Archrock Partners, L.P. - FORM 8-K - EX-99.1 - CONSOLIDATED BALANCE SHEET

Attached files

file	filename
8-K - FORM 8-K - Archrock Partners, L.P.	form8_k.htm
EX-23.1 - CONSENT OF INDEPENDENT ACCOUNTANTS - Archrock Partners, L.P.	exhibit23_1.htm

Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of

Exterran GP LLC

Houston, Texas

We have audited the accompanying consolidated balance sheets of Exterran General Partner, L.P. and subsidiaries (the “General Partner”) as of December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the General Partner’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The General Partner is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the General Partner’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated balance sheets presents fairly, in all material respects, the financial position of the General Partner as of December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, in 2009, the General Partner changed the method of accounting for Non-controlling Interest in accordance with guidance provided within ASC 810.

/s/ DELOITTE & TOUCHE LLP

Houston, Texas

April 6, 2010

EXTERRAN GENERAL PARTNER, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	203		$	3,244
Restricted cash		431			—
Accounts receivable, trade, net of allowance of $714 and $230, respectively		23,210			25,958
Due from affiliate, net		—			6,445
Total current assets		23,844			35,647
Compression equipment		770,703			566,286
Accumulated depreciation		(212,776	)		(131,973	)
Net compression equipment		557,927			434,313
Goodwill		124,019			124,019
Interest rate swaps		262			—
Intangibles and other assets, net		11,174			5,965
Total assets	$	717,226		$	599,944
LIABILITIES AND PARTNER’S CAPITAL
Current liabilities:
Accounts payable, trade	$	—		$	297
Due to affiliate, net		1,293			—
Accrued liabilities		7,198			5,703
Accrued interest		2,030			1,880
Current portion of interest rate swaps		9,229			5,483
Total current liabilities		19,750			13,363
Long-term debt		432,500			398,750
Interest rate swaps		6,668			12,204
Other long-term liabilities		—			159
Total liabilities		458,918			424,476
Commitments and contingencies (Note 14)
Capital:
General partner units		8,457			6,805
Accumulated other comprehensive loss		(297	)		(338	)
Total partner’s capital		8,160			6,467
Non-controlling interest		250,148			169,001
Total capital		258,308			175,468
Total liabilities and capital	$	717,226		$	599,944

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

EXTERRAN GENERAL PARTNER, L.P.

NOTES TO CONSOLIDATED BALANCE SHEETS

1. Basis of Presentation and Summary of Significant Accounting Policies

Organization

Exterran General Partner, L.P., is a Delaware limited partnership that was formed in June 2006 to become the general partner of Exterran Partners, L.P. (together with its subsidiaries, the “Partnership”). The terms “we,” “us,” or “our” when used in this report refer to Exterran General Partner, L.P. and its subsidiaries, collectively. Exterran General Partner, L.P. was initially an indirect wholly-owned subsidiary of Universal Compression Holdings, Inc. (“Universal”). Universal was merged with and into Exterran Holdings, Inc. (individually, and together with its subsidiaries other than us and our subsidiaries, “Exterran Holdings”) in August 2007. Exterran General Partner, L.P. contributed $20 and Exterran, Inc., as the organizational limited partner, contributed $980 to the Partnership on June 22, 2006. As Exterran General Partner, L.P. is a limited partnership, its general partner, Exterran GP LLC, conducts the Partnership’s business and operations, and the board of directors and officers of Exterran GP LLC make decisions on the Partnership’s behalf.

The Partnership is a publicly held Delaware limited partnership formed on June 22, 2006 to acquire certain contract operations customer service agreements and a compressor fleet used to provide compression services under those agreements.

In the opinion of management, the accompanying consolidated financial statements contain all appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, considered necessary to present fairly our financial position.

Nature of Operations

Natural gas compression is a mechanical process whereby the pressure of a volume of natural gas is increased to a desired higher pressure for transportation from one point to another, and is essential to the production and transportation of natural gas. Compression is typically required several times during the natural gas production and transportation cycle, including: (i) at the wellhead; (ii) throughout gathering and distribution systems; (iii) into and out of processing and storage facilities; and (iv) along intrastate and interstate pipelines.

Principles of Consolidation

We consolidate all majority-owned and controlled subsidiaries including the Partnership. All significant intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), section 20 “Control of Partnerships and Similar Entities,” we have consolidated our interest in the Partnership into our consolidated balance sheets.

Use of Estimates in the Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. Management believes that the estimates and assumptions used are reasonable.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash

Restricted cash consists of cash restricted for use to pay for expenses incurred under the Partnership’s asset-backed securitization facility (see Note 7). Restricted cash is presented separately from cash and cash equivalents in the balance sheet.

Revenue Recognition

Revenue from contract operations is recorded when earned, which generally occurs monthly at the time the monthly service is provided to customers in accordance with the contracts.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. We believe that the credit risk in cash investments that we have with financial institutions is minimal. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the world. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of the services we provide them and the terms of our contract operations service contracts.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The determination of the collectibility of amounts due from our customers requires us to use estimates and make judgments regarding future events and trends, including monitoring our customers’ payment history and current credit worthiness to determine that collectibility is reasonably assured, as well as consideration of the overall business climate in which our customers operate. Inherently, these uncertainties require us to make judgments and estimates regarding our customers’ ability to pay amounts due us in order to determine the appropriate amount of valuation allowances required for doubtful accounts. We review the adequacy of our allowance for doubtful accounts quarterly. We determine the allowance needed based on historical write-off experience and by evaluating significant balances aged greater than 90 days individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. During the years ended December 31, 2009 and 2008, our bad debt expense was $0.6 million and $0.2 million, respectively.

