e10vq

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2008


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. 001-33666

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or Other Jurisdiction of. Incorporation or Organization)		74-3204509 (I.R.S. Employer Identification No.)

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

(281) 836-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

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

Number of shares of the Common Stock of the registrant outstanding as of October 30, 2008: 64,708,357 shares.

PART I. UNAUDITED FINANCIAL INFORMATION

Item 1. Financial Statements

EXTERRAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value and share amounts)
(unaudited)


	September 30,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	118,294		$	149,224
Restricted cash		7,633			9,133
Accounts receivable, net of allowance of $13,587 and $10,846, respectively		598,986			516,072
Inventory, net		503,459			411,436
Costs and estimated earnings in excess of billings on uncompleted contracts		207,420			203,932
Current deferred income taxes		38,443			41,648
Other current assets		154,081			145,159

Total current assets		1,628,316			1,476,604
Property, plant and equipment, net		3,690,747			3,533,505
Goodwill, net		1,514,408			1,455,881
Intangible and other assets, net		305,443			311,457
Investments in non-consolidated affiliates		102,635			86,076

Total assets	$	7,241,549		$	6,863,523

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	85		$	997
Accounts payable, trade		239,628			221,391
Accrued liabilities		291,583			326,163
Advance billings		202,092			169,830
Billings on uncompleted contracts in excess of costs and estimated earnings		157,072			87,741

Total current liabilities		890,460			806,122
Long-term debt		2,467,688			2,332,927
Other liabilities		151,724			89,012
Deferred income taxes		303,866			281,898

Total liabilities		3,813,738			3,509,959
Commitments and contingencies (Note 9)
Minority interest		188,574			191,304
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized; zero issued		—			—
Common stock, $0.01 par value; 250,000,000 shares authorized; 67,135,312 and 66,574,419 shares issued, respectively		671			666
Additional paid-in capital		3,344,687			3,317,321
Accumulated other comprehensive income		5,448			13,004
Retained earnings (accumulated deficit)		39,331			(68,733	)
Treasury stock, 2,443,817 and 1,287,237 common shares, at cost, respectively		(150,900	)		(99,998	)

Total stockholders’ equity		3,239,237			3,162,260

Total liabilities and stockholders’ equity	$	7,241,549		$	6,863,523

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

EXTERRAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues:
North America contract operations	$	197,926		$	148,986		$	591,609		$	348,184
International contract operations		135,153			88,457			380,899			225,393
Aftermarket services		98,275			75,045			280,153			172,182
Fabrication		364,608			432,114			1,095,601			941,350

		795,962			744,602			2,348,262			1,687,109


Expenses:
North America contract operations		84,440			64,581			259,031			145,939
International contract operations		53,884			35,439			141,397			86,420
Aftermarket services		78,306			58,049			221,914			131,864
Fabrication		292,978			364,749			912,005			782,155
Selling, general and administrative		94,533			71,191			279,559			175,397
Merger and integration expenses		3,728			34,008			9,710			37,397
Early extinguishment of debt		—			70,150			—			70,150
Depreciation and amortization		94,286			66,040			277,150			166,894
Fleet impairment		1,000			61,945			2,450			61,945
Interest expense		33,364			38,680			96,689			95,133
Equity in (income) loss of non-consolidated affiliates		(6,657	)		5,005			(19,712	)		(6,957	)
Other (income) expense, net		5,689			(13,578	)		(15,922	)		(29,644	)

		735,551			856,259			2,164,271			1,716,693

Income (loss) before income taxes and minority interest		60,411			(111,657	)		183,991			(29,584	)
Provision (benefit) for income taxes		20,350			(38,692	)		67,411			(8,085	)
Minority interest, net of tax		3,028			2,426			8,914			2,426

Income (loss) from continuing operations		37,033			(75,391	)		107,666			(23,925	)
Gain on sale of discontinued operation, net of tax		—			—			398			—

Net income (loss)	$	37,033		$	(75,391	)	$	108,064		$	(23,925	)


Weighted average common and equivalent shares outstanding:
Basic		64,940			48,771			65,070			38,983

Diluted		68,537			48,771			67,760			38,983


Basic earnings (loss) per share:
Income (loss) from continuing operations	$	0.57		$	(1.55	)	$	1.65		$	(0.61	)
Income from discontinued operations		—			—			0.01			—

Net income (loss)	$	0.57		$	(1.55	)	$	1.66		$	(0.61	)


Diluted earnings (loss) per share:
Income (loss) from continuing operations	$	0.56		$	(1.55	)	$	1.62		$	(0.61	)
Income from discontinued operations		—			—			0.01			—

Net income (loss)	$	0.56		$	(1.55	)	$	1.63		$	(0.61	)

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

EXTERRAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	108,064		$	(23,925	)
Adjustments:
Depreciation and amortization		277,150			166,894
Fleet impairment		2,450			61,945
Deferred financing cost amortization		2,587			16,385
Income from discontinued operations, net of tax		(398	)		—
Minority interest		8,914			2,426
Bad debt expense		2,593			1,752
Gain on sale of property, plant and equipment		(3,513	)		(8,941	)
Equity in (income) loss of non-consolidated affiliates, net of dividends received		(16,954	)		1,560
Interest rate swaps		2,572			—
Gain on remeasurement of intercompany balances		(3,423	)		(74	)
Net realized gain on trading securities		(8,236	)		(13,903	)
Stock compensation expense		12,023			21,366
Sales of trading securities		19,346			30,848
Purchases of trading securities		(11,110	)		(16,945	)
Deferred income taxes		11,296			(29,363	)
Changes in assets and liabilities, net of acquisition:
Accounts receivable and notes		(78,324	)		(23,446	)
Inventory		(88,317	)		78,935
Costs and estimated earnings versus billings on uncompleted contracts		66,232			(76,510	)
Prepaid and other current assets		(6,019	)		(10,634	)
Accounts payable and other liabilities		(24,178	)		23,864
Advance billings		78,043			(92,573	)
Other		(5,455	)		(1,820	)

Net cash provided by continuing operations		345,343			107,841
Net cash provided by discontinued operations		—			—

Net cash provided by operating activities		345,343			107,841


Cash flows from investing activities:
Capital expenditures		(376,070	)		(232,911	)
Proceeds from sale of property, plant and equipment		44,669			29,814
Cash paid for business acquisitions, net of cash acquired		(133,349	)		25,873
Cash invested in non-consolidated affiliates		—			(3,095	)
Decrease in restricted cash		1,500			—

Net cash used in continuing operations		(463,250	)		(180,319	)
Net cash provided by discontinued operations		1,815			—

Net cash used in investing activities		(461,435	)		(180,319	)


Cash flows from financing activities:
Borrowings on revolving credit facilities		738,000			721,900
Repayments on revolving credit facilities		(594,000	)		(654,900	)
Repayment of debt assumed in merger		—			(601,970	)
Repayment of 2001A equipment lease notes		—			(137,123	)
Repayment of 2001B equipment lease notes		—			(257,750	)
Proceeds from issuance of term loan		—			800,000
Proceeds from ABS credit facility		—			800,000
Proceeds from the Partnership credit facility		65,250			9,000
Borrowings on Partnership term loan facility		117,500			—
Repayment of senior notes		—			(549,915	)
Repayments of convertible senior notes due 2008		(192,000	)		—
Payments for debt issue costs		(583	)		(11,365	)


	Nine Months Ended
	September 30,
	2008			2007
Proceeds from stock options exercised		5,065			15,474
Proceeds from stock issued pursuant to our employee stock purchase plan		3,400			—
Purchase of treasury stock		(50,903	)		(49,997	)
Proceeds (repayments) of other debt, net		(901	)		(2,897	)
Stock-based compensation excess tax benefit		6,284			9,580
Distributions to non-controlling partners in Exterran Partners, L.P.		(10,632	)		—

Net cash provided by continuing operations		86,480			90,037
Net cash provided by discontinued operations		—			—

Net cash provided by financing activities		86,480			90,037

Effect of exchange rate changes on cash and equivalents		(1,318	)		4,679

Net increase (decrease) in cash and cash equivalents		(30,930	)		22,238
Cash and cash equivalents at beginning of period		149,224			73,286

Cash and cash equivalents at end of period	$	118,294		$	95,524


Supplemental disclosure of non-cash transactions:
Conversion of debt to common stock	$	—		$	84,392

Stock issued in the merger	$	—		$	2,003,524

Conversion of Universal stock options to Exterran stock options	$	—		$	67,574

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

EXTERRAN HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

We were incorporated on February 2, 2007 as Iliad Holdings, Inc., a wholly-owned subsidiary of Universal Compression Holdings, Inc. (“Universal”), and thereafter changed our name to Exterran Holdings, Inc. On August 20, 2007, in accordance with their merger agreement, Universal and Hanover Compressor Company (“Hanover”) merged into our wholly-owned subsidiaries, and we became the parent entity of Universal and Hanover. Immediately following the completion of the merger, Universal merged with and into us. Hanover was determined to be the acquirer for accounting purposes and, therefore, our financial statements reflect Hanover’s historical results for periods prior to the merger date. We have included the financial results of Universal’s operations in our consolidated financial statements beginning August 20, 2007. References to “our,” “we” and “us” refer to Hanover for periods prior to the merger date and to Exterran for periods on or after the merger date. The financial statement information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. These interim results are not necessarily indicative of results for a full year.

As a result of the merger between Hanover and Universal, each outstanding share of common stock of Universal was converted into one share of Exterran common stock and each outstanding share of Hanover common stock was converted into 0.325 shares of Exterran common stock. All share and per share amounts in these consolidated financial statements and related notes have been retroactively adjusted to reflect the conversion ratio of Hanover common stock for all periods presented.

Earnings (Loss) Per Common Share

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

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008			2007
Weighted average common shares outstanding-used in basic income (loss) per common share		64,940		48,771			65,070			38,983
Net dilutive potential common stock issuable:
On exercise of options and vesting of restricted stock and restricted stock units		458		*	*		599			*	*
On settlement of employee stock purchase plan shares		25		—			15			—
On conversion of convertible senior notes due 2008		—		*	*		*	*		*	*
On conversion of convertible junior subordinated notes due 2029		—		—			—			*	*
On conversion of convertible senior notes due 2014		3,114		*	*		2,076			*	*

Weighted average common shares and dilutive potential common shares used in diluted income (loss) per common share		68,537		48,771			67,760			38,983


**		Excluded from diluted income (loss) per common share as the effect would have been anti-dilutive.

Net income (loss) for the diluted earnings (loss) per share calculation for the three and nine months ended September 30, 2008 is adjusted to add back interest expense and amortization of financing costs totaling $1.2 million and $2.4 million, respectively, net of tax, relating to our convertible senior notes due 2014.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock and restricted stock units		—		658		—		569
On exercise of options where exercise price is greater than average market value for the period		582		32		566		17
On conversion of convertible senior notes due 2008		—		1,420		399		1,420
On conversion of junior subordinated notes due 2029		—		—		—		431
On conversion of convertible senior notes due 2014		—		3,115		1,039		3,115

Net dilutive potential common shares issuable		582		5,225		2,004		5,552

Stock Options and Stock-based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments,” using the modified prospective transition method. Under that transition method, compensation cost recognized beginning in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value, and (b) compensation cost for any share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value.

Other (income) expense, net

Other (income) expense, net is primarily comprised of gains and losses on foreign currency translation adjustments and on the sale of assets and trading securities.

Minority Interest

As of September 30, 2008, minority interest is primarily comprised of the portion of Exterran Partners, L.P.’s (together with its subsidiaries, the “Partnership”) capital and earnings that is applicable to the 43% limited partner interest in the Partnership we do not own (see further discussion of the Partnership in Note 2, below).

Reclassifications

Certain amounts in the prior periods’ financial statements have been reclassified to conform to the 2008 financial statement classification, including the reclassification of our used equipment sales to report these transactions within other income and expense, and the reclassification of installation sales from Aftermarket Services to our Fabrication segment. Additionally, we reclassified our supply chain department to include it as part of cost of sales rather than a component of selling, general and administrative expense.

Our Fabrication segment previously reported three product lines: Compressor and Accessory Fabrication, Production and Processing Fabrication — Surface Equipment and Production and Processing Fabrication — Belleli. We also renamed three of our other segments as follows: U.S. Rentals is now referred to as North America Contract Operations; International Rentals is now referred to as International Contract Operations; and Parts, Service and Used Equipment is now referred to as Aftermarket Services. North America Contract Operations includes U.S. and Canada contract operations. We have made these reclassifications to all periods presented within this Quarterly Report on Form 10-Q. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

2. BUSINESS COMBINATIONS

On August 20, 2007, pursuant to the merger agreement dated as of February 5, 2007, as amended, by and among us, Hanover, Universal, Hector Sub, Inc., a Delaware corporation and our wholly-owned subsidiary, and Ulysses Sub, Inc., a Delaware corporation and our wholly-owned subsidiary, Ulysses Sub, Inc. merged with and into Universal and Hector Sub, Inc. merged with and into Hanover. As a result of the merger, each of Universal and Hanover became our wholly-owned subsidiary. Immediately following the completion of the merger, Universal merged with and into us.

As a result of the merger, each outstanding share of common stock of Universal was converted into one share of Exterran common stock, which resulted in the issuance of approximately 30.3 million shares of Exterran common stock. Additionally, each outstanding share of Hanover common stock was converted into 0.325 shares of common stock of Exterran, which resulted in the issuance of approximately 35.6 million shares of Exterran common stock. Exterran’s common stock, listed on the New York Stock Exchange under the symbol “EXH,” began trading on August 21, 2007, concurrent with the cessation of the trading of Hanover and Universal common stock. The merger has been accounted for as a purchase business combination. We determined that Hanover was the acquirer for accounting purposes and therefore our financial statements reflect Hanover’s historical results for periods prior to the merger date. We have included the financial results of Universal in our consolidated financial statements beginning August 20, 2007.

