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

FOR THE TRANSITION PERIOD FROM ____________ TO ___________.

Commission File No. 001-33078

EXTERRAN PARTNERS, L.P.

Delaware (State or Other Jurisdiction of Incorporation or Organization)		22-3935108 (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 o 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):

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

As of October 28, 2010, there were 27,347,695 common units and 4,743,750 subordinated units outstanding.

 

 

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			5
Condensed Consolidated Statements of Partners’ Capital			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			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6. Exhibits			31
SIGNATURES			33

PART I. FINANCIAL INFORMATION

ITEM 1.		Financial Statements

EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for unit amounts)
(unaudited)

		September 30, 2010				December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	33			$	203
Restricted cash			644				431
Accounts receivable, trade, net of allowance of $601 and $714, respectively			27,491				23,210
Due from affiliates, net			22				—
Total current assets			28,190				23,844
Compression equipment			974,001				770,703
Accumulated depreciation			(304,001	)			(212,776	)
Net compression equipment			670,000				557,927
Goodwill			124,019				124,019
Interest rate swaps			—				262
Intangibles and other assets, net			15,313				11,174
Total assets		$	837,522			$	717,226
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable, trade		$	72			$	—
Due to affiliates, net			—				1,293
Accrued liabilities			9,960				7,198
Accrued interest			2,023				2,030
Current portion of interest rate swaps			10,282				9,229
Total current liabilities			22,337				19,750
Long-term debt			435,500				432,500
Interest rate swaps			3,744				6,668
Total liabilities			461,581				458,918
Commitments and contingencies (Note 11)
Partners’ capital:
Limited partner units:
Common units, 27,363,451 and 17,541,965 units issued and outstanding, respectively			404,186				298,010
Subordinated units, 4,743,750 and 6,325,000 units issued and outstanding, respectively			(25,747	)			(33,194	)
General partner units, 2% interest with 653,318 and 486,243 units issued and outstanding, respectively			11,024				8,457
Accumulated other comprehensive loss			(13,248	)			(14,857	)
Treasury units, 15,756 and 8,426 common units, respectively			(274	)			(108	)
Total partners’ capital			375,941				258,308
Total liabilities and partners’ capital		$	837,522			$	717,226

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

EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue		$	62,721			$	41,317			$	169,221			$	134,627
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense)			33,819				19,802				88,796				62,160
Depreciation and amortization			13,697				9,042				37,338				26,054
Long-lived asset impairment			93				—				324				2,995
Selling, general and administrative			8,504				4,961				24,718				16,513
Interest expense			6,020				5,039				17,436				14,663
Other (income) expense, net			333				324				(73	)			351
Total costs and expenses			62,466				39,168				168,539				122,736
Income before income taxes			255				2,149				682				11,891
Income tax expense			172				141				518				424
Net income		$	83			$	2,008			$	164			$	11,467
General partner interest in net income		$	420			$	289			$	1,045			$	976
Common units interest in net income		$	(271	)		$	1,151			$	(671	)		$	7,019
Subordinated units interest in net income		$	(66	)		$	568			$	(210	)		$	3,472
Weighted average common units outstanding:
Basic			22,882				12,800				19,342				12,784
Diluted			22,882				12,823				19,342				12,794
Weighted average subordinated units outstanding:
Basic			5,552				6,325				6,064				6,325
Diluted			5,552				6,325				6,064				6,325
Earnings (loss) per common unit:
Basic		$	(0.01	)		$	0.09			$	(0.03	)		$	0.55
Diluted		$	(0.01	)		$	0.09			$	(0.03	)		$	0.55
Earnings (loss) per subordinated unit:
Basic		$	(0.01	)		$	0.09			$	(0.03	)		$	0.55
Diluted		$	(0.01	)		$	0.09			$	(0.03	)		$	0.55

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

EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income		$	83			$	2,008			$	164			$	11,467
Other comprehensive income:
Interest rate swap gain (loss)			690				(1,215	)			1,609				576
Comprehensive income		$	773			$	793			$	1,773			$	12,043

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

EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands, except for unit amounts)
(unaudited)

		Partners’ Capital																																Accumulated
																		General Partner								Treasury								Other
		Common Units								Subordinated Units								Units								Units								Comprehensive
		$				Units				$				Units				$				Units				$				Units				Loss				Total
Balance, December 31, 2008		$	221,090				12,767,462			$	(35,518	)			6,325,000			$	6,805				389,642			$	—				—			$	(16,909	)		$	175,468
Issuance of units for vesting of phantom units							26,150
Other			175																																				175
Contribution of capital			5,394								7,705								264																				13,363
Excess of purchase price of equipment over Exterran Holdings’ cost of equipment			(54	)							(75	)							(5	)																			(134	)
Cash distributions			(17,734	)							(8,775	)							(1,303	)																			(27,812	)
Unit based compensation expense			706																																				706
Interest rate swap gain																																			576				576
Net income			7,019								3,472								976																				11,467
Balance, September 30, 2009		$	216,596				12,793,612			$	(33,191	)			6,325,000			$	6,737				389,642			$	—				—			$	(16,333	)		$	173,809

		Partners’ Capital																																Accumulated
																		General Partner								Treasury								Other
		Common Units								Subordinated Units								Units								Units								Comprehensive
		$				Units				$				Units				$				Units				$				Units				Loss				Total
Balance, December 31, 2009		$	298,010				17,541,965			$	(33,194	)			6,325,000			$	8,457				486,243			$	(108	)			(8,426	)		$	(14,857	)		$	258,308
Issuance of common units for vesting of phantom units							33,373
Treasury units purchased																											(166	)			(7,330	)							(166	)
Transaction costs for the public offering of common units by Exterran Holdings			(189	)																																			(189	)
Transaction costs for conversion of subordinated units			(25	)																																			(25	)
Conversion of subordinated units to common units			(8,721	)			1,581,250				8,721				(1,581,250	)																							—
Issuance of units to Exterran Holdings for a portion of it’s U.S. contract operations business			125,043				8,206,863												2,548				167,075																127,591
Contribution of capital			15,006								8,097								631																				23,734
Excess of purchase price of equipment over Exterran Holdings’ cost of equipment			(558	)							(385	)							(29	)																			(972	)
Cash distributions			(24,354	)							(8,776	)							(1,628	)																			(34,758	)
Unit based compensation expense			645																																				645
Interest rate swap gain																																			1,609				1,609
Net income			(671	)							(210	)							1,045																				164
Balance, September 30, 2010		$	404,186				27,363,451			$	(25,747	)			4,743,750			$	11,024				653,318			$	(274	)			(15,756	)		$	(13,248	)		$	375,941