Property and Equipment

Property and equipment is carried at cost. Depreciation for financial reporting purposes is computed on the straight-line basis using estimated useful lives. For compression equipment, depreciation begins with the first compression service. The estimated useful lives as of December 31, 2009 were 15 to 30 years. Maintenance and repairs are charged to expense as incurred. Overhauls and major improvements that increase the value or extend the life of contract compressor units are capitalized and depreciated over the estimated useful life of up to seven years. Depreciation expense for the years ended December 31, 2009 and 2008 was $35.8 million and $26.8 million, respectively.

Long-Lived Assets

We review for the impairment of long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss recognized represents the excess of the asset’s carrying value as compared to its estimated fair value. Identifiable intangibles are amortized over the assets’ estimated useful lives.

Goodwill

Goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred.

Due To/From Affiliates, Net

We have receivables and payables with Exterran Holdings. A valid right of offset exists related to the receivables and payables with these affiliates and as a result, we present such amounts on a net basis on our consolidated balance sheets. The transactions reflected in due to/from affiliates, net primarily consist of centralized cash management activities between us and Exterran Holdings.

Segment Reporting

ASC 280, “Segment Reporting,” 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 United States (“U.S”).

Fair Value of Financial Instruments

Our financial instruments consist of cash, restricted cash, trade receivables and payables, interest rate swaps and long-term debt. At December 31, 2009 and 2008, the estimated fair values of such financial instruments, except for debt, approximated their carrying values as reflected in our consolidated balance sheets. As a result of the current credit environment, we believe that the fair value of our debt does not approximate its carrying value as of December 31, 2009 and 2008 because the applicable margin on our debt was below the market rates as of these dates. The fair value of our debt has been estimated based on similar debt transactions that occurred near December 31, 2009 and 2008. A summary of the fair value and carrying value of our debt is shown in the table below (in thousands):

	As of December 31, 2009				As of December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	432,500	$	417,861	$	398,750	$	366,476

Hedging and Uses of Derivative Instruments

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. We record interest rate swaps on the balance sheet as either derivative assets or derivative liabilities measured at their fair value. Fair value for our derivatives was estimated using a combination of the market and income approach. Changes in the fair value of the swaps designated as cash flow hedges are deferred in accumulated other comprehensive loss, net of tax, to the extent the contracts are effective as hedges until settlement of the underlying hedged transaction. To qualify for hedge accounting treatment, we must formally document, designate and assess the effectiveness of the transactions. If the necessary correlation ceases to exist or if physical delivery of the hedged item becomes improbable, we would discontinue hedge accounting and apply mark-to-market accounting.

Non-controlling Interest

Effective January 1, 2009, we adopted recently issued guidance under ASC 810, which requires that minority interests be recharacterized as non-controlling interests, requires them to be reported as a component of equity, 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 that the interest sold, as well as any interest retained, be recorded at fair value, with any gain or loss recognized in earnings. The consolidated financial statements included in this Form 8-K have been retrospectively adjusted to reflect the changes required by ASC 810.

2. Recent Accounting Pronouncements

In September 2006, the FASB issued guidance under ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. The new provisions of ASC 820 are effective for fiscal years beginning after November 15, 2007; however, in February 2008, the FASB deferred the effective date to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements at fair value on at least an annual basis. Our adoption of the required undeferred provisions of ASC 820 on January 1, 2008 did not have a material impact on our consolidated financial statements. Our adoption of the deferred provisions of ASC 820 on January 1, 2009 did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued guidance under ASC 805, “Business Combinations” (“ASC 805”), which requires that all assets, liabilities, contingent consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; that acquisition costs generally be expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense.

ASC 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with an exception for the accounting for valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions. Under ASC 805, adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of ASC 805 would also apply the provisions of ASC 805. Our adoption of ASC 805 on January 1, 2009 did not have a material impact on our consolidated financial statements, although we are not able to predict its impact on future potential acquisitions.

In March 2008, the FASB issued guidance under ASC 815, “Derivatives and Hedging” (“ASC 815”), which requires enhanced disclosures for derivative instruments, including those used in hedging activities. The new guidance in ASC 815 is effective for fiscal years beginning on or after November 15, 2008. Our adoption of the new provisions of ASC 815 on January 1, 2009 did not have a material impact on our consolidated financial statements; however, we have expanded disclosures regarding our derivative instruments.

In April 2008, the FASB issued guidance under ASC 350, “Intangibles — Goodwill and Other” (“ASC 350”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the new guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset, in accordance with GAAP. The new guidance under ASC 350 requires an entity to disclose information for a recognized intangible asset that enables users of the financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The new guidance under ASC 350 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Our adoption of the new provisions of ASC 350 on January 1, 2009 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued guidance under ASC 105, “Generally Accepted Accounting Principles” (“ASC 105”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the codification carries an equal level of authority. The new guidance under ASC 105 is effective for interim and annual periods ending after September 15, 2009. Our adoption of the new provisions of ASC 105 on September 30, 2009 did not have a material impact on our consolidated financial statements.