The total purchase price of Universal was $2.1 billion, including the fair value of Universal stock options assumed and acquisition related transaction costs. Assets acquired and liabilities assumed were recorded at their fair values as of August 20, 2007. The purchase price has been calculated as follows:


Number of shares of Universal common stock outstanding at August 20, 2007		30,273,866
Conversion ratio		1.0
Number of shares of Exterran that were issued		30,273,866
Assumed market price of an Exterran share that was issued(1)	$	66.18

Aggregate value of the Exterran shares that were issued	$	2,003,524,000
Fair value of vested and unvested Universal stock options outstanding as of August 20, 2007, which were converted into options to purchase Exterran common stock(2)		67,574,000
Capitalizable transaction costs		11,469,000

Purchase price	$	2,082,567,000


(1)		The stock price is based on the average close price of Hanover’s stock for the two days before and through the two days after the announcement of the merger on February 5, 2007, divided by the exchange ratio.

(2)		The majority of Universal’s stock options and stock-based compensation vested upon consummation of the merger.

Under the purchase method of accounting, the total purchase price was allocated to Universal’s net tangible and identifiable intangible assets based on their estimated fair values as of August 20, 2007, as set forth below. The excess of the purchase price over net tangible and identifiable intangible assets was recorded as goodwill. The goodwill resulting from the allocation of the purchase price was primarily associated with Universal’s market presence in certain geographic locations where Hanover did not have a presence, the advantage of a lower cost of capital over time that we believe results from the Partnership’s structure, growth opportunities in the markets that the combined companies serve, the expected cost saving synergies from the merger, the expertise of Universal’s experienced workforce and its established operating infrastructure.

The table below indicates the purchase price allocation to Universal’s net tangible and identifiable intangible assets based on their estimated fair values as of August 20, 2007 (in thousands):


	Fair Value
Current assets	$	485,610
Property, plant and equipment		1,671,726
Goodwill		1,279,179
Intangible and other assets		233,818
Current liabilities		(322,765	)
Long-term debt		(812,969	)
Deferred income taxes		(238,347	)
Other long-term liabilities		(21,225	)
Minority interest		(192,460	)

Purchase price	$	2,082,567

Goodwill and Intangible Assets Acquired

The amount of goodwill of $1,279.2 million resulting from the merger is considered to have an indefinite life and will not be amortized. Instead, goodwill will be reviewed for impairment annually or more frequently if indicators of impairment exist. Approximately $91.5 million of the goodwill is deductible for U.S. federal income tax purposes.

The amount of finite life intangible assets includes $159.6 million and $42.0 million associated with customer relationships and contracts, respectively. The intangible assets for customer relationships and contracts are being amortized through 2024 and 2015, respectively, based on the present value of expected income to be realized from these assets. Finite life intangible assets also include $12.0 million for the Universal backlog that existed on the date of the merger and is being amortized over 15 months.

Exterran Partners, L.P.

As a result of the merger, we became the indirect majority owner of the Partnership. The Partnership is a master limited partnership that was formed to provide natural gas contract operations services to customers throughout the U.S. In October 2006, the Partnership completed its initial public offering, as a result of which the common units owned by the public represented a 49% limited partner ownership interest, at that time, in the Partnership and Universal owned the remaining equity interest in the Partnership. The general partner of the Partnership is our subsidiary and we consolidate the financial position and results of operations of the Partnership. It is our intention for the Partnership to be our primary growth vehicle for the U.S. contract operations business and for us to continue to contribute U.S. contract operations customer contracts and equipment to the Partnership over time in exchange for cash and/or additional interests in the Partnership. As of September 30, 2008, the Partnership had a fleet of approximately 2,450 compressor units

comprising approximately 1,017,000 horsepower, or 23% (by available horsepower) of our and the Partnership’s combined total U.S. horsepower.

We are party to an omnibus agreement with the Partnership and others (as amended and restated, the “Omnibus Agreement”), the terms of which include, among other things, our agreement to provide to the Partnership operational staff, corporate staff and support services; the terms governing our sales to the Partnership of newly fabricated equipment; the terms governing our transfers between the Partnership and us of compression equipment and an agreement by us to provide caps on the amount of cost of sales and selling, general and administrative costs that the Partnership must pay.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Hanover and Universal, on a pro forma basis, as though the companies had been combined as of the beginning of the period presented. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have occurred had the transaction been consummated at the beginning of each period presented, nor is it necessarily indicative of future results. The pro forma amounts represent the historical operating results of Hanover and Universal with adjustments for purchase accounting expenses and to conform accounting policies that affect revenues, cost of sales, selling, general and administrative expenses, depreciation and amortization, interest expense, other income (expense) and income taxes (in thousands, except per share amounts).


	Three months			Nine months
	ended			ended
	September 30, 2007
Total revenues	$	923,066		$	2,436,897

Net income (loss)	$	(37,100	)	$	53,103

Basic income (loss) per common share	$	(0.57	)	$	0.83

Diluted income (loss) per common share	$	(0.57	)	$	0.80

In January 2008, we acquired GLR Solutions LTD. (“GLR”), a Canadian provider of water treatment products for the upstream petroleum and other industries, for approximately $25 million plus certain working capital adjustments and contingent payments of up to $22 million (Canadian) based on the performance of GLR over each of the three years ending December 31, 2010. Under the purchase method of accounting, the total preliminary purchase price was allocated to GLR’s net tangible and intangible assets based on their estimated fair value at the purchase date. This allocation resulted in preliminary amounts of goodwill and intangible assets of $12.5 million and $15.3 million, respectively. The intangible assets for customer relationships and patents are being amortized through 2027 based on the present value of expected income to be realized from these assets. The intangible assets for non-compete agreements and backlog will be amortized over five years and one year, respectively. The final valuation of net assets is expected to be completed as soon as possible, but no later than one year from the acquisition date, in accordance with GAAP.

In July 2008, we acquired for approximately $108 million EMIT Water Discharge Technology, LLC (“EMIT”), a leading provider of contract water management and processing services to the coalbed methane industry. Under the purchase method of accounting, the total preliminary purchase price was allocated to EMIT’s net tangible and intangible assets based on their estimated fair value at the purchase date. This allocation resulted in preliminary amounts of goodwill and intangible assets of $43.3 million and $44.2 million, respectively. The intangible assets for contracts and customer relationships are being amortized through 2017 and 2019, respectively, based on the present value of expected income to be realized from these assets. The intangible assets for non-compete agreements and technology will be amortized through 2013 and 2027, respectively. The final valuation of net assets is expected to be completed as soon as possible, but no later than one year from the acquisition date, in accordance with GAAP.

3. INVENTORY

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


	September 30,		December 31,
	2008		2007
Parts and supplies	$	288,358	$	246,540
Work in progress		192,604		139,956
Finished goods		22,497		24,940

Inventory, net of reserves	$	503,459	$	411,436

As of September 30, 2008 and December 31, 2007, we had inventory reserves of approximately $17.9 million and $21.5 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

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


	September 30,			December 31,
	2008			2007
Compression equipment, facilities and other fleet assets	$	4,634,968		$	4,359,936
Land and buildings		180,480			175,925
Transportation and shop equipment		186,265			147,797
Other		108,259			72,395

		5,109,972			4,756,053
Accumulated depreciation		(1,419,225	)		(1,222,548	)

Property, plant and equipment, net	$	3,690,747		$	3,533,505

During the first quarter of 2008, management identified certain fleet units that will not be used in our contract operations business in the future. We compared the expected proceeds from the disposition to determine the fair value for the fleet assets we will no longer utilize in our operations. The net book value of these assets exceeded the fair value by $1.5 million, and this difference was recorded as a long-lived asset impairment in the first quarter of 2008. The impairment is recorded in fleet impairment expense in the condensed consolidated statements of operations. During the three months ended September 30, 2008, we recorded a $1.0 million impairment related to the loss sustained on offshore units that were on platforms that capsized during Hurricane Ike. The impairment is recorded in fleet impairment expense in the condensed consolidated statements of operations.

5. DEBT

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


	September 30,			December 31,
	2008			2007
Revolving credit facility due August 2012	$	324,000		$	180,000
Term loan		800,000			800,000
2007 ABS Facility notes due 2012		800,000			800,000
Partnership’s revolving credit facility due 2011		282,250			217,000
Partnership’s term loan facility due 2011		117,500			—
4.75% convertible senior notes due 2008		—			192,000
4.75% convertible senior notes due 2014		143,750			143,750
Other, interest at various rates, collateralized by equipment and other assets		273			1,174

		2,467,773			2,333,924
Less current maturities		(85	)		(997	)

Long-term debt	$	2,467,688		$	2,332,927

On August 20, 2007, we entered into a credit agreement (the “Credit Agreement”) with various financial institutions. The Credit Agreement consists of (a) a five-year revolving credit facility in the aggregate amount of $850 million, which includes a variable allocation for a Canadian tranche and (b) a six-year term loan credit facility, in the aggregate amount of $800 million (collectively, the “Credit Facility”). Subject to certain conditions, at our request and with the approval of the lenders, the aggregate commitments under the Credit Facility may be increased by an additional $400 million less certain adjustments.

As of September 30, 2008, we had $324.0 million in outstanding borrowings and $337.9 million in letters of credit outstanding under our revolving credit facility. Additional borrowings of up to approximately $188.1 million were available under that facility as of September 30, 2008.

Borrowings under the Credit Agreement bear interest, if they are in U.S. dollars, at our option, a base rate or LIBOR, plus an applicable margin, as defined in the agreement. At September 30, 2008, all amounts outstanding were LIBOR loans. The applicable margin at September 30, 2008 was 0.825%. The weighted average interest rate at September 30, 2008 on the outstanding balance, excluding the effect of related cash flow hedges, was 4.1%.

On August 20, 2007, our wholly-owned subsidiary Exterran ABS 2007 LLC entered into a $1.0 billion asset-backed securitization facility (the “2007 ABS Facility”) and issued $400 million in notes under this facility. On September 18, 2007, Exterran ABS 2007 LLC issued an additional $400 million in notes under this facility. Interest will accrue on these notes at a variable rate consisting of LIBOR plus an applicable margin. For outstanding amounts up to $800 million, the applicable margin is 0.825%. For amounts outstanding over $800 million, the

applicable margin is 1.35%. The weighted average interest rate at September 30, 2008 on these notes, excluding the effect of related cash flow hedges, was 4.0%.

Our 4.75% Convertible Senior Notes due 2008 were repaid using funds from our revolving credit facility in March 2008.

The Partnership, as guarantor, and EXLP Operating LLC, a wholly-owned subsidiary of the Partnership, entered into a senior secured credit agreement in 2006. The five year revolving credit facility under the credit agreement was expanded in 2007 from $225 million to $315 million and matures in October 2011. As of September 30, 2008, there were $282.3 million in outstanding borrowings under the Partnership’s revolving credit facility and $32.7 million was available for additional borrowings.

The Partnership’s revolving credit facility bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin, as defined in the agreement. At September 30, 2008 all amounts outstanding were LIBOR loans and the applicable margin was 1.0%. The weighted average interest rate on the outstanding balance of the Partnership’s revolving credit facility, at September 30, 2008, excluding the effect of related cash flow hedges, was 4.1%.

In May 2008, the Partnership entered into an amendment to its senior secured credit agreement that increased the aggregate commitments under that facility to provide for a $117.5 million term loan facility. The $117.5 million term loan was funded during July 2008 and $58.3 million was drawn on the Partnership’s revolving credit facility, which together were used to repay debt assumed by the Partnership concurrent with the acquisition by the Partnership from us of certain contract operations customer service agreements and a fleet of compressor units used to provide compression services under those agreements and to pay other costs incurred associated with this transaction. The $117.5 million term loan is non-amortizing but must be repaid with the net proceeds from any equity offerings of the Partnership until paid in full. All amounts outstanding under the senior secured credit facility mature in October 2011.

The term loan bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. The applicable margin, depending on its leverage ratio, varies (i) in the case of LIBOR loans, from 1.5% to 2.5% or (ii) in the case of base rate loans, from 0.5% to 1.5%. Borrowings under the term loan will be subject to the same credit agreement and covenants as the Partnership’s revolving credit facility, except for an additional covenant requiring mandatory prepayment of the term loan from net cash proceeds of any future equity offerings of the Partnership, on a dollar-for-dollar basis. The weighted average interest rate on the outstanding balance of the Partnership’s term loan at September 30, 2008, excluding the effect of related cash flow hedges, was 5.8%.

Subject to certain conditions, at the Partnership’s request and with the approval of the lenders, the aggregate commitments under the senior secured credit facility may be increased by an additional $17.5 million. This amount will be increased on a dollar-for-dollar basis with each repayment under the term loan facility.

We were in compliance with our debt covenants as of September 30, 2008.

6. ACCOUNTING FOR DERIVATIVES

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

As a result of the merger, we assumed ten interest rate swaps with a total notional amount of $500.1 million as of September 30, 2008, that we designated as cash flow hedges to hedge the risk of variability of LIBOR based interest rate payments related to variable rate debt.

In September 2007, we entered into three interest rate swaps that we designated as cash flow hedges to hedge the risk of variability of LIBOR interest rate payments related to variable rate debt. The three swap agreements have notional amounts as of September 30, 2008 of $153.8 million, $231.1 million and $150.0 million, respectively.

In January 2008, we entered into six interest rate swaps that we designated as cash flow hedges to hedge the risk of variability of LIBOR interest rate payments related to variable rate debt. The six swap agreements each have notional amounts as of September 30, 2008 of $50.0 million.

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


						Fair Value of
		Floating Rate to be	Notional			Swap at
Fixed Rate to be Paid	Maturity Date	Received	Amount			September 30, 2008
4.035%	March 31, 2010	Three Month LIBOR	$	37,500	(1)	$	(111	)
4.007%	March 31, 2010	Three Month LIBOR		37,500	(1)		(102	)
3.990%	March 31, 2010	Three Month LIBOR		37,500	(1)		(97	)
4.057%	March 31, 2010	Three Month LIBOR		37,500	(1)		(112	)
4.675%	August 20, 2012	One Month LIBOR		153,763	(2)		(4,837	)
4.744%	July 20, 2012	One Month LIBOR		231,147	(2)		(7,963	)
4.668%	July 20, 2012	One Month LIBOR		150,000	(2)		(4,498	)
5.210%	January 20, 2013	One Month LIBOR		54,500	(2)		(2,040	)
4.450%	September 20, 2019	One Month LIBOR		40,000	(2)		(631	)
5.020%	October 20, 2019	One Month LIBOR		50,590	(2)		(2,409	)
5.275%	December 1, 2011	Three Month LIBOR		125,000	(3)		(5,519	)
5.343%	October 20, 2011	Three Month LIBOR		40,000	(3)		(1,883	)
5.315%	October 20, 2011	Three Month LIBOR		40,000	(3)		(1,853	)
3.080%	January 28, 2011	Three Month LIBOR		50,000			391
3.075%	January 28, 2011	Three Month LIBOR		50,000			383
3.062%	January 28, 2011	Three Month LIBOR		50,000			401
3.100%	January 28, 2011	Three Month LIBOR		50,000			365
3.065%	January 28, 2011	Three Month LIBOR		50,000			398
3.072%	January 28, 2011	Three Month LIBOR		50,000			400

			$	1,335,000		$	(29,717	)


(1)		These swaps amortize ratably over the life of the swap.

