
            13,580Cash
      flows from investing activities:Capital
      expenditures
            
            
            (11,972
            )
            
            
            (16,150
            )Proceeds
      from the sale of compression equipment
            
            
            5,275
            
            
            
            —Net
      cash used in investing activities
            
            
            (6,697
            )
            
            
            (16,150
            )Cash
      flows from financing activities:Borrowings
      under revolving credit facility
            
            
            —
            
            
            
            (7,300
            )Repayments
      under revolving credit facility
            
            
            —
            
            
            
            3,300Distributions
      to unitholders
            
            
            (14,582
            )
            
            
            (8,105
            )Capital
      contribution from limited and general partner
            
            
            7,073
            
            
            
            3,367Net
      change in accounts receivable/accounts payable with
    affiliate
            
            
            (3,426
            )
            
            
            10,036Net
      cash provided by (used in) financing activities
            
            
            (10,935
            )
            
            
            1,298Net
      decrease in cash and cash equivalents
            
            
            (1,817
            )
            
            
            (1,272
            )Cash
      and cash equivalents at beginning of period
            
            
            2,835
            
            
            
            2,430Cash
      and cash equivalents at end of period
            
            $
            1,018
            
            
            $
            1,158





The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


6


EXTERRAN
PARTNERS, L.P.


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Organization





The
accompanying unaudited condensed consolidated financial statements of Exterran
Partners, L.P. (“we,” “us” or “our”) included herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S.”) for interim financial information and the rules and regulations
of the Securities and Exchange Commission (“SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the U.S. (“GAAP”)
are not required in these interim financial statements and have been condensed
or omitted. It is the opinion of management that the information furnished
includes all adjustments, consisting only of normal recurring adjustments, which
are necessary to present fairly our consolidated financial position, results of
operations, and cash flows for the periods indicated. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements presented in our Annual Report on Form
10-K for the year ended December 31, 2007. That report contains a more
comprehensive summary of our accounting policies.  These interim results
are not necessarily indicative of results for a full year.





We are a
publicly held Delaware limited partnership formed on June 22, 2006, to acquire
certain contract operations customer service agreements and a compressor fleet
used to provide compression services under those agreements from our
predecessor, Exterran Partners Predecessor (the “Predecessor”). The
Predecessor’s operations were owned by Universal Compression Holdings, Inc. and
its subsidiaries (“Universal Compression Holdings”).
  On August
20, 2007, we changed our name from Universal Compression Partners, L.P. to
Exterran Partners, L.P. concurrent with the closing of the merger of Hanover
Compressor Company (“Hanover”) and Universal Compression Holdings. In connection
with the merger, Universal Compression Holdings and Hanover became wholly-owned
subsidiaries of Exterran Holdings, Inc. (“Exterran Holdings”), a new company
formed in anticipation of the merger, and thereafter Universal Compression
Holdings, Inc. was merged with and into Exterran Holdings.





Exterran
General Partner, L.P. is our general partner and an indirect wholly-owned
subsidiary of Exterran Holdings. As Exterran General Partner, L.P. is a limited
partnership, its general partner, Exterran GP LLC, conducts our business and
operations, and the board of directors and officers of Exterran GP LLC make
decisions on our behalf.





Unit-Based
Compensation





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





Segment
Reporting





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





Earnings
Per Limited Partner Unit





The
computation of earnings per limited partner unit is based on the weighted
average number of common and subordinated units outstanding during the
applicable period. Basic earnings per limited partner unit is determined by
dividing net income, after deducting the amount allocated to the general partner
interest (including any incentive distribution in excess of its 2% interest), by
the weighted average number of outstanding limited partner units during the
period.





The only
potentially dilutive securities issued by us are unit options and phantom units,
neither of which requires an adjustment to the amount of net income used for
dilutive earnings per unit purposes. The dilutive effects of unit option and
phantom unit grants outstanding for the three and six months ended June 30, 2008
were 100,148 units and 96,820 units, respectively. The dilutive effects of unit
option and phantom unit grants outstanding for the three and six months ended
June 30, 2007 were 59,152 and 26,146 units, respectively.





7





Reclassifications





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





2.
RECENT ACCOUNTING PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (the “FASB”) issued
SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair
value, establishes a framework for measuring fair value in accordance with GAAP
and expands disclosures about fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007; however, in February 2008,
the FASB issued a FASB Staff Position that defers the effective date to fiscal
years beginning after November 15, 2008 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed in the financial
statements at fair value on at least an annual basis. We adopted the required
undeferred provisions of SFAS No. 157 on January 1, 2008, and the adoption of
SFAS No. 157 did not have a material impact on our consolidated results of
operations, cash flows or financial position. We do not expect the adoption of
the deferred provisions of SFAS No. 157 will have a material impact on our
consolidated results of operations, cash flows or financial
position.





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





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141 and requires that all
assets, liabilities, contingent consideration, contingencies and in-process
research and development costs of an acquired business be recorded at fair value
at the acquisition date; that acquisition costs generally be expensed as
incurred; that restructuring costs generally be expensed in periods subsequent
to the acquisition date; and that changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period impact income tax expense. SFAS No. 141(R) is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, with the
exception for the accounting for valuation allowances on deferred taxes and
acquired tax contingencies associated with acquisitions.  SFAS No.
141(R) amends SFAS No. 109 “Accounting For Income Taxes” such that adjustments
made to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of SFAS No.
141(R) would also apply the provisions of SFAS No. 141(R). We are currently
evaluating the impact that the adoption of SFAS No. 141(R) will have on our
consolidated financial statements.





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





In March
2008, the FASB’s Emerging Issues Task Force reached a consensus on Issue 07-04,
“Application of the Two-Class Method Under FASB Statement No. 128, Earnings per
Share, to Master Limited Partnerships” (“EITF 07-04”). EITF 07-04 provides
guidance on the accounting treatment of cash distributions in excess of earnings
and earnings in excess of cash distributions. EITF 07-04 concluded that when
earnings are in excess of cash distributions, current-period earnings should be
reduced by the amount of distributions to the general partner, limited partners
and incentive distribution rights (“IDR”) holder determined in accordance with
the contractual terms of the partnership agreement. The remaining undistributed
earnings should be allocated to the general partner, limited partners and IDR
holder using the distribution waterfall for available cash. When cash
distributions are in excess of earnings, the excess should be allocated to the
general partner and limited partners on the basis of their respective sharing of
losses. The excess will also be allocated to the IDR holder if the IDR holder
has a contractual obligation to share in losses on a basis that is objectively
determinable. EITF 07-04 is effective for fiscal years beginning after December
15, 2008, and interim periods within those fiscal years, and should be applied
retrospectively for all financial statements presented. We are currently
evaluating the impact that the adoption of EITF 07-04 will have on our
consolidated financial statements.





8





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





3.
            JULY 2007 CONTRACT OPERATIONS
      ACQUISITION





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


In
connection with this acquisition, we assumed $159.6 million in debt from
Universal Compression Holdings and issued to Universal Compression Holdings
approximately 2.0 million common units and 82,220 general partner units.
Additionally, we issued approximately 2.0 million common units for proceeds of
$69.0 million (net of private placement fees of $1.0 million) to institutional
investors in a private placement. We used the proceeds from the private
placement to repay a portion of the debt assumed from Universal Compression
Holdings.





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





Pro
Forma Financial Information





The
unaudited pro forma financial information for the three and six months ended
June 30, 2007 assumes that the contribution of the assets and the assumption of
the long-term debt in the July 2007 Contract Operations Acquisition and the
other related transactions, as described below, occurred as of January 1, 2007.
The unaudited pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that would have occurred had the transaction been consummated at the beginning
of the period presented, nor is it necessarily indicative of future results. The
unaudited pro forma consolidated financial information was derived by adjusting
our historical financial statements.





