UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-33666

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		74-3204509 (I.R.S. Employer Identification No.)
16666 Northchase Drive Houston, Texas (Address of principal executive offices)		77060 (Zip 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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 þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(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 o No þ

Number of shares of the common stock of the registrant outstanding as of October 28, 2010: 63,220,020 shares.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive Income (Loss)			5
Condensed Consolidated Statements of Equity			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			47
Item 4. Controls and Procedures			48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 6. Exhibits			51
SIGNATURES			52
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

EXTERRAN HOLDINGS, INC.

(In thousands, except par value and share amounts)

(unaudited)

		September 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	81,367			$	83,745
Restricted cash			7,435				14,871
Accounts receivable, net of allowance of $13,846 and $15,342, respectively			434,002				447,504
Inventory, net			412,564				489,982
Costs and estimated earnings in excess of billings on uncompleted contracts			206,008				180,181
Current deferred income taxes			20,839				25,913
Other current assets			99,109				118,813
Current assets associated with discontinued operations			4,914				58,152
Total current assets			1,266,238				1,419,161
Property, plant and equipment, net			3,273,752				3,404,354
Goodwill, net			196,101				195,164
Intangible and other assets, net			268,008				273,883
Long-term assets associated with discontinued operations			833				386
Total assets		$	5,004,932			$	5,292,948
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable, trade		$	165,264			$	131,337
Accrued liabilities			315,396				321,412
Deferred revenue			137,816				206,160
Billings on uncompleted contracts in excess of costs and estimated earnings			111,914				156,245
Current liabilities associated with discontinued operations			7,209				21,879
Total current liabilities			737,599				837,033
Long-term debt			1,971,309				2,260,936
Other long-term liabilities			187,148				179,327
Deferred income taxes			175,003				182,126
Long-term liabilities associated with discontinued operations			12,831				16,667
Total liabilities			3,083,890				3,476,089
Commitments and contingencies (Note 13)
Equity:
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; zero issued			—				—
Common stock, $0.01 par value per share; 250,000,000 shares authorized; 69,045,236 and 68,195,447 shares issued, respectively			690				682
Additional paid-in capital			3,494,390				3,434,618
Accumulated other comprehensive loss			(28,266	)			(27,879	)
Accumulated deficit			(1,549,286	)			(1,565,489	)
Treasury stock — 5,829,298 and 5,667,897 common shares, at cost, respectively			(203,945	)			(201,935	)
Total Exterran stockholders’ equity			1,713,583				1,639,997
Noncontrolling interest			207,459				176,862
Total equity			1,921,042				1,816,859
Total liabilities and equity		$	5,004,932			$	5,292,948

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

EXTERRAN HOLDINGS, INC.

(In thousands, except per share amounts)

(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues:
North America contract operations		$	152,007			$	167,567			$	456,682			$	540,415
International contract operations			111,879				96,420				352,706				282,547
Aftermarket services			82,348				75,526				236,034				229,561
Fabrication			279,389				340,193				800,331				1,008,363
			625,623				679,706				1,845,753				2,060,886
Costs and Expenses:
Cost of sales (excluding depreciation and amortization expense):
North America contract operations			78,281				74,556				224,467				232,681
International contract operations			46,936				37,850				130,664				108,552
Aftermarket services			73,717				59,360				200,619				180,892
Fabrication			231,716				278,036				674,987				840,311
Selling, general and administrative			88,229				81,600				266,446				253,091
Depreciation and amortization			98,503				87,781				296,466				255,757
Long-lived asset impairment			2,246				—				4,698				92,284
Restructuring charges			—				2,616				—				12,396
Goodwill impairment			—				—				—				150,778
Interest expense			33,050				33,371				98,592				89,268
Equity in loss of non-consolidated affiliates			—				1,011				348				92,695
Other (income) expense, net			(2,941	)			(12,768	)			(7,609	)			(25,563	)
			649,737				643,413				1,889,678				2,283,142
Income (loss) before income taxes			(24,114	)			36,293				(43,925	)			(222,256	)
Provision for (benefit from) income taxes			(7,083	)			13,691				(10,898	)			1,477
Income (loss) from continuing operations			(17,031	)			22,602				(33,027	)			(223,733	)
Income (loss) from discontinued operations, net of tax			(1,325	)			(3,834	)			48,057				(345,351	)
Net income (loss)			(18,356	)			18,768				15,030				(569,084	)
Less: Net (income) loss attributable to the noncontrolling interest			371				(576	)			1,173				(2,908	)
Net income (loss) attributable to Exterran stockholders		$	(17,985	)		$	18,192			$	16,203			$	(571,992	)
Basic income (loss) per common share:
Income (loss) from continuing operations attributable to Exterran stockholders		$	(0.27	)		$	0.36			$	(0.51	)		$	(3.70	)
Income (loss) from discontinued operations attributable to Exterran stockholders			(0.02	)			(0.06	)			0.77				(5.63	)
Net income (loss) attributable to Exterran stockholders		$	(0.29	)		$	0.30			$	0.26			$	(9.33	)
Diluted income (loss) per common share:
Income (loss) from continuing operations attributable to Exterran stockholders		$	(0.27	)		$	0.35			$	(0.51	)		$	(3.70	)
Income (loss) from discontinued operations attributable to Exterran stockholders			(0.02	)			(0.05	)			0.77				(5.63	)
Net income (loss) attributable to Exterran stockholders		$	(0.29	)		$	0.30			$	0.26			$	(9.33	)
Weighted average common and equivalent shares outstanding:
Basic			62,111				61,579				61,969				61,315
Diluted			62,111				77,509				61,969				61,315