(2)		Certain of these swaps amortize while the notional amounts of others increase in corresponding amounts to maintain a consistent outstanding notional amount of $680 million.

(3)		These swaps are expected to offset changes in expected cash flows due to fluctuations in the variable rate of the Partnership’s debt.

Interest rate swap balances as of September 30, 2008 are presented in the accompanying condensed consolidated balance sheet as follows (in thousands):


	September 30,
	2008
Other current assets	$	1,698
Intangibles and other assets, net		640
Accrued liabilities		(8,172	)
Other liabilities		(23,883	)

Net interest rate swap balance	$	(29,717	)

We have designated these interest rate swaps as cash flow hedging instruments pursuant to the criteria of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), so that any change in their fair values is recognized as a component of comprehensive income or loss and is included in accumulated other comprehensive income or loss to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine if the swap agreements are still effective and to calculate any ineffectiveness. For the three and nine months ended September 30, 2008, we recorded approximately $0.8 million and $1.6 million, respectively, of interest expense due to the ineffectiveness related to these swaps.

In April 2008, we entered into a foreign currency economic hedge to reduce our foreign exchange risk associated with cash flows we will receive under a contract in Kuwaiti Dinars. This economic hedge did not qualify for hedge accounting treatment. At September 30, 2008, the remaining notional amount of the derivative was approximately 17.8 million Kuwaiti Dinars. Gains and losses on this foreign currency hedge are included in other (income) expense, net in our condensed consolidated statements of operations. The fair value of this derivative at September 30, 2008 was a liability of $3.5 million.

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.

7. FAIR VALUE OF DERIVATIVES

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

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

•

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 derivatives under SFAS No. 157 pricing levels as of September 30, 2008 (in thousands):


	As of September 30, 2008
				Quoted
				market
				prices in		Significant			Significant
				active		other			unobservable
				markets		observable			inputs
	Total			(Level 1)		inputs (Level 2)			(Level 3)
Interest rate swaps asset (liability)	$	(29,717	)	$	—	$	(29,717	)	$	—
Foreign currency derivative asset (liability)		(3,549	)		—		(3,549	)		—

Our interest rate swaps and our foreign currency derivative are recorded at fair value utilizing a combination of the market and income approach to fair value. We used discounted cash flows and market based methods to compare similar derivative instruments.

8. STOCK-BASED COMPENSATION

At the time of the merger, each outstanding share of restricted stock and each stock option granted prior to the date of the merger agreement under the Hanover equity incentive plans, whether vested or unvested, was fully vested. Stock options granted under the Hanover equity incentive plans outstanding on the merger date were converted into options to acquire a number of shares of Exterran common stock equal to the number of shares of Hanover common stock subject to that stock option immediately before the merger multiplied by 0.325, and at a price per share of Exterran common stock equal to the price per share under the Hanover option divided by 0.325. Similarly, each outstanding stock option granted prior to the date of the merger agreement under the Universal equity incentive plans (other than options to purchase Universal common stock under the Universal employee stock purchase plan), whether vested or unvested, was fully vested. Stock options granted under the Universal equity incentive plans outstanding on the merger date were converted into options to acquire the same number of shares of Exterran common stock at the same price per share.

Stock Incentive Plan

On August 20, 2007, we adopted the Exterran Holdings, Inc. 2007 Stock Incentive Plan (the “2007 Plan”), which was previously approved by the stockholders of each of Hanover and Universal. The 2007 Plan provides for the granting of stock-based awards in the form of options, restricted stock, restricted stock units, stock appreciation rights and performance awards to our employees and directors. Under the 2007 Plan, the aggregate number of shares of common stock that may be issued shall not exceed 4,750,000. Grants of options and stock appreciation rights count as one share against the aggregate share limit, and grants of restricted stock and restricted stock units count as two shares against the aggregate share limit. Awards granted under the 2007 Plan that are subsequently cancelled, terminated or forfeited remain available for future grant. Option grants under the 2007 Plan expire no later than seven years from the date of grant.

Stock Options

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

The weighted average fair value at date of grant for options granted during the nine months ended September 30, 2008 was $18.84, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:


	Nine Months
	Ended
	September 30,
	2008
Expected life in years		4.5
Risk-free interest rate		2.38	%
Volatility		28.66	%
Dividend yield		0.00	%

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

The following table presents stock option activity for the nine months ended September 30, 2008 (in thousands, except per share data and remaining life in years). The number of stock options and related exercise prices have been adjusted to reflect the exchange ratio in the merger.


						Weighted
				Weighted		Average		Aggregate
	Stock			Average		Remaining		Intrinsic
	Options			Exercise Price		Life		Value
Options outstanding, December 31, 2007		1,798		$	36.37
Granted		424			67.08
Exercised		(173	)		30.83
Cancelled		(55	)		65.23

Options outstanding, September 30, 2008		1,994		$	42.59		5.3	$	5,362

Options exercisable, September 30, 2008		1,508		$	34.04		4.8	$	5,362

Intrinsic value is the difference between the market value of our stock and exercise price of each option multiplied by the number of options outstanding for those options where the market value exceeds their exercise price. The total intrinsic value of stock options exercised during the nine months ended September 30, 2008 and 2007 was $6.6 million and $19.7 million, respectively. As of September 30, 2008, $8.2 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over the weighted-average period of 2.3 years.

Restricted Stock

For grants of restricted stock and stock-settled restricted stock units, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the date of grant. Common stock subject to restricted stock grants generally vests 33 1/3% on each of the first three anniversaries of the grant date.

The following table presents restricted stock activity for the nine months ended September 30, 2008 (shares in thousands).


				Weighted
				Average
				Grant-Date
				Fair Value
	Shares			Per Share
Non-vested restricted stock, December 31, 2007		299		$	71.52
Granted		389			67.13
Vested		(96	)		71.72
Cancelled		(59	)		68.78

Non-vested restricted stock, September 30, 2008		533		$	68.64

As of September 30, 2008, $26.5 million of unrecognized compensation cost related to non-vested restricted stock is expected to be recognized over the weighted-average period of 2.2 years.

Unit Appreciation Rights

As a result of the merger, we assumed approximately 0.3 million outstanding unit appreciation rights (“UARs”). These UARs entitle the holder to receive a payment from us in cash equal to the excess of the fair market value of a common unit of the Partnership on the date of exercise over the exercise price. These UARs vest on January 1, 2009 and expire on December 31, 2009.

Because the holders of the UARs will receive a cash payment from us, these awards have been recorded as a liability, and we are required to remeasure the fair value of these awards at each reporting date under the guidance of SFAS No. 123(R). The re-measurement of fair value of the UARs reduced SG&A expense by $1.1 million and $0.1 million for the nine months ended September 30, 2008 and 2007, respectively.

Partnership Unit Options

As of September 30, 2008, the Partnership had 591,429 outstanding unit options. During the nine months ended September 30, 2008 and 2007, no unit options were granted or exercised. During the nine months ended September 30, 2008, 2,143 unit options were cancelled.

In October 2008, the Partnership’s Long-Term Incentive Plan was amended to allow us the option to settle any exercised unit options in a cash payment equal to the fair market value of the number of common units that we would otherwise issue upon exercise of such unit option less the exercise price and any amounts required to meet withholding requirements.

Partnership Phantom Units

The Partnership has granted phantom units to directors of the general partner of the Partnership’s general partner and to our employees. The Partnership expects to settle the phantom units granted to our employees in cash instead of common units of the Partnership and therefore we are required to re-measure the fair value of these phantom units each period and record a cumulative adjustment of the expense previously recognized. The cumulative expense related to grants to our employees is recorded as a liability.

As of September 30, 2008, the Partnership had 48,152 outstanding phantom units. During the nine months ended September 30, 2008, 44,310 phantom units were granted with a weighted average grant-date fair value of $32.22 per phantom unit. During the nine months ended September 30, 2008, 5,590 phantom units were forfeited with a weighted average grant-date fair value of $32.22 per phantom unit. The phantom units outstanding at September 30, 2008 vest and settle on various dates ranging from January 2009 to March 2011 and have various contractual lives. As of September 30, 2008, no phantom units had vested. As of September 30, 2008, $1.0 million of unrecognized compensation cost related to non-vested phantom units is expected to be recognized over the weighted-average period of 2.1 years.

9. COMMITMENTS AND CONTINGENCIES

We have issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):


			Maximum Potential
			Undiscounted
			Payments as of
	Term		September 30, 2008
Indebtedness of non-consolidated affiliates:
El Furrial (1)		2013	$	22,119
Other:
Performance guarantees through letters of credit (2)		2008-2012		321,770
Standby letters of credit		2008-2012		27,057
Commercial letters of credit		2008-2009		10,818
Bid bonds and performance bonds (2)		2008-2014		131,222

Maximum potential undiscounted payments			$	512,986


(1)		We have guaranteed the amounts included above, which is a percentage of the total debt of this non-consolidated affiliate equal to our ownership percentage in such affiliate.

(2)		We have issued guarantees to third parties to ensure performance of our obligations, some of which may be fulfilled by third parties.

As part of our acquisition of Production Operators Corporation in 2001, we may be required to make contingent payments of up to $46 million to Schlumberger based on our realization of certain U.S. federal income tax benefits through the year 2016. To date, we have not realized any such benefits that would require a payment to Schlumberger and do not anticipate realizing any such benefits that would require a payment before the year 2013.

In January 2007, Universal acquired B.T.I. Holdings Pte Ltd (“B.T.I.”) and its wholly-owned subsidiary B.T. Engineering Pte Ltd, a Singapore based fabricator of oil and natural gas, petrochemical, marine and offshore equipment, including pressure vessels, floating, production, storage and offloading process modules, terminal buoys, turrets, natural gas compression units and related equipment. We may be required to pay up to $20 million in the future based on the earnings of B.T.I. over each of the two years ending March 31, 2009.

See Note 2 for a discussion of the contingent purchase price related to our acquisition of GLR.

The natural gas service operations business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in the natural gas service operations industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

Additionally, we are substantially self-insured for worker’s compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

We are involved in a project in the Cawthorne Channel in Nigeria (the “Cawthorne Channel Project”), in which Global Gas and Refining Ltd., a Nigerian entity (“Global”), has contracted with an affiliate of Royal Dutch Shell plc (“Shell”) to process natural gas from some of Shell’s Nigerian oil and natural gas fields. Pursuant to a contract between us and Global, we provide natural gas compression and natural gas processing services from a barge-mounted facility we own that is stationed in a Nigerian coastal waterway. We completed the building of the required barge-mounted facility and our portion of the project was declared commercial by Global in November 2005. The contract runs for a ten-year period which commenced when the project was declared commercial, subject to a purchase option by Global, which is exercisable for the remainder of the term of the contract. Under the terms of a series of contracts between us, Global, Shell and several other counterparties, Global is primarily responsible for the overall project.

The area in Nigeria where the Cawthorne Channel Project is located has experienced civil unrest and violence, and natural gas delivery from Shell to the Cawthorne Channel Project was stopped from June 2006 to June 2007. As a result, the Cawthorne Channel Project did not operate from early June 2006 to June 2007. From July 2007 through March 31, 2008, we received and processed some

natural gas from Shell. In early April 2008, shipments of natural gas from Shell to us were halted and we did not receive gas for the majority of the second quarter of 2008. We began receiving some natural gas again from Shell in July 2008. However, in late July 2008, the vessel, which we do not own, that provides storage and splitting services for the liquids processed by our facility was the target of a local incident. As a result, we ceased processing operations on the Cawthorne Channel Project until an assessment can be made to improve security.

During the three and nine months ended September 30, 2008, we received approximately $1.8 million and $8.3 million, respectively, in payments related to the Cawthorne Channel Project, which we applied against outstanding receivables. Although we believe we are entitled to payments from Global and have accordingly invoiced Global for such, collectibility is not reasonably assured due to uncertainty regarding when the Cawthorne Channel Project will receive natural gas from Shell and due to Global’s dependence on natural gas production by the Cawthorne Channel Project to pay us. Therefore, we billed but did not recognize revenue of approximately $4.2 million and $12.6 million, respectively, related to the Cawthorne Channel Project during the three and nine months ended September 30, 2008. Based on our analysis of estimated future cash flows, we believe we will recover all of our receivables and our full investment in the Cawthorne Channel Project over the remaining term of the contract.

However, if Shell does not provide natural gas to the project or if Shell (or any other party involved in the project) were to terminate its contract with Global for any reason or if we were to terminate our involvement in the Cawthorne Channel Project, we could be required to find an alternative use for the barge facility, which would result in an impairment and write-down of our investment and receivables related to this project and could have a material impact on our consolidated financial position or results of operations. Additionally, due to the environment in Nigeria and Global’s capitalization level, inexperience with projects of a similar nature, ability to manage their obligations and lack of a successful track record with respect to this project, as well as other factors, there is no assurance that Global can satisfy its obligations under its various contracts, including its contract with us.

This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may ultimately realize from our investments in Nigeria. At September 30, 2008, we had net assets of approximately $71 million related to our operations in Nigeria, which primarily related to our capital investment and advances/accounts receivable for the Cawthorne Channel Project.

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

10. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, which provides a single definition of fair value, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value to measure assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, however, in February 2008, the FASB issued a FASB Staff Position that defers the effective date to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements at fair value on at least an annual basis. We adopted the required undeferred provisions of SFAS No. 157 on January 1, 2008, and the adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements. We do not expect the adoption of the deferred provisions of SFAS No. 157 will have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”). SFAS No. 159 provided entities the one-time election to measure financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under a fair value option. SFAS No. 159 is effective for financial statements as of the beginning of the first fiscal year that begins after November 15, 2007. Its provisions may be applied to an earlier period only if the following conditions are met: (1) the decision to adopt is made after the issuance of SFAS No. 159 but within 120 days after the first day of the fiscal year of adoption, and no financial statements, including footnotes, for any interim period of the adoption year have yet been issued and (2) the requirements of SFAS No. 157 are adopted concurrently with or prior to the adoption of SFAS No. 159.