3. November 2009, July 2008 and July 2007 Contract Operations Acquisitions

In November 2009, we acquired from Exterran Holdings certain contract operations customer service agreements with 18 customers and a fleet of approximately 900 compressor units used to provide compression services under those agreements having a net book value of $137.2 million, net of accumulated depreciation of $47.2 million, and comprising approximately 270,000 horsepower, or 6% (by then available horsepower) of the combined contract operations business in the U.S. of Exterran Holdings and us (the “November 2009 Contract Operations Acquisition”). In connection with this acquisition, the Partnership assumed $57.2 million of long-term debt from Exterran Holdings and issued to Exterran Holdings approximately 4.7 million common units and issued to us approximately 97,000 general partner units. Concurrent with the closing of the November 2009 Contract Operations Acquisition, the Partnership borrowed $28.0 million and $30.0 million under its revolving credit facility and asset-backed securitization facility, respectively, which together were used to repay the debt assumed from Exterran Holdings in the acquisition.

In connection with this acquisition, we were allocated $4.6 million finite life intangible assets of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. The amount of finite life intangible assets included in the November 2009 Contract Operations Acquisition is comprised of $4.9 million associated with customer relationships and $0.8 million associated with customer contracts. These intangible assets are being amortized through 2024 and 2016, respectively, based on the present value of expected income to be realized from these assets.

In July 2008, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of approximately 620 compressor units used to provide compression services under those agreements having a net book value of $133.9 million, net of accumulated depreciation of $16.5 million, and comprising approximately 254,000 horsepower, or 6% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “July 2008 Contract Operations Acquisition”). In connection with this acquisition, the Partnership assumed $175.3 million of debt from Exterran Holdings and issued to Exterran Holdings approximately 2.4 million common units and issued to us approximately 49,000 general partner units.

Concurrent with the closing of the July 2008 Contract Operations Acquisition, the Partnership borrowed $117.5 million under its term loan and $58.3 million under its revolving credit facility, which together were used to repay the debt assumed from Exterran Holdings in the acquisition and to pay other costs incurred in the acquisition.

In connection with this acquisition, we were allocated $56.9 million historical cost goodwill and $4.6 million finite life intangible assets of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. The amount of finite life intangible assets included in the July 2008 Contract Operations Acquisition is comprised of $3.5 million associated with customer relationships and $1.1 million associated with customer contracts. These intangible assets are being amortized through 2024 and 2016, respectively, based on the present value of expected income to be realized from these assets.

In July 2007, we acquired from Universal contract operations customer service agreements with eight customers and a fleet of approximately 720 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 approximately 280,000 horsepower, or 13% (by then available horsepower) of the combined U.S. contract operations business relating to natural gas compression of Universal 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’s goodwill related to its U.S. contract operations segment. The amount allocated was based on the fair value of the net assets of Universal’s U.S. contract operations segment that were transferred to us compared to the total fair value of the net assets of Universal’s U.S. contract operations segment.

In connection with the July 2007 Contract Operations Acquisition, the Partnership assumed $159.6 million in debt from Universal and issued to Universal’s wholly-owned subsidiaries approximately 2.0 million common units and issued to us approximately 82,000 general partner units. Additionally, the Partnership 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. The Partnership used the proceeds from the private placement and additional borrowings of $90.0 million under its revolving credit facility, along with available cash, to repay the debt assumed from Universal in the acquisition.

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

An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the November 2009 and July 2008 Contract Operations Acquisitions was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be substantiated. Accordingly, our financial statements include the assets acquired and liabilities assumed associated with the acquisition beginning on the date of such acquisition.

4. Merger Between Universal and Hanover

On August 20, 2007, Universal and Hanover Compressor Company (“Hanover”) completed their merger transaction. In connection with the merger, Universal and Hanover became wholly-owned subsidiaries of Exterran Holdings, and Universal then merged with and into Exterran Holdings. As a result of the merger, Exterran Holdings owns us, including the 486,243 general partner units in the Partnership, representing a 2% general partner interest, and all the incentive distribution rights in the Partnership. As of December 31, 2009, Exterran Holdings owned 9,167,994 common units and 6,325,000 subordinated units which, together with the general partner interest, represent a 66% total ownership interest in the Partnership.

5. Related Party Transactions

The Partnership is a party to an omnibus agreement with Exterran Holdings and others (as amended and restated, the “Omnibus Agreement”), the terms of which include, among other things:

•

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

•

Exterran Holdings’ obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate the Partnership’s business and the Partnership’s 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 the Partnership, Exterran Holdings, and their respective affiliates may transfer compression equipment among one another to meet their respective contract operations services obligations;

•

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

•

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

•

Exterran Holdings’ obligation to indemnify the Partnership for certain liabilities and the Partnership’s obligation to indemnify Exterran Holdings for certain liabilities.

Non-competition

Under the Omnibus Agreement, subject to the provisions described below, Exterran Holdings agreed not to offer or provide compression services in the U.S. to the Partnership’s contract operations services customers that are not also contract operations services customers of Exterran Holdings. Compression services are defined to include the provision of natural gas contract compression services, but exclude fabrication of compression equipment, sales of compression equipment or material, parts or equipment that are components of compression equipment, leasing of compression equipment without also providing related compression equipment service and operating, maintenance, service, repairs or overhauls of compression equipment owned by third parties. In addition, under the Omnibus Agreement, the Partnership agreed not to offer or provide compression services to Exterran Holdings’ U.S. contract operations services customers that are not also contract operations services customers of the Partnership’s.