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

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income (loss)		$	(18,356	)		$	18,768			$	15,030			$	(569,084	)
Other comprehensive income (loss), net of tax:
Change in fair value of derivative financial instruments			2,441				(5,723	)			(534	)			7,447
Foreign currency translation adjustment			14,933				17,485				(984	)			54,025
Comprehensive income (loss)			(982	)			30,530				13,512				(507,612	)
Less: Comprehensive (income) loss attributable to the noncontrolling interest			934				(53	)			1,423				(4,012	)
Comprehensive income (loss) attributable to Exterran		$	(48	)		$	30,477			$	14,935			$	(511,624	)

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

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(unaudited)

		Exterran Holdings, Inc. Stockholders
										Accumulated
						Additional				Other
		Common				Paid-in				Comprehensive				Treasury				Accumulated				Noncontrolling
		Stock				Capital				Loss				Stock				Deficit				Interest				Total
Balance at December 31, 2008		$	672			$	3,354,922			$	(94,767	)		$	(200,959	)		$	(1,016,082	)		$	184,291			$	2,228,077
Treasury stock purchased															(1,019	)											(1,019	)
Shares issued in employee stock purchase plan			2				3,178																				3,180
Stock-based compensation expense, net of forfeitures			7				18,043																708				18,758
Income tax expense from stock-based compensation expense							(2,674	)																			(2,674	)
Cash distribution to noncontrolling unitholders of the Partnership																							(11,589	)			(11,589	)
Issuance of convertible senior notes and purchased call options and warrants sold							56,745																				56,745
Other																							(6	)			(6	)
Comprehensive income (loss):
Net income (loss)																			(571,992	)			2,908				(569,084	)
Derivatives change in fair value, net of tax											6,343												1,104				7,447
Foreign currency translation adjustment											54,025																54,025
Balance at September 30, 2009		$	681			$	3,430,214			$	(34,399	)		$	(201,978	)		$	(1,588,074	)		$	177,416			$	1,783,860
Balance at December 31, 2009		$	682			$	3,434,618			$	(27,879	)		$	(201,935	)		$	(1,565,489	)		$	176,862			$	1,816,859
Treasury stock purchased															(2,010	)											(2,010	)
Options exercised			1				767																				768
Shares issued in employee stock purchase plan			1				1,873																				1,874
Stock-based compensation expense, net of forfeitures			6				16,922																250				17,178
Income tax expense from stock-based compensation expense							(891	)																			(891	)
Net proceeds from sale of Partnership units, net of tax							41,111				881												43,273				85,265
Cash distribution to noncontrolling unitholders of the Partnership																							(11,631	)			(11,631	)
Other							(10	)															128				118
Comprehensive income (loss):
Net income (loss)																			16,203				(1,173	)			15,030
Derivatives change in fair value, net of tax											(284	)											(250	)			(534	)
Foreign currency translation adjustment											(984	)															(984	)
Balance at September 30, 2010		$	690			$	3,494,390			$	(28,266	)		$	(203,945	)		$	(1,549,286	)		$	207,459			$	1,921,042

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

EXTERRAN HOLDINGS, INC.

(In thousands)
(unaudited)

		Nine Months Ended September 30,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	15,030			$	(569,084	)
Adjustments:
Depreciation and amortization			296,466				255,757
Amortization of debt discount			12,128				4,559
Long-lived asset impairment			4,698				92,284
Goodwill impairment			—				150,778
Deferred financing cost amortization			3,733				2,855
(Income) loss from discontinued operations, net of tax			(48,057	)			345,351
Provision for doubtful accounts			3,699				4,594
Gain on sale of property, plant and equipment			(5,253	)			(7,931	)
Gain on sale of business			—				(3,193	)
Equity in loss of non-consolidated affiliates, net of dividends received			348				92,695
Interest rate swaps			740				1,387
Gain on remeasurement of intercompany balances			(2,354	)			(5,087	)
Stock-based compensation expense			17,296				18,670
Deferred income tax provision			(41,936	)			(28,194	)
Changes in assets and liabilities:
Accounts receivable and notes			11,137				121,879
Inventory			85,134				(43,324	)
Costs and estimated earnings versus billings on uncompleted contracts			(72,679	)			16,179
Prepaid and other current assets			19,619				8,902
Accounts payable and other liabilities			32,972				(131,724	)
Deferred revenue			(70,842	)			(3,706	)
Other			(9,842	)			39
Net cash provided by continuing operations			252,037				323,686
Net cash provided by (used in) discontinued operations			(3,880	)			829
Net cash provided by operating activities			248,157				324,515
Cash flows from investing activities:
Capital expenditures			(168,462	)			(303,560	)
Proceeds from sale of property, plant and equipment			25,500				17,510
Proceeds from sale of business			—				5,642
Cash invested in non-consolidated affiliates			(348	)			(1,578	)
Net proceeds from the sale of Partnership units			109,365				—
Decrease in restricted cash			7,436				2,602
Net cash used in continuing operations			(26,509	)			(279,384	)
Net cash provided by (used in) discontinued operations			89,509				(829	)
Net cash provided by (used in) investing activities			63,000				(280,213	)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt			856,328				692,750
Repayments of long-term debt			(1,158,083	)			(726,128	)
Payments for debt issue costs			—				(10,600	)
Proceeds from warrants sold			—				53,138
Payment from call options			—				(89,408	)
Proceeds from stock options exercised			768				—
Proceeds from stock issued pursuant to our employee stock purchase plan			1,874				3,180
Purchases of treasury stock			(2,010	)			(1,019	)
Stock-based compensation excess tax benefit			1,157				89
Distributions to noncontrolling partners in the Partnership			(11,631	)			(11,589	)
Net cash used in financing activities			(311,597	)			(89,587	)
Effect of exchange rate changes on cash and equivalents			(1,938	)			7,573
Net decrease in cash and cash equivalents			(2,378	)			(37,712	)
Cash and cash equivalents at beginning of period			83,745				123,906
Cash and cash equivalents at end of period		$	81,367			$	86,194

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

EXTERRAN HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Exterran Holdings, Inc. (“we” or “Exterran” ) 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) are not required in these interim financial statements and have been condensed or omitted. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our financial position, results of operations and cash flows for the periods indicated.