We adopted SFAS No. 159 on January 1, 2008, and the adoption of SFAS No. 159 did not impact our consolidated financial statements.

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

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

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

In May 2008, the FASB issued Financial Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”). APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), unless the embedded conversion option is required to be separately accounted for as a derivative, be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008; however, early adoption is not permitted. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. We are currently evaluating the impact that the adoption of APB 14-1 will have on our consolidated financial statements.

11. REPORTABLE SEGMENTS

We manage our business segments primarily based upon the type of product or service provided. We have four principal industry segments: North America Contract Operations, International Contract Operations, Aftermarket Services and Fabrication. The North America and International Contract Operations segments primarily provide natural gas compression services, production and processing operations and maintenance services to meet specific customer requirements utilizing Exterran-owned assets. The Aftermarket Services segment provides a full range of services to support the surface production, compression and processing needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. The Fabrication segment involves (i) design, engineering, installation, fabrication and sale of natural gas compression units, accessories and equipment and equipment used in the production, treating and processing of crude oil and natural gas and (ii) engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the construction of tank farms and the construction of evaporators and brine heaters for desalination plants.

We evaluate the performance of our segments based on segment gross margin. Revenues include only sales to external customers. We do not include intersegment sales when we evaluate the performance of our segments. Our chief executive officer does not review asset information by segment.

The following tables present sales and other financial information by industry segment for the three and nine months ended September 30, 2008 and 2007 (in thousands).


	North
	America		International						Reportable
	Contract		Contract		Aftermarket				Segments
Three Months Ended	Operations		Operations		Services		Fabrication		Total
September 30, 2008:
Revenue from external customers	$	197,926	$	135,153	$	98,275	$	364,608	$	795,962
Gross margin(1)		113,486		81,269		19,969		71,630		286,354
September 30, 2007:
Revenue from external customers	$	148,986	$	88,457	$	75,045	$	432,114	$	744,602
Gross margin(1)		84,405		53,018		16,996		67,365		221,784


(1)		Gross margin, a non-GAAP financial measure, is reconciled to net income below.


	North
	America		International						Reportable
	Contract		Contract		Aftermarket				Segments
Nine Months Ended	Operations		Operations		Services		Fabrication		Total
September 30, 2008:
Revenue from external customers	$	591,609	$	380,899	$	280,153	$	1,095,601	$	2,348,262
Gross margin(1)		332,578		239,502		58,239		183,596		813,915
September 30, 2007:
Revenue from external customers	$	348,184	$	225,393	$	172,182	$	941,350	$	1,687,109
Gross margin(1)		202,245		138,973		40,318		159,195		540,731


(1)		Gross margin, a non-GAAP financial measure, is reconciled to net income below.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net income (loss)	$	37,033		$	(75,391	)	$	108,064		$	(23,925	)
Selling, general and administrative		94,533			71,191			279,559			175,397
Merger and integration expenses		3,728			34,008			9,710			37,397
Early extinguishment of debt		—			70,150			—			70,150
Depreciation and amortization		94,286			66,040			277,150			166,894
Fleet impairment		1,000			61,945			2,450			61,945
Interest expense		33,364			38,680			96,689			95,133
Equity in (income) loss of non-consolidated affiliates		(6,657	)		5,005			(19,712	)		(6,957	)
Other (income) expense, net		5,689			(13,578	)		(15,922	)		(29,644	)
Provision (benefit) for income taxes		20,350			(38,692	)		67,411			(8,085	)
Minority interest, net of tax		3,028			2,426			8,914			2,426
Gain on sale of discontinued operation, net of tax		—			—			(398	)		—

Gross margin	$	286,354		$	221,784		$	813,915		$	540,731

12. INCOME TAXES

The provision for income taxes for the three months ended September 30, 2008 included a charge of $2.7 million for the tax effect of recently enacted state tax law changes. Tax benefits were also recorded for the reversal of $5.1 million of valuation allowances against certain foreign tax loss carryforwards and a $3.3 million reduction in our provision for uncertain tax positions, including penalties and interest, due to a favorable foreign court decision.

The provision for income taxes for the nine months ended September 30, 2008 included a charge of $2.7 million for the tax effect of recently enacted state tax law changes. A tax benefit was also recorded for the reversal of $2.9 million of valuation allowances against certain foreign tax loss carryforwards.

13. STOCKHOLDERS’ EQUITY

On August 20, 2007, our board of directors authorized the repurchase of up to $200 million of our common stock through August 19, 2009. Under the stock repurchase program, we may repurchase shares in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations. We may also implement all or part of the repurchases under a Rule 10b5-1 trading plan, so as to provide the flexibility to extend our share repurchases beyond the quarterly purchasing window. The timing and extent to which we repurchase our shares will depend upon market conditions and other corporate considerations, and will be at management’s discretion. Repurchases under the program may commence or be suspended at any time without prior notice. The stock repurchase program may be funded through cash provided by operating activities or borrowings. During the nine months ended September 30, 2008, we repurchased 1,087,038 shares of our common stock at an aggregate cost of $49.9 million. See Part II, Item 2 (“Unregistered Sales of Equity Securities and Use of Proceeds”) for information regarding these repurchases. Since the program was initiated, we have repurchased 2,345,438 shares of our common stock at an aggregate cost of $149.9 million. At September 30, 2008, we were authorized to purchase up to an additional $50.1 million worth of our common stock under the stock repurchase program.

The 2007 Plan allows participants to sell shares to us upon vesting of restricted stock at the current market price to cover the minimum level of taxes required to be withheld on the vesting date. We purchased approximately $1 million of our shares from participants during the nine months ended September 30, 2008. The 2007 Plan is administered by the Compensation Committee.

14. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

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

We own 35.5% of the SIMCO and Harwat Consortium (the “Consortium”), which owns, operates and services water injection plants in Venezuela. Due to unresolved disputes with the customer of the Consortium, management of the Consortium has informed us that they currently intend to send a notice to the customer which states that the Consortium may not be able to continue to fund its operations if some of its outstanding disputes are not paid in the near future. We have evaluated our investment in this joint venture and do not believe our investment is impaired at September 30, 2008; however, we cannot provide assurances that we will not have an impairment of this investment in the future. At September 30, 2008, our investment in the Consortium was $6.1 million.

15. SUBSEQUENT EVENTS

In October 2008, we borrowed an additional $100 million on our 2007 ABS Facility and used it to pay off approximately $60 million on our revolving credit facility. In October 2008, we also entered into two new interest rate swaps with an aggregate notional amount of $85 million to hedge the risk of variability of LIBOR interest rate payments related to variable rate debt.

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. 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, including, without limitation, statements regarding future financial position, business strategy, proposed acquisitions, budgets, litigation, projected costs and plans and objectives of management for future operations, and are intended to come within the safe harbor protection provided by that section. 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 fund continuing operations;

•		the expected amount of our capital expenditures;

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

•		the future value of our equipment; and

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

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, 2007, as amended by Amendment No. 1 thereto, 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 and oil and natural gas production and processing equipment and services;

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

•		the success of our subsidiaries, including Exterran Partners, L.P. (along with its subsidiaries, the “Partnership”);

•		our inability to realize the anticipated benefits from the merger of Hanover Compressor Company (“Hanover”) and Universal Compression Holdings, Inc. (“Universal”);

•		changes in economic or political conditions in the countries in which we do business, including civil uprisings, riots, terrorism, kidnappings, the taking of property without fair compensation and legislative changes;

•		changes in currency exchange rates;

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

•		the risk that counterparties will not perform their obligations under our financial instruments;

•		the creditworthiness of our customers;

•		our ability to timely and cost-effectively obtain components necessary to conduct our business;

•		employment workforce factors, including our ability to hire, train and retain key employees;

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

	•		international expansion;

	•		sales of additional U.S. contract operations contracts and equipment to the Partnership;

	•		timely and cost-effective execution of projects;

	•		integrating acquired businesses;

	•		generating sufficient cash; and

	•		accessing the capital markets at a reasonable cost;

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

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

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

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

GENERAL

Exterran Holdings, Inc., together with its subsidiaries (“Exterran,” “we,” “us,” or “our”), is a global market leader in the full service natural gas compression business and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. We operate in three primary business lines: contract operations, fabrication and aftermarket services. In our contract operations business line, we own a fleet of natural gas compression and crude oil and natural gas production and processing equipment that we utilize to provide operations services to our customers. In our fabrication business line, we fabricate and sell equipment that is similar to the equipment that we own and utilize to provide contract operations to our customers and we utilize our expertise and fabrication facilities to build equipment utilized in our contract operations services. Our fabrication business line also provides engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the construction of tank farms and the construction of evaporators and brine heaters for desalination plants. In what we refer to as “Total Solutions” projects, we can provide the engineering design, project management, procurement and construction services necessary to incorporate our products into complete production, processing and compression facilities. Total Solutions products are offered to our customers on a contract operations or on a turn-key sale basis. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression, production, gas treating and oilfield power generation equipment.

Hanover and Universal Merger

On August 20, 2007, Hanover and Universal completed their business combination pursuant to the merger agreement by and among us, Hanover, Universal, and two of our wholly-owned subsidiaries. As a result of the merger, each of Universal and Hanover became our wholly-owned subsidiary, and Universal merged with and into us. Hanover was determined to be the acquirer for accounting purposes and, therefore, our financial statements and the financial information included in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflect only Hanover’s historical results for the periods

prior to the merger date. For more information regarding the merger, please see Note 2 to the Condensed Consolidated Financial Statements included in Part I, Item 1 (“Financial Statements”) of this report.

Exterran Partners, L.P.

On July 30, 2008, the Partnership acquired from us contract operations customer service agreements with 34 customers and a fleet of approximately 620 compressor units used to provide compression services under those agreements, comprising approximately 254,000 horsepower, or 6% (by then available horsepower) of our and the Partnership’s combined U.S. contract operations business (the “July 2008 Contract Operations Acquisition”). In connection with this acquisition, the Partnership assumed $175.3 million of our debt and issued to our wholly-owned subsidiaries 2,413,672 common units and 49,259 general partner units.

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

Also, in connection with the closing of the July 2008 Contract Operations Acquisition, the Partnership entered into an amendment to its existing Omnibus Agreement with us. The amendment, among other things, increased the cap on the Partnership’s reimbursement of selling, general and administrative expenses allocable from us to the Partnership based on such costs incurred by us on the Partnership’s behalf from $4.75 million per quarter to $6.0 million per quarter (after taking into account such costs that the Partnership incurs and pays directly) and increased the cap on the Partnership’s reimbursement of operating costs allocable from us to the Partnership based on such costs incurred by us on behalf of the Partnership from $18.00 per horsepower per quarter to $21.75 per horsepower per quarter (after taking into account such costs that the Partnership incurs and pays directly). The amendment also extended the caps on the Partnership’s reimbursement of selling, general and administrative costs and operating costs for an additional year such that the caps will now terminate on December 31, 2009.

The general partner of the Partnership is our subsidiary and we consolidate the financial position and results of operations of the Partnership. It is our intention for the Partnership to be the primary growth vehicle for our U.S. contract operations business and for us to continue to contribute over time to the Partnership U.S. contract operations customer contracts and equipment in exchange for cash and/or additional interests in the Partnership. As of September 30, 2008, the Partnership had a fleet of approximately 2,450 compressor units comprising approximately 1,017,000 horsepower, or 23% (by available horsepower) of our and the Partnership’s combined total U.S. horsepower.

Debt Refinancing

On August 20, 2007, we completed a refinancing of much of the outstanding debt of Hanover and Universal by entering into two new debt facilities. We entered into a $1.65 billion senior secured credit facility, consisting of an $850 million five-year revolving credit facility and an $800 million six-year term loan, with a syndicate of financial institutions, as well as a $1.0 billion asset-backed securitization facility. As a result of these new credit facilities, substantially all of Universal and Hanover’s debt that existed on the merger date has been replaced, other than Hanover’s convertible notes due 2014 and the Partnership’s revolving credit facility.

OVERVIEW

Industry Conditions and Trends

Natural gas consumption in the U.S. for the twelve months ended August 31, 2008 increased by approximately 4% over the twelve months ended August 31, 2007 and is expected to increase by 0.7% per year until 2030, according to the Energy Information Administration.

For 2007, the U.S. accounted for an estimated annual production of approximately 19 trillion cubic feet of natural gas, or 19% of the worldwide total, compared to an estimated annual production of approximately 85 trillion cubic feet in the rest of the world. Industry sources estimate that the U.S.’s natural gas production level will be approximately 21 trillion cubic feet in 2030, or 13% of the worldwide total, compared to estimated annual production of approximately 144 trillion cubic feet for the rest of the world.

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

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

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

While the international contract compression services market is currently smaller than the U.S. market, we believe there are growth opportunities in international demand for compression services and products due to the following factors:

•		implementation of international environmental and conservation laws preventing the practice of flaring natural gas and recognition of natural gas as a clean air fuel;

•		a desire by a number of oil exporting nations to replace oil with natural gas as a fuel source in local markets to allow greater export of oil;

•		increasing development of pipeline infrastructure, particularly in Latin America and Asia, necessary to transport natural gas to local markets; and

•		growing demand for electrical power generation, for which the fuel of choice tends to be natural gas.

Our Performance Trends and Outlook

During the fourth quarter of 2008, we expect the overall market demand for contract operations services to be good. Given our recent declines in working horsepower in North America, however, we expect less growth in our contract operations business than for the overall market in North America. In international markets, we continue to expect relatively strong demand for our contract operations services, particularly for our Total Solutions projects throughout Latin America and the Eastern Hemisphere. Within the North America contract operations segment, we expect that operating costs will continue to moderate during the fourth quarter of 2008. We expect our 2008 fabrication revenue to exceed our 2007 reported fabrication revenue as the 2008 amount will include a full year of Universal’s operations.