As a result of the merger between Hanover and Universal, at the time of execution of the Omnibus Agreement with Exterran Holdings, some of the Partnership’s customers were also contract operations services customers of Exterran Holdings, which we refer to as overlapping customers. The Partnership and Exterran Holdings have agreed, subject to the exceptions described below, not to provide contract operations services to an overlapping customer at any site at which the other was providing such services to an overlapping customer on the date of the Omnibus Agreement, each being referred to as a “Partnership site” or an “Exterran site.” After the date of the Omnibus Agreement, if an overlapping customer requests contract operations services at a Partnership site or an Exterran site, whether in addition to or in the replacement of the equipment existing at such site on the date of the Omnibus Agreement, the Partnership will be entitled to provide contract operations services if such overlapping customer is a Partnership overlapping customer, and Exterran Holdings will be entitled to provide such contract operations services at other locations if such overlapping customer is an Exterran overlapping customer. Additionally, any additional contract operations services provided to a Partnership overlapping customer will be provided by the Partnership and any additional services provided to an Exterran overlapping customer will be provided by Exterran Holdings.

Exterran Holdings also agreed that new customers for contract compression services (neither the Partnership’s customers nor customers of Exterran Holdings for U.S. contract compression services) are for the Partnership’s account unless the new customer is unwilling to contract with the Partnership or unwilling to do so under the Partnership’s form of compression services agreement. If a new customer is unwilling to enter into such an arrangement with the Partnership, then Exterran Holdings may provide compression services to the new customer. In the event that either the Partnership or Exterran Holdings enter into a contract to provide compression services to a new customer, either the Partnership or Exterran Holdings, as applicable, will receive the protection of the applicable non-competition arrangements described above in the same manner as if such new customer had been a compression services customer of either the Partnership or Exterran Holdings on the date of the Omnibus Agreement.

Unless the Omnibus Agreement is terminated earlier due to our change of control or our removal or withdrawal as general partner of the Partnership, or from a change of control of Exterran Holdings, the non-competition provisions of the Omnibus Agreement will terminate on November 10, 2012 or on the date on which a change of control of Exterran Holdings occurs, whichever event occurs first. If a change of control of Exterran Holdings occurs, and neither the Omnibus Agreement nor the non-competition arrangements have already terminated, Exterran Holdings will agree for the remaining term of the non-competition arrangements not to provide contract operations services to the Partnership’s customers at the sites at which the Partnership is providing contract operations services to them at the time of the change of control.

Indemnification for Environmental and Related Liabilities

Under the Omnibus Agreement, Exterran Holdings will indemnify the Partnership, for a three-year period following the applicable acquisition date, against certain potential environmental claims, losses and expenses associated with the ownership and operation of the assets it acquires from Exterran Holdings that occur before that acquisition date. Exterran Holdings’ maximum liability for this and its other indemnification obligations under the Omnibus Agreement cannot exceed $5 million, and Exterran Holdings will not have any obligation under this indemnification until the Partnership’s aggregate losses exceed $250,000. Exterran Holdings will have no indemnification obligations with respect to environmental claims made as a result of additions to or modifications of environmental laws promulgated after such acquisition date. The Partnership has agreed to indemnify Exterran Holdings against environmental liabilities occurring on or after the applicable acquisition date related to our assets to the extent Exterran Holdings is not required to indemnify the Partnership.

Additionally, Exterran Holdings will indemnify the Partnership for losses attributable to title defects, retained assets and income taxes attributable to pre-closing operations. The Partnership will indemnify Exterran Holdings for all losses attributable to the post-closing operations of the assets contributed to the Partnership, to the extent not subject to Exterran Holdings’ indemnification obligations. For the years ended December 31, 2009 and 2008, there were no requests for indemnification by either party.

Purchase of New Compression equipment from Exterran Holdings

Pursuant to the Omnibus Agreement, the Partnership is permitted to purchase newly fabricated compression equipment from Exterran Holdings or its affiliates at Exterran Holdings’ cost to fabricate such equipment plus a fixed margin of 10%, which may be modified with the approval of Exterran Holdings and the conflicts committee of our board of directors. During the years ended December 31, 2009 and 2008, the Partnership purchased $3.1 million and $9.8 million, respectively, of new compression equipment from Exterran Holdings. Under GAAP, transfers of assets and liabilities between entities under common control are to be initially recorded on the books of the receiving entity at the carrying value of the transferor. Any difference between consideration given and the carrying value of the assets or liabilities is treated as an equity distribution or contribution. Transactions between the Partnership and Exterran Holdings and its affiliates are transactions between entities under common control. As a result, the equipment purchased during the years ended December 31, 2009 and 2008 was recorded in our consolidated balance sheet as property, plant and equipment of $2.8 million and $8.8 million, respectively, which represents the carrying value of the Exterran Holdings affiliates that sold it to the Partnership, and as a distribution of equity of $0.3 million and $1.0 million, respectively, which represents the fixed margin the Partnership paid above the carrying value in accordance with the Omnibus Agreement. During the years ended December 31, 2009 and 2008, Exterran Holdings contributed $7.5 million and $11.1 million, respectively, primarily related to the completion of overhauls on compression equipment that was exchanged with the Partnership or contributed to the Partnership and where overhauls were in progress on the date of exchange or contribution.