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

EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Nine Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net income		$	164			$	11,467
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			37,338				26,054
Long-lived asset impairment			324				2,995
Amortization of debt issuance cost			707				273
Amortization of fair value of acquired interest rate swaps			111				112
Unit based compensation expense			660				555
Provision for doubtful accounts			592				226
Gain on sale of compression equipment			(425	)			—
Changes in assets and liabilities:
Accounts receivable, trade			(4,873	)			6,285
Other assets			—				94
Accounts payable, trade			72				(511	)
Other liabilities			2,427				2,627
Net cash provided by operating activities			37,097				50,177
Cash flows from investing activities:
Capital expenditures			(21,578	)			(14,694	)
Proceeds from the sale of compression equipment			823				—
Increase in restricted cash			(213	)			—
Increase in amounts due from affiliates, net			(22	)			(2,425	)
Net cash used in investing activities			(20,990	)			(17,119	)
Cash flows from financing activities:
Borrowings under long-term debt			17,000				18,750
Repayments on long-term debt			(14,000	)			(33,000	)
Distributions to unitholders			(34,758	)			(27,812	)
Purchase of treasury units			(166	)			—
Capital contribution from limited and general partner			16,940				6,090
Decrease in amounts due to affiliates, net			(1,293	)			—
Net cash used in financing activities			(16,277	)			(35,972	)
Net decrease in cash and cash equivalents			(170	)			(2,914	)
Cash and cash equivalents at beginning of period			203				3,244
Cash and cash equivalents at end of period		$	33			$	330
Supplemental disclosure of cash flow information:
Non-cash capital contribution from limited and general partner		$	2,603			$	4,027
Compression equipment acquired/exchanged, net		$	4,191			$	3,246

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

EXTERRAN PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The accompanying unaudited condensed consolidated financial statements of Exterran Partners, L.P. (“we,” “us” or “our”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) are not required in these interim financial statements and have been condensed or omitted. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2009. That report contains a more comprehensive summary of our accounting policies. These interim results are not necessarily indicative of results for a full year.

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

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 September 30, 2010 and December 31, 2009, the estimated fair values of such financial instruments, except for debt, approximated their carrying values as reflected in our condensed consolidated balance sheets. Based on market conditions, we believe that the fair value of our debt does not approximate its carrying value as of September 30, 2010 and December 31, 2009 because the applicable margin on our debt was below market rates as of these dates. The fair value of our debt has been estimated based on similar debt transactions that occurred near September 30, 2010 and December 31, 2009, respectively. A summary of the fair value and carrying value of our debt is shown in the table below (in thousands):

		As of September 30, 2010								As of December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Long-term debt		$	435,500			$	432,700			$	432,500			$	418,000

Earnings Per Common and Subordinated Unit

The computations of earnings per common and subordinated unit are based on the weighted average number of common and subordinated units, respectively, outstanding during the applicable period. Our subordinated units meet the definition of a participating security and therefore we are required to use the two-class method in the computation of earnings per unit. Basic earnings per common and subordinated unit are determined by dividing net income allocated to the common units and subordinated units, respectively, after deducting the amount allocated to our general partner (including distributions to our general partner on its incentive distribution rights), by the weighted average number of outstanding common and subordinated units, respectively, during the period.

When computing earnings per common and subordinated unit under the two-class method in periods when earnings are greater than distributions, earnings are allocated to the general partner, common and subordinated units based on how our partnership agreement would allocate earnings if the full amount of earnings for the period had been distributed. This allocation of net income does not impact our total net income, consolidated results of operations or total cash distributions; however, it may result in our general partner being allocated additional incentive distributions for purposes of our earnings per unit calculation, which could reduce net income per common and subordinated unit. However, as defined in our partnership agreement, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our general partner based on actual distributions. When computing earnings per common and subordinated unit, the amount of the assumed incentive distribution rights is deducted from net income and allocated to our general partner for the period to which the calculation relates. The remaining amount of net income, after deducting the assumed incentive distribution rights, is allocated between the general partner, common and subordinated units based on how our partnership agreement allocates net income.

When computing earnings per common and subordinated unit under the two-class method in periods when distributions are greater than earnings, the excess of distributions over earnings is allocated to the general partner, common and subordinated units based on how our partnership agreement allocates net losses. The amount of the incentive distribution rights is deducted from net income and allocated to our general partner for the period to which the calculation relates. The remaining amount of net income, after deducting the incentive distribution rights, is allocated between the general partner, common and subordinated units based on how our partnership agreement allocates net losses.

The potentially dilutive securities issued by us include unit options and phantom units, neither of which requires an adjustment to the amount of net income (loss) used for dilutive earnings (loss) per common unit purposes. The table below indicates the potential common units that were included in computing the dilutive potential common units used in diluted earnings (loss) per common unit (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Weighted average common units outstanding — used in basic earnings (loss) per common unit			22,882				12,800				19,342				12,784
Net dilutive potential common units issuable:
Unit options			—				**				—				**
Phantom units			**				23				**				10
Weighted average common units and dilutive potential common units — used in diluted earnings (loss) per common unit			22,882				12,823				19,342				12,794
**   Excluded from diluted earnings (loss) per common unit as the effect would have been anti-dilutive. The table below indicates the potential number of common units that were excluded from net dilutive potential units of common units 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 units issuable:
Unit options			—				581				—				581
Phantom units			91				—				81				6
Net dilutive potential common units issuable			91				581				81				587

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. AUGUST 2010 CONTRACT OPERATIONS ACQUISITION AND NOVEMBER 2009 CONTRACT OPERATIONS ACQUISITION

In August 2010, we acquired from Exterran Holdings contract operations customer service agreements with 43 customers and a fleet of approximately 580 compressor units used to provide compression services under those agreements having a net book value of $175.4 million, net of accumulated depreciation of $53.6 million, and comprising approximately 255,000 horsepower, or 6% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “August 2010 Contract Operations Acquisition”) for approximately $214.0 million, excluding transaction costs. In connection with this acquisition, we issued approximately 8.2 million common units to Exterran Holdings and approximately 167,000 general partner units to Exterran Holdings’ wholly-owned subsidiary.

In connection with this acquisition, we were allocated $5.9 million finite life intangible assets associated with customer relationships 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. These intangible assets are being amortized through 2024, based on the present value of expected income to be realized from these intangible assets.

In November 2009, we acquired from Exterran Holdings 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 U.S. contract operations business of Exterran Holdings and us (the “November 2009 Contract Operations Acquisition”) for approximately $144.0 million. In connection with this acquisition, we assumed $57.2 million of long-term debt from Exterran Holdings and issued approximately 4.7 million common units to Exterran Holdings and approximately 97,000 general partner units to Exterran Holdings’ wholly-owned subsidiary. Concurrent with the closing of the November 2009 Contract Operations Acquisition, we borrowed $28.0 million and $30.0 million under our revolving credit facility and asset-backed securitization facility, respectively, 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 $4.4 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 $4.2 million associated with customer relationships and $0.2 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 intangible assets.

An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Giving retroactive effect to the August 2010 Contract Operations Acquisition and the November 2009 Contract Operations Acquisition 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, liabilities assumed, revenues and direct operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP.

Unaudited Pro Forma Financial Information

Pro forma financial information for the three and nine months ended September 30, 2010 and 2009 has been included to give effect to the significant expansion of our compressor fleet and service contracts as a result of the August 2010 Contract Operations Acquisition and the November 2009 Contract Operations Acquisition. The transactions are presented in the pro forma financial information as though the transactions had occurred as of January 1, 2009.

The unaudited pro forma financial information for the three and nine months ended September 30, 2010 and 2009 reflects the following transactions:

As related to the August 2010 Contract Operations Acquisition:

	•		our acquisition in August 2010 of certain contract operations customer service agreements and compression equipment from Exterran Holdings; and
	•		our issuance of approximately 8.2 million common units to Exterran Holdings and approximately 167,000 general partner units to Exterran Holdings’ wholly-owned subsidiary.