Currently, we believe the recent decline in commodity prices and the impact of uncertain credit and capital market conditions resulting from the global financial crisis could negatively impact the level of capital spending by our customers in 2009. While we believe that, barring a significant and extended worldwide recession, industry activity outside of North America should remain strong given the longer-term nature of natural gas infrastructure development projects in international markets, the effects of lower capital spending by our customers could negatively impact demand for our products and services in North America. Should industry capital spending in North America decline, we believe our fabrication business segment will likely see a reduction in demand and profitability. These conditions may also negatively impact our contract operations business segment, although the effects are more difficult to predict for a variety of reasons. First, we believe our contract operations business is more closely tied to natural gas production than drilling activities and, therefore, it has historically experienced more stable demand than that for other energy service products and services. Second, some of our customers may have less access to external capital sources than in the recent past, which we believe could result in their desire to seek to outsource a greater amount of their compression and processing services.

Although we are not able at this time to predict the final impact of the current financial market and industry conditions on our businesses in 2009, we believe we are well positioned both from a capital and competitive perspective to take advantage of opportunities that may become available during this period of uncertainty. We will continue to evaluate the impact of these trends on our business as the market and industry environment continue to evolve.

Our revenue, earnings and financial position are affected by, among other things, (i) market conditions that impact demand for compression and oil and natural gas production and processing, (ii) our customers’ decisions to utilize our products and services rather than purchase equipment or engage our competitors and (iii) our customers’ decisions whether to renew service agreements with us. In particular, many of our North America contract operations agreements with customers have short initial terms, and we cannot be sure that such contracts for these services will be renewed after the end of the initial contractual term; any such nonrenewal could adversely impact our results of operations. Our level of capital spending depends on the demand for our products and services and the equipment we require to render services to our customers. For further information regarding material uncertainties to which our business is exposed, see Item 1A. (“Risk Factors”), included in Part II of this report, and Item 1A. (“Risk Factors”), included in Part I of our Annual Report on Form 10-K for the year ended December 31, 2007, as amended.

We are investing in key initiatives to help support the future growth of our company. These initiatives include an increased marketing and business development commitment and the conversion of certain of our locations to our enterprise resource planning system.

We intend for the Partnership to be the primary growth vehicle for our U.S. contract operations business. To this end, we intend to continue to contribute over time additional U.S. contract operations customer contracts and equipment to the Partnership in exchange for cash and/or additional interests in the Partnership. Such transactions would depend on, among other things, reaching agreement with the Partnership regarding the terms of any purchase and the Partnership’s ability to finance any such purchase.

Financial Highlights

Financial highlights for the three and nine months ended September 30, 2008, as compared to the prior year periods, which are discussed in greater detail below in “Results of Operations,” were as follows:

•		Revenue. Revenue increased 6.9% to $796.0 million for the three months ended September 30, 2008 compared to $744.6 million for the prior year period. Revenue increased 39.2% to $2,348.3 million for the nine months ended September 30, 2008 compared to $1,687.1 million for the prior year period. The increase in revenues in the current year was primarily due to the inclusion of Universal’s results for the entire period compared to the prior year, which included Universal’s results only after the merger date of August 20, 2007 through the end of the period.

•		Net Income (loss). Net income (loss) for the three months and nine months ended September 30, 2008 was $37.0 million and $108.1 million, respectively, an increase of $112.4 million and $132.0 million, respectively, over the prior year periods. Net income in the current year benefited from the inclusion of Universal’s results for the entire nine-month period compared to the prior year, which included Universal’s results only after the merger date of August 20, 2007 through the end of the period. Net income (loss) for the three and nine months ended September 30, 2008 and 2007 was impacted by the following charges (in millions):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Merger and integration expense	$	3.7	$	34.0	$	9.7	$	37.4
Debt extinguishment charges		—		70.2		—		70.2
Fleet impairment		1.0		61.9		2.5		61.9
Impairment of investment in non-consolidated affiliate (recorded in Equity in income (loss) of non-consolidated affiliates)		—		6.7		—		6.7
Cost over-runs on fabrication job(s) in Eastern Hemisphere		—		9.6		31.8		16.3
Interest rate swap termination (recorded in Interest expense)		—		7.0		—		7.0

Total	$	4.7	$	189.4	$	44.0	$	199.5

Operating Highlights

The following tables summarize our total available and operating horsepower, horsepower utilization percentage and fabrication backlog.


	September 30,			December 31,			September 30,
	2008			2007			2007
	(Horsepower in thousands)
Total Available Horsepower (at period end):
North America		4,540			4,514			4,475
International		1,478			1,447			1,442

Total		6,018			5,961			5,917

Total Operating Horsepower (at period end):
North America		3,452			3,632			3,719
International		1,359			1,306			1,290

Total		4,811			4,938			5,009

Horsepower Utilization:
North America spot (at period end)		76	%		80	%		83	%
International spot (at period end)		92	%		90	%		89	%
Total spot (at period end)		80	%		83	%		85	%


	September 30,		December 31,		September 30,
	2008		2007		2007
			(In millions)
Compressor and Accessory Fabrication Backlog	$	359.4	$	321.9	$	395.3
Production and Processing Equipment Fabrication Backlog		731.9		787.6		720.2

Fabrication Backlog	$	1,091.3	$	1,109.5	$	1,115.5

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2007

Our results of operations after the merger date of August 20, 2007 include Universal’s results of operations, and periods prior to the merger date reflect only Hanover’s historical results of operations.

Summary of Business Segment Results

North America Contract Operations
(dollars in thousands)


	Three months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	197,926		$	148,986			33	%
Cost of sales (excluding depreciation and amortization expense)		84,440			64,581			31	%

Gross margin	$	113,486		$	84,405			34	%
Gross margin percentage		57	%		57	%		0	%

The increase in revenue, cost of sales and gross margin (defined as revenue less cost of sales (excluding depreciation and amortization expense)) was primarily due to the inclusion of Universal’s results after the merger. Revenue for the three months ended September 30, 2008 benefited by $5.9 million from the inclusion of the results of EMIT Water Discharge Technology, LLC (“EMIT”), which we acquired in July 2008. Gross margin percentage (defined as revenue less cost of sales, excluding depreciation and amortization expense, divided by revenue) was consistent with the prior year period.

International Contract Operations
(dollars in thousands)


	Three months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	135,153		$	88,457			53	%
Cost of sales (excluding depreciation and amortization expense)		53,884			35,439			52	%

Gross margin	$	81,269		$	53,018			53	%
Gross margin percentage		60	%		60	%		0	%

The increase in revenue, cost of sales and gross margin was primarily due to the inclusion of Universal’s results after the merger and approximately $10 million of higher revenues in Venezuela. Our operations in Argentina, Venezuela and Brazil accounted for approximately 64% of the increase in revenues. Gross margin percentage was consistent with the prior year period.

Aftermarket Services
(dollars in thousands)


	Three months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	98,275		$	75,045			31	%
Cost of sales (excluding depreciation and amortization expense)		78,306			58,049			35	%

Gross margin	$	19,969		$	16,996			17	%
Gross margin percentage		20	%		23	%		(3	)%

The increase in revenue, cost of sales and gross margin was primarily due to the inclusion of Universal’s results after the merger. North America aftermarket services accounted for approximately 94% of the increase in revenues. The decrease in gross margin percentage was primarily due to reduced margins on aftermarket services provided internationally.

Fabrication
(dollars in thousands)


	Three months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	364,608		$	432,114			(16	)%
Cost of sales (excluding depreciation and amortization expense)		292,978			364,749			(20	)%

Gross margin	$	71,630		$	67,365			6	%
Gross margin percentage		20	%		16	%		4	%

The decrease in revenue and cost of sales was primarily due to approximately $58 million less in installation sales in the three months ended September 30, 2008. Results for the three months ended September 30, 2007 included the recognition of a $66 million installation project in the Eastern Hemisphere. The increase in gross margin percentage is primarily due to $9.6 million of cost over-runs on one of our Eastern Hemisphere projects in the prior year period, $29.7 million of revenues with a 0% margin in the prior year period and $58 million of higher installation revenues in the prior year period which had lower margins than the rest of our fabrication segment. Our results for the third quarter of 2007 include a Universal project in the Eastern Hemisphere accounted for under the completed contract method of accounting that was near completion on the merger date and was completed by September 30, 2007. Due to the adjustment to record Universal’s inventory at fair value pursuant to the allocation of the purchase price on the date of merger, the inventory related to this project was increased to its sales price which resulted in a gross margin percentage of 0% on this project. This project reduced our fabrication equipment gross margin percentage by approximately 1% in the three months ended September 30, 2007. For further information regarding the purchase price allocation with the merger, see Note 2 to the Financial Statements.

Costs and Expenses
(dollars in thousands)


	Three months ended
	September 30,						Increase
	2008			2007			(Decrease)
Selling, general and administrative	$	94,533		$	71,191			33	%
Merger and integration expenses		3,728			34,008			(89	)%
Early extinguishment of debt		—			70,150			(100	)%
Depreciation and amortization		94,286			66,040			43	%
Fleet impairment		1,000			61,945			(98	)%
Interest expense		33,364			38,680			(14	)%
Equity in (income) loss of non-consolidated affiliates		(6,657	)		5,005			(233	)%
Other (income) expense, net		5,689			(13,578	)		142	%

The increase in selling, general and administrative expenses (“SG&A”) was primarily due to the inclusion of Universal’s results after the merger. As a percentage of revenue, SG&A for the three months ended September 30, 2008 and 2007 was 12% and 10%, respectively.

Merger and integration expenses related to the merger between Hanover and Universal recorded during the three months ended September 30, 2008 were primarily comprised of change of control payments for executives and severance costs. During the three months ended September 30, 2007, merger and integration expenses were primarily comprised of amortization of retention bonus awards, acceleration of vesting of restricted stock, stock options and long-term cash incentives, change of control payments for executives and severance for employees.

The early extinguishment of debt costs in the three months ended September 30, 2007, relates to the call premium and tender fees paid to retire various Hanover notes as part of the debt refinancing following the merger and a charge of $16.4 million related to the write-off of deferred financing costs in conjunction with that refinancing, which was completed during the three months ended September 30, 2007.

The increase in depreciation and amortization expense was primarily due to the inclusion of Universal’s results after the merger and property, plant and equipment additions. Amortization expense of intangible assets from the Hanover and Universal merger and other acquisitions was $10.9 million and $1.6 million for the three months ended September 30, 2008 and 2007, respectively.

During the three months ended September 30, 2008, we recorded a $1.0 million impairment related to the loss sustained on offshore units that were on platforms which capsized during Hurricane Ike. In the third quarter of 2007, we recorded an impairment of fleet equipment of $61.9 million. Following completion of the merger between Hanover and Universal, our management reviewed the compression fleet assets that existed at the merger date. Management reviewed our fleet for units that were not of the type, configuration, make or model that management wanted to continue to offer due to the cost to refurbish the equipment, the incremental costs of maintaining more types of equipment and the increased financial flexibility of the new company to build new units in the configuration currently in demand by our customers. Prior to the merger, we had planned to rebuild or reconfigure these units over time to make them into the configurations currently in demand by customers. We performed a cash flow analysis of the expected proceeds from the disposition to determine the fair value for the fleet assets we decided to dispose of. The net book value of the fleet assets to be disposed of, previously owned by Hanover, exceeded the fair value by $61.9 million, which was recorded as an impairment of our long-lived assets in the third quarter of 2007. The impairment is recorded in fleet impairment expense in the consolidated statements of operations.

The decrease in interest expense during the three months ended September 30, 2008 compared to the three months ended September 30, 2007, was primarily due to a reduction in our weighted average effective interest rate, including the impact of interest rate swaps, to 5.6% for the three months ended September 30, 2008 from 7.5% for the three months ended September 30, 2007 and a $7.0 million charge to interest expense in the third quarter of 2007 from the termination of two fair value hedges. This decrease was partially offset by a higher average debt balance due to the addition of Universal’s debt after the merger compared to our average debt balance before the merger.

The increase in equity in income of non-consolidated affiliates was primarily due to higher equity income in our El Furrial joint venture in the three months ended September 30, 2008 and a charge of $6.7 million in the third quarter of 2007 on our investment in the SIMCO and Harwat Consortium. The $6.7 million charge on our investment in the SIMCO and Harwat Consortium was caused by an impairment of our investment that was determined to be other than temporary. This decline in value of our investment was

primarily caused by increased costs to operate this business that were not expected to improve in the near term. The increase in equity in income of non-consolidated affiliates was also caused by higher equity in earnings from our Venezuelan joint venture, El Furrial. We have a 33.3% ownership interest in the El Furrial joint venture that operates gas compression plants. During the three months ended September 30, 2008 we recorded equity income of $1.1 million related to El Furrial compared to $2.5 million in equity loss for the three months ended September 30, 2007.

The change in other (income) expense, net, was primarily due to an increase of approximately $14.9 million in foreign currency translation losses for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The loss is primarily related to the remeasurement of our international subsidiaries’ net assets exposed to changes in foreign currency rates and a $2.8 million loss on a foreign currency hedge in the current period. The change in other (income) expense, net was also impacted by a $2.4 million decrease in gains on sales of used equipment in the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

Income Taxes
(dollars in thousands)


	Three months ended
	September 30,						Increase
	2008			2007			(Decrease)
Provision (benefit) for income taxes	$	20,350		$	(38,692	)		153	%
Effective tax rate		33.7	%		34.7	%		(1.0	)%

The increase in the provision for income taxes was primarily due to an increase in income before income taxes primarily caused by the inclusion of Universal’s results after the merger and merger and refinancing related charges that did not recur in the current period. Our provision for income taxes was further increased by $2.7 million for the tax effect of recently enacted state tax law changes. These increases were partially offset by a $3.9 million reduction in the impact of changes in our provision for uncertain tax positions, including penalties and interest, primarily due to a favorable foreign court decision.

Minority Interest

As of September 30, 2008, minority interest is primarily comprised of the portion of the Partnership’s capital and earnings that is applicable to the 43% limited partner interest in the Partnership not owned by us. Minority interest increased due to higher earnings of the Partnership in the current period which resulted primarily from the customer contracts and compression units that the Partnership acquired from us in July 2008.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2007

Summary of Business Segment Results

North America Contract Operations
(dollars in thousands)


	Nine months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	591,609		$	348,184			70	%
Cost of sales (excluding depreciation and amortization expense)		259,031			145,939			77	%

Gross margin	$	332,578		$	202,245			64	%
Gross margin percentage		56	%		58	%		(2	)%

The increase in revenue, cost of sales and gross margin (defined as revenue less cost of sales (excluding depreciation and amortization expense)) was primarily due to the inclusion of Universal’s results after the merger. Revenue for the nine months ended September 30, 2008 benefited by $5.9 million from the inclusion of the results of EMIT, which we acquired in July 2008. Gross margin percentage (defined as revenue less cost of sales, excluding depreciation and amortization expense, divided by revenue) was negatively impacted in the current year as compared to the prior year due to higher repair and maintenance expenses.