The pro
forma financial information reflects the following transactions:





•
            the
      contribution of the assets in the July 2007 Contract Operations
      Acquisition from Universal Compression Holdings to
  us;





•
            our
      assumption of $159.6 million of Universal Compression Holdings’ long-term
      debt;





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





•
            additional
      borrowings of $90 million under our amended revolving credit facility and
      use of those proceeds to repay the remainder of the debt assumed from
      Universal Compression Holdings.





9





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30, 2007
            
            
            June
      30, 2007(In
      thousands, except per unit amountsTotal
      revenues
            
            $
            34,508
            
            
            $
            66,203Net
      income
            
            $
            7,417
            
            
            $
            12,649Earnings
      per limited partner unit—Basic
            
            $
            0.44
            
            
            $
            0.75Earnings
      per limited partner unit—Diluted
            
            $
            0.43
            
            
            $
            0.74





4.
MERGER BETWEEN UNIVERSAL COMPRESSION HOLDINGS AND HANOVER





On August
20, 2007, Universal Compression Holdings and Hanover completed their merger
transaction. In connection with the merger, Universal Compression Holdings and
Hanover became wholly-owned subsidiaries of Exterran Holdings, and Universal
Compression Holdings then merged with and into Exterran Holdings. As a result of
the merger, Exterran Holdings became the owner of our general partner, which
owned 340,383 general partner units, representing a 2% general partner interest
at that time, and all the incentive distribution rights in us, and in addition,
Exterran Holdings became the owner of 2,014,395 common units and 6,325,000
subordinated units, collectively representing a 49% limited partner interest in
us at that time.





5.
RELATED PARTY TRANSACTIONS





We are a
party to an omnibus agreement with Exterran Holdings and others, and prior to
the merger between Universal Compression Holdings and Hanover, with Universal
Compression Holdings and others, (as amended and restated, the “Omnibus
Agreement”), the terms of which include, among other things:





•
            certain
      agreements not to compete between Exterran Holdings and its affiliates, on
      the one hand, and us and our affiliates, on the other
  hand;





•
            Exterran
      Holdings’ obligation to provide all operational staff, corporate staff and
      support services reasonably necessary to operate our business and our
      obligation to reimburse Exterran Holdings for the provision of such
      services, subject to certain limitations and the cost caps discussed
      below;





•
            the
      terms under which we, Exterran Holdings, and our respective affiliates may
      transfer compression equipment among one another to meet our respective
      contract operations services
obligations;





•
            the
      terms under which we may purchase newly-fabricated contract operations
      equipment from Exterran Holdings’
affiliates;





•
            Exterran
      Holdings’ grant of a license of certain intellectual property to us,
      including our logo; and





•
            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.




On May 1,
2008, pursuant to the terms of the Omnibus Agreement, we transferred ownership
of 52 compressor units, totaling approximately 24,600 horsepower with a net book
value of approximately $11.3 million to EI Leasing LLC, an indirect wholly-owned
subsidiary of Exterran Holdings. On that date, EI Leasing LLC transferred
ownership to us of 133 compressor units totaling approximately 27,100 horsepower
with a net book value of approximately $11.3 million. No customer contracts were
included in the transfer. Under the terms of the Omnibus Agreement, such
transfers must be of equal appraised value, as defined in the Omnibus Agreement,
with any difference being settled in cash. As a result, we paid a nominal amount
to EI Leasing LLC. We recorded the compressor units received at the historical
book basis of EI Leasing LLC.  The units we received from EI Leasing
LLC were being utilized to provide services to our customers on the date of the
transaction, and prior to the transaction, had been leased by us from EI Leasing
LLC.
  For the
three months ended June 30, 2008 and 2007, our cost of sales exceeded the cap
provided in the Omnibus Agreement by $3.5 million and $1.7 million,
respectively. For the six months ended June 30, 2008 and 2007, our cost of sales
exceeded the cap provided in the Omnibus Agreement by $7.1 million and $3.1
million, respectively. For the three months ended June 30, 2008 and 2007, our
selling, general and administrative (“SG&A”) expense exceeded the cap
provided in the Omnibus Agreement by zero and $0.1 million, respectively. For
the six months ended June 30, 2008 and 2007, our SG&A expense exceeded the
cap provided in the Omnibus Agreement by zero and $0.3 million, respectively. As
discussed in Note 12, the Omnibus Agreement was amended in connection with the
July 2008 Contract Operations Acquisition (as defined in Note 12,
below).  As part of that amendment, the date that the cap on our
obligation to reimburse Exterran Holdings for any cost of sales or SG&A
expense that it incurs in the operation of our business contained in the Omnibus
Agreement was extended from December 31, 2008 to December 31,
2009.  Additionally, as further described in Note 12, the cost of
sales and SG&A cap amounts were increased in connection with this
amendment.





10




During
the six months ended June 30, 2008 and 2007, we purchased $8.0 million and $13.4
million, respectively, of new compression equipment from Exterran Holdings. The
equipment purchased during the six months ended June 30, 2008 and 2007 was
recorded in our consolidated balance sheet as property, plant and equipment of
$7.2 million and $12.1 million, respectively, which represents the carrying
value of the equipment from the Exterran Holdings affiliates that sold it to us,
and as a distribution of equity of $0.8 million and $1.3 million, respectively,
which represents the fixed margin we paid above the carrying value in accordance
with the Omnibus Agreement . During the six months ended June 30, 2008 and 2007,
Exterran Holdings contributed zero and $1.8 million, respectively, of cost to
overhaul compression equipment to us. These costs related to in-progress
overhauls on equipment that was contributed to us on the dates of our initial
public offering and the July 2007 Contract Operations Acquisition.
 
 For both
the three months ended June 30, 2008 and 2007, we had revenue of $0.3 million
related to rental of our compression equipment to affiliates. For the three
months ended June 30, 2008 and 2007, we had cost of sales of $1.7 million and
$1.0 million, respectively, related to rental of compression equipment from
affiliates.
 
 For the
six months ended June 30, 2008 and 2007, we had revenue of $0.9 million and $0.5
million, respectively, related to rental of our compression equipment to
affiliates. For the six months ended June 30, 2008 and 2007, we had cost of
sales of $3.7 million and $1.4 million, respectively, related to rental of
compression equipment from affiliates.
 
 6.
LONG-TERM DEBT
 
 On
October 20, 2006, we, as guarantor, and EXLP Operating LLC, our wholly-owned
subsidiary, entered into a five-year senior secured credit agreement. The
revolving credit facility under the credit agreement initially consisted of a
five-year $225 million revolving credit facility. We expanded our revolving
credit facility to $315 million in connection with the July 2007 Contract
Operations Acquisition as described in Note 3.
 
 Our
revolving credit facility bears interest at a base rate, or LIBOR, at our
option, plus an applicable margin, as defined in the credit agreement. At June
30, 2008, all amounts outstanding were LIBOR loans and the applicable margin was
1.0%. The weighted average interest rate on the outstanding balance at June 30,
2008, excluding the effect of related cash flow hedges, was 3.8%.
 
 In May
2008, we entered into an amendment to our senior secured credit agreement that
increased the aggregate commitments under that facility to provide for a $117.5
million term loan facility which matures in October 2011.  Concurrent
with the closing of the July 2008 Contract Operations Acquisition, the $117.5
million term loan was funded  (see Note 12).  The $117.5
million term loan is non-amortizing but must be repaid with the net proceeds
from any equity offerings we make until paid in full. Subject to certain
conditions, at our request, and with the approval of the lenders, the aggregate
commitments under the senior secured credit facility may be increased by an
additional $17.5 million.  This amount will be increased on a
dollar-for-dollar basis with each repayment under the term loan
facility.
 