As related to the November 2009 Contract Operations Acquisition for the period January 1, 2009 through September 30, 2009:

	•		our acquisition in November 2009 of certain contract operations customer service agreements and compression equipment from Exterran Holdings;
	•		our assumption of $57.2 million of Exterran Holdings’ long-term debt;
	•		our borrowing of $30.0 million under our asset-backed securitization facility and $28.0 million under our revolving credit facility and use of those proceeds to retire the debt assumed from Exterran Holdings; and
	•		our issuance of approximately 4.7 million common units to Exterran Holdings and approximately 97,000 general partner units to Exterran Holdings’ wholly-owned subsidiary.

The unaudited pro forma financial information below is presented for informational purposes only and is not necessarily indicative of the results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results. The unaudited pro forma consolidated financial information below was derived by

adjusting our historical financial statements.

The following table presents pro forma financial information for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per unit amounts):

		Three Months				Nine Months				Three Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30, 2010								September 30, 2009
Revenue		$	68,566			$	200,870			$	68,610			$	219,606
Net income		$	1,544			$	8,076			$	9,137			$	34,271
Basic earnings per common and subordinated limited partner unit		$	0.03			$	0.21			$	0.27			$	1.01
Diluted earnings per common and subordinated limited partner unit		$	0.03			$	0.21			$	0.27			$	1.01

Pro forma net income per limited partner unit is determined by dividing the pro forma net income that would have been allocated to the common and subordinated unitholders by the weighted average number of common and subordinated units expected to be outstanding after the completion of the transactions included in the pro forma consolidated financial statements. All units were assumed to have been outstanding since the beginning of the periods presented. Pursuant to our partnership agreement, to the extent that the quarterly distributions exceed certain targets, our general partner is entitled to receive certain incentive distributions that will result in more net income proportionately being allocated to our general partner than to the holders of our common and subordinated units. The pro forma net earnings per limited partner unit calculations reflect pro forma incentive distributions to our general partner, including an additional reduction of net income allocable to our limited partners of approximately zero and $0.2 million for the three and nine months ended September 30, 2010, respectively, and approximately $0.2 million and $0.5 million for the three and nine months ended September 30, 2009, respectively, which includes the amount of additional incentive distributions that would have occurred during the period.

3. RELATED PARTY TRANSACTIONS

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

	•		certain agreements not to compete between Exterran Holdings and its affiliates, on the one hand, and us and our affiliates, on the other hand;
	•		Exterran Holdings’ obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below;
	•		the terms under which we, Exterran Holdings, and our respective affiliates may transfer compression equipment among one another to meet our respective contract operations services obligations;
	•		the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings’ affiliates;
	•		Exterran Holdings’ grant of a license of certain intellectual property to us, including our logo; and
	•		Exterran Holdings’ obligation to indemnify us for certain liabilities and our obligation to indemnify Exterran Holdings for certain liabilities.

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

During the nine months ended September 30, 2010, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 105 compressor units, totaling approximately 45,900 horsepower with a net book value of approximately $21.1 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership to us of 179 compressor units, totaling approximately 43,200 horsepower with a net book value of approximately $25.2 million. During the nine months ended September 30, 2009, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 81compressor units, totaling approximately 34,600 horsepower with a net book value of approximately $18.0 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership to us of 164 compressor units, totaling approximately 36,800 horsepower with a net book value of approximately $21.2 million. During the nine months ended September 30, 2010 and 2009, we recorded capital contributions of approximately $4.1 million and $3.2 million, respectively, related to the differences in net book value on the compression equipment that was exchanged with us. No customer

contracts were included in the transfers. Under the terms of the Omnibus Agreement, such transfers must be of equal appraised value, as defined in the Omnibus Agreement, with any difference being settled in cash. As a result, we paid a nominal amount to Exterran Holdings for the difference in fair value of the equipment in connection with the transfers. We recorded the compressor units received at the historical book basis of Exterran Holdings. The units we received from Exterran Holdings were being utilized to provide services to our customers on the date of the transfers and, prior to the transfers, had been leased by us from Exterran Holdings. The units we transferred to Exterran Holdings were being utilized to provide services to customers of Exterran Holdings on the date of the transfers, and prior to the transfers had been leased by Exterran Holdings from us.

Under the Omnibus Agreement, Exterran Holdings has agreed that, for a period that will terminate on December 31, 2011, our obligation to reimburse Exterran Holdings for (i) any cost of sales that it incurs in the operation of our business will be capped (after taking into account any such costs we incur and pay directly); and (ii) any cash selling, general and administrative (“SG&A”) costs allocated to us will be capped (after taking into account any such costs we incur and pay directly). Cost of sales were capped at $21.75 per operating horsepower per quarter from July 30, 2008 through September 30, 2010. SG&A costs were capped at $6.0 million per quarter from July 30, 2008 through November 9, 2009, and at $7.6 million per quarter from November 10, 2009 through September 30, 2010. These caps may be subject to future adjustment or termination in connection with expansions of our operations through the acquisition or construction of new assets or businesses.

For the three months ended September 30, 2010 and 2009, our cost of sales exceeded the cap provided in the Omnibus Agreement by $7.1 million and $2.0 million, respectively. For the nine months ended September 30, 2010 and 2009, our cost of sales exceeded the cap provided in the Omnibus Agreement by $15.6 million and $6.1 million, respectively. For the three and nine months ended September 30, 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $0.7 million and $1.4 million, respectively. For the three and nine months ended September 30, 2009, our SG&A expenses did not exceed the cap provided in the Omnibus Agreement. The excess amounts over the caps are included in the consolidated statements of operations as cost of sales or SG&A expense. The cash received for the amounts over the caps has been accounted for as a capital contribution in our consolidated balance sheets and consolidated statements of cash flows.

Pursuant to the Omnibus Agreement, we are 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 Exterran GP LLC’s board of directors. During the nine months ended September 30, 2010 and 2009, we purchased $9.8 million and $1.3 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 a capital distribution or contribution. Transactions between us and Exterran Holdings and its affiliates are transactions between entities under common control. As a result, the equipment purchased during the nine months ended September 30, 2010 and 2009 was recorded in our consolidated balance sheet as property, plant and equipment of $8.8 million and $1.2 million, respectively, which represents the carrying value of the Exterran Holdings affiliates that sold it to us, and as a distribution of capital of $1.0 million and $0.1 million, respectively, which represents the fixed margin we paid above the carrying value in accordance with the Omnibus Agreement. During the nine months ended September 30, 2010 and 2009, Exterran Holdings contributed to us $2.6 million and $4.0 million, respectively, primarily related to the completion of overhauls on compression equipment that was exchanged with us or contributed to us and where overhauls were in progress on the date of exchange or contribution.

Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith that there exists a need on the part of Exterran Holdings’ contract operations services business or on our part to lease compression equipment between Exterran Holdings and us to fulfill the compression services obligations of either Exterran Holdings or us, such equipment may be leased if it will not cause us to breach any existing compression services contracts or to suffer a loss of revenue under an existing compression services contract or to incur any unreimbursed costs. At September 30, 2010, we had equipment on lease to Exterran Holdings with an aggregate cost and accumulated depreciation of $9.6 million and $1.6 million, respectively.