International Contract Operations
(dollars in thousands)


	Nine months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	380,899		$	225,393			69	%
Cost of sales (excluding depreciation and amortization expense)		141,397			86,420			64	%

Gross margin	$	239,502		$	138,973			72	%
Gross margin percentage		63	%		62	%		1	%

The increase in revenue, cost of sales and gross margin was primarily due to the inclusion of Universal’s results after the merger and approximately $32 million of higher revenues in Venezuela. Our operations in Argentina, Venezuela and Brazil accounted for approximately 69% of the increase in revenues. Gross margin percentage increased primarily due to the improved gross margin percentage in Venezuela compared to the same period in the prior year.

Aftermarket Services
(dollars in thousands)


	Nine months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	280,153		$	172,182			63	%
Cost of sales (excluding depreciation and amortization expense)		221,914			131,864			68	%

Gross margin	$	58,239		$	40,318			44	%
Gross margin percentage		21	%		23	%		(2	)%

The increase in revenue, cost of sales and gross margin was primarily due to the inclusion of Universal’s results after the merger. North America aftermarket services accounted for approximately 71% of the increase in revenues. The decrease in gross margin percentage was primarily due to reduced margins on aftermarket services provided internationally.

Fabrication
(dollars in thousands)


	Nine months ended
	September 30,						Increase
	2008			2007			(Decrease)
Revenue	$	1,095,601		$	941,350			16	%
Cost of sales (excluding depreciation and amortization expense)		912,005			782,155			17	%

Gross margin	$	183,596		$	159,195			15	%
Gross margin percentage		17	%		17	%		0	%

The increase in revenues and gross margin was primarily due to the inclusion of Universal’s results after the merger, partially offset by approximately $86 million less in installation sales in the nine months ended September 30, 2008. Results for the nine months ended September 30, 2007 included the recognition of a $66 million installation project in the Eastern Hemisphere. Gross margin and gross margin percentage for the nine months ended September 30, 2008 were impacted by $31.8 million in cost overruns on two Eastern Hemisphere projects. Because these projects were loss contracts, we recorded the full amount of our estimated loss in the second quarter of 2008. Gross margin in the nine months ended September 30, 2007 included approximately $16.3 million in cost overruns on an Eastern Hemisphere project and $29.7 million of revenues with a 0% margin. Our results for the nine months ended September 30, 2007 include a Universal project in the Eastern Hemisphere accounted for under the completed contract method of accounting that was near completion on the merger date and was completed by September 30, 2007. Due to the adjustment to record Universal’s inventory at fair value pursuant to the allocation of the purchase price on the date of merger, the inventory related to this project was increased to its sales price which resulted in a gross margin percentage of 0% on this project. For further information regarding the purchase price allocation with the merger, see Note 2 to the Financial Statements.

Costs and Expenses
(dollars in thousands)


	Nine months ended
	September 30,						Increase
	2008			2007			(Decrease)
Selling, general and administrative	$	279,559		$	175,397			59	%
Merger and integration expenses		9,710			37,397			(74	)%
Early extinguishment of debt		—			70,150			(100	)%
Depreciation and amortization		277,150			166,894			66	%
Fleet impairment		2,450			61,945			(96	)%
Interest expense		96,689			95,133			2	%
Equity in income of non-consolidated affiliates		(19,712	)		(6,957	)		(183	)%
Other (income) expense, net		(15,922	)		(29,644	)		46	%

The increase in selling, general and administrative expenses (“SG&A”) was primarily due to the inclusion of Universal’s results after the merger. As a percentage of revenue, SG&A for the nine months ended September 30, 2008 and 2007 was 12% and 10%, respectively.

Merger and integration expenses related to the merger between Hanover and Universal during the nine months ended September 30, 2008 were primarily comprised of professional fees, amortization of retention bonus awards, change of control payments and severance for employees. During the nine months ended September 30, 2007, merger and integration expenses were primarily comprised of amortization of retention bonus awards, acceleration of vesting of restricted stock, stock options and long-term cash incentives, change of control payments for executives and severance for employees.

The early extinguishment of debt costs in the nine months ended September 30, 2007 relates to the call premium and tender fees paid to retire various Hanover notes as part of the debt refinancing following the merger and a charge of $16.4 million related to the write-off of deferred financing costs in conjunction with that refinancing, which was completed during the nine months ended September 30, 2007.

The increase in depreciation and amortization expense was primarily due to the inclusion of Universal’s results after the merger and property, plant and equipment additions. Amortization expense of intangible assets from the Hanover and Universal merger and other acquisitions was $31.1 million and $1.6 million for the nine months ended September 30, 2008 and 2007, respectively.

During the first quarter of 2008, management identified certain fleet units that will not be used in our contract operations business in the future and recorded a $1.5 million impairment in the first quarter of 2008. During the three months ended September 30, 2008, we recorded a $1.0 million impairment related to the loss sustained on offshore units that were on platforms which capsized during Hurricane Ike. In the third quarter of 2007, we recorded an impairment of fleet equipment of $61.9 million. Following completion of the merger between Hanover and Universal, our management reviewed the compression fleet assets used in our business that existed at the merger date. Management reviewed our fleet for units that were not of the type, configuration, make or model that management wanted to continue to offer due to the cost to refurbish the equipment, the incremental costs of maintaining more types of equipment and the increased financial flexibility of the new company to build new units in the configuration currently in demand by our customers. Prior to the merger, we had planned to rebuild or reconfigure these units over time to make them into the configurations currently in demand by customers. We performed a cash flow analysis of the expected proceeds from the disposition to determine the fair value for the fleet assets we decided to dispose of. The net book value of the fleet assets to be disposed of, previously owned by Hanover, exceeded the fair value by $61.9 million, which was recorded as an impairment of our long-lived assets in the third quarter of 2007. The impairment is recorded in fleet impairment expense in the consolidated statements of operations.

The increase in interest expense during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, was primarily due to a higher average debt balance due to the addition of Universal’s debt after the merger compared to our average debt balance before the merger. The increase was partially offset by a reduction in our weighted average effective interest rate, including the impact of interest rate swaps, to 5.3% for the nine months ended September 30, 2008 from 6.5% for the nine months ended September 30, 2007 and a $7.0 million charge to interest expense in the third quarter of 2007 from the termination of two fair value hedges.

The increase in equity in income of non-consolidated affiliates was primarily due to higher equity income in our El Furrial joint venture in the nine months ended September 30, 2008 and a charge of $6.7 million in the third quarter of 2007 on our investment in the SIMCO and Harwat Consortium. The $6.7 million charge on our investment in the SIMCO and Harwat Consortium was caused by an impairment of our investment that was determined to be other than temporary. This decline in value of our investment was

primarily caused by increased costs to operate the business that were not expected to improve in the near term. The increase in equity in income of non-consolidated affiliates was also caused by higher equity in earnings from our Venezuelan joint venture, El Furrial. We have a 33.3% ownership interest in the El Furrial joint venture that operates gas compression plants. During the nine months ended September 30, 2008 we recorded equity income of $4.7 million related to El Furrial compared to $0.8 million in equity income for the nine months ended September 30, 2007.

The change in other (income) expense, net, was primarily due to an increase of approximately $6.5 million in foreign currency translation losses for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The foreign currency translation loss is primarily related to the remeasurement of our international subsidiaries’ net assets exposed to changes in foreign currency rates and a $4.3 million loss on a foreign currency hedge in the current year period. The change in other (income) expense, net was also impacted by a $5.7 million decrease in gains on sales of trading securities and by a $4.0 million decrease in gains on sales of used equipment. From time to time, we purchase short-term debt securities denominated in U.S. dollars and exchange them for short-term debt securities denominated in local currency in Latin America to achieve more favorable exchange rates. These funds are utilized in our international contract operations, which have experienced an increase in operating costs due to local inflation.

Income Taxes
(dollars in thousands)


	Nine months ended
	September 30,						Increase
	2008			2007			(Decrease)
Provision (benefit) for income taxes	$	67,411		$	(8,085	)		934	%
Effective tax rate		36.6	%		27.3	%		9.3	%

The increase in the provision for income taxes was primarily due to an increase in income before income taxes primarily caused by the inclusion of Universal’s results after the merger and merger and refinancing related charges that did not recur in the current period. Our provision for income taxes was further increased by $2.7 million for the tax effect of recently enacted state tax law changes. These increases were partially offset by a $2.7 million reduction in the impact of changes in our provision for uncertain tax positions, including penalties and interest, primarily due to a favorable foreign court decision.

Minority Interest

As of September 30, 2008, minority interest is primarily comprised of the portion of the Partnership’s capital and earnings that is applicable to the 43% limited partner interest in the Partnership not owned by us. We acquired our ownership of the Partnership through the merger with Universal (see Note 2 to the Financial Statements). Minority interest is higher in the current year period primarily due to the fact that Universal and the Partnership’s results of operations for 2007 are included in our results of operations only for periods after the merger date of August 20, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted cash balance was $118.3 million at September 30, 2008, compared to $149.2 million at December 31, 2007. Working capital increased to $737.9 million at September 30, 2008 from $670.5 million at December 31, 2007.

Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below (in thousands):


	Nine Months Ended
	September 30,
	2008			2007

Net cash provided by (used in) continuing operations:
Operating activities	$	345,343		$	107,841
Investing activities		(463,250	)		(180,319	)
Financing activities		86,480			90,037
Discontinued Operations		1,815			—
Effect of exchange rate changes on cash and cash equivalents		(1,318	)		4,679

Net change in cash and cash equivalents	$	(30,930	)	$	22,238

Operating Activities: The increase in cash provided by operating activities for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to the inclusion of operating cash flows from Universal in the nine months ended September 30, 2008 and cash provided by the change in costs and estimated earnings versus billings on uncompleted contracts and advanced billings, partially offset by an increase in inventory.

Investing Activities: The increase in cash used in investing activities during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily attributable to increased capital expenditures, which were primarily due to our larger contract operations business after the merger and approximately $133 million in cash paid for acquisitions in the nine months ended September 30, 2008.

Financing Activities: The decrease in cash provided by financing activities during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily attributable to reduced proceeds from stock options exercised, a reduction in the stock-based compensation excess tax benefit and distributions to non-controlling partners in the Partnership, partially offset by increased borrowings and lower debt issuance costs.

Capital Expenditures: We generally invest funds necessary to fabricate fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceed our return on capital targets. We currently plan to spend approximately $500 million in net capital expenditures during 2008 including (1) fleet equipment additions and (2) approximately $120 million to $125 million on equipment maintenance capital.

Credit and Financial Industry Environment: The continuing credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition. For example, in September 2008, Lehman Brothers, one of the lenders under our $850 million revolving credit facility, filed for bankruptcy protection. As a result, our ability to borrow under this facility may be reduced by Lehman Brothers’ pro rata portion (approximately 1.4% as of September 30, 2008) of the $188.1 million in unfunded commitments that, as of September 30, 2008, was available under our revolving credit facility. The administrative agent under our revolving credit facility and the Partnership’s revolving credit facility, Wachovia Bank, National Association, has announced its agreement to be acquired by Wells Fargo. If Wachovia or its successor, or any other lender under our revolving credit facility and the Partnership’s revolving credit facility, is not able to perform its obligations under those facilities, our borrowing capacity could be further reduced by such lender’s pro rata portion of the unfunded commitments.

In addition, Wachovia is also the bank agent and sole lender under our 2007 ABS Facility. As of September 30, 2008, $200 million was available under this facility. In October 2008, we borrowed an additional $100 million on the 2007 ABS Facility, a portion of which we used to pay off approximately $60 million on our revolving credit facility. If Wachovia or its successor is not able to perform its obligations under the 2007 ABS Facility, we would have no additional borrowing capacity under this facility.

The global financial crisis could also have an impact on our interest rate swap agreements if our counterparties are unable to perform their obligations under those agreements. At September 30, 2008, counterparties to these agreements owed us approximately $2.3 million, and we owed counterparties approximately $32.0 million related to our interest rate swap agreements.

Although we cannot predict the impact that the credit market crisis will have on the lenders in our credit facilities, we currently do not believe that the Lehman Brothers bankruptcy and the pending acquisition by Wells Fargo of Wachovia will have a material adverse effect on our financial position, results of operations or cash flows. We continue to closely monitor these situations and our legal rights under our contractual relationships with these and other lender or counterparty entities.

Long-Term Debt and Debt Refinancing: Following the merger of Hanover and Universal, we completed a refinancing of a significant amount of our outstanding debt on the merger date. We entered into a $1.65 billion senior secured credit facility and a $1.0 billion asset-backed securitization facility. As a result of this and a subsequent refinancing, substantially all of the debt of Universal and Hanover outstanding on the merger date has been retired or redeemed, with the exception of Hanover’s convertible senior notes due 2014 and the Partnership’s credit facility. For more information regarding the refinancing and the repayment of debt, see Note 5 to the Financial Statements. On August 20, 2007, we entered into a credit agreement (the “Credit Agreement”) with various financial institutions. The Credit Agreement consists of (a) a five-year revolving credit facility in the aggregate amount of $850 million, which includes a variable allocation for a Canadian tranche and the ability to issue letters of credit under the facility and (b) a six-year term loan senior secured credit facility, in the aggregate amount of $800 million with principal payments due on multiple dates through June 2013 (collectively, the “Credit Facility”). Subject to certain conditions, at our request and with the approval of the lenders, the aggregate commitments under the Credit Facility may be increased by an additional $400 million less certain adjustments, including the amount of any outstanding borrowing under the 2007 ABS Facility (described below) in excess of $800 million.

Borrowings under the Credit Agreement bear interest, if they are in U.S. dollars, at our option, a base rate or LIBOR, plus an applicable margin, as defined in the agreement. The applicable margin varies depending on our debt ratings. At September 30, 2008, all amounts outstanding were LIBOR loans and the applicable margin was 0.825%. The weighted average interest rate at September 30, 2008 on the outstanding balance, excluding the effect of related cash flow hedges, was 4.1%.