Earnings (Loss) Attributable to Exterran Stockholders Per Common Share

Basic income (loss) attributable to Exterran stockholders per common share is computed by dividing income (loss) attributable to Exterran common stockholders by the weighted average number of shares outstanding for the period. Diluted income (loss) attributable to Exterran stockholders per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock, restricted stock units, stock to be issued pursuant to our employee stock purchase plan and convertible senior notes, unless their effect would be anti-dilutive.

The table below summarizes income (loss) attributable to Exterran stockholders (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Income (loss) from continuing operations attributable to Exterran stockholders		$	(16,660	)		$	22,026			$	(31,854	)		$	(226,641	)
Income (loss) from discontinued operations attributable to Exterran stockholders, net of tax			(1,325	)			(3,834	)			48,057				(345,351	)
Net income (loss) attributable to Exterran stockholders		$	(17,985	)		$	18,192			$	16,203			$	(571,992	)

The table below indicates the potential shares of common stock that were included in computing the dilutive potential shares of common stock used in diluted income (loss) attributable to Exterran stockholders per common share (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

Weighted average common shares outstanding-used in basic income (loss) per common share

62,111

61,579

61,969

61,315

Net dilutive potential common stock issuable:

On exercise of options and vesting of restricted stock and restricted stock units

**

571

**

**

On settlement of employee stock purchase plan shares

**

25

**

**

On exercise of warrants

**

**

**

**

On conversion of 4.25% convertible senior notes due 2014

**

15,334

**

**

On conversion of 4.75% convertible senior notes due 2014

**

**

**

**

Weighted average common shares and dilutive potential common shares-used in diluted income per common share

62,111

77,509

61,969

61,315

There were no adjustments to net income attributable to Exterran stockholders for the diluted earnings per share calculation for the three and nine months ended September 30, 2010 and the nine months ended September 30, 2009. Net income attributable to Exterran stockholders for the diluted earnings per share calculation for the three months ended September 30, 2009 is adjusted to add back interest expense and amortization of financing costs totaling $5.0 million, net of tax, relating to our 4.25% convertible senior notes due 2014.

The table below indicates the potential shares of common stock issuable that were excluded from net dilutive potential shares of common stock issuable as their effect would have been anti-dilutive (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period			1,334				654				1,402				998
On exercise of options and vesting of restricted stock and restricted stock units			629				—				462				500
On settlement of employee stock purchase plan shares			15				—				14				35
On exercise of warrants			2,808				2,808				2,808				1,203
On conversion of 4.25% convertible senior notes due 2014			15,334				—				15,334				6,572
On conversion of 4.75% convertible senior notes due 2014			3,115				3,115				3,115				3,115
Net dilutive potential common shares issuable			23,235				6,577				23,135				12,423

Financial Instruments

Our financial instruments include cash, restricted cash, receivables, payables, interest rate swaps, foreign currency hedges and debt. At September 30, 2010 and December 31, 2009, the estimated fair value of such financial instruments, except for debt, approximated their carrying value as reflected in our consolidated balance sheets. Based on market conditions, we believe that the fair value of our floating rate debt does not approximate its carrying value as of September 30, 2010 and December 31, 2009 because the applicable margin on our floating rate debt was below the market rates as of these dates. The fair value of our fixed rate debt has been estimated primarily based on quoted market prices. The fair value of our floating rate debt has been estimated based on similar debt transactions that occurred near September 30, 2010 and December 31, 2009. A summary of the fair value and carrying value of our debt as of September 30, 2010 and December 31, 2009 is shown in the table below (in thousands):

		As of September 30, 2010								As of December 31, 2009
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Fixed rate debt		$	421,600			$	459,000			$	409,506			$	424,000
Floating rate debt			1,549,709				1,508,000				1,851,430				1,739,000
Total debt		$	1,971,309			$	1,967,000			$	2,260,936			$	2,163,000

GAAP requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings (loss) unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

Reclassifications

Certain amounts in the prior financial statements have been reclassified to conform to the 2010 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

2. DISCONTINUED OPERATIONS

In May 2009, the Venezuelan government enacted a law that reserves to the State of Venezuela certain assets and services related to hydrocarbon activities, which included substantially all of our assets and services in Venezuela. The law provides that the reserved activities are to be performed by the State, by the State-owned oil company, Petroleos de Venezuela S.A. (“PDVSA”), or its affiliates,

or through mixed companies under the control of PDVSA or its affiliates. The law authorizes PDVSA or its affiliates to take possession of the assets and take over control of those operations related to the reserved activities as a step prior to the commencement of an expropriation process, and permits the national executive of Venezuela to decree the total or partial expropriation of shares or assets of companies performing those services.

On June 2, 2009, PDVSA commenced taking possession of our assets and operations in a number of our locations in Venezuela. By the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela.

While the law provides that companies whose assets are expropriated in this manner may be compensated in cash or securities, we are unable to predict what, if any, compensation Venezuela will ultimately offer in exchange for any such expropriated assets and, accordingly, we are unable to predict what, if any, compensation we ultimately will receive. We reserve and will continue to reserve the right to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law. In this connection, on June 16, 2009, we delivered to the Venezuelan government and PDVSA an official notice of dispute relating to the seized assets and investments under the Agreement between Spain and Venezuela for the Reciprocal Promotion and Protection of Investments and under Venezuelan law. On March 23, 2010, we filed a request for the institution of an arbitration proceeding against Venezuela with the International Centre for Settlement of Investment Disputes (“ICSID”) related to the seized assets and investments, which was registered by ICSID on April 12, 2010.