Transfer of Compression Equipment with Exterran Holdings

Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith that there exists a need on the part of Exterran Holdings’ contract operations services business or on the Partnership’s part to transfer compression equipment between Exterran Holdings and the Partnership so as to fulfill the compression services obligations of either Exterran Holdings or the Partnership, such equipment may be so transferred if it will not cause the Partnership to breach any existing contracts or to suffer a loss of revenue under an existing compression services contract or incur any unreimbursed costs.

During the year ended December 31, 2009, pursuant to the terms of the Omnibus Agreement, the Partnership transferred ownership of 140 compressor units, totaling approximately 49,400 horsepower with a net book value of approximately $25.7 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership to the Partnership of 242 compressor units, totaling approximately 50,400 horsepower with a net book value of approximately $30.2 million. During the year ended December 31, 2008, pursuant to the terms of the Omnibus Agreement, the Partnership transferred ownership of 119 compressor units, totaling approximately 57,100 horsepower with a net book value of approximately $29.2 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership to the Partnership of 279 compressor units, totaling approximately 63,200 horsepower with a net book value of approximately $29.4 million. During the years ended December 31, 2009 and 2008, the Partnership recorded equity contributions of approximately $4.5 million and $0.2 million, respectively, related to the differences in net book value on the compression equipment that was exchanged with the Partnership. No customer contracts were included in the transfers. Under the terms of the Omnibus Agreement, such transfers must be of equal appraised value, as defined in the Omnibus Agreement, with any difference being settled in cash. As a result, the Partnership paid a nominal amount to Exterran Holdings for the difference in fair value of the equipment in connection with the transfers. The Partnership recorded the compressor units received at the historical book basis of Exterran Holdings. The units the Partnership received from Exterran Holdings were being utilized to provide services to the Partnership’s customers on the date of the transfers and, prior to the transfers, had been leased by the Partnership from Exterran Holdings. The units we transferred to Exterran Holdings were being utilized to provide services to customers of Exterran Holdings on the date of the transfers, and prior to the transfers had been leased by Exterran Holdings from the Partnership.

The Omnibus Agreement will terminate upon our change of control or our removal or withdrawal as general partner of the Partnership, and certain provisions of the Omnibus Agreement will terminate upon a change of control of Exterran Holdings.

Lease of Equipment Between Exterran Holdings and the Partnership

Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith that there exists a need on the part of Exterran Holdings’ contract operations services business or on the Partnership’s part to lease compression equipment between Exterran Holdings and the Partnership so as to fulfill the compression services obligations of either Exterran Holdings or the Partnership, such equipment may be leased if it will not cause the Partnership to breach any existing compression services contracts or to suffer a loss of revenue under an existing compression services contract or incur any unreimbursed costs. At December 31, 2009, the Partnership had equipment on lease to Exterran Holdings with an aggregate cost and accumulated depreciation of $10.4 million and $2.8 million, respectively.

Reimbursement of Operating and General and Administrative Expense

Exterran Holdings provides all operational staff, corporate staff and support services reasonably necessary to run the Partnership’s business. The services to be provided by Exterran Holdings may include, without limitation, operations, marketing, maintenance and repair, periodic overhauls of compression equipment, inventory management, legal, accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes, facilities management, investor relations, enterprise resource planning system, training, executive, sales, business development and engineering.

The Partnership is charged costs incurred by Exterran Holdings directly attributable to the Partnership. Costs incurred by Exterran Holdings that are indirectly attributable to the Partnership and Exterran Holdings’ other operations are allocated among Exterran Holdings’ other operations and the Partnership. The allocation methodologies vary based on the nature of the charge and include, among other things, revenue and horsepower. The Partnership believes that the allocation methodologies used to allocate indirect costs to the Partnership are reasonable.

Under the Omnibus Agreement, Exterran Holdings has agreed that, for a period that will terminate on December 31, 2010, the Partnership’s obligation to reimburse Exterran Holdings for (i) any cost of sales that it incurs in the operation of the Partnership’s business will be capped (after taking into account any such costs the Partnership incurs and pays directly); and (ii) any SG&A costs allocated to the Partnership will be capped (after taking into account any such costs the Partnership incurs and pays directly). From July 9, 2007 through July 29, 2008, cost of sales were capped at $18.00 per operating horsepower per quarter. From July 30, 2008 through December 31, 2009, cost of sales were capped at $21.75 per operating horsepower per quarter. From July 9, 2007 through July 29, 2008, SG&A costs were capped at $4.75 million per quarter. From July 30, 2008 through November 9, 2009, SG&A costs were capped at $6.0 million per quarter. From November 10, 2009 through December 31, 2009, SG&A costs were capped at $7.6 million per quarter. These caps may be subject to future adjustment in connection with expansions of the Partnership’s operations through the acquisition or construction of new assets or businesses.

For the years ended December 31, 2009 and 2008, the Partnership’s cost of sales exceeded the cap provided in the Omnibus Agreement by $7.2 million and $12.5 million, respectively. For the years ended December 31, 2009 and 2008, the Partnership’s SG&A expense exceeded the cap provided in the Omnibus Agreement by $0.6 million and $0.1 million, respectively. The excess amounts over the caps are included in the consolidated statements of operations as cost of sales or SG&A expense. The cash received for the amounts over the caps has been accounted for as a capital contribution in the Partnership’s consolidated balance sheets.