The Credit Agreement contains various covenants with which we must comply, including, but not limited to, limitations on incurrence of indebtedness, investments, liens on assets, transactions with affiliates, mergers, consolidations, sales of assets and other provisions customary in similar types of agreements. We must also maintain, on a consolidated basis, required leverage and interest coverage ratios. Additionally, the Credit Agreement contains customary conditions, representations and warranties, events of default and indemnification provisions. Our indebtedness under the Credit Facility is collateralized by liens on substantially all of our personal property in the U.S. and Canada. The assets of the Partnership and our wholly-owned subsidiary, Exterran ABS 2007 LLC (along with its subsidiaries, “Exterran ABS”), are not collateral under the Credit Agreement. We have executed a U.S. Pledge Agreement pursuant to which we and our Significant Subsidiaries (as defined in the Credit Agreement) are required to pledge our equity and the equity of certain subsidiaries. The Partnership and Exterran ABS are not pledged under this agreement and do not guarantee debt under the Credit Facility.

Repayment of the ABS facility notes has been secured by a pledge of all of the assets of Exterran ABS, consisting primarily of a fleet of natural gas compressors and contracts to provide compression services to our customers. Under the 2007 ABS Facility, we had $7.6 million of restricted cash as of September 30, 2008.

The Partnership, as guarantor, and EXLP Operating LLC, a wholly-owned subsidiary of the Partnership (together with the Partnership, the “Partnership Borrowers”), entered into a senior secured credit agreement in 2006 (the “Partnership Credit Agreement”). The revolving credit facility under the Partnership Credit Agreement was expanded in 2007 to consist of a five-year $315 million revolving credit facility, which matures in October 2011. As of September 30, 2008, there was $282.3 million in outstanding borrowings under the revolving credit facility and $32.8 million was available for additional borrowings.

In May 2008, the Partnership entered into an amendment to the Partnership Credit Agreement that increased the aggregate commitments under that facility to provide for a $117.5 million term loan facility. The $117.5 million term loan was funded during July 2008 and $58.3 million was drawn on the Partnership’s revolving credit facility, which together were used to repay the debt assumed by the Partnership concurrent with the closing of the July 2008 Contract Operations Acquisition and to pay other costs incurred. The $117.5 million term loan is non-amortizing but must be repaid with the net proceeds from any equity offerings of the Partnership until paid in full. All amounts outstanding under the Partnership’s senior secured credit facility mature in October 2011.

The term loan bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin, as defined in the credit agreement. The applicable margin, depending on its leverage ratio, varies (i) in the case of LIBOR loans, from 1.5% to 2.5% or (ii) in the case of base rate loans, from 0.5% to 1.5%. Borrowings under the term loan are subject to the same credit agreement and covenants as the Partnership’s revolving credit facility, except for an additional covenant requiring mandatory prepayment of the term loan from net cash proceeds of any future equity offerings of the Partnership, on a dollar-for-dollar basis. The weighted average interest rate on the outstanding balance of the Partnership’s term loan at September 30, 2008, excluding the effect of related cash flow hedges, was 5.8%.

Borrowings under the Partnership Credit Agreement are secured by substantially all of the personal property assets of the Partnership Borrowers. In addition, all of the capital stock of the Partnership’s U.S. restricted subsidiaries has been pledged to secure the

obligations under the Partnership Credit Agreement. Subject to certain conditions, at the Partnership’s request, and with the approval of the lenders, the aggregate commitments under the Partnership’s senior secured credit facility may be increased by an additional $17.5 million. This amount will be increased on a dollar-for-dollar basis with each payment under the term loan facility.

Under the Partnership Credit Agreement, the Partnership Borrowers are subject to certain limitations, including limitations on their ability to incur additional debt or sell assets, with restrictions on the use of proceeds; to make certain investments and acquisitions; to grant liens; and to pay dividends and distributions. The Partnership Borrowers are also subject to financial covenants which include a total leverage and an interest coverage ratio.

As of September 30, 2008, we had approximately $2.5 billion in outstanding debt obligations, consisting of $800.0 million outstanding under the 2007 ABS Facility, $800.0 million outstanding under our term loan, $324.0 million outstanding under our $850 million revolving credit facility, $143.8 million outstanding under our 4.75% convertible notes, $282.3 million outstanding under the Partnership’s revolving credit facility and $117.5 million outstanding under the Partnership’s term loan. During March 2008, we repaid our 4.75% Convertible Senior Notes due 2008 using funds from our revolving credit facility. We were in compliance with our debt covenants as of September 30, 2008. In October 2008, we borrowed an additional $100 million on our 2007 ABS Facility and used it to pay off approximately $60 million on our revolving credit facility.

We have entered into interest rate swap agreements related to a portion of our variable rate debt. See Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of our interest rate swap agreements.

The interest rate we pay under our Credit Agreement can be affected by changes in our credit rating. As of October 31, 2008, our credit ratings as assigned by Moody’s and Standard & Poor’s were:


		Standard
	Moody’s	& Poor’s
Outlook	Stable	Stable
Corporate Family Rating	Ba2	BB
Exterran Senior Secured Credit Facility	Ba2	BB+
4.75% convertible senior notes due 2014	—	BB

Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. As a result of the economic slowdown and the declines in both our stock price and the availability of equity and debt capital in the public markets, 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. Based on current market conditions, we expect that net cash provided by operating activities will be sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt repayments through December 31, 2008, but to the extent it is not, we may borrow additional funds under our credit facilities or we may obtain additional debt or equity financing.

Stock Repurchase Program. On August 20, 2007, our board of directors authorized the repurchase of up to $200 million of our common stock through August 19, 2009. During the three months ended September 30, 2008, we repurchased 1,087,038 shares of our common stock at an aggregate cost of $49.9 million. See Part II, Item 2 (“Unregistered Sales of Equity Securities and Use of Proceeds”) for information regarding these repurchases. Since the program was initiated, we have repurchased 2,345,438 shares of our common stock at an aggregate cost of $149.9 million.

Dividends. We have not paid any cash dividends on our common stock since formation, and we do not anticipate paying such dividends in the foreseeable future. Our board of directors anticipates that all cash flow generated from operations in the foreseeable future will be retained and used to repay our debt, repurchase our stock or develop and expand our business. Any future determinations to pay cash dividends on our common stock will be at the discretion of our board of directors and will depend on our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by our board of directors.

Partnership Distributions to Unitholders. The Partnership’s partnership agreement requires it to distribute all of its “available cash” quarterly. Under the partnership agreement, available cash is defined to generally mean, for each fiscal quarter, (1) cash on hand at the Partnership at the end of the quarter in excess of the amount of reserves its general partner determines is necessary or appropriate to provide for the conduct of its business, to comply with applicable law, any of its debt instruments or other agreements or to provide for future distributions to its unitholders for any one or more of the upcoming four quarters, plus, (2) if the Partnership’s general partner so determines, all or a portion of the Partnership’s cash on hand on the date of determination of available cash for the quarter.

Under the terms of the partnership agreement, there is no guarantee that unitholders will receive quarterly distributions from the Partnership. The Partnership’s distribution policy, which may be changed at anytime, is subject to certain restrictions, including (1) restrictions contained in the Partnership’s revolving credit facility, (2) the Partnership’s general partner’s establishment of reserves to fund future operations or cash distributions to the Partnership’s unitholders, (3) restrictions contained in the Delaware Revised Uniform Limited Partnership Act and (4) the Partnership’s lack of sufficient cash to pay distributions.

Through our ownership of common and subordinated units and all of the equity interests in the general partner of the Partnership, we expect to receive cash distributions from the Partnership. Our rights to receive distributions of cash from the Partnership as holder of subordinated units are subordinated to the rights of the common unitholders to receive such distributions.

On October 28, 2008, the board of directors of the general partner of the Partnership approved a cash distribution of approximately $9.3 million, including distributions to its general partner on its incentive distribution rights, or $0.4625 per limited partner unit, covering the period from July 1, 2008 through September 30, 2008. The record date for this distribution is November 7, 2008 and payment is expected to occur on November 14, 2008.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements that may affect us, please see Note 10 to the Financial Statements.

NON-GAAP FINANCIAL MEASURE

We define gross margin as total revenue less cost of sales (excluding depreciation and amortization expense). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and cost of sales (excluding depreciation and amortization expense), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, the impact of our financing methods and income taxes. Depreciation expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income as determined in accordance with accounting principles generally accepted in the U.S. (“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.

For a reconciliation of gross margin to net income, see Note 11 to the Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

We have agreed to guarantee certain obligations of indebtedness of the SIMCO/Harwat Consortium, a joint venture in which we own a 35.5% interest, and of El Furrial, a joint venture in which we own a 33.3% interest. Each of these joint ventures is our non-consolidated affiliate, and our guarantee obligations are not recorded on our accompanying balance sheet. In each case, our guarantee obligation is a percentage of the guaranteed debt of the non-consolidated affiliate equal to our ownership percentage in such affiliate. At September 30, 2008, we have guaranteed approximately $22.1 million of the debt of the El Furrial joint venture. Our obligation to perform under the guarantees arises only in the event that our non-consolidated affiliate defaults under the agreements governing the indebtedness. We currently have no reason to believe that either of these non-consolidated affiliates will default on its indebtedness. For more information on these off-balance sheet arrangements, see Note 9 to the Financial Statements and Note 8 to the Consolidated Financial Statements included in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2007, as amended.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Variable Rate Debt

We are exposed to market risk due to variable interest rates under our financing arrangements.

As of September 30, 2008, after taking into consideration interest rate swaps, we had approximately $988.8 million of outstanding indebtedness that was effectively subject to floating interest rates. A 1.0% increase in interest rates would result in an annual increase in our interest expense of approximately $9.9 million.

Interest Rate Swap Arrangements

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

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


								Fair Value of
Fixed Rate					Notional			Swap at
to be Paid			Maturity Date	Floating Rate to be Received	Amount			September 30, 2008
	4.035	%	March 31, 2010	Three Month LIBOR	$	37,500	(1)	$	(111	)
	4.007	%	March 31, 2010	Three Month LIBOR		37,500	(1)		(102	)
	3.990	%	March 31, 2010	Three Month LIBOR		37,500	(1)		(97	)
	4.057	%	March 31, 2010	Three Month LIBOR		37,500	(1)		(112	)
	4.675	%	August 20, 2012	One Month LIBOR		153,763	(2)		(4,837	)
	4.744	%	July 20, 2012	One Month LIBOR		231,147	(2)		(7,963	)
	4.668	%	July 20, 2012	One Month LIBOR		150,000	(2)		(4,498	)
	5.210	%	January 20, 2013	One Month LIBOR		54,500	(2)		(2,040	)
	4.450	%	September 20, 2019	One Month LIBOR		40,000	(2)		(631	)
	5.020	%	October 20, 2019	One Month LIBOR		50,590	(2)		(2,409	)
	5.275	%	December 1, 2011	Three Month LIBOR		125,000	(3)		(5,519	)
	5.343	%	October 20, 2011	Three Month LIBOR		40,000	(3)		(1,883	)
	5.315	%	October 20, 2011	Three Month LIBOR		40,000	(3)		(1,853	)
	3.080	%	January 28, 2011	Three Month LIBOR		50,000			391
	3.075	%	January 28, 2011	Three Month LIBOR		50,000			383
	3.062	%	January 28, 2011	Three Month LIBOR		50,000			401
	3.100	%	January 28, 2011	Three Month LIBOR		50,000			365
	3.065	%	January 28, 2011	Three Month LIBOR		50,000			398
	3.072	%	January 28, 2011	Three Month LIBOR		50,000			400

					$	1,335,000		$	(29,717	)


(1)		These swaps amortize ratably over the life of the swap.

(2)		Certain of these swaps amortize while the notional amounts of others increase in corresponding amounts to maintain a consistent outstanding notional amount of $680 million.

(3)		These swaps are expected to offset changes in expected cash flows due to fluctuations in the variable rate of the Partnership’s debt.

Interest rate swap balances as of September 30, 2008 are presented in the accompanying condensed consolidated balance sheet as follows (in thousands):


	September 30,
	2008
Other current assets	$	1,698
Intangibles and other assets, net		640
Accrued liabilities		(8,172	)
Other liabilities		(23,883	)

Net interest rate swap balance	$	(29,717	)

We have designated these swaps as cash flow hedging instruments pursuant to the criteria of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” so that any change in their fair values is recognized as a component of comprehensive income or loss and is included in accumulated other comprehensive income or loss to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine if the swap agreements are still effective and to calculate any ineffectiveness. For the three and nine months ended September 30, 2008, we recorded approximately $0.8 million and $1.6 million, respectively, of interest expense due to the ineffectiveness related to these swaps.

Foreign Currency Exchange Risk

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

In April 2008, we entered into a foreign currency economic hedge to reduce our foreign exchange risk associated with cash flows we will receive under a contract in Kuwaiti Dinars. This economic hedge did not qualify for hedge accounting treatment. At September 30, 2008, the remaining notional amount of the derivative is approximately 17.8 million Kuwaiti Dinars. Gains and losses on this foreign currency hedge are included in other (income) expense, net in our condensed consolidated statements of operations. The fair value of this derivative at September 30, 2008 was a liability of $3.5 million.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of September 30, 2008. Based on the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 1.A. (“Risk Factors”) of our Annual Report on Form 10-K for the year ended December 31, 2007, as amended, includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. Except as presented below, there have been no material changes from the risk factors described in our Form 10-K.

The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict.

The continuing credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition. For example, in September 2008, Lehman Brothers, one of the lenders under our $850 million revolving credit facility, filed for bankruptcy protection. As a result, our ability to borrow under this facility may be reduced by Lehman Brothers’ pro rata portion (approximately 1.4% as of September 30, 2008) of the $188.1 million in unfunded commitments that, as of September 30, 2008, was available under our revolving credit facility. The administrative agent under our revolving credit facility and the Partnership’s revolving credit facility, Wachovia Bank, National Association, has announced its agreement to be acquired by Wells Fargo. If Wachovia or its successor is not able to perform its obligations under our revolving credit facility and the Partnership’s revolving credit facility, our borrowing capacity would be further reduced by Wachovia’s pro rata portion of the unfunded commitments. If other lenders become unable to perform their obligations under those facilities, our borrowing capacity could be further reduced. Inability to borrow additional amounts under those facilities could limit our ability to fund our future growth and operations.