We maintained insurance for the risk of expropriation of our investments in Venezuela, subject to a policy limit of $50 million. During the year ended December 31, 2009, we recorded a receivable of $50 million related to this insurance policy because we determined that recovery under this policy of a portion of our loss was probable. We collected the $50 million under our policy in January 2010. Under the terms of the insurance policy, certain compensation we may receive from the Venezuelan government or PDVSA for our expropriated assets and operations will be applied first to the reimbursement of out-of-pocket expenses incurred by us and the insurance company, second to the insurance company until the $50 million payment has been repaid and third to us.

We believe the fair value of our seized Venezuelan operations substantially exceeds the historical cost-based carrying value of the assets, including the goodwill allocable to those operations; however, GAAP requires that our claim be accounted for as a gain contingency with no benefit being recorded until resolved. Accordingly, we did not include any compensation we may receive for our seized assets and operations from Venezuela in recording the loss on expropriation.

The expropriation of our business in Venezuela meets the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements. Therefore, our Venezuela contract operations and aftermarket services businesses are now reflected as discontinued operations in our consolidated statements of operations.

In January 2010, the Venezuelan government announced a devaluation of the Venezuelan Bolivar. This devaluation resulted in a translation gain of approximately $12.2 million on the remeasurement of our net liability position in Venezuela and is reflected in other (income) loss, net in the table below for the nine months ended September 30, 2010. The functional currency of our Venezuela subsidiary is the U.S. Dollar and we had more liabilities than assets denominated in Bolivars in Venezuela at the time of the devaluation. The exchange rate used to remeasure our net liabilities changed from 2.15 Bolivars per U.S. Dollar at December 31, 2009 to 4.3 Bolivars per U.S. Dollar in January 2010.

Our loss (recovery) attributable to expropriation for the nine months ended September 30, 2010 includes a benefit of $40.9 million from payments received from PDVSA and its affiliates for the fixed assets for two projects. These payments relate to the recovery of the loss we recognized on the value of the equipment for these projects in the second quarter of 2009.

The table below summarizes the operating results of the discontinued operations (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	384			$	976			$	964			$	68,322
Expenses and selling, general and administrative			696				2,830				2,438				60,913
Loss (recovery) attributable to expropriation			253				2,135				(39,959	)			380,026
Other (income) loss, net			(30	)			(162	)			(12,093	)			(4,655	)
Provision for (benefit from) income taxes			790				7				2,521				(22,611	)
Income (loss) from discontinued operations, net of tax		$	(1,325	)		$	(3,834	)		$	48,057			$	(345,351	)

The table below summarizes the balance sheet data for discontinued operations (in thousands):

		September 30,				December 31,
		2010				2009
Cash		$	866			$	1,841
Accounts receivable			274				177
Political risk insurance receivable			—				50,000
Inventory			599				169
Other current assets			3,175				5,965
Total current assets associated with discontinued operations			4,914				58,152
Property, plant and equipment, net			525				386
Other long-term assets			308				—
Total assets associated with discontinued operations		$	5,747			$	58,538
Accounts payable		$	1,570			$	9,543
Accrued liabilities			4,870				12,336
Deferred revenues			769				—
Total current liabilities associated with discontinued operations			7,209				21,879
Other long-term liabilities			12,831				16,667
Total liabilities associated with discontinued operations		$	20,040			$	38,546

3. INVENTORY

Inventory, net of reserves, consisted of the following amounts (in thousands):

		September 30,				December 31,
		2010				2009
Parts and supplies		$	249,512			$	284,849
Work in progress			116,979				154,763
Finished goods			46,073				50,370
Inventory, net of reserves		$	412,564			$	489,982

As of September 30, 2010 and December 31, 2009, we had inventory reserves of $17.8 million and $18.4 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

		September 30,				December 31,
		2010				2009
Compression equipment, facilities and other fleet assets		$	4,446,039			$	4,355,915
Land and buildings			164,624				174,004
Transportation and shop equipment			215,013				207,035
Other			134,767				125,435
			4,960,443				4,862,389
Accumulated depreciation			(1,686,691	)			(1,458,035	)
Property, plant and equipment, net		$	3,273,752			$	3,404,354

5. GOODWILL

As discussed in Note 2, on June 2, 2009, PDVSA commenced taking possession of our assets and operations in Venezuela. As of the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela. We determined that this event could indicate an impairment of our international contract operations and aftermarket services reporting units’ goodwill and therefore performed a goodwill impairment test for these reporting units in the second quarter of 2009.

Our international contract operations reporting unit failed step one of the goodwill impairment test and we recorded an impairment of goodwill in our international contract operations reporting unit of $150.8 million in the second quarter of 2009. The $32.6 million of goodwill related to our Venezuela contract operations and aftermarket services businesses was also written off in the second quarter of 2009 as part of our loss from discontinued operations. The decrease in value of our international contract operations reporting unit was primarily caused by the loss of our operations in Venezuela. If for any reason the fair value of our goodwill or that of our reporting units that have associated goodwill declines below the carrying value in the future, we may incur additional goodwill impairment charges.

6. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

Investments in affiliates that are not controlled by Exterran but where we have the ability to exercise significant influence over the operations are accounted for using the equity method. Our share of net income or losses of these affiliates is reflected in the consolidated statements of operations as equity in loss of non-consolidated affiliates. Our equity method investments have been primarily comprised of entities that own, operate, service and maintain compression and other related facilities, as well as water injection plants.