 The term
loan bears interest at a base rate or LIBOR, at our option, plus an applicable
margin. The applicable margin, depending on our leverage ratio, varies (i) in
the case of LIBOR loans, from 1.5% to 2.5% or (ii) in the case of base rate
loans, from 0.5% to 1.5%, with initial pricing set at LIBOR plus 2.0%.
Borrowings under the term loan will be subject to the same credit agreement and
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 we make, on a dollar-for-dollar basis.
 
 As of
June 30, 2008, we had $217 million outstanding and $98 million available under
our revolving credit facility. All amounts outstanding under the revolving
credit facility mature in October 2011.
 
 As of
June 30, 2008, we were in compliance with all financial covenants under the
credit agreement.
  11


7.
CASH DISTRIBUTIONS




Period
      Covering
              Payment
      Date
              Distribution
      per Limited Partner Unit
              Total
      Distribution10/20/2006
      – 12/31/2006
              February
      14, 2007
              $       0.278
              (1)
              $                 3.6
              million1/1/2007
      – 3/31/2007
              May
      15, 2007
              $    
          0.35
              
              $                 4.5
              million4/1/2007
      – 6/30/2007
              August
      14, 2007
              $    
          0.35
              
              $            
          6.0
              million7/1/2007
      – 9/30/2007
              November
      14, 2007
              $  
            0.40
              
              $          
            6.8
              million10/1/2007
      – 12/31/2007
              February
      14, 2008
              $       0.425
              
              $          
            7.3
              million
      (2)1/1/2008
      – 3/31/2008
              May
      14, 2008
              $       0.425
              
              $          
            7.3
              million
      (2)


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


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





On
July 29, 2008, the board of directors of Exterran GP LLC approved a cash
distribution of $0.425 per limited partner unit, or approximately $8.3 million,
including distributions to our general partner on its incentive distribution
rights. The distribution covers the time period from April 1, 2008 through June
30, 2008. The record date for this distribution is August 11, 2008 and payment
is expected to occur on August 14, 2008. The aggregate amount of the August 2008
cash distribution will be greater than the May 2008 cash distribution because we
are required to pay distributions on the approximately 2.5 million units we
issued to Exterran Holdings in connection with the July 2008 Contract Operations
Acquisition (see Note 12).


8.
UNIT-BASED COMPENSATION
 
 We
have granted unit options to individuals who are not our employees, but who are
employees of Exterran Holdings and its subsidiaries who provide services to us.
We have also granted phantom units to directors of the general partner of our
general partner and to employees of Exterran Holdings and its subsidiaries.
Because we grant unit options and phantom units to non-employees, we are
required to re-measure the fair value of these unit options and phantom units
each period and to record a cumulative adjustment of the expense previously
recognized. The cumulative effect recognized in SG&A expense as a result of
the re-measurement of fair value of the unit options and phantom units was an
expense of $0.9 million and $1.2 million for the three months ended June 30,
2008 and 2007, respectively, and a reduction of expense of $0.3 million and an
expense of $1.7 million for the six months ended June 30, 2008 and 2007,
respectively. We expect to settle the phantom units granted to employees of
Exterran Holdings in cash instead of common units and therefore the cumulative
expense recognized related to these grants is recorded as a
liability.
 
 There
was no unit-based compensation cost capitalized during the three and six months
ended June 30, 2008 and 2007.
 
 Long-Term
Incentive Plan
 
 We
have a long-term incentive plan that was adopted by Exterran GP LLC, the general
partner of our general partner, in October 2006 for employees, directors and
consultants of us, Exterran Holdings or our respective affiliates. The long-term
incentive plan currently permits the grant of awards covering an aggregate of
1,035,378 common units, common unit options, restricted units and phantom units.
The long-term incentive plan is administered by the board of directors of
Exterran GP LLC or a committee thereof (the “Plan Administrator”).
 
 Unit
options will have an exercise price that is not less than the fair market value
of the units on the date of grant and will become exercisable over a period
determined by the Plan Administrator. Phantom units are notional units that
entitle the grantee to receive a common unit upon the vesting of the phantom
unit or, in the discretion of the Plan Administrator, cash equal to the fair
value of a common unit.
 
 Unit
Options
 
 As
of June 30, 2008, we had 591,429 outstanding unit options. During the six months
ended June 30, 2008 and 2007, no unit options were granted or exercised. During
the six months ended June 30, 2008, 2,143 unit options were
cancelled.  As of June 30, 2008, $0.9 million of unrecognized
compensation cost related to non-vested unit options is expected to be
recognized over the weighted-average period of 0.5 years.
  12
  Phantom
Units





During
the six months ended June 30, 2008, we granted 44,310 phantom units to officers
and directors of Exterran GP LLC and certain employees of Exterran Holdings and
its subsidiaries, which settle 33 1/3% on each of the first three anniversaries
of the grant date. No phantom units vested during the six months ended June 30,
2008.





PhantomUnits
            
            
            WeightedAverageGrant-DateFairValueper UnitPhantom
      units outstanding, December 31, 2007
            
            
            9,432
            
            
            $
            25.87Granted
            
            
            44,310
            
            
            
            32.22Phantom
      units outstanding, June 30, 2008
            
            
            53,742
            
            
            $
            31.11





As of
June 30, 2008, $1.3 million of unrecognized compensation cost related to
non-vested phantom units is expected to be recognized over the weighted-average
period of 2.4 years.





9.
ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS





We use
derivative financial instruments to minimize the risks and/or costs associated
with financial activities by managing our exposure to interest rate fluctuations
on a portion of our debt obligations. We do not use derivative financial
instruments for trading or other speculative purposes. Cash flows from hedges
are classified in our consolidated statements of cash flows under the same
category as the cash flows from the underlying assets, liabilities or
anticipated transactions.





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





Fixed
      Rate to be Paid
            
            Maturity
      Date
            
            Floating
      Rate to be
                Received
            
            Notional
                Amount
            
            
            Fair
      Value of
                Swap
      at
                June
      30, 20085.275
            %
            December
      1, 2011
            
            Three
      Month LIBOR
            
            $
            125,000
            
            
            $
            (5,311
            )5.343
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,898
            )5.315
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,864
            )$
            205,000
            
            
            $
            (9,073
            )





We
designated these swaps as cash flow hedging instruments pursuant to the criteria
of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
so that any change in their fair values is recognized as a component of
comprehensive income or loss and is included in accumulated other comprehensive
income or loss to the extent the hedge is effective. The swap terms
substantially coincide with the hedged item and are expected to offset changes
in expected cash flows due to fluctuations in the variable rate, and therefore
we currently do not expect a significant amount of ineffectiveness on these
hedges. We perform quarterly calculations to determine if the swap agreements
are still effective and to calculate any ineffectiveness. For the three and six
months ended June 30, 2008 and 2007, there was no ineffectiveness.





The
counterparties to our interest rate swap agreements are major international
financial institutions. We monitor the credit quality of these financial
institutions and do not expect non-performance by any counterparty, although
such non-performance could have a material adverse effect on us.





10.
FAIR VALUE OF INTEREST RATE SWAPS





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





SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into the following three broad
categories.





13







•
            Level 1— Quoted
      unadjusted prices for identical instruments in active markets to which we
      have access at the date of
measurement.





•
            Level 2— Quoted prices
      for similar instruments in active markets; quoted prices for identical or
      similar instruments in markets that are not active; and model-derived
      valuations in which all significant inputs and significant value drivers
      are observable in active markets. Level 2 inputs are those in markets for
      which there are few transactions, the prices are not current, little
      public information exists or prices vary substantially over time or among
      brokered market makers.





•
            Level 3— Model derived
      valuations in which one or more significant inputs or significant value
      drivers are unobservable. Unobservable inputs are those inputs that
      reflect our own assumptions regarding how market participants would price
      the asset or liability based on the best available
      information.