For the nine months ended September 30, 2010 and 2009, we had revenues of $0.7 million and $0.8 million, respectively, from Exterran Holdings related to the lease of our compression equipment. For the nine months ended September 30, 2010 and 2009, we had cost of sales of $11.1 million and $8.1 million, respectively, with Exterran Holdings related to the lease of Exterran Holdings’ compression equipment.

4. DEBT

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

		September 30, 2010				December 31, 2009
Revolving credit facility due October 2011		$	288,000			$	285,000
Term loan due October 2011			117,500				117,500
Asset-backed securitization facility due July 2013			30,000				30,000
Long-term debt		$	435,500			$	432,500

As of September 30, 2010, we had undrawn capacity of $27.0 million and $120.0 million under our revolving credit facility and our asset-backed securitization facility, respectively.

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

The 2010 Revolver bears interest at a base rate or LIBOR, at our 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 our 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 our 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 our 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 Credit Facility are secured by substantially all of the U.S. personal property assets of us and our significant subsidiaries (as defined in the 2010 Credit Agreement), including all of the membership interests of our U.S. restricted subsidiaries (as defined in the 2010 Credit Agreement). Subject to certain conditions, at our request, and with the approval of the Administrative Agent (as defined in the 2010 Credit Agreement), the aggregate commitments under the 2010 Credit Facility may be increased by an additional $150 million.

Like the 2006 Credit Agreement, the 2010 Credit Agreement contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. It also contains various covenants regarding mandatory prepayments from net cash proceeds of certain future asset transfers or debt issuances. If we experienced a material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impact our ability to perform our obligations under our senior secured credit facility, this could lead to a default under that facility. As of September 30, 2010, we were in compliance with all financial covenants under the 2006 Credit Agreement.

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

5. CASH DISTRIBUTIONS

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

	•		first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;
	•		second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
	•		third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter;
	•		fourth, 98% to all common and subordinated unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.4025;
	•		fifth, 85% to all common and subordinated unitholders, pro rata, and 15% to our general partner, until each unit has received a

			distribution of $0.4375;
	•		sixth, 75% to all common and subordinated unitholders, pro rata, and 25% to our general partner, until each unit has received a total of $0.525; and
	•		thereafter, 50% to all common and subordinated unitholders, pro rata, and 50% to our general partner.

The following table summarizes our distributions per unit for 2009 and 2010:

Distribution

per

Limited

Period Covering

Payment Date

Partner Unit

Total Distribution (1)

1/1/2009 — 3/31/2009

May 15, 2009

$

0.4625

$

9.3 million

4/1/2009 — 6/30/2009

August 14, 2009

0.4625

9.3 million

7/1/2009 — 9/30/2009

November 13, 2009

0.4625

9.3 million

10/1/2009 — 12/31/2009

February 12, 2010

0.4625

11.6 million

1/1/2010 — 3/31/2010

May 11, 2010

0.4625

11.6 million

4/1/2010 — 6/30/2010

August 10, 2010

0.4625

11.6 million

On October 29, 2010, the board of directors of Exterran GP LLC approved a cash distribution of $0.4675 per limited partner unit, or approximately $15.7 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from July 1, 2010 through September 30, 2010. The record date for this distribution is November 9, 2010 and payment is expected to occur on November 12, 2010.

6. UNIT-BASED COMPENSATION

Long-Term Incentive Plan

We have a long-term incentive plan that was adopted by Exterran GP LLC, the general partner of our general partner, in October 2006 for employees, directors and consultants of us, Exterran Holdings or our respective affiliates. The long-term incentive plan currently permits the grant of awards covering an aggregate of 1,035,378 common units, common unit options, restricted units and phantom units. The long-term incentive plan is administered by the board of directors of Exterran GP LLC or a committee thereof (the “Plan Administrator”).

Unit options have an exercise price that is not less than the fair market value of the units on the date of grant and become exercisable over a period determined by the Plan Administrator. We have the option to settle any exercised unit option 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. 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.

Phantom Units

Exterran GP LLC’s practice is to grant equity-based awards (i) to its officers once a year, in late February or early March around the time the compensation committee of the board of directors of Exterran Holdings grants equity-based awards to Exterran Holdings’ officers, and (ii) to its directors once a year in October or November, around the anniversary of our initial public offering. The schedule for making equity-based awards is typically established several months in advance and is not set based on knowledge of material nonpublic information or in response to our unit price. This practice results in awards being granted on a regular, predictable annual cycle. Equity-based awards are occasionally granted at other times during the year, such as upon the hiring of a new employee or following the promotion of an employee. In some instances, Exterran GP LLC’s board of directors may be aware, at the time grants are made, of matters or potential developments that are not ripe for public disclosure at that time but that may result in public announcement of material information at a later date.

The following table presents phantom unit activity for the nine months ended September 30, 2010:

						Weighted
						Average
						Grant-Date
		Phantom				Fair Value
		Units				per Unit
Phantom units outstanding, December 31, 2009			91,124			$	17.06
Granted			35,242				22.79
Vested			(33,373	)			18.18
Cancelled			(2,065	)			17.26
Phantom units outstanding, September 30, 2010			90,928			$	18.85

As of September 30, 2010, $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.

Unit Options

As of September 30, 2010 and December 31, 2009, we had no unit options outstanding.

7. 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 September 30, 2010, we were party to interest rate swaps pursuant to which we pay fixed payments and receive floating payments on a notional value of $285.0 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 2013. The weighted average effective fixed interest rate payable on our interest rate swaps was 4.5% 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 and is included in accumulated other comprehensive 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 three and nine months ended September 30, 2010 and 2009, there was no ineffectiveness related to these swaps. We estimate that $10.3 million of deferred pre-tax losses from the interest rate swaps will be realized as an expense during the next twelve months. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

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

		September 30, 2010
						Fair Value
						Asset
		Balance Sheet Location				(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Current portion of interest rate swaps				$	(10,282	)
Interest rate hedges		Interest rate swaps					(3,744	)
Total derivatives						$	(14,026	)

		December 31, 2009
						Fair Value
						Asset
		Balance Sheet Location				(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	)

Three Months Ended September 30, 2010

Nine Months Ended September 30, 2010

Gain (Loss)

Gain (Loss)

Reclassified

Reclassified

Location of Gain

from

Location of Gain

from

Gain (Loss)

(Loss) Reclassified

Accumulated

Gain (Loss)

(Loss) Reclassified

Accumulated

Recognized in

from Accumulated

Other

Recognized in

from Accumulated

Other

Other

Other

Comprehensive

Other

Other

Comprehensive

Comprehensive

Comprehensive

Income (Loss)

Comprehensive

Comprehensive

Income (Loss)

Income (Loss)

Income (Loss) into

into Income

Income (Loss)

Income (Loss) into

into Income

on Derivatives

Income (Loss)

(Loss)

on Derivatives

Income (Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(2,241

)

Interest expense

$

(2,931

)

$

(7,204

)

Interest expense

$

(8,813

)

Three Months Ended September 30, 2009

Nine Months Ended September 30, 2009

Gain (Loss)

Gain (Loss)

Reclassified

Reclassified

Location of Gain

from

Location of Gain

from

Gain (Loss)

(Loss) Reclassified

Accumulated

Gain (Loss)

(Loss) Reclassified

Accumulated

Recognized in

from Accumulated

Other

Recognized in

from Accumulated

Other

Other

Other

Comprehensive

Other

Other

Comprehensive

Comprehensive

Comprehensive

Income (Loss)

Comprehensive

Comprehensive

Income (Loss)

Income (Loss)

Income (Loss) into

into Income

Income (Loss)

Income (Loss) into

into Income

on Derivatives

Income (Loss)

(Loss)

on Derivatives

Income (Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(3,898

)

Interest expense

$

(2,683

)

$

(6,069

)

Interest expense

$

(6,645

)

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.