Our ownership interest and location of each equity method investee at September 30, 2010 is as follows:

Ownership

Interest

Location

Type of Business

PIGAP II

30.0

%

Venezuela

Gas Compression Plant

El Furrial

33.3

%

Venezuela

Gas Compression Plant

We also had a 35.5% ownership interest in each of the SIMCO Consortium and Harwat that we sold in November 2009. The SIMCO Consortium and Harwat operate a water injection plant in Venezuela. The summarized financial information in the table below includes the investees listed above as well as the SIMCO Consortium and Harwat through their disposition date in November 2009.

Summarized combined earnings information for these entities consisted of the following amounts (on a 100% basis, in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	—			$	681			$	—			$	8,160
Operating income (loss)			18,841				(103,722	)			38,119				(397,955	)
Net income (loss)			17,130				(107,910	)			37,387				(337,450	)

Due to unresolved disputes with its only customer, PDVSA, SIMCO sent a notice to PDVSA in the fourth quarter of 2008 stating that SIMCO might not be able to continue to fund its operations if some of its outstanding disputes were not resolved and paid in the near future. On February 25, 2009, the Venezuelan National Guard occupied SIMCO’s facilities and during March 2009 transitioned the operation of SIMCO, including the hiring of SIMCO’s employees, to PDVSA.

During the first quarter of 2009, we determined that the expected proceeds from our investment in the SIMCO Consortium and Harwat would be less than the book value of our investment and, as a result, that the fair value of our investment had declined and the loss in value was not temporary. Therefore, we recorded an impairment charge in the first quarter of 2009 of $6.5 million, which is reflected as a charge in equity in loss of non-consolidated affiliates in our consolidated statements of operations.

Due to lack of payments from their only customer, PDVSA, PIGAP II and El Furrial each sent a notice of default to PDVSA in April 2009. PIGAP II’s and El Furrial’s debt was in technical default triggered by past due payments from their sole customer under their related services contracts. As a result of PDVSA’s nonpayment, in March 2009 these joint ventures recorded impairments on their assets. Accordingly, we reviewed our expected cash flows related to these two joint ventures and determined in March 2009 that the fair value of our investment in PIGAP II and El Furrial had declined and that we had a loss in our investment that was not temporary. Therefore, we recorded an impairment charge of $90.1 million ($81.7 million net of tax) to write-off our investments in PIGAP II and El Furrial. These impairment charges are reflected as a charge in equity in loss of non-consolidated affiliates in our consolidated statements of operations. In May 2009, PDVSA assumed control over the assets of PIGAP II and El Furrial and transitioned the operations of PIGAP II and El Furrial, including the hiring of their employees, to PDVSA. Our non-consolidated affiliates are expected to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law, which could result in us recording a gain on our investment in future periods. However, we are unable to predict what compensation we ultimately will receive.

Because the assets and operations of our investments in our remaining non-consolidated affiliates have been expropriated, we currently do not expect to have any meaningful equity earnings in non-consolidated affiliates in the future from these investments.

7. DEBT

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

		September 30,				December 31,
		2010				2009
Revolving credit facility due August 2012		$	118,266			$	68,929
Term loan			695,943				780,000
2007 asset-backed securitization facility notes due July 2012			300,000				570,000
Partnership’s revolving credit facility due October 2011			288,000				285,000
Partnership’s term loan facility due October 2011			117,500				117,500
Partnership’s asset-backed securitization facility notes due July 2013			30,000				30,000
4.75% convertible senior notes due January 2014			143,750				143,750
4.25% convertible senior notes due June 2014 (presented net of the unamortized discount of $77.4 million and $89.5 million, respectively)			277,600				265,469
Other, interest at various rates, collateralized by equipment and other assets			250				288
Long-term debt		$	1,971,309			$	2,260,936

In June 2009, we issued under our shelf registration statement $355.0 million aggregate principal amount of 4.25% convertible senior notes due June 2014 (the “4.25% Notes”). The 4.25% Notes are convertible upon the occurrence of certain conditions into shares of our common stock at an initial conversion rate of 43.1951 shares of our common stock per $1,000 principal amount of the convertible notes, equivalent to an initial conversion price of approximately $23.15 per share of common stock. The conversion rate will be subject to adjustment following certain dilutive events and certain corporate transactions. The 4.25% Notes’ intrinsic value did not exceed their principal amount as of September 30, 2010. We may not redeem the notes prior to the maturity date of the notes.

GAAP requires that the liability and equity components of certain convertible debt instruments that may be settled in cash upon conversion be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. Upon issuance of our 4.25% Notes, $97.9 million was recorded as a debt discount and reflected in equity related to the convertible feature of these notes.

The unamortized discount on the 4.25% Notes will be amortized using the effective interest method through June 30, 2014. During the three and nine months ended September 30, 2010, we recognized $3.8 million and $11.3 million, respectively, of interest expense related to the contractual interest coupon. During the three and nine months ended September 30, 2010, we recognized $4.2 million and $12.1 million, respectively, of interest expense related to amortization of the debt discount. The effective interest rate on the debt component of these notes was 11.67% for the three and nine months ended September 30, 2010.

As of September 30, 2010, our senior secured borrowings consisted of our asset-backed securitization facility (the “2007 ABS Facility”), our term loan facility and our revolving credit facility. At September 30, 2010, we had undrawn capacity of $485.5 million and $500.0 million under our revolving credit facility and 2007 ABS Facility, respectively. Our senior secured credit agreement (the “Credit Agreement”) limits our Total Debt to EBITDA ratio (as defined in the Credit Agreement) to not greater than 5.0 to 1.0. Due to this limitation, only $449.1 million of the combined $985.5 million of undrawn capacity under both facilities was available for additional borrowings as of September 30, 2010. Further, as of September 30, 2010, only $174.7 million of the $500.0 million in unfunded commitments under our 2007 ABS Facility was available due to certain covenant limitations under the facility, assuming such facility was fully funded with all eligible contract compression assets available at that time. If our operations within Exterran ABS 2007 LLC (along with its subsidiary, “Exterran ABS”) experience additional reductions in cash flows, the amount available for additional borrowings could be further reduced. If the outstanding borrowings exceed the amount allowed, we would be able to utilize certain cash flows from Exterran ABS’s operations or borrowings under our revolving credit facility, or a combination of both, to reduce the amount of borrowings outstanding under the 2007 ABS Facility to the amount allowed pursuant to the limitations. The 2007 ABS Facility was reduced from an $800 million facility to a $700 million facility in November 2010 concurrently with the closing of the 2010 Partnership Credit Facility (as defined below).