The
following table summarizes the valuation of our interest rate swaps under SFAS
No. 157 pricing levels as of June 30, 2008 (in thousands):




As
      of June 30, 2008Total
              
              
              Quoted
      market prices in active markets (Level 1)
              
              
              Significant
      other observable inputs
                  (Level
      2)
              
              
              Significant
      unobservable inputs
                  (Level
      3)Interest
      rate swaps assets (liability)
              
              $
              (9,073
              )
              
              $
              —
              
              
              $
              (9,073
              )
              
              $
              —




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.




12. SUBSEQUENT
EVENTS




On July
30, 2008, we acquired from Exterran Holdings contract operations customer
service agreements with 34 customers and a fleet of approximately 617 compressor
units used to provide compression services under those agreements, comprising
approximately 242,000 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 millionof debt from Exterran
Holdings and issued to Exterran Holdings’ wholly-owned subsidiaries 2,413,672
common units and 49,259 general partner units.  Concurrent with the
closing of the July 2008 Contract Operations Acquisition, we borrowed $117.5
million under the term loan (see Note 6) and $58.3 million under our revolving
credit facility, which together were used to repay the debt assumed from
Exterran Holdings in the acquisition and to pay other costs
incurred.


Also, in
connection with the closing of the July 2008 Contract Operations Acquisition, we
entered into an amendment to our existing Omnibus Agreement with Exterran
Holdings.  The amendment, among other things, increased the cap on our
reimbursement of SG&A expenses allocable from Exterran Holdings to us based
on such costs incurred by Exterran Holdings on our behalf from $4.75 million per
quarter to $6.0 million per quarter (after taking into account such costs that
we incur and pay directly) and increased the cap on our reimbursement of cost of
sales allocable from Exterran Holdings to us based on such costs incurred by
Exterran Holdings on our behalf from $18.00 per horsepower per quarter to $21.75
per horsepower per quarter (after taking into account such costs that we incur
and pay directly).  The amendment also extends these caps for an
additional year such that the caps will now terminate on December 31,
2009.
  14
  ITEM
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
report contains “forward-looking statements” within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact contained in this report are forward-looking
statements, including, without limitation, statements regarding future financial
position, business strategy, proposed acquisitions, budgets, litigation,
projected costs and plans and objectives of management for future operations.
You can identify many of these statements by looking for words such as
“believes,” “expects,” “intends,” “projects,” “anticipates,” “estimates” or
similar words or the negative thereof.





Such
forward-looking statements in this report include, without limitation,
statements regarding:





•
            our
      business growth strategy and projected
costs;





•
            our
      future financial position;





•
            the
      sufficiency of available cash flows to make cash
      distributions;





•
            the
      expected timing and amount of our capital
  expenditures;





•
            anticipated
      cost savings, future revenue, gross margin and other financial or
      operational measures related to our
business;





•
            the
      future value of our equipment;





•
            plans
      and objectives of our management for our future operations;
      and





•
            any
      potential contribution of additional assets from Exterran Holdings, Inc.
      (“Exterran Holdings”) to us.





Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this report. Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct. These
forward-looking statements are also affected by the risk factors described in
this report in Part II, Item 1A. “Risk Factors,” those described in our Annual
Report on Form 10-K for the year ended December 31, 2007 and those set forth
from time to time in our filings with the Securities and Exchange Commission
(“SEC”), which are available through our website at www.exterran.com and through
the SEC’s Electronic Data Gathering and Retrieval System at www.sec.gov.
Important factors that could cause our actual results to differ materially from
the expectations reflected in these forward-looking statements include, among
other things:





•
            conditions
      in the oil and gas industry, including a sustained decrease in the level
      of supply or demand for natural gas and the impact on the price of natural
      gas, which could cause a decline in the demand for our compression
      services;





•
            reduced
      profit margins or the loss of market share resulting from competition or
      the introduction of competing technologies by other
    companies;





•
            our
      dependence on Exterran Holdings to provide services, including its ability
      to hire, train and retain key employees and to timely and cost effectively
      obtain components necessary to conduct our
  business;





•
            changes
      in economic or political conditions, including terrorism and legislative
      changes;





•
            the
      inherent risks associated with our operations, such as equipment defects,
      malfunctions and natural disasters;





•
            an
      IRS challenge to our valuation methodologies, which may result in a shift
      of income, gain, loss and deduction between the general partner and the
      unitholders;





•
            our
      inability to implement certain business and financial objectives, such
      as:





•
            growing
      our asset base, particularly our fleet of
  compressors;





15





•
            integrating
      acquired businesses;





•
            generating
      sufficient cash;





•
            accessing
      the capital markets; and





•
            refinancing
      existing or incurring additional indebtedness to fund our
      business;





•
            liability
      related to the use of our products and
services;





•
            changes
      in governmental safety, health, environmental and other regulations, which
      could require us to make significant expenditures;
  and





•
            our
      level of indebtedness and ability to fund our
  business.





All
forward-looking statements included in this report are based on information
available to us on the date of this report. Except as required by law, we
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this report.




GENERAL
 
 We
are a publicly held Delaware limited partnership formed on June 22, 2006 to
acquire certain contract operations customer service agreements and the
compressor fleet used to provide compression services under those agreements
from our predecessor, Exterran Partners Predecessor. In October 2006, we
completed an initial public offering of 6,325,000 of our common units at a price
of $21.00 per unit, including 825,000 common units sold pursuant to the exercise
of the underwriters’ overallotment option.
  On
August 20, 2007, we changed our name from Universal Compression Partners, L.P.
to Exterran Partners, L.P. concurrent with the closing of the merger of Hanover
Compressor Company (“Hanover”) and Universal Compression Holdings, Inc.
(“Universal Compression Holdings”). In connection with the merger, Universal
Compression Holdings and Hanover became wholly-owned subsidiaries of Exterran
Holdings, a new company formed in anticipation of the merger, and thereafter
Universal Compression Holdings was merged with and into Exterran
Holdings.
 
 July
2007 Contract Operations Acquisition
 
 In
July 2007, we acquired from Universal Compression Holdings contract operations
customer service agreements with eight customers and a fleet of 722 compressor
units used to provide compression services under those agreements having a net
book value of $132.1 million, net of accumulated depreciation of $37.5 million,
and comprising 281,992 horsepower, or 13% (by then available horsepower), of the
combined U.S. contract operations business relating to natural gas compression
of Universal Compression Holdings and us (the “July 2007 Contract Operations
Acquisition”).  In connection with this acquisition, we assumed $159.6
million in debt from Universal Compression Holdings and issued to Universal
Compression Holdings approximately 2.0 million common units
and  82,220 general partner units. Additionally, we issued
approximately 2.0 million common units for proceeds of $69.0 million (net of
private placement fees of $1.0 million) to institutional investors in a private
placement. We used the proceeds from the private placement to repay a portion of
the debt assumed from Universal Compression Holdings.
  Additionally,
in connection with this acquisition, we expanded our revolving credit facility
from $225 million to $315 million and borrowed an additional $90 million under
that facility, which we used, along with available cash, to repay the remainder
of the debt assumed from Universal Compression Holdings in conjunction with this
acquisition. In July 2007, we entered into two interest rate swap agreements
related to our revolving credit facility. Each swap agreement has a notional
amount of $40 million. These swap agreements terminate in October 2011 and have
a weighted average fixed rate of 5.33%.
  16
  Merger
Between Universal Compression Holdings and Hanover





On August
20, 2007, Universal Compression Holdings and Hanover completed their merger
transaction. As a result of the merger, Exterran Holdings became the owner of
our general partner, which owned 340,383 general partner units, representing a
2% general partner interest at that time, and all the incentive distribution
rights in us, and in addition, Exterran Holdings became the owner of 2,014,395
common units and 6,325,000 subordinated units, collectively representing a 49%
limited partner interest in us at that time.