Wachovia is also the bank agent and sole lender under our $1.0 billion asset-backed securitization facility (the “2007 ABS Facility”). As of September 30, 2008, $200 million was available under this facility. In October 2008, we borrowed an additional $100 million on the 2007 ABS Facility, a portion of which we used to pay off approximately $60 million on our revolving credit facility. If Wachovia or its successor is not able to perform its obligations under the 2007 ABS Facility, we would have no additional borrowing capacity under this facility. The inability to borrow additional amounts under the 2007 ABS Facility, our revolving credit facility and the Partnership’s revolving credit facility could limit our ability to fund our future growth and operations.

In addition, Wachovia is a counterparty to several of our interest rate swap agreements. If these swap agreements are settled in our favor, and if Wachovia or its successor is unable to perform its obligations under these agreements, we could lose the amounts we are owed under these agreements. The credit crisis could have an impact on our remaining interest rate swap agreements if other counterparties are unable to perform their obligations under those agreements.

The securities market declines and economic slowdown may have an impact on our ability to sell the remainder of our U.S. contract operations business to the Partnership, limiting our ability to fund our future international growth and operations.

We intend to offer the Partnership the opportunity to purchase the remainder of our U.S. contract operations business over time and to use the proceeds of any such sales to fund our own international growth and operations. The Partnership intends to fund its future acquisitions from us with external sources of capital, including additional borrowings under its credit agreement and/or offerings of equity or debt in the capital markets. As a result of the economic slowdown and the declines in both the Partnership’s unit price and the availability of equity capital in the public markets, the Partnership’s ability to access the capital markets may be restricted, which could have an impact on its ability to fund future acquisitions of our U.S. contract operations business. Failure to sell our U.S. contract operations business to the Partnership, together with the absence of alternative sources of capital, could limit our ability to fund our future international growth and operations and adversely affect our business, financial condition and results of operations.

A reduction in demand for oil or natural gas or prices for those commodities, or instability in North American or global energy and credit markets, could adversely affect our business.

Our results of operations depend upon the level of activity in the global energy market, including natural gas development, production, processing and transportation. 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. As a result, the demand for our natural gas compression services and oil and natural gas production and processing equipment could be adversely affected. A reduction in demand could also force us to reduce our pricing substantially. Additionally, in North America compression services for our customers’ production from unconventional natural gas sources such as tight sands, shales and coalbeds constitute an increasing percentage of our business. Such unconventional sources are generally less economically feasible to produce in lower natural gas price environments. A reduction in natural gas demand may cause such unconventional sources of natural gas to be uneconomic to drill and produce. These factors could in turn negatively impact the demand for our products and services. Any future decline in demand for oil and natural gas or prices for those commodities, or instability in the global energy markets, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The impact of the global financial crisis on our customers’ level of demand, and ability to pay, for our products and services could adversely affect our business.

Erosion of the financial condition of our customers could also have an adverse effect on our business. During times when the oil or natural gas markets weaken, our customers are more likely to experience a downturn in their financial condition. In addition, many of our customers finance their exploration and development activities through cash flow from operations, the incurrence of debt or the issuance of equity. Recently, there has been a significant decline in the credit markets and availability of credit. Similarly, many of our customers’ equity values have substantially declined, and the equity capital markets have been unavailable as a source of financing. The combination of a reduction of cash flow resulting from declines in commodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in our customers’ spending for our products and services. For example, our customers could seek to preserve capital by canceling any month-to-month contracts, canceling or delaying scheduled maintenance of their existing natural gas compression and oil and natural gas production and processing equipment or determining not to enter into any new natural gas compression service contracts or purchase new compression and oil and natural gas production and processing equipment, thereby reducing demand for our products and services. Some of our customers already have announced reduced capital expenditure budgets for the remainder of 2008 and 2009. The reduced demand for our products and services as described above could adversely affect our business, financial condition, results of operations and cash flow. In addition, in the event of the financial failure of a customer, we could experience a loss associated with the unsecured portion of any of our outstanding accounts receivable associated with that customer.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


					Total Number of		Maximum Dollar
					Shares Purchased		Value of Shares that
	Total Number of				as Part of Publicly		may yet be
	Shares		Average Price		Announced		Purchased under the
Period	Purchased		Paid per Share		Programs		Programs
07/01/08 — 07/31/08		—	$	—		—	$	100,029,767
08/01/08 — 08/31/08		753,176		47.54		753,176		64,223,321
09/01/08 — 09/30/08		333,862		42.33		333,862		50,092,112

Total		1,087,038	$	45.94		1,087,038	$	50,092,112

Item 5. Other Information.

Effective as of November 3, 2008, our board of directors adopted an amendment to our Amended and Restated Bylaws (the “Amendment”). Among other provisions, the Amendment amended the Bylaws to provide that a stockholder’s notice of a stockholder proposal or nomination of a director to be considered at an annual meeting of stockholders must be received by our Secretary at our principal executive offices:

	•		not less than 90 or more than 120 days prior to the first anniversary of the date on which we first mailed our proxy materials for the previous year’s annual meeting of stockholders, or

	•		if the date of the annual meeting is advanced by more than 30 days or delayed by more than 30 days after the anniversary of the preceding year’s annual meeting, not later than the close of business on the later of the 120^th day prior to the date of such annual meeting or, if we first publicly announce the date of such annual meeting less than 130 days prior to the date of such annual meeting, the tenth day following the day on which we first publicly announce the date of such meeting.

The Amendment also amended the Bylaws to provide that a stockholder’s notice of a stockholder proposal or nomination of a director to be considered at a special meeting of stockholders must be received by our Secretary at our principal executive offices not earlier than the close of business on the 120th day prior to the special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or, if the first public announcement of the date of such special meeting is less than 100 days prior to the date of such special meeting, the tenth day following the day on which public announcement is first made of the date of the special meeting.

The Amendment also amended the Bylaws to require any stockholder submitting a proposal or a nomination of a person for election as a director to include the following additional information in the notice:

	•		a description of the material terms of certain derivative instruments to which the stockholder or the beneficial owner, if any, on whose behalf the nomination or proposal is being made (each such stockholder or beneficial owner, a “Proposing Person”) is a party, a description of the material terms of any proportionate interest in our shares or derivative instruments held by a general or limited partnership in which such Proposing Person is a general partner or beneficially owns an interest in a general partner, and a description of the material terms of any performance-related fees to which such Proposing Person is entitled based on any increase or decrease in the value of our shares or derivative instruments; and

	•		with respect to a nomination of a director, a description of the material terms of all direct and indirect compensation and other material monetary arrangements during the past three years, and any other material relationships between or among any Proposing Person and their respective affiliates, on the one hand, and each proposed nominee and his or her respective affiliates, on the other hand, including all information that would be required to be disclosed pursuant to Rule 404 promulgated under the Securities and Exchange Commission’s Regulation S-K if such Proposing Person were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant.

The Proposing Person must update and supplement the required information 10 business days prior to the date of the meeting.

The Amendment also provides that a Proposing Person must be a stockholder of record as of the time of giving the notice provided for in the Bylaws and at the time of the meeting at which the nomination or proposal will be considered.

The foregoing is a summary of changes effected by adoption of the Amendment and is qualified in its entirety by reference to the Second Amended and Restated Bylaws filed as Exhibit 3.2 to this report and incorporated herein by reference.

Stockholder Nominations and Proposals for 2009 Annual Meeting

As a result of the amendment to the Bylaws as described above, a stockholder nomination or proposal intended to be considered at our 2009 annual meeting of stockholders must be received by our Secretary prior to January 3, 2009. Nominations or proposals should be mailed to Exterran Holdings, Inc., 16666 Northchase Drive, Houston, Texas, 77060, Attention: Corporate Secretary.

Item 6. Exhibits


Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of February 5, 2007, by and among Hanover Compressor Company, Universal Compression Holdings, Inc., Iliad Holdings, Inc., Hector Sub, Inc. and Ulysses Sub, Inc., incorporated by reference to Exhibit 2.1 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed August 20, 2007

2.2		Amendment No. 1, dated as of June 25, 2007, to Agreement and Plan of Merger, dated as of February 5, 2007, by and among Hanover Compressor Company, Universal Compression Holdings, Inc., Exterran Holdings, Inc. (formerly Iliad Holdings, Inc.), Hector Sub, Inc. and Ulysses Sub, Inc., incorporated by reference to Exhibit 2.2 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed August 20, 2007

2.3		Amended and Restated Contribution Conveyance and Assumption Agreement, dated July 6, 2007, by and among Universal Compression, Inc., UCO Compression 2005 LLC, UCI Leasing LLC, UCO GP, LLC, UCI GP LP LLC, UCO General Partner, LP, UCI MLP LP LLC, UCLP Operating LLC, UCLP Leasing LLC and Universal Compression Partners, L.P., incorporated by reference to Exhibit 2.1 of Universal Compression Holdings, Inc. Current Report on Form 8-K filed July 11, 2007

2.4		Contribution, Conveyance and Assumption Agreement, dated June 25, 2008, by and among Exterran Holdings, Inc., Hanover Compressor Company, Hanover Compression General Holdings, LLC, Exterran Energy Solutions, L.P., Exterran ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed June 26, 2008

3.1		Restated Certificate of Incorporation of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed August 20, 2007

3.2*		Second Amended and Restated Bylaws of Exterran Holdings, Inc.

4.1		First Supplemental Indenture, dated August 20, 2007, by and between Hanover Compressor Company, Exterran Holdings, Inc., and Wilmington Trust Company, as Trustee, for the 4.75% Convertible Senior Notes due 2008, incorporated by reference to Exhibit 10.14 of Exterran Holdings, Inc. Current Report on Form 8-K filed on August 23, 2007

4.2		Eighth Supplemental Indenture, dated August 20, 2007, by and between Hanover Compressor Company, Exterran Holdings, Inc., and U.S. Bank National Association, as Trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 10.15 of Exterran Holdings, Inc. Current Report on Form 8-K filed on August 23, 2007

10.1*		Amendment No. 1, dated as of July 30, 2008, to First Amended and Restated Omnibus Agreement, dated as of August 20, 2007, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General Partner, L.P., EXLP Operating LLC and Exterran Partners, L.P. (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended)

10.2†*		Form of First Amendment to Exterran Holdings, Inc. Change of Control Agreement

10.3†*		Amendment No. 2 to Hanover Compressor Company Change of Control Agreement with Norman A. Mckay

31.1*		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


†		Management contract or compensatory plan or arrangement

*		Filed herewith.

EXHIBIT INDEX


Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of February 5, 2007, by and among Hanover Compressor Company, Universal Compression Holdings, Inc., Iliad Holdings, Inc., Hector Sub, Inc. and Ulysses Sub, Inc., incorporated by reference to Exhibit 2.1 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed August 20, 2007

2.2		Amendment No. 1, dated as of June 25, 2007, to Agreement and Plan of Merger, dated as of February 5, 2007, by and among Hanover Compressor Company, Universal Compression Holdings, Inc., Exterran Holdings, Inc. (formerly Iliad Holdings, Inc.), Hector Sub, Inc. and Ulysses Sub, Inc., incorporated by reference to Exhibit 2.2 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed August 20, 2007

2.3		Amended and Restated Contribution Conveyance and Assumption Agreement, dated July 6, 2007, by and among Universal Compression, Inc., UCO Compression 2005 LLC, UCI Leasing LLC, UCO GP, LLC, UCI GP LP LLC, UCO General Partner, LP, UCI MLP LP LLC, UCLP Operating LLC, UCLP Leasing LLC and Universal Compression Partners, L.P., incorporated by reference to Exhibit 2.1 of Universal Compression Holdings, Inc. Current Report on Form 8-K filed July 11, 2007

2.4		Contribution, Conveyance and Assumption Agreement, dated June 25, 2008, by and among Exterran Holdings, Inc., Hanover Compressor Company, Hanover Compression General Holdings, LLC, Exterran Energy Solutions, L.P., Exterran ABS 2007 LLC, Exterran ABS Leasing 2007 LLC, EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed June 26, 2008

3.1		Restated Certificate of Incorporation of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of Exterran Holdings, Inc.’s Current Report on Form 8-K filed August 20, 2007

3.2*		Second Amended and Restated Bylaws of Exterran Holdings, Inc.

4.1		First Supplemental Indenture, dated August 20, 2007, by and between Hanover Compressor Company, Exterran Holdings, Inc., and Wilmington Trust Company, as Trustee, for the 4.75% Convertible Senior Notes due 2008, incorporated by reference to Exhibit 10.14 of Exterran Holdings, Inc. Current Report on Form 8-K filed on August 23, 2007

4.2		Eighth Supplemental Indenture, dated August 20, 2007, by and between Hanover Compressor Company, Exterran Holdings, Inc., and U.S. Bank National Association, as Trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 10.15 of Exterran Holdings, Inc. Current Report on Form 8-K filed on August 23, 2007

10.1*		Amendment No. 1, dated as of July 30, 2008, to First Amended and Restated Omnibus Agreement, dated as of August 20, 2007, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General Partner, L.P., EXLP Operating LLC and Exterran Partners, L.P. (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended)

10.2†*		Form of First Amendment to Exterran Holdings, Inc. Change of Control Agreement

10.3†*		Amendment No. 2 to Hanover Compressor Company Change of Control Agreement with Norman A. Mckay

31.1*		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


†		Management contract or compensatory plan or arrangement.

*		Filed herewith.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net income (loss)	$	37,033		$	(75,391	)	$	108,064		$	(23,925	)
Other comprehensive income (loss), net of tax:
Change in fair value of derivative financial instruments		(2,763	)		(1,568	)		985			(1,568	)
Foreign currency translation adjustment		4,008			14,419			(8,541	)		16,256

Comprehensive income (loss)	$	38,278		$	(62,540	)	$	100,508		$	(9,237	)


	Page
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Comprehensive Income (Loss)		5
Condensed Consolidated Statements of Cash Flows		6
Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 5. Other Information		44
Item 6. Exhibits		45
SIGNATURES		46
EX-3.2
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	EXTERRAN HOLDINGS, INC.
Date: November 6, 2008	By:	/s/ J. MICHAEL ANDERSON
		J. Michael Anderson
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)


	By:	/s/ KENNETH R. BICKETT
		Kenneth R. Bickett
		Vice President, Accounting and Corporate Controller (Principal Accounting Officer)