Our bank credit facilities, asset-backed securitization facilities and the agreements governing certain of our other indebtedness include various covenants with which we must comply, including, but not limited to, limitations on incurrence of indebtedness, investments, liens on assets, transactions with affiliates, mergers, consolidations, sales of assets and other provisions customary in similar types of agreements. For example, under our Credit Agreement 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 2.25 to 1.0, a ratio of consolidated Total Debt (as defined in the Credit Agreement) to EBITDA of not greater than 5.0 to 1.0 and a ratio of Senior Secured Debt (as defined in the Credit Agreement) to EBITDA of not greater than 4.0 to 1.0. As of September 30, 2010, we maintained a 4.6 to 1.0 EBITDA to Total Interest Expense ratio, a 3.9 to 1.0 consolidated Total Debt to EBITDA ratio and a 2.9 to 1.0 Senior Secured Debt to EBITDA ratio. If we fail to remain in compliance with our financial covenants we would be in default under our credit agreements. In addition, if we experienced a material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our ability to perform our obligations under our credit agreements, this could lead to a default under our credit agreements. A default under one or more of our debt agreements, including a default by the Partnership (as defined below) under its credit facilities, would trigger cross-default provisions under certain of our debt agreements, which would accelerate our obligation to repay our indebtedness under those agreements. As of September 30, 2010, we were in compliance with all financial covenants under our credit agreements.

As of September 30, 2010, our subsidiary, Exterran Partners L.P. (together with its subsidiaries, the “Partnership”), had undrawn capacity of $27.0 million and $120.0 million under its revolving credit facility and asset-backed securitization facility, respectively.

On November 3, 2010, the Partnership and certain of its subsidiaries, as guarantors, and EXLP Operating LLC, as borrower, entered into an amendment and restatement of its senior secured credit agreement (the “2006 Partnership Credit Agreement,” as so amended and restated, the “2010 Partnership Credit Agreement”) to provide for a new five-year, $550 million senior secured credit facility (the “2010 Partnership Credit Facility”) consisting of a $400 million revolving credit facility (the “2010 Revolver”) and a $150 million term loan facility (the “2010 Term Loan”). Concurrent with the execution of the agreement, the Partnership borrowed $304.0 million under the 2010 Revolver and $150.0 million under the 2010 Term Loan and used the proceeds to (i) repay the entire $406.1 million outstanding under the 2006 Partnership Credit Agreement, (ii) repay the entire $30.0 million outstanding under the Partnership’s asset-backed securitization facility and terminate that facility, (iii) pay $14.8 million to terminate the interest rate swap agreements to which the Partnership was a party and (iv) pay customary fees and other expenses relating to the facility. The $14.8 million paid by the Partnership related to the terminated interest rate swaps will be amortized into interest expense over the original term of the swaps. The Partnership incurred transaction costs of approximately $4.0 million related to the 2010 Partnership Credit Agreement. These costs will be included in Intangible and other assets, net and amortized over the respective facility terms.

The Partnership’s 2010 Revolving credit facility bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. The applicable margin, depending on its leverage ratio, varies (i) in the case of LIBOR loans, from 2.25% to 3.25% or (ii) in the case of base rate loans, from 1.25% to 2.25%. The base rate is the higher of the prime rate announced by Wells Fargo Bank, National Association, the Federal Funds Rate plus 0.5% or one-month LIBOR plus 1.0%. At September 30, 2010, all amounts outstanding under the then existing revolver were LIBOR loans and the applicable margin that would have applied under the new 2010 Revolver was 2.5%. The weighted average interest rate on the outstanding balance of the Partnership’s revolving credit facility at September 30, 2010, excluding the effect of interest rate swaps, was 2.1% and would have been 2.9% under the 2010 Revolver.

The 2010 Term Loan bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. The applicable margin, depending on its leverage ratio, varies (i) in the case of LIBOR loans, from 2.5% to 3.5% or (ii) in the case of base rate loans, from 1.5% to 2.5%. At September 30, 2010, all amounts outstanding under the then existing term loan were LIBOR loans and the applicable margin that would have been applied under the new 2010 Term Loan was 2.75%. The weighted average interest rate on the outstanding balance of the Partnership’s term loan at September 30, 2010, excluding the effect of interest rate swaps, was 2.6% and would have been 3.1% under the 2010 Term Loan.

Borrowings under the 2010 Partnership Credit Facility are secured by substantially all of the U.S. personal property assets of the Partnership and its Significant Subsidiaries (as defined in the 2010 Partnership Credit Agreement), including all of the membership

interests of the Partnership’s U.S. Restricted Subsidiaries (as defined in the 2010 Partnership Credit Agreement). Subject to certain conditions, at the Partnership’s request, and with the approval of the Administrative Agent (as defined in the 2010 Partnership Credit Agreement), the aggregate commitments under the 2010 Partnership Credit Facility may be increased by an additional $150 million.