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





July
2008 Contract Operations Acquisition




On July
30, 2008, we acquired from Exterran Holdings contract operations customer
service agreements with 34 customers and a fleet of approximately 617 compressor
units used to provide compression services under those agreements, comprising
approximately 242,000 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 2,413,672 common units and
49,259 general partner units. Concurrent with the closing of the July 2008
Contract Operations Acquisition, we borrowed $117.5 million under the term loan
(please see Note 6 to the Consolidated Financial Statements included in Part I,
Item 1 (“Financial Statements”) of this report) and $58.3 million under our
revolving credit facility, which together were used to repay the debt assumed
from Exterran Holdings in the acquisition and to pay other costs
incurred.
 
 Also, in
connection with the closing of the July 2008 Contract Operations Acquisition, we
entered into an amendment to our existing Omnibus Agreement with Exterran
Holdings.  For further discussion of the Omnibus Agreement, please see
the section entitled "Omnibus Agreement" below.
  Omnibus
Agreement





We are a
party to an omnibus agreement with Exterran Holdings, our general partner, 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;
and





•
            the
      terms under which we may purchase newly-fabricated contract operations
      equipment from Exterran Holdings’
affiliates.




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


17




OVERVIEW





Industry
Conditions





Natural
gas consumption in the United States of America (“U.S.”) for the twelve months
ended May 31, 2008 increased by approximately 5% over the twelve months ended
May 31, 2007 and is expected to increase by 0.7% per year until 2030, according
to the Energy Information Administration. For 2007, the U.S. accounted for an
estimated annual production of approximately 19 trillion cubic feet of natural
gas.  Industry sources estimate that the U.S.’s natural gas production
level will be approximately 21 trillion cubic feet in calendar year
2030.





The
natural gas compression services industry has experienced a significant increase
in the demand for its products and services since the early 1990s, and we
believe the contract compression services industry in the U.S. will continue to
have growth opportunities due to the following factors, among
others:





•
            aging
      producing natural gas fields will require more compression to continue
      producing the same volume of natural gas;
and





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





Our
Performance Trends and Outlook




During
the remainder of 2008, we expect the overall market demand for contract
operations services to be good. Given our recent declines in working horsepower,
however, we expect less growth in our contract operations business than for the
market overall. Because we initially purchased only contracted equipment, 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 and undergo major overhauls. We expect that
operating costs will moderate during the remainder of 2008; however, pursuant to
the Omnibus Agreement between us and Exterran Holdings, our obligation to
reimburse Exterran Holdings for any costs of sales is capped through December
31, 2009 (see Notes 5 and 12 to the Financial Statements).  During
2007 and the first six months of 2008, our costs of sales exceeded this
cap.
 
 Exterran
Holdings currently intends for us to be the primary growth vehicle for its U.S.
contract operations business. To this end, Exterran Holdings may contribute
additional U.S. contract operations customer contracts and equipment to us in
exchange for cash and/or additional interests in us. Such transactions would
depend on, among other things, reaching agreement with Exterran Holdings
regarding the terms of any purchase, which will require approval of the
conflicts committee of the board of directors of our general partner, and our
ability to finance any such purchase. This discussion of performance trends and
outlook excludes any potential transfers of additional contract operations
customer contracts and equipment from Exterran Holdings to us.


18





Operating
Highlights





The
following table summarizes our total available horsepower, average operating
horsepower and horsepower utilization percentages for the periods
presented.


Three Months Ended
              
              
              Six Months Ended
              
              
              Three Months Ended
              
              
              Six Months EndedJune 30, 2008
              
              
              June 30, 2007Total
      Available Horsepower (at period end)
              
              
              741,859
              
              
              
              741,859
              
              
              
              386,988
              
              
              
              386,988Average
      Operating Horsepower
              
              
              652,174
              
              
              
              656,331
              
              
              
              347,852
              
              
              
              340,092Horsepower
      Utilization:Spot
      (at period end)
              
              
              88
              %
              
              
              88
              %
              
              
              93
              %
              
              
              93
              %Average
              
              
              89
              %
              
              
              90
              %
              
              
              93
              %
              
              
              94
              %
  FINANCIAL
RESULTS OF OPERATIONS





THE
THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2007





The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income:





Three Months Ended June 30,2008
            
            
            2007(Dollars
      in thousands)Revenue
            
            $
            34,999
            
            
            $
            18,804Gross
      margin (1)
            
            
            19,062
            
            
            
            10,742Gross
      margin percentage
            
            
            54
            %
            
            
            57
            %Expenses:Depreciation
            
            $
            5,811
            
            
            $
            2,968Selling,
      general and administrative
            
            
            4,745
            
            
            
            3,426Interest
      expense
            
            
            3,445
            
            
            
            2,093Other
      (income) expense, net
            
            
            (1,129
            )
            
            
            (3
            )Income
      tax expense (benefit)
            
            
            111
            
            
            
            (6
            )Net
      income
            
            $
            6,079
            
            
            $
            2,264


____________





(1)
            For
      a reconciliation of gross margin to its most directly comparable financial
      measure calculated and presented in accordance with accounting principles
      generally accepted in the U.S. (“GAAP”) see Part I, Item 2 (“Management’s
      Discussion and Analysis of Financial Condition and Results of Operations –
      Non-GAAP Financial Measure”) of this
report.




Revenue.Revenue
per average monthly operating horsepower was $17.89 and $18.02 for the three
months ended June 30, 2008 and 2007, respectively. Average monthly operating
horsepower was 652,174 and 347,852 for the three months ended June 30, 2008 and
2007, respectively. The increase in revenue was primarily due to the inclusion
of the results from the assets acquired in the July 2007 Contract Operations
Acquisition, and accounted for approximately $14.4 million of the increase in
revenue for the three months ended June 30, 2008 compared to the three months
ended June 30, 2007.
 
 Gross
Margin.Gross margin (defined as revenue less cost of sales,
excluding depreciation expense) was $19.1 million and $10.7 million for the
three months ended June 30, 2008 and 2007, respectively. The increase in gross
margin for the three months ended June 30, 2008 was primarily due to the
inclusion of the results from the assets acquired in the July 2007 Contract
Operations Acquisition.
 Gross Margin
Percentage.Gross margin percentage (defined as gross margin
as a percentage of revenue) was 54% and 57% for the three months ended June 30,
2008 and 2007, respectively. The decrease in gross margin percentage was
primarily due to increased repair and maintenance costs.





Depreciation.Depreciation
expense related to our contract operations fleet was $5.8 million and $3.0
million for the three months ended June 30, 2008 and 2007, respectively. The
increase in depreciation expense was primarily due to the additional
depreciation on the assets acquired in the July 2007 Contract Operations
Acquisition.





19





SG&A.SG&A
expenses are primarily comprised of an allocation of expenses from Exterran
Holdings and Universal Compression Holdings, including costs for personnel
support and related expenditures.  The increase in SG&A expenses
was primarily due to the increased costs associated with the increase in
revenues after the July 2007 Contract Operations
Acquisition.  SG&A expenses represented 14% and 18% of revenues
for the three months ended June 30, 2008 and 2007, respectively.  We
have granted unit options and phantom units to individuals who are not our
employees, but who are employees of Exterran Holdings and its subsidiaries who
provide services to us. Because we grant unit options and phantom units to
non-employees, we are required to re-measure the fair value of the unit options
each period and to record a cumulative adjustment of the expense previously
recognized. The decrease in SG&A expense as a percentage of revenue was
primarily due to the difference in the impact of the re-measurement of fair
value of the unit options and phantom units which increased SG&A expense by
$0.9 million and $1.2 million for the three months ended June 30, 2008 and 2007,
respectively.