8. FAIR VALUE OF INTEREST RATE SWAP AGREEMENTS

The Financial Accounting Standards Board (“FASB”) 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 long-lived 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)		$	(14,026	)		$	—			$	(14,026	)		$	—
Impaired long-lived assets			34				—				—				34

The following table summarizes the valuation of our interest rate swaps and impaired long-lived 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)		$	(17,110	)		$	—			$	(17,110	)		$	—
Impaired long-lived assets			197				—				—				197

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 long-lived assets was based on the estimated component value of the equipment that we plan to use.

9. UNIT TRANSACTIONS

All of our subordinated units are owned by a wholly-owned subsidiary of Exterran Holdings. As of June 30, 2010, we met the requirements under our Partnership Agreement for early conversion of 25% of these subordinated units into common units. Accordingly, in August 2010, 1,581,250 subordinated units owned by Exterran Holdings converted into common units.

On September 13, 2010, Exterran Holdings closed a public underwritten offering of 5,290,000 common units representing limited partner interests in us, including 690,000 common units sold pursuant to an over-allotment option, at a price to the public of $21.60 per common unit. We did not sell any common units in this offering and did not receive any proceeds from the sale of the common units by Exterran Holdings. At the time we issued these units to Exterran Holdings, we agreed to pay certain costs of a future public sale. These costs have been recorded as a reduction to partners’ capital. This offering reduced the percentage of units owned by Exterran Holdings and its affiliates to approximately 58% of our total outstanding units.

10. LONG-LIVED ASSET IMPAIRMENT

As a result of a decline in market conditions during 2010 and 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 effective 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 $0.3 million and $3.0 million, respectively, for the nine months ended September 30, 2010 and 2009, and was recorded as a long-lived asset impairment.

11. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, we are involved in various pending or threatened legal actions. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows; however, because of the inherent uncertainty of litigation, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows for the period in which that resolution occurs.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can identify many of these statements by looking for words such as “believes,” “expects,” “intends,” “projects,” “anticipates,” “estimates” or similar words or the negative thereof.

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

	•		our business growth strategy and projected costs;
	•		our future financial position;
	•		the sufficiency of available cash flows to make cash distributions;
	•		our ability to comply with financial covenants contained in our credit agreements;
	•		our ability to refinance existing debt or incur additional indebtedness at an acceptable cost;
	•		the expected timing and amount of our capital expenditures;
	•		anticipated cost savings, future revenue, gross margin and other financial or operational measures related to our business;
	•		the future value of our equipment;
	•		plans and objectives of our management for our future operations; and
	•		any potential contribution of additional assets from Exterran Holdings, Inc. (individually, and together with its wholly-owned subsidiaries, “Exterran Holdings”) to us.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. These forward-looking statements are also affected by the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2009, and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”), which are available through our website at www.exterran.com and through the SEC’s Electronic Data Gathering and Retrieval System at www.sec.gov. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

	•		conditions in the oil and gas industry, including a sustained decrease in the level of supply or demand for natural gas and the impact on the price of natural gas, which could cause a decline in the demand for our compression services;
	•		reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;
	•		our dependence on Exterran Holdings to provide services, including its ability to hire, train and retain key employees and to timely and cost effectively obtain components necessary to conduct our business;
	•		changes in economic or political conditions, including terrorism and legislative changes;
	•		the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;
	•		an Internal Revenue Service challenge to our valuation methodologies, which may result in a shift of income, gains, losses and/or deductions between our general partner and our unitholders;
	•		the risk that counterparties will not perform their obligations under our financial instruments;

	•		the financial condition of our customers;
	•		our ability to implement certain business and financial objectives, such as:

	•		growing our asset base and asset utilization, particularly our fleet of compressors;
	•		integrating acquired businesses;
	•		generating sufficient cash;
	•		accessing the capital markets at an acceptable cost;
	•		purchasing additional contract operations contracts and equipment from Exterran Holdings; and
	•		refinancing existing or incurring additional indebtedness to fund our business;

	•		liability related to the provision of our services;
	•		changes in governmental safety, health, environmental or other regulations, which could require us to make significant expenditures; and
	•		our level of indebtedness and ability to fund our business.

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

GENERAL

We are a publicly held Delaware limited partnership formed in 2006 to acquire certain contract operations customer service agreements and a compressor fleet used to provide compression services under those agreements. We completed our initial public offering in October 2006.

November 2009 Contract Operations Acquisition

In November 2009, we acquired from Exterran Holdings 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 U.S. contract operations business of Exterran Holdings and us (the “November 2009 Contract Operations Acquisition”) for approximately $144.0 million. In connection with this acquisition, we assumed $57.2 million of long-term debt from Exterran Holdings and issued to Exterran Holdings approximately 4.7 million common units and approximately 97,000 general partner units. Concurrent with the closing of the November 2009 Contract Operations Acquisition, we borrowed $28.0 million and $30.0 million under our revolving credit facility and our $150.0 million asset-backed securitization facility (the “2009 ABS Facility”), respectively, which together were used to repay the debt assumed from Exterran Holdings in the acquisition and to pay other costs incurred in the acquisition.

August 2010 Contract Operations Acquisition

In August 2010, we acquired from Exterran Holdings contract operations customer service agreements with 43 customers and a fleet of approximately 580 compressor units used to provide compression services under those agreements, comprising approximately 255,000 horsepower, or approximately 6% (by available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “August 2010 Contract Operations Acquisition”). Total consideration for the transaction was approximately $214.0 million, excluding transaction costs. In connection with this acquisition, we issued to Exterran Holdings’ wholly-owned subsidiaries approximately 8.2 million common units and approximately 167,000 general partner units.

Also, in connection with the closing of the August 2010 Contract Operations Acquisition, we amended the Omnibus Agreement (as defined below) to among other things, extend the term of the caps on our obligation to reimburse Exterran Holdings for the selling, general and administrative (“SG&A”) costs and operating costs Exterran Holdings allocates to us based on such costs it incurs on our behalf for an

additional year such that the caps will now terminate on December 31, 2011.

Omnibus Agreement

We are a party to an omnibus agreement with Exterran Holdings, our general partner, and others (as amended and restated, the “Omnibus Agreement”), the terms of which include, among other things:

	•		certain agreements not to compete between Exterran Holdings and its affiliates, on the one hand, and us and our affiliates, on the other hand;
	•		Exterran Holdings’ obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below;
	•		the terms under which we, Exterran Holdings, and our respective affiliates may transfer compression equipment among one another to meet our respective contract operations services obligations; and
	•		the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings’ affiliates.

For further discussion of the Omnibus Agreement, please see Note 3 to the Consolidated Financial Statements included in Part I, Item 1 (“Financial Statements”) of this report.