Like the 2006 Partnership Credit Agreement, the 2010 Partnership Credit Agreement contains various covenants with which the Partnership must comply, including restrictions on the use of proceeds from borrowings and limitations on its ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. It also contains various covenants regarding mandatory prepayments from net cash proceeds of certain future asset transfers or debt issuances. A violation of one or more the Partnership’s covenants would be an event of default under the 2010 Partnership Credit Agreement which would trigger cross-default provisions under certain of our debt agreements. As of September 30, 2010, the Partnership was in compliance with all financial covenants under the 2006 Partnership Credit Agreement, and would have been in compliance with all financial covenants under the 2010 Partnership Credit Agreement had such covenants been in effect on such date.

In connection with the Partnership entering into the 2010 Credit Agreement and the termination of its existing interest rate swaps, the Partnership intends to enter into new interest rate swaps in the near term pursuant to which it will pay fixed payments and receive floating payments on a majority of its floating rate debt. The Partnership intends to designate these interest rate swaps as cash flow hedging instruments of interest payments on its floating rate debt. The term of the interest swaps may be less than the term of the Partnership’s outstanding floating rate debt and its ability to execute these swaps will depend on market conditions.

8. ACCOUNTING FOR DERIVATIVES

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

Interest Rate Risk

At September 30, 2010, we were a party to interest rate swaps pursuant to which we pay fixed payments and receive floating payments on a notional value of $1,450.0 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, with interest rate swaps having a notional amount of $1,395.0 million expiring through January 2013 and the remaining interest rate swaps expiring through October 2019. The weighted average effective fixed interest rate payable on our interest rate swaps was 4.1% as of September 30, 2010. 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. We recorded approximately $17,000 and $0.2 million of interest expense for the three and nine months ended September 30, 2010, respectively, due to the ineffectiveness related to these swaps. We recorded approximately $50,000 and $0.5 million of interest expense for the three and nine months ended September 30, 2009, respectively, due to the ineffectiveness related to these swaps. We estimate that approximately $46.9 million of deferred pre-tax losses attributable to interest rate swaps and that is included in our accumulated other comprehensive loss at September 30, 2010, will be reclassified into earnings as interest expense at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

Foreign Currency Exchange Risk

We operate in approximately 30 countries throughout the world, and a fluctuation in the value of the currencies of these countries relative to the U.S. Dollar could impact our profits from international operations and the value of the net assets of our international operations when reported in U.S. Dollars in our financial statements. From time to time we may enter into foreign currency hedges to reduce our foreign exchange risk associated with cash flows we will receive in a currency other than the functional currency of the local Exterran affiliate that entered into the contract. The impact of foreign currency exchange on our condensed consolidated statements of operations will depend on the amount of our net asset and liability positions exposed to currency fluctuations in future periods.

Foreign currency swaps or forward contacts that meet the hedging requirements or that qualify for hedge accounting treatment are accounted for as cash flow hedges and changes in the fair value are recognized as a component of comprehensive income (loss) to the extent the hedge is effective. The amounts recognized as a component of other comprehensive income (loss) will be reclassified into earnings (loss) in the periods in which the underlying foreign currency exchange transaction is recognized. We estimate that approximately $0.3 million of deferred pre-tax losses attributable to foreign currency swaps and that is included in our accumulated other comprehensive income (loss) at September 30, 2010, will be reclassified into earnings at then-current values during the next twelve months as the underlying hedged transactions occur. At September 30, 2010, the remaining notional amount of our foreign currency hedge that met the requirements for hedge accounting was approximately 15.1 million Kuwaiti Dinars ($52.8 million U.S. Dollars). For foreign currency swaps and forward contracts that do not qualify for hedge accounting treatment, changes in fair value and gains and losses on settlement are included under the same category as the income or loss from the underlying assets, liabilities or anticipated transactions in our condensed consolidated statements of operations.

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

		September 30, 2010
						Fair Value
		Balance Sheet Location				Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Accrued liabilities				$	(46,910	)
Interest rate hedges		Other long-term liabilities					(37,017	)
Foreign currency hedge		Accrued liabilities					(211	)
Total derivatives						$	(84,138	)

		December 31, 2009
						Fair Value
		Balance Sheet Location				Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Intangibles and other assets				$	262
Interest rate hedges		Accrued liabilities					(48,421	)
Interest rate hedges		Other long-term liabilities					(35,300	)
Total derivatives						$	(83,459	)

Three Months Ended September 30, 2010

Nine Months Ended September 30, 2010

Gain (Loss)

Gain (Loss)

Location of Gain

Reclassified

Location of Gain

Reclassified

(Loss)

from

(Loss)

from

Gain (Loss)

Reclassified from

Accumulated

Gain (Loss)

Reclassified from

Accumulated

Recognized in

Accumulated

Other

Recognized in

Accumulated

Other

Other

Other Comprehensive

Comprehensive

Other

Other Comprehensive

Comprehensive

Comprehensive

Income

Income (Loss)

Comprehensive

Income

Income (Loss)

Income (Loss) on

(Loss) into Income

into Income

Income (Loss) on

(Loss) into Income

into Income

Derivatives

(Loss)

(Loss)

Derivatives

(Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(13,560

)

Interest expense

$

(13,918

)

$

(42,622

)

Interest expense

$

(42,377

)

Foreign currency hedge

4,040

Fabrication revenue

1,957

(3,808

)

Fabrication revenue

(3,519

)

Total

$

(9,520

)

$

(11,961

)

$

(46,430

)

$

(45,896

)

Three Months Ended September 30, 2009

Nine Months Ended September 30, 2009

Gain (Loss)

Gain (Loss)

Location of Gain

Reclassified

Location of Gain

Reclassified

(Loss)

from

(Loss)

from

Gain (Loss)

Reclassified from

Accumulated

Gain (Loss)

Reclassified from

Accumulated

Recognized in

Accumulated

Other

Recognized in

Accumulated

Other

Other

Other Comprehensive

Comprehensive

Other

Other Comprehensive

Comprehensive

Comprehensive

Income

Income (Loss)

Comprehensive

Income

Income (Loss)

Income (Loss) on

(Loss) into Income

into Income

Income (Loss) on

(Loss) into Income

into Income

Derivatives

(Loss)

(Loss)

Derivatives

(Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(20,334

)

Interest expense

$

(14,506

)

$

(34,227

)

Interest expense

$

(40,090

)

Foreign currency hedge

—

Fabrication revenue

(105

)

1,255

Fabrication revenue

(329

)

Total

$

(20,334

)

$

(14,611

)

$

(32,972

)

$

(40,419

)

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 facilities and/or our ABS facilities and, in that capacity, share proportionally in the collateral pledged under the related facility.

9. FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements and disclosures 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 assets as of and for the nine months ended September 30, 2010 with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(83,927	)		$	—			$	(83,927	)		$	—
Foreign currency derivatives asset (liability)			(211	)			—				(211	)			—
Long-lived asset impairment			555				—				—				555

The following table summarizes the valuation of our interest rate swaps and impaired assets as of and for the nine months ended September 30, 2009 with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(91,146	)		$	—			$	(91,146	)		$	—
Foreign currency derivatives asset (liability)			(168	)			—				(168	)			—
Long-lived asset impairment			7,020				—				—				7,020
Impairment of manufacturing facilities			8,400				—				8,400				—
International contract operations goodwill			—				—				—				—
Impairment of investments in non-consolidated affiliates			1,217				—				—				1,217

Our interest rate swaps and foreign currency derivatives are recorded at fair value utilizing a combination of the market and income approach to estimate fair value. We used discounted cash flows and market based methods to compare similar derivative instruments. Our estimate of the fair value of the long-lived assets impaired was based on the estimated component value of the equipment that we plan to use. Our estimate of the fair value of the impaired manufacturing facilities was based on sales of similar assets. See Note 5 for a discussion of the valuation methodology we used in connection with the goodwill impairment. Our estimate of the fair value of our investments in non-consolidated affiliates was based on discounted cash flow models that use probability weighted estimated cash flows to estimate the fair value of our investment in these non-consolidated affiliates. The primary inputs for the cash flow models were estimates of cash flows from operations we received from management of the joint ventures and our estimates of final proceeds that we would ultimately receive.

10. LONG-LIVED ASSET IMPAIRMENT

As a result of a decline in market conditions in North America during 2010 and 2009, we reviewed the idle compression assets used in our contract operations segments for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. We performed a cash flow analysis of the expected proceeds from the disposition of these units to determine the fair value of the assets. The net book value of these assets exceeded the fair value by $4.7 million and $86.7 million, respectively, for the nine months ended September 30, 2010 and 2009 and was recorded as a long-lived asset impairment.

In the first quarter of 2009, our management approved a plan to close certain fabrication facilities and consolidate our compression fabrication activities (see Note 11). As a result, we reviewed the facilities to be closed for impairment and the net book value of these facilities exceeded the fair value by $5.6 million and was recorded as a long-lived asset impairment.

11. RESTRUCTURING CHARGES

As a result of the reduced level of demand for our products and services, our management approved a plan in March 2009 to close certain facilities to consolidate our compression fabrication activities. These actions were the result of significant fabrication capacity stemming from the 2007 merger that created Exterran and the lack of consolidation of this capacity since that time, as well as the anticipated continuation of weaker global economic and energy industry conditions. The consolidation of those compression fabrication activities was completed in September 2009. The restructuring activities in the first quarter of 2009 included a $5.6 million facility impairment charge that was reflected in our consolidated statement of operations as a long-lived asset impairment (see Note 10). Additionally, we reduced the size of our workforce at our two manufacturing locations in Houston, Texas to support the forecasted level of new fabrication work.

12. STOCK-BASED COMPENSATION

Stock Incentive Plan

On August 20, 2007, we adopted the Exterran Holdings, Inc. 2007 Stock Incentive Plan (as amended and restated, the “2007 Plan”) that provides for the granting of stock-based awards in the form of options, restricted stock, restricted stock units, stock appreciation rights and performance awards to our employees and directors. In May 2010, our stockholders approved an amendment to the 2007

Plan which increased the aggregate number of shares of common stock that may be issued under the 2007 Plan from 6,750,000 to 9,750,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and each share of restricted stock and restricted stock unit granted counts as two shares against the aggregate share limit. Awards granted under the 2007 Plan that are subsequently cancelled, terminated or forfeited are available for future grant.

Stock Options

Under the 2007 Plan, stock options are granted at fair market value at the date of grant, are exercisable in accordance with the vesting schedule established by the compensation committee of our board of directors in its sole discretion and expire no later than seven years after the date of grant. Options generally vest 33 1/3% on each of the first three anniversaries of the grant date.

The weighted average fair value at date of grant for options granted during the nine months ended September 30, 2010 was $8.71, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

		Nine Months
		Ended
		September 30, 2010
Expected life in years			4.5
Risk-free interest rate			2.13	%
Volatility			42.94	%
Dividend yield			0.00	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a period commensurate with the estimated expected life of the stock options. Expected volatility is based on the historical volatility of our stock over the most recent period commensurate with the expected life of the stock options and other factors. We have not historically paid a dividend and do not expect to pay a dividend during the expected life of the stock options.

The following table presents stock option activity for the nine months ended September 30, 2010 (in thousands, except per share data and remaining life in years):

										Weighted
						Weighted				Average				Aggregate
		Stock				Average				Remaining				Intrinsic
		Options				Exercise Price				Life				Value
Options outstanding, December 31, 2009			2,833			$	33.37
Granted			688				22.77
Exercised			(46	)			16.68
Cancelled			(222	)			34.00
Options outstanding, September 30, 2010			3,253			$	31.31				4.6			$	6,389
Options exercisable, September 30, 2010			1,959			$	36.58				3.7			$	3,294