Interest
expense.The increase in interest expense is primarily due to
a higher average balance on our revolving credit facility during the three
months ended June 30, 2008 compared to the three months ended June 30, 2007, as
a result of funding the July 2007 Contract Operations Acquisition.





Other (income) expense,
net.The increase in other (income) expense, net, was due to a
$1.1 million gain on the sale of used compression equipment during the three
months ended June 30, 2008.





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





THE
SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2007





The
following table summarizes our revenue, gross margin, gross margin percentage,
expenses and net income:





Six Months Ended June 30,2008
            
            
            2007(Dollars
      in thousands)Revenue
            
            $
            70,266
            
            
            $
            36,389Gross
      margin (1)
            
            
            38,186
            
            
            
            20,820Gross
      margin percentage
            
            
            54
            %
            
            
            57
            %Expenses:Depreciation
            
            $
            11,485
            
            
            $
            5,750Selling,
      general and administrative
            
            
            7,746
            
            
            
            6,196Interest
      expense
            
            
            7,246
            
            
            
            4,226Other
      (income) expense, net
            
            
            (1,139
            )
            
            
            (9
            )Income
      tax expense
            
            
            222
            
            
            
            50Net
      income
            
            $
            12,626
            
            
            $
            4,607


____________





(1)
            For
      a reconciliation of gross margin to its most directly comparable financial
      measure calculated and presented in accordance with accounting principles
      generally accepted in the U.S. (“GAAP”) see Part I, Item 2 (“Management’s
      Discussion and Analysis of Financial Condition and Results of Operations –
      Non-GAAP Financial Measure”) of this
report.





Revenue.Revenue
per average monthly operating horsepower was $17.84 and $17.83 for the six
months ended June 30, 2008 and 2007, respectively. Average monthly operating
horsepower was 656,331 and 340,092 for the six months ended June 30, 2008 and
2007, respectively. The increase in revenue was primarily due to the inclusion
of the results from the assets acquired in the July 2007 Contract Operations
Acquisition, and accounted for approximately $26.9 million of the increase in
revenue for the six months ended June 30, 2008 compared to the six months ended
June 30, 2007.





Gross
Margin.Gross margin (defined as revenue less cost of sales,
excluding depreciation expense) was $38.2 million and $20.8 million for the six
months ended June 30, 2008 and 2007, respectively. The increase in gross margin
for the six months ended June 30, 2008 was primarily due to the inclusion of the
results from the assets acquired in the July 2007 Contract Operations
Acquisition.





Gross Margin
Percentage.Gross margin percentage (defined as gross margin
as a percentage of revenue) was 54% and 57% for the six months ended June 30,
2008 and 2007, respectively. The decrease in gross margin percentage was
primarily due to increased repair and maintenance costs.





20





Depreciation.Depreciation
expense related to our contract operations fleet was $11.5 million and $5.8
million for the six months ended June 30, 2008 and 2007, respectively. The
increase in depreciation expense was primarily due to the additional
depreciation on the assets acquired in the July 2007 Contract Operations
Acquisition.





SG&A.SG&A expenses
are primarily comprised of an allocation of expenses from Exterran Holdings and
Universal Compression Holdings, including costs for personnel support and
related expenditures.  The increase in SG&A expense was primarily
due to the increased costs associated with the increase in revenues after the
July 2007 Contract Operations Acquisition.  SG&A expenses
represented 11% and 17% of revenues for the six months ended June 30, 2008 and
2007, respectively. We have granted unit options and phantom units to
individuals who are not our employees, but who are employees of Exterran
Holdings and its subsidiaries who provide services to us. Because we grant unit
options and phantom units to non-employees, we are required to re-measure the
fair value of the unit options each period and to record a cumulative adjustment
of the expense previously recognized. The decrease in SG&A expense as a
percentage of revenue was primarily due to the difference in the impact of the
re-measurement of fair value of the unit options and phantom units which reduced
SG&A expense by $0.3 million and increased SG&A expense by $1.7 million
for the six months ended June 30, 2008 and 2007, respectively.





Interest
expense.The increase in interest expense is primarily due to
a higher average balance on our revolving credit facility during the six months
ended June 30, 2008 compared to the six months ended June 30, 2007, as a result
of funding the July 2007 Contract Operations Acquisition.





Other (income) expense,
net.The increase in other (income) expense, net, was due to a
$1.1 million gain on the sale of used compression equipment during the six
months ended June 30, 2008.





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





LIQUIDITY
AND CAPITAL RESOURCES





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





Six Months Ended June 30,2008
            
            
            2007(Dollars
      in thousands)Net
      cash provided by (used in):Operating
      activities
            
            $
            15,815
            
            
            $
            13,580Investing
      activities
            
            
            (6,697
            )
            
            
            (16,150
            )Financing
      activities
            
            
            (10,935
            )
            
            
            1,298Net
      change in cash
            
            $
            (1,817
            )
            
            $
            (1,272
            )





June 30, 2008
            
            
            December 31, 2007(Dollars
      in thousands)Cash
      and cash equivalents
            
            $
            1,018
            
            
            $
            2,835Working
      capital
            
            
            8,536
            
            
            
            108





Operating
Activities.The increase in net cash provided by operating
activities for the six months ended June 30, 2008 was primarily  the
result of additional earnings generated from increased business after the July
2007 Contract Operations Acquisition.




Investing
Activities.Capital
expenditures for the six months ended June 30, 2008 were $12.0 million,
consisting of $8.9 million for fleet additions and $3.1 million for compressor
maintenance activities. Included in our capital expenditures for the six months
ended June 30, 2008 were new compression equipment purchases of $8.0 million
from Exterran Holdings.  Cash flows used in investing activities
decreased due to proceeds of $5.3 million from the sale of used compression
equipment in the six months ended June 30, 2008 and reduced capital expenditures
during the six months ended June 30, 2008 compared to the six months ended June
30, 2007.
  Financing
Activities.Net cash used in financing activities for the six
months ended June 30, 2008 was $10.9 million which was the net result of
distributions to unitholders, capital contribution from our limited partner and
general partner and changes in accounts receivable and accounts payable with
affiliates.





21





Capital
Requirements.The natural gas compression business is capital
intensive, requiring significant investment to maintain and upgrade existing
operations. 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.





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 revolving credit
facility. Given our objective of growth through acquisitions, expansion capital
expenditure projects and other internal growth projects, we anticipate that we
will continue to invest significant amounts of capital to grow and acquire
assets. We will actively consider a variety of assets for potential acquisitions
and expansion projects. We expect to fund future capital expenditures with
borrowings under our revolving credit facility, the issuance of additional
partnership units, and future debt offerings as appropriate, given market
conditions.





22
  Our Ability to Grow Depends on Our
Ability to Access External Expansion Capital.We
expect that we will distribute all of our available cash to our unitholders.
Available cash is reduced by cash reserves established by our general partner to
provide for the proper conduct of our business (including for future capital
expenditures). However, we expect that we will rely primarily upon external
financing sources, including our revolving credit facility and the issuance of
debt and equity securities, rather than cash reserves established by our general
partner, to fund our acquisitions and expansion capital expenditures. To the
extent we are unable to finance growth externally and we are unwilling or unable
to establish sufficient cash reserves to fund future acquisitions, our cash
distribution policy will significantly impair our ability to grow. In addition,
because we distribute all of our available cash, we may not grow as quickly as
businesses that reinvest their available cash to expand ongoing operations. To
the extent we issue additional units in connection with any acquisitions or
expansion capital expenditures, the payment of distributions on those additional
units may increase the risk that we will be unable to maintain or increase our
per unit distribution level, which in turn may impact the available cash that we
have to distribute on each unit. There are no limitations in our partnership
agreement or in the terms of our revolving credit facility on our ability to
issue additional units, including units ranking senior to the common
units.
 