6. Goodwill

In connection with the July 2008 and July 2007 Contract Operations Acquisitions, we were allocated historical cost goodwill of Exterran Holdings’ North America contract operations segment and Universal’s U.S. contract operations segment, respectively. The amount allocated was based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment and Universal’s U.S. contract operations segment. The amount of goodwill allocated to us in the July 2008 and July 2007 Contract Operations Acquisitions was $56.9 million and $30.7 million, respectively.

We perform our goodwill impairment test in the fourth quarter of every year, or whenever events indicate impairment may have occurred, to determine if the estimated recoverable value of our reporting unit exceeds the net carrying value of the reporting unit, including the applicable goodwill.

The first step in performing a goodwill impairment test is to compare the estimated fair value of our reporting unit with its recorded net book value (including the goodwill) of the respective reporting unit. If the estimated fair value of the reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the reporting unit is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition of the reporting unit. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill for the reporting unit, and the recorded amount is written down to the hypothetical amount, if lower.

Because quoted market prices for our reporting units are not available, management must apply judgment in determining the estimated fair value of these reporting units for purposes of performing the annual goodwill impairment test. Management uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets.

We determine the fair value of our reporting units using a combination of the expected present value of future cash flows and a market approach. Each approach is weighted 50% in determining our calculated fair value. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the reporting units’ earnings before interest, tax, depreciation and amortization.

For the years ended December 31, 2009 and 2008, we determined that there was no impairment of goodwill.

7. Debt

Long-term debt consisted of the following (in thousands):

	December 31,
	2009		2008
Revolving credit facility due October 2011	$	285,000	$	281,250
Term loan facility due October 2011		117,500		117,500
Asset-backed securitization facility due July 2013		30,000		—
Long-term debt	$	432,500	$	398,750

Senior Secured Credit Facility

The Partnership, as guarantor, and EXLP Operating LLC, its wholly-owned subsidiary, are parties to a senior secured credit agreement that provides for a five-year, $315 million revolving credit facility that matures in October 2011.

In May 2008, the Partnership entered into an amendment to its senior secured credit facility that increased the aggregate commitments under that facility to provide for a $117.5 million term loan facility that matures in October 2011. Concurrent with the closing of the July 2008 Contract Operations Acquisition, the $117.5 million term loan was funded and $58.3 million was drawn on the Partnership’s revolving credit facility, which together were used to repay the debt assumed from Exterran Holdings in the acquisition and to pay other costs incurred in the acquisition. The $117.5 million term loan is non-amortizing but must be repaid with the net cash proceeds from any future equity offerings until paid in full. Subject to certain conditions, at the Partnership’s request, and with the approval of the lenders, the aggregate commitments under the senior secured credit facility may be increased by an additional $17.5 million. This amount will be increased on a dollar-for-dollar basis with each repayment under the term loan facility.

As of December 31, 2009, we had $285.0 million outstanding, with $30.0 million available, under the revolving credit facility and $117.5 million of long-term debt outstanding under the term loan.

All amounts outstanding under the senior secured credit facility mature in October 2011.

The Partnership’s revolving credit facility bears interest at a base rate, or LIBOR, at its option, plus an applicable margin, as defined in the credit agreement. The applicable margin, depending on the Partnership’s leverage ratio, varies (i) in the case of LIBOR loans, from 1.0% to 2.0% or (ii) in the case of base rate loans, from 0.0% to 1.0%. The base rate is the higher of the U.S. Prime Rate or the Federal Funds Rate plus 0.5%. At December 31, 2009, all amounts outstanding were LIBOR loans and the applicable margin was 1.75%. The weighted average interest rate on the outstanding balance at December 31, 2009, excluding the effect of interest rate swaps, was 2.1%.

The term loan bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. The applicable margin, depending on the Partnership’s 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%.

At December 31, 2009, all amounts outstanding were LIBOR loans and the applicable margin was 2.25%. Borrowings under the term loan are subject to the same credit agreement covenants as the Partnership’s revolving credit facility, except for an additional covenant requiring mandatory prepayment of the term loan from net cash proceeds of any future equity offerings, on a dollar-for-dollar basis. The weighted average interest rate on the outstanding balance of the term loan at December 31, 2009, excluding the effect of interest rate swaps, was 2.5%.

The Partnership’s senior secured credit facility contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on the Partnership’s ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the credit agreement) to Total Interest Expense (as defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of Total Debt (as defined in the credit agreement) to EBITDA of not greater than 5.0 to 1.0. The Partnership’s senior secured credit facility allows for our Total Debt to EBITDA ratio to be increased from 5.0 to 1.0 to 5.5 to 1.0 during a quarter when an acquisition closes meeting certain thresholds and for the following two quarters after the acquisition closes. Therefore, due to the November 2009 Contract Operations Acquisition closing in the fourth quarter of 2009, the maximum allowed ratio of Total Debt to EBITDA was increased from 5.0 to 1.0 to 5.5 to 1.0 for the period from December 31, 2009 through June 30, 2010. After June 30, 2010, our required Total Debt to EBITDA ratio will go back to 5.0 to 1.0. As of December 31, 2009, we maintained a 5.2 to 1.0 EBITDA to Total Interest Expense ratio and a 4.0 to 1.0 Total Debt to EBITDA ratio. If the Partnership continues to experience a deterioration in the demand for its services, and the Partnership is unable to consummate further acquisitions from Exterran Holdings, amend its senior secured credit facility or restructure its debt, the Partnership estimates that we could be in violation of the maximum Total Debt to EBITDA covenant ratio contained in its senior secured credit facility during 2010. In addition, if the Partnership experiences a material adverse effect on its assets, liabilities, financial condition, business, operations or prospects that, taken as a whole, impacted the Partnership’s ability to perform its obligations under its credit agreement, this could lead to a default under the Partnership’s credit agreement. As of December 31, 2009, we were in compliance with all financial covenants under the credit agreement.