OVERVIEW

Industry Conditions and Trends

Our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration, development and production of natural gas reserves in the U.S. Spending by natural gas exploration and production companies is dependent upon these companies’ forecasts regarding the expected future supply and demand for, and future pricing of, oil and natural gas products as well as their estimates of risk-adjusted costs to find, develop and produce reserves. Although we believe our business is typically less impacted by commodity prices than certain other oil and natural gas service providers, changes in natural gas exploration and production spending will normally result in changes in demand for our services.

Natural gas consumption in the U.S. for the twelve months ended July 31, 2010 increased by approximately 4% compared to the twelve months ended July 31, 2009. Total U.S. natural gas consumption is projected by the Energy Information Administration (“EIA”) to increase by 4.6% in 2010 and by 0.1% in 2011, and is expected to increase by an average of 0.7% per year thereafter until 2035. For 2008, the U.S. accounted for an estimated annual production of approximately 21 trillion cubic feet of natural gas. The EIA expects total U.S. marketed natural gas production to increase by 2.2% in 2010. The EIA estimates that the natural gas production level in the U.S. will be approximately 23 trillion cubic feet in calendar year 2035. Natural gas marketed production in the U.S. for the twelve months ended July 31, 2010 increased by approximately 3% compared to the twelve months ended July 31, 2009.

Our Performance Trends and Outlook

Our results of operations depend upon the level of activity in the U.S. energy market. Oil and natural gas prices and the level of drilling and exploration activity can be volatile. For example, oil and natural gas exploration and development activity and the number of well completions typically decline when there is a significant reduction in oil and natural gas prices or significant instability in energy markets.

Our revenue, earnings, financial position and capital spending are affected by, among other things, (i) market conditions that impact demand and pricing for natural gas compression, (ii) our customers’ decisions to utilize our services rather than utilize products or services from our competitors, and (iii) the timing and consummation of acquisitions of additional contract operations customer contracts and equipment from Exterran Holdings. In particular, many of our contracts with customers have short initial terms; we cannot be certain that these contracts will be renewed after the end of the initial contractual term, and any such nonrenewal, or renewal at a reduced rate, could adversely impact our results of operations and cash available for distribution.

In the nine months ended September 30, 2010, we began to see an increase in overall natural gas activity and an increase in our compression order activity. Our total operating horsepower increased by approximately 5%, excluding the impact of the August 2010 Contract Operations Acquisition, during the nine months ended September 30, 2010. However, we believe that due to uncertainty around natural gas supply and demand and natural gas prices, along with the current available supply of idle and underutilized compression equipment owned by our customers and competitors, we may not be able to significantly improve our horsepower

utilization and pricing and therefore revenues in the near term (excluding the impact of potential transfers of additional contract operations customer contracts and equipment from Exterran Holdings to us). Our contract operations services business has historically experienced more stable demand than that of certain other energy service products and services. A 1% decrease in average utilization of our contract operations fleet would result in a decrease in our revenue and gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for the nine months ended September 30, 2010 of approximately $1.7 million and $0.8 million, respectively.

Pursuant to the Omnibus Agreement between us and Exterran Holdings, our obligation to reimburse Exterran Holdings for cost of sales and SG&A expenses is capped through December 31, 2011 (see Note 3 to the Financial Statements). During the nine months ended September 30, 2010 and 2009, our cost of sales exceeded this cap by $15.6 million and $6.1 million, respectively. During the nine months ended September 30, 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $1.4 million. For the nine months ended September 30, 2009, our SG&A expenses did not exceed the cap provided in the Omnibus Agreement.

Exterran Holdings intends for us to be the primary long-term growth vehicle for its U.S. contract operations business and intends to offer us the opportunity to purchase the remainder of its U.S. contract operations business over time, but is not obligated to do so. Likewise, we are not required to purchase any additional portions of such business. The consummation of any future purchase of additional portions of Exterran Holdings’ U.S. contract operations business and the timing of any such purchase will depend upon, among other things, our reaching an agreement with Exterran Holdings regarding the terms of such purchase, which will require the approval of the conflicts committee of Exterran GP LLC’s board of directors. The timing of such transactions would also depend on, among other things, market and economic conditions and our access to debt and equity capital. Future contributions of assets to us upon consummation of transactions with Exterran Holdings may increase or decrease our operating performance, financial position and liquidity. This discussion of performance trends and outlook excludes any future potential transfers of additional contract operations customer contracts and equipment from Exterran Holdings to us.

Operating Highlights

The following table summarizes total available horsepower, total operating horsepower, average operating horsepower and horsepower utilization percentages (in thousands, except percentages):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Total Available Horsepower (at period end)			1,655				1,039				1,655				1,039
Total Operating Horsepower (at period end)			1,362				808				1,362				808
Average Operating Horsepower			1,208				819				1,123				859
Horsepower Utilization:
Spot (at period end)			82	%			78	%			82	%			78	%
Average			81	%			79	%			81	%			83	%

FINANCIAL RESULTS OF OPERATIONS

The three months ended September 30, 2010 compared to the three months ended September 30, 2009

The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net income (dollars in thousands):

		Three Months Ended
		September 30,
		2010				2009
Revenue		$	62,721			$	41,317
Gross margin (1)			28,902				21,515
Gross margin percentage			46	%			52	%
Expenses:
Depreciation and amortization		$	13,697			$	9,042
Long-lived asset impairment			93				—
Selling, general and administrative			8,504				4,961
Interest expense			6,020				5,039
Other (income) expense, net			333				324
Income tax expense			172				141
Net income		$	83			$	2,008

Revenue. Average monthly operating horsepower was approximately 1,208,000 and 819,000 for the three months ended September 30, 2010 and 2009, respectively. The increase in revenue and average monthly operating horsepower was primarily due to the inclusion of the results from the assets acquired in the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Gross Margin. The increase in gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) during the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily due to the inclusion of results from the assets acquired in the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. The decrease in gross margin percentage was primarily caused by an increase in our field operating expenses, the primary driver of which were costs to make idle units ready to be placed back into operation.

Depreciation and Amortization. The increase in depreciation and amortization expense during the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily due to the additional depreciation on compression equipment additions, including the assets acquired in the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Long-lived Asset Impairment. We recorded approximately $0.1 million of long-lived asset impairment on idle compression units during the three months ended September 30, 2010. See Note 10 to the Financial Statements for further discussion of the long-lived asset impairments.

SG&A. SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings. The increase in SG&A expense was primarily due to increased costs associated with the increase in revenues after the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. SG&A expenses represented 14% and 12% of revenues for the three months ended September 30, 2010 and 2009, respectively.

Interest Expense. The increase in interest expense was primarily due to a higher average balance of long-term debt for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 resulting from the additional debt incurred for the November 2009 Contract Operations Acquisition. This increase was also partially caused by an increase in our weighted average effective interest rate, including the impact of interest rate swaps, to 5.4% for the three months ended September 30, 2010 from 5.0% for the three months ended September 30, 2009.

Other (Income) Expense, Net. Other (income) expense, net for the three months ended September 30, 2010 included $0.4 million of transaction costs associated with the August 2010 Contract Operations Acquisition. Other (income) expense, net for the three months

ended September 30, 2009 included $0.3 million of transaction costs associated with the November 2009 Contract Operations Acquisition.