 Long-term Debt.In May 2008, we entered into an amendment to our
senior secured credit agreement that increased the aggregate commitments under
that facility to provide for a $117.5 million term loan facility which matures
in October 2011.  Concurrent with the closing of the July 2008
Contract Operations Acquisition, the $117.5 million term loan was funded and an
additional $58.3 million was drawn on our revolving credit facility, which
together were used to repay the debt assumed from Exterran Holdings in the
acquisition and to pay other costs incurred.  The $117.5 million term
loan is non-amortizing but must be repaid with the net proceeds from any equity
offerings we make until paid in full. Subject to certain conditions, at our
request, and with the approval of the lenders, the aggregate commitments under
the senior secured credit facility may be increased by an additional $17.5
million.  This amount will be increased on a dollar-for-dollar basis
with each repayment under the term loan facility.
  In
July 2007, we expanded our revolving credit facility from $225 million to $315
million. As of June 30, 2008, we had $217.0 million outstanding and $98.0
million available under our revolving credit facility. All amounts under the
revolving credit facility mature in October 2011.
  Under
the credit agreement, we are subject to certain limitations, including
limitations on our ability to incur additional debt or sell assets, with
restrictions on the use of proceeds; to make certain investments and
acquisitions; to grant liens; and to pay dividends and distributions. Covenants
in the revolving credit facility and term loan require that we maintain various
financial ratios. As of June 30, 2008, we were in compliance with all financial
covenants.
 
 Distributions to
Unitholders.Our partnership
agreement requires us to distribute all of our “available cash” quarterly. Under
the partnership agreement, available cash is defined to generally mean, for each
fiscal quarter, (i) our cash on hand at the end of the quarter in excess of the
amount of reserves our general partner determines is necessary or appropriate to
provide for the conduct of our business, to comply with applicable law, any of
our debt instruments or other agreements or to provide for future distributions
to our unitholders for any one or more of the upcoming four quarters, plus, (ii)
if our general partner so determines, all or a portion of our cash on hand on
the date of determination of available cash for the
quarter.


23




On May
14, 2008, we distributed approximately $7.3 million, or $0.425 per unit,
including distributions to our general partner on its incentive distribution
rights. The distribution covers the time period from January 1, 2008 through
March 31, 2008. On July 29, 2008, the board of directors of Exterran GP LLC
approved a cash distribution of $0.425 per limited partner unit, or
approximately $8.3 million, including distributions to our general partner on
its incentive distribution rights. The distribution covers the time period from
April 1, 2008 through June 30, 2008. The record date for this distribution is
August 11, 2008 and payment is expected to occur on August 14,
2008.  The aggregate amount of the August 2008 cash distribution will
be greater than the May 2008 cash distribution because we
are required to pay distributions on the approximately 2.5 million units we
issued to Exterran Holdings in connection with the July 2008 Contract Operations
Acquisition.
  NON-GAAP
FINANCIAL MEASURE





We define
gross margin as total revenue less cost of sales (excluding depreciation
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 expense), which are key components of
our operations. We believe gross margin is important because it focuses on the
current operating performance of our operations and excludes the impact of the
prior historical costs of the assets acquired or constructed that are utilized
in those operations, the indirect costs associated with our SG&A activities,
the impact of our financing methods and income taxes. Depreciation 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 expense and SG&A expense. Each of these excluded
expenses is material to our consolidated results of operations. Because we
intend to finance a portion of our operations through borrowings, interest
expense is a necessary element of our costs and our ability to generate revenue.
Additionally, because we use capital assets, depreciation expense is a necessary
element of our costs and our ability to generate revenues and SG&A expenses
are necessary costs to support our operations and required corporate activities.
To compensate for these limitations, management uses this non-GAAP measure as a
supplemental measure to other GAAP results to provide a more complete
understanding of our performance.





The
following table reconciles our net income to gross margin:




Three Months Ended June 30,
              
              
              Six Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(Dollars
      in thousands)Net
      income
              
              $
              6,079
              
              
              $
              2,264
              
              
              $
              12,626
              
              
              $
              4,607Depreciation
              
              
              5,811
              
              
              
              2,968
              
              
              
              11,485
              
              
              
              5,750Selling,
      general and administrative
              
              
              4,745
              
              
              
              3,426
              
              
              
              7,746
              
              
              
              6,196Interest
      expense
              
              
              3,445
              
              
              
              2,093
              
              
              
              7,246
              
              
              
              4,226Other
      (income) expense, net
              
              
              (1,129
              )
              
              
              (3
              )
              
              
              (1,139
              )
              
              
              (9
              )Income
      tax expense (benefit)
              
              
              111
              
              
              
              (6
              )
              
              
              222
              
              
              
              50Gross
      margin
              
              $
              19,062
              
              
              $
              10,742
              
              
              $
              38,186
              
              
              $
              20,820
  OFF-BALANCE
SHEET ARRANGEMENTS





We have
no material off-balance sheet arrangements.








24





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 and
interest rate swap arrangements.





As of
June 30, 2008, after taking into consideration interest rate swaps, we had
approximately $12.0 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 $0.1
million.





Interest
Rate Swap Arrangements





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





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








Fixed
      Rate to be Paid
            
            Maturity
      Date
            
            Floating
      Rate to beReceived
            
            Notional
                Amount
            
            
            Fair
      Value of
                Swap
      at
                June
      30, 20085.275
            %
            December
      1, 2011
            
            Three
      Month LIBOR
            
            $
            125,000
            
            
            $
            (5,311
            )5.343
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,898
            )5.315
            %
            October
      20, 2011
            
            Three
      Month LIBOR
            
            
            40,000
            
            
            
            (1,864
            )$
            205,000
            
            
            $
            (9,073
            )





We have
designated these swaps as cash flow hedging instruments pursuant to the criteria
of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
so that any change in their fair values is recognized as a component of
comprehensive income or loss and is included in accumulated other comprehensive
income or loss to the extent that the hedge is effective. The swap terms
substantially coincide with the hedged item and are expected to offset changes
in expected cash flows due to fluctuations in the variable rate, and therefore
we currently do not expect a significant amount of ineffectiveness on these
hedges. We perform quarterly calculations to determine if the swap agreements
are still effective and to calculate any ineffectiveness. For the three and six
months ended June 30, 2008 and 2007, there was no ineffectiveness.





Stock
Compensation Costs





We have
granted unit options and phantom units to individuals who are not our employees,
but who are employees of Exterran Holdings and its subsidiaries who provide
services to us. Because we grant unit options and phantom units to
non-employees, we are required to re-measure the fair value of these unit
options and phantom units each period and to record a cumulative adjustment of
the expense previously recognized.  A 10% change in our unit price
from June 30, 2008 would result in an increase or decrease in our second quarter
2008 SG&A expense of approximately $0.2 million.




ITEM
4. Controls and Procedures





Management’s Evaluation of Disclosure
Controls and Procedures





As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”), the management of Exterran GP LLC, the general partner of our
general partner, including the Chief Executive Officer and Chief Financial
Officer, evaluated as of the end of the period covered by this report, the
effectiveness of our disclosure controls and procedures as defined in Exchange
Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures,
as of the end of the period covered by this report, were effective for the
purpose of ensuring that information required to be disclosed by us in this
report is recorded, processed, summarized and reported within the time periods
specified by the rules and forms under the Exchange Act and is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting during our second
quarter of fiscal 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





25





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 in our risk factors that were previously disclosed
in our Annual Report on Form 10-K for the year ended December 31,
2007.





26





ITEM 6. Exhibits





Exhibit No.
            