Asset-Backed Securitization Facility

In connection with the November 2009 Contract Operations Acquisition, the Partnership entered into an asset-backed securitization facility ("the 2009 ABS Facility"), a portion of which was used to fund the transaction. The 2009 ABS Facility notes are revolving in nature and are payable in July 2013. Interest and fees payable to the noteholders accrue on these notes at a variable rate consisting of an applicable margin of 3.5% plus, at the Partnership’s option, either LIBOR or a base rate. The weighted average interest rate on the outstanding balance of the 2009 ABS Facility at December 31, 2009, excluding the effect of interest rate swaps, was 3.8%. Repayment of the 2009 ABS Facility notes has been secured by a pledge of all of the assets of EXLP ABS 2009 LLC (“EXLP ABS 2009”) and its subsidiaries, consisting primarily of specified compression services contracts and a fleet of natural gas compressor units. The amount outstanding at any time is limited to the lower of (i) 75% of the value of the natural gas compression equipment owned by EXLP ABS 2009 (as defined in the agreement), (ii) 4.0 times free cash flow or (iii) the amount calculated under an interest coverage test. Additionally, the senior secured credit facility’s credit agreement limits the amount we can borrow under the 2009 ABS Facility to two times the Partnership’s EBITDA (as defined in the credit agreement). As of December 31, 2009, we had $30.0 million outstanding, with $120.0 million of availability, under the 2009 ABS Facility. Under the 2009 ABS Facility, we had $0.4 million of restricted cash as of December 31, 2009.

Long-term Debt Maturity Schedule

Contractual maturities of long-term debt (excluding interest to be accrued thereon) are as follows (in thousands):

	December 31, 2009
2010	$	—
2011		402,500
2012		—
2013		30,000
2014		—
Thereafter		—
Total debt	$	432,500

8. Partner’s Capital

Partner’s capital at December 31, 2009 represented a 99.999% ownership interest in us by EXH GP LP LLC, and a 0.001% ownership interest in us by Exterran GP LLC.

9. Non-controlling interest and Investment in the Partnership

We own a 2% general partner interest in the Partnership, which conducts substantially all of our business. We have no independent operations and no material assets outside those of the Partnership.

The general partner units of the Partnership have the management rights as set forth in the Partnership’s partnership agreement and cash distribution rights as described below.

In October 2006, the Partnership completed an initial public offering of approximately 6.3 million common units. Upon the closing of the Partnership’s initial public offering, Universal and its subsidiaries received an aggregate of approximately 6.3 million subordinated units.

The non-controlling interest is related to the capital and retained earnings applicable to the limited partner interest in the Partnership which is owned by the public and affiliates of ours. As of December 31, 2009, Exterran Holdings owned 9,167,994 common units and 6,325,000 subordinated units which, together with the general partner interest, represent a 66% total ownership interest in the Partnership.

In connection with the July 2007 Contract Operations Acquisition, as described in Note 3, the Partnership sold approximately 2.0 million common units in a private placement and issued approximately 2.0 million common units to Universal’s wholly-owned subsidiaries and approximately 82,000 general partner units to us.

In connection with the July 2008 Contract Operations Acquisition, as described in Note 3, the Partnership issued approximately 2.4 million common units to Exterran Holdings and approximately 49,000 general partner units to us.

In connection with the November 2009 Contract Operations Acquisition, as described in Note 3, the Partnership issued approximately 4.7 million common units to Exterran Holdings and approximately 97,000 general partner units to us.

Cash Distributions

The Partnership will make distributions of available cash (as defined in the Partnership’s partnership agreement) from operating surplus for any quarter during any subordination period in the following manner:

•

first, 98% to the common unitholders, pro rata, and 2% to us, until the Partnership distributes for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

•

second, 98% to the common unitholders, pro rata, and 2% to us, until the Partnership distributes for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

•

third, 98% to the subordinated unitholders, pro rata, and 2% to us, until the Partnership distributes for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter;

•

fourth, 98% to all common and subordinated unitholders, pro rata, and 2% to us, until each unit has received a distribution of $0.4025;

•

fifth, 85% to all common and subordinated unitholders, pro rata, and 15% to us, until each unit has received a distribution of $0.4375;

•

sixth, 75% to all common and subordinated unitholders, pro rata, and 25% to us, until each unit has received a total of $0.525; and

•

thereafter, 50% to all common and subordinated unitholders, pro rata, and 50% us.