Income Tax Expense. Income tax expense primarily reflects taxes recorded under the Texas margins tax and the Michigan business tax. The increase in income tax expense for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily due to an increase in our revenue earned within the state of Texas.

The nine months ended September 30, 2010 compared to the nine months ended September 30, 2009

The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net income (dollars in thousands):

		Nine Months Ended
		September 30,
		2010				2009
Revenue		$	169,221			$	134,627
Gross margin (1)			80,425				72,467
Gross margin percentage			48	%			54	%
Expenses:
Depreciation and amortization		$	37,338			$	26,054
Long-lived asset impairment			324				2,995
Selling, general and administrative			24,718				16,513
Interest expense			17,436				14,663
Other (income) expense, net			(73	)			351
Income tax expense			518				424
Net income		$	164			$	11,467

Revenue. Average monthly operating horsepower was approximately 1,123,000 and 859,000 for the nine months ended September 30, 2010 and 2009, respectively. The increase in revenue and average monthly operating horsepower was primarily due to the inclusion of the results from the assets acquired in the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition, which was partially offset by a 2% decrease in average operating horsepower utilization and a 4% decrease in revenue per average operating horsepower for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The decrease in horsepower utilization and pricing was due to the continued challenging market conditions in the U.S. natural gas energy industry.

Gross Margin. The increase in gross margin for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 was primarily due to the inclusion of the results from the assets acquired in the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. The decrease in gross margin percentage was primarily caused by lower pricing and an increase in our field operating expenses for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Depreciation and Amortization. The increase in depreciation and amortization expense during the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 was primarily due to the additional depreciation on compression equipment additions, including the assets acquired in the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Long-lived Asset Impairment. We recorded approximately $0.3 million and $3.0 million of long-lived asset impairments on idle compression units during the nine months ended September 30, 2010 and 2009, respectively. See Note 10 to the Financial Statements for further discussion of the long-lived asset impairments.

SG&A. SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings. The increase in SG&A expense was primarily due to increased costs associated with the increase in revenues after the November 2009 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. In addition, SG&A expenses for the nine months ended September 30, 2010 increased due to $0.8 million in additional sales taxes as a result of a state tax ruling received in June 2010 that applies retroactively back to July 2007 to certain contract compression transactions. SG&A expenses represented 15% and 12% of revenues for the nine months ended September 30, 2010 and 2009,

respectively. The increase in SG&A expense as a percentage of revenues was primarily due to the decrease in revenue per operating horsepower without a corresponding reduction in SG&A expense.

Interest Expense. The increase in interest expense was primarily due to a higher average balance of long-term debt and an increase in our weighted average effective interest rate for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 resulting from the additional debt incurred for the November 2009 Contract Operations Acquisition. Our weighted average effective interest rate, including the impact of interest rate swaps, was 5.2% for the nine months ended September 30, 2010 compared to 4.8% for the nine months ended September 30, 2009.

Other (Income) Expense, Net. Other (income) expense, net for the nine months ended September 30, 2010 included $0.4 million of gains on the sale of used compression equipment, significantly offset by $0.4 million of transaction costs associated with the August 2010 Contract Operations Acquisition recorded in the nine months ended September 30, 2010. Other (income) expense, net for the nine months ended September 30, 2009 primarily related to $0.3 million of transaction costs associated with the November 2009 Contract Operations Acquisition.

Income Tax Expense. Income tax expense primarily reflects taxes recorded under the Texas margins tax and the Michigan business tax. The increase in income tax expense for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 was primarily due to an increase in our revenue earned within the state of Texas.

LIQUIDITY AND CAPITAL RESOURCES

The following tables summarize our sources and uses of cash for the nine months ended September 30, 2010 and 2009, and our cash and working capital as of the end of the periods presented (in thousands):

		Nine Months Ended September 30,
		2010				2009
Net cash provided by (used in):
Operating activities		$	37,097			$	50,177
Investing activities			(20,990	)			(17,119	)
Financing activities			(16,277	)			(35,972	)
Net change in cash and cash equivalents		$	(170	)		$	(2,914	)
		September 30, 2010				December 31, 2009
Cash and cash equivalents		$	33			$	203
Working capital			5,853				4,094

Operating Activities. The decrease in net cash provided by operating activities was primarily due to an increase in accounts receivables due to higher business levels after the August 2010 Contract Operations Acquisition in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Investing Activities. The increase in cash used in investing activities was primarily attributable to an increase in capital expenditures for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, partially offset by a $2.4 million increase in amounts due from affiliates in the nine months ended September 30, 2009. Capital expenditures for the nine months ended September 30, 2010 were $21.6 million, consisting of $11.9 million for fleet growth capital and $9.7 million for compressor maintenance activities. We purchased $9.8 million of new compression equipment from Exterran Holdings during the nine months ended September 30, 2010.

Financing Activities. The decrease in cash used in financing activities was the result of a decrease in net repayments under our debt facilities and an increase in capital contributions during the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Capital Requirements. The natural gas compression business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is dependent on the demand for our services and the availability of the type of compression equipment required for us to render those services to our customers. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist of, the following:

•

maintenance capital expenditures, which are capital expenditures made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets; and

•

expansion capital expenditures, which are capital expenditures made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition or modification.

We currently plan to spend approximately $14 million to $16 million on equipment maintenance capital during 2010.

In addition, our capital requirements include funding distributions to our unitholders. We anticipate such distributions will be funded through cash provided by operating activities and borrowings under our credit facilities and that we have the ability to generate adequate amounts of cash to meet our short-term and long-term needs. Given our objective of long-term growth through acquisitions, expansion capital expenditure projects and other internal growth projects, we anticipate that over time we will continue to invest capital to grow and acquire assets. We expect to actively consider a variety of assets for potential acquisitions and expansion projects. We expect to fund future capital expenditures with borrowings under our credit facilities, the issuance of additional partnership units, and future debt offerings as appropriate, given market conditions. The timing of future capital expenditures will be based on the economic environment, including the availability of debt and equity capital.

Our Ability to Grow Depends on Our Ability to Access External Expansion Capital. We expect that we will rely primarily upon external financing sources, including our 2010 Credit Facility (as defined below) and the issuance of debt and equity securities, rather than cash reserves established by our general partner, to fund our acquisitions and expansion capital expenditures. Our ability to access the capital markets may be restricted at a time when we would like, or need, to do so, which could have an impact on our ability to grow.

We expect that we will distribute all of our available cash to our unitholders. Available cash is reduced by cash reserves established by our general partner to provide for the proper conduct of our business, including future capital expenditures. To the extent we are unable to finance growth externally and we are unwilling to establish cash reserves to fund future acquisitions, our cash distribution policy will significantly impair our ability to grow. Because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may impact the available cash that we have to distribute for each unit. There are no limitations in our partnership agreement or in the terms of our credit facilities on our ability to issue additional units, including units ranking senior to our common units.

Long-term Debt. We, as guarantor, and EXLP Operating LLC, our wholly-owned subsidiary (“EXLP Operating”), as borrower, were parties to a senior secured credit agreement (the “2006 Credit Agreement”) that provided for a five-year, $315 million revolving credit facility maturing in October 2011 (the “2006 Revolver”). In May 2008, we and EXLP Operating entered into an amendment to the 2006 Credit Agreement that provided for a $117.5 million term loan facility (the “2008 Term Loan”). As of September 30, 2010, we had $288.0 million in outstanding borrowings under the 2006 Revolver and $117.5 million in outstanding borrowings under the 2008 Term Loan.