            Description2.1
            
            Amended
      and Restated Contribution Conveyance and Assumption Agreement, dated July
      6, 2007, by and among Universal Compression Partners, L.P., Universal
      Compression, Inc., UCO Compression 2005 LLC, UCI Leasing LLC, UCO GP, LLC,
      UCI GP LP LLC, UCO General Partner, LP, UCI MLP LP LLC, UCLP Operating LLC
      and UCLP Leasing LLC., incorporated by reference to Exhibit 2.1 to the
      Registrant’s Current Report on Form 8-K filed July 11, 2007.2.2
            
            Contribution, Conveyance and Assumption Agreement,
      dated June 25, 2008, by and among Exterran Holdings, Inc., Hanover
      Compressor Company, Hanover Compression General Holdings, LLC, ExterranEnergy Solutions, L.P., Exterran
      ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH GP LP
      LLC, Exterran GPLLC,
      EXH MLP LP LLC, Exterran General Partner, L.P., EXLP
              Operating LLC, EXLP Leasing LLC and Exterran Partners,
      L.P., incorporated by reference to Exhibit 2.1 of the Registrant’s Current
      Report on Form 8-K filed June 26,2008.3.1
            
            Certificate
      of Limited Partnership of Universal Compression Partners, L.P. (now
      Exterran Partners, L.P.), incorporated by reference to Exhibit 3.1 to the
      Registrant’s Registration Statement on Form S-1 filed June 27,
      2006.3.2
            
            Certificate
      of Amendment to Certificate of Limited Partnership of Universal
      Compression Partners, L.P. (now Exterran Partners, L.P.), dated as of
      August 20, 2007, incorporated by reference to Exhibit 3.1 to the
      Registrant’s Current Report on Form 8-K filed August 24,
2007.3.3
            
            First
      Amended and Restated Limited Partnership Agreement of Exterran Partners,
      L.P., as amended, incorporated by reference to Exhibit 3.3 to the
      Registrant’s Quarterly Report on form 10-Q filed May 8, 2008.3.4
            
            Certificate
      of Partnership of UCO General Partner, LP (now Exterran General Partner,
      L.P.), incorporated by reference to Exhibit 3.3 to the Registrant’s
      Registration Statement on Form S-1 filed June 27, 2006.3.5
            
            Amended
      and Restated Limited Partnership Agreement of UCO General Partner, LP (now
      Exterran General Partner, L.P.), incorporated by reference to Exhibit 3.2
      to the Registrant’s Current Report on Form 8-K filed October 26,
      2006.3.6
            
            Certificate
      of Formation of UCO GP, LLC (now Exterran GP LLC), incorporated by
      reference to Exhibit 3.5 to the Registrant’s Registration Statement on
      Form S-1 filed June 27, 2006.3.7
            
            Amended
      and Restated Limited Liability Company Agreement of UCO GP, LLC (now
      Exterran GP LLC), incorporated by reference to Exhibit 3.3 to the
      Registrant’s Current Report on Form 8-K filed October 26,
      2006.10.1
            
            First
      Amendment to Loan Documents, dated May 8, 2008, by and among EXLP
      Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, EXLP
      Leasing LLC, as Guarantor, Wachovia Bank, National Association, as
      Administrative Agent and the other lenders party thereto, incorporated by
      reference to Exhibit 10.2 to the Registrant’s Quarterly Report on form
      10-Q filed May 8, 2008.31.1*
            
            Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14
      under the Securities Exchange Act of 1934.31.2*
            
            Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14
      under the Securities Exchange Act of 1934.32.1*
            
            Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.32.2*
            
            Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.


____________


*
            Filed
      herewith.





27





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.
 
 August 6,
2008                                                                           By:
EXTERRAN GENERAL PARTNER, L.P.
 its General Partner
 
 By: EXTERRAN GP LLC
 its General Partner
 
 By: /s/ DANIEL K.
SCHLANGER
 Daniel K. Schlanger
 Senior Vice President and Chief
Financial Officer
 (Principal Financial
Officer)
 
 By: /s/ KENNETH R.
BICKETT
 Kenneth R. Bickett
 Vice President and
Controller
 (Principal Accounting
Officer)
  28


Index
to Exhibits





Exhibit No.
            
            Description2.1
            
            Amended
      and Restated Contribution Conveyance and Assumption Agreement, dated July
      6, 2007, by and among Universal Compression Partners, L.P., Universal
      Compression, Inc., UCO Compression 2005 LLC, UCI Leasing LLC, UCO GP, LLC,
      UCI GP LP LLC, UCO General Partner, LP, UCI MLP LP LLC, UCLP Operating LLC
      and UCLP Leasing LLC., incorporated by reference to Exhibit 2.1 to the
      Registrant’s Current Report on Form 8-K filed July 11, 2007.2.2
            
            Contribution, Conveyance and Assumption Agreement,
      dated June 25, 2008, by and among Exterran Holdings, Inc., Hanover
      Compressor Company, Hanover Compression General Holdings, LLC, ExterranEnergy Solutions, L.P., Exterran
      ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH GP LP
      LLC, Exterran GPLLC,
      EXH MLP LP LLC, Exterran General Partner, L.P., EXLP
                Operating LLC, EXLP Leasing LLC and Exterran Partners,
      L.P., incorporated by reference to Exhibit 2.1 of the Registrant’s Current
      Report on Form 8-K filed June 26,2008.3.1
            
            Certificate
      of Limited Partnership of Universal Compression Partners, L.P. (now
      Exterran Partners, L.P.), incorporated by reference to Exhibit 3.1 to the
      Registrant’s Registration Statement on Form S-1 filed June 27,
      2006.3.2
            
            Certificate
      of Amendment to Certificate of Limited Partnership of Universal
      Compression Partners, L.P. (now Exterran Partners, L.P.), dated as of
      August 20, 2007, incorporated by reference to Exhibit 3.1 to the
      Registrant’s Current Report on Form 8-K filed August 24,
2007.3.3
            
            First
      Amended and Restated Limited Partnership Agreement of Exterran Partners,
      L.P., as amended, incorporated by reference to Exhibit 3.3 to the
      Registrant’s Quarterly Report on form 10-Q filed May 8, 2008.3.4
            
            Certificate
      of Partnership of UCO General Partner, LP (now Exterran General Partner,
      L.P.), incorporated by reference to Exhibit 3.3 to the Registrant’s
      Registration Statement on Form S-1 filed June 27, 2006.3.5
            
            Amended
      and Restated Limited Partnership Agreement of UCO General Partner, LP (now
      Exterran General Partner, L.P.), incorporated by reference to Exhibit 3.2
      to the Registrant’s Current Report on Form 8-K filed October 26,
      2006.3.6
            
            Certificate
      of Formation of UCO GP, LLC (now Exterran GP LLC), incorporated by
      reference to Exhibit 3.5 to the Registrant’s Registration Statement on
      Form S-1 filed June 27, 2006.3.7
            
            Amended
      and Restated Limited Liability Company Agreement of UCO GP, LLC (now
      Exterran GP LLC), incorporated by reference to Exhibit 3.3 to the
      Registrant’s Current Report on Form 8-K filed October 26,
      2006.10.1
            
            First
      Amendment to Loan Documents, dated May 8, 2008, by and among EXLP
      Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, EXLP
      Leasing LLC, as Guarantor, Wachovia Bank, National Association, as
      Administrative Agent and the other lenders party thereto, incorporated by
      reference to Exhibit 10.2 to the Registrant’s Quarterly Report on form
      10-Q filed May 8, 2008.31.1*
            
            Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14
      under the Securities Exchange Act of 1934.31.2*
            
            Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14
      under the Securities Exchange Act of 1934.32.1*
            
            Certification
      of the Chief Executive Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.32.2*
            
            Certification
      of the Chief Financial Officer of Exterran GP LLC (as general partner of
      the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.


____________


*
            Filed
      herewith.




29