The following table summarizes the Partnership’s distributions per unit for 2007, 2008 and 2009:

Period Covering	Payment Date	Distribution per Limited Partner Unit		Total Distribution
1/1/2007 – 3/31/2007	May 15, 2007	$	0.3500	$ 4.5 million
4/1/2007 – 6/30/2007	August 14, 2007		0.3500	6.0 million
7/1/2007 – 9/30/2007	November 14, 2007		0.4000	6.8 million
10/1/2007 – 12/31/2007	February 14, 2008		0.4250	7.3 million(1)
1/1/2008 – 3/31/2008	May 14, 2008		0.4250	7.3 million(1)
4/1/2008 – 6/30/2008	August 14, 2008		0.4250	8.3 million(1)
7/1/2008 – 9/30/2008	November 14, 2008		0.4625	9.3 million(1)
10/1/2008 – 12/31/2008	February 13, 2009		0.4625	9.3 million(1)
1/1/2009 – 3/31/2009	May 15, 2009		0.4625	9.3 million(1)
4/1/2009 – 6/30/2009	August 14, 2009		0.4625	9.3 million(1)
7/1/2009 – 9/30/2009	November 13, 2009		0.4625	9.3 million(1)
10/1/2009 – 12/31/2009	February 12, 2010		0.4625	11.6 million(1)

(1)	Including distributions on the Partnership’s incentive distribution rights.

10. Unit-Based Compensation

Long-Term Incentive Plan

We have a long-term incentive plan that was adopted by Exterran GP LLC, our general partner, in October 2006 for employees, directors and consultants of the Partnership, 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 of the Partnership. 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 Partnership units on the date of grant and will become exercisable over a period determined by the Plan Administrator. Phantom units are notional units that entitle the grantee to receive a common unit upon the vesting of the phantom unit or, at the discretion of the Plan Administrator, cash equal to the fair value of a common unit.

In October 2008, our long-term incentive plan was amended to allow us the option to settle any exercised unit options in a cash payment equal to the fair market value of the number of common units that we would otherwise issue upon exercise of such unit option less the exercise price and any amounts required to meet withholding requirements.

Unit Options

All unit options vested and became exercisable on January 1, 2009, and expired on December 31, 2009.

The following table presents unit option activity for 2009 (remaining life in years):

	Unit Options			Weighted Average Exercise Price		Weighted Average Remaining Life		Aggregate Intrinsic Value
Unit options outstanding, December 31, 2008		591,429		$	23.77
Cancelled		(10,714	)		25.94
Expired		(580,715	)		23.73
Unit options outstanding, December 31, 2009		—		$	—		—	$	—
Unit options exercisable, December 31, 2009		—		$	—		—	$	—

Phantom Units

During the year ended December 31, 2009, we granted 90,502 phantom units to officers and directors of Exterran GP LLC and certain employees of Exterran Holdings and its subsidiaries, which settle 33 1/3% on each of the first three anniversaries of the grant date.

The following table presents phantom unit activity for 2009:

	Phantom Units			Weighted Average Grant-Date Fair Value per Unit
Phantom units outstanding, December 31, 2008		48,152		$	30.98
Granted		90,502			12.35
Vested		(34,576	)		24.02
Cancelled		(12,954	)		17.39
Phantom units outstanding, December 31, 2009		91,124		$	17.06

As of December 31, 2009, $1.4 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 1.9 years.

11. Accounting for Interest Rate Swap Agreements

We are exposed to market risks primarily associated with changes in interest rates. We use derivative financial instruments to minimize the risks and costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative financial instruments for trading or other speculative purposes.

Interest Rate Risk

At December 31, 2009, we were party to interest rate swaps in which we pay fixed payments and receive floating payments on a notional value of $255.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire over varying dates through July 2012. The weighted average effective fixed interest rate payable on our interest rate swaps was 4.7% as of December 31, 2009. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. For the years ended December 31, 2009 and 2008, there was no ineffectiveness related to these swaps.

The following tables present the effect of derivative instruments on our consolidated financial position (in thousands):

	December 31, 2009
	Balance Sheet Location	Fair Value Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges	Interest rate swaps	$	262
Interest rate hedges	Current portion of interest rate swaps		(9,229	)
Interest rate hedges	Interest rate swaps		(6,668	)
Total derivatives		$	(15,635	)

The counterparties to our derivative agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments. The counterparties to our interest rate swaps are also lenders under our credit facility and, in that capacity, share proportionally in the collateral pledged under the credit facility.

12. Fair Value Measurements

ASC 820 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.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.

•

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

•

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

•

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

The following table summarizes the valuation of our interest rate swaps and impaired fleet units in 2009 under ASC 820 pricing levels as of the date of valuation (in thousands):

	Total			Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swaps liability	$	(15,635	)	$	—	$	(15,635	)	$	—
Impaired fleet units		215			—		—			215

The following table summarizes the valuation of our interest rate swaps at December 31, 2008 under ASC 820 pricing levels (in thousands):

		Total				Quoted Market Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Interest rate swaps liability		$	(17,687	)		$	—			$	(17,687	)		$	—

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. Our estimate of the fair value of the impaired fleet units was based on the estimated component value of the equipment that we plan to use.

13. Impaired Fleet Units

As a result of a decline in market conditions and operating horsepower during 2009, we reviewed the idle compression fleet used in our business for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. As a result of that review, we determined that 56 units representing approximately 8,900 horsepower would be retired from the fleet.

14. 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.

Attached files

Archrock Partners, L.P. Reports

Also read