On November 3, 2010, we and our subsidiaries, as guarantors, and EXLP Operating, as borrower, entered into an amendment and restatement of the 2006 Credit Agreement (as so amended and restated, the “2010 Credit Agreement”) to provide for a new five-year, $550 million senior secured credit facility (the “2010 Credit Facility”) consisting of a $400 million revolving credit facility (the “2010 Revolver”) and a $150 million term loan (the “2010 Term Loan”). Concurrent with the execution of the agreement, we borrowed $304.0 million under the 2010 Revolver and $150 million under the 2010 Term Loan and used the proceeds to (i) repay the entire $406.1 million outstanding under the 2006 Credit Agreement, (ii) repay the entire $30.0 million outstanding under our 2009 ABS Facility and terminate that facility, (iii) pay $14.8 million to terminate the interest rate swap agreements to which we were a party and (iv) pay customary fees and other expenses relating to the facility. The $14.8 million we paid related to the terminated interest rate swaps will be amortized into interest expense over the original term of the swaps. We incurred transaction costs of approximately $4.0 million related to the 2010 Credit Agreement. These costs will be included in Intangible and other assets, net and amortized over the respective facility terms.

Borrowings under the 2010 Credit Facility are secured by substantially all of the U.S. personal property assets of us and our significant subsidiaries (as defined in the 2010 Credit Agreement), including all of the membership interests of our U.S. restricted subsidiaries (as defined in the 2010 Credit Agreement). Subject to certain conditions, at our request, and with the approval of the Administrative Agent (as defined in the 2010 Credit Agreement), the aggregate commitments under the 2010 Credit Facility may be increased by an additional $150 million.

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

The 2010 Revolver bears interest at a base rate or LIBOR, at our 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 our 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 our 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 applied under the new 2010 Term Loan was 2.75%. The weighted average interest rate on the outstanding balance of our 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.

As of September 30, 2010, we had undrawn capacity of $27.0 million and $120.0 million under the 2006 Revolver and 2009 ABS Facility, respectively. Under the 2010 Credit Agreement, we have limitations on our Total Debt to EBITDA ratio as discussed below.

Like the 2006 Credit Agreement, the 2010 Credit Agreement contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. It also contains various covenants regarding mandatory prepayments from net cash proceeds of certain future asset transfers or debt issuances. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the 2010 Credit Agreement) to Total Interest Expense (as defined in the 2010 Credit Agreement) of not less than 3.0 to 1.0 (which will decrease to 2.75 to 1.0 following the occurrence of certain events specified in the 2010 Credit Agreement) and a ratio of Total Debt (as defined in the 2010 Credit Agreement) to EBITDA of not greater than 4.75 to 1.0. Our senior secured credit facility allows for our Total Debt to EBITDA ratio to be increased from 4.75 to 1.0 to 5.25 to 1.0 during a quarter when an acquisition closes meeting certain thresholds and for the following two quarters after the acquisition closed. We closed an acquisition in the third quarter of 2010 that met the applicable thresholds; therefore the maximum allowed ratio of Total Debt to EBITDA is 5.25 to 1.0 for the quarters ending December 31, 2010 and March 31, 2011, reverting back to 4.75 to 1.0 for the quarter ending June 30, 2011 and subsequent quarters. As of September 30, 2010, we maintained a 5.5 to 1.0 EBITDA to Total Interest Expense ratio and a 3.7 to 1.0 Total Debt to EBITDA ratio as calculated per the 2010 Credit Agreement. If we experienced a material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacted our ability to perform our obligations under our senior secured credit facility, this could lead to a default under this facility. As of September 30, 2010, we were in compliance with all financial covenants under the 2006 Credit Agreement, and would have been in compliance with all financial covenants under the 2010 Credit Agreement had such covenants been in effect on such date.

In connection with the November 2009 Contract Operations Acquisition, we entered into the 2009 ABS Facility, a portion of which was used to fund the November 2009 Contract Operations Acquisition. The 2009 ABS Facility notes were revolving in nature and were payable in July 2013. Interest and fees payable to the noteholders accrued on these notes at a variable rate consisting of an applicable margin of 3.5% plus, at our option, either LIBOR or a base rate. The weighted average interest rate on the outstanding balance of the 2009 ABS Facility at September 30, 2010, excluding the effect of interest rate swaps, was 3.8%. Repayment of the 2009 ABS Facility notes was secured by a pledge of all of the assets of EXLP ABS 2009 LLC consisting primarily of specified compression services contracts and a fleet of natural gas compressor units. The amount outstanding at any time was limited to the lower of (i) 75% of the value of the natural gas compression equipment owned by EXLP ABS 2009 LLC (as defined in the agreement), (ii) 4.0 times free cash flow or (iii) the amount calculated under an interest coverage test. Additionally, the 2006 Credit Agreement limited the amount we could borrow under the 2009 ABS Facility to two times our EBITDA (as defined in the 2006 Credit Agreement). As of September 30, 2010, we had $30.0 million outstanding under the 2009 ABS Facility. On November 3, 2010, we used a portion of the proceeds borrowed under the 2010 Credit Facility to repay the entire amount outstanding under the 2009 ABS Facility and terminate that facility.

Distributions to Unitholders. Our partnership agreement requires us to distribute all of our “available cash” quarterly. Under the partnership agreement, available cash is defined generally to mean, for each fiscal quarter, (i) our cash on hand at the end of the quarter in excess of the amount of reserves our general partner determines is necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters, plus, (ii) if our general partner so determines, all or a portion of our cash on hand on the date of determination of available cash for the quarter.

On October 29, 2010, Exterran GP LLC’s board of directors approved a cash distribution of $0.4675 per limited partner unit, or approximately $15.7 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from July 1, 2010 through September 30, 2010. The record date for this distribution is November 9, 2010 and payment is expected to occur on November 12, 2010.

NON-GAAP FINANCIAL MEASURE

We define gross margin as total revenue less cost of sales (excluding depreciation and amortization expense). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and cost of sales (excluding depreciation and amortization expense), which are key components of our operations. We believe gross margin is important because it focuses on the current performance of our operations and excludes the impact of the prior historical

costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, the impact of our financing methods and income tax expense. Depreciation and amortization expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate gross margin in the same manner.

Gross margin has certain material limitations associated with its use as compared to net income. These limitations are primarily due to the exclusion of interest expense, depreciation and amortization expense and SG&A expense. Each of these excluded expenses is material to our consolidated results of operations. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue, and SG&A expenses are necessary costs to support our operations and required corporate activities. To compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.

The following table reconciles our net income to our gross margin (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income		$	83			$	2,008			$	164			$	11,467
Depreciation and amortization			13,697				9,042				37,338				26,054
Long-lived asset impairment			93				—				324				2,995
Selling, general and administrative			8,504				4,961				24,718				16,513
Interest expense			6,020				5,039				17,436				14,663
Other (income) expense, net			333				324				(73	)			351
Income tax expense			172				141				518				424
Gross margin		$	28,902			$	21,515			$	80,425			$	72,467