Archrock Partners (APLP) 10-Q 2009 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTERLY PERIOD ENDED June 30, 2009
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM____________TO____________.

Commission File No. 001-33078

EXTERRAN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

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

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

(281) 836-7000

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of July 31, 2009, there were 12,793,612 common units and 6,325,000 subordinated units outstanding.

TABLE OF CONTENTS

	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		5
Condensed Consolidated Statements of Cash Flows		6
Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		29
Item 4. Controls and Procedures		29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 6. Exhibits		32
SIGNATURES		33

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for unit amounts)

(unaudited)

	June 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	564		$	3,244
Accounts receivable, trade, net of allowance of $569 and $230, respectively		22,569			25,958
Due from affiliates, net		6,337			6,445
Total current assets		29,470			35,647
Compression equipment		578,147			566,286
Accumulated depreciation		(149,944	)		(131,973	)
Net compression equipment		428,203			434,313
Goodwill		124,019			124,019
Intangibles and other assets, net		5,298			5,965
Total assets	$	586,990		$	599,944
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable, trade	$	33		$	297
Accrued liabilities		6,225			5,703
Accrued interest		1,881			1,880
Current portion of interest rate swaps		7,839			5,483
Total current liabilities		15,978			13,363
Long-term debt		387,750			398,750
Interest rate swaps		8,057			12,204
Other long-term liabilities		—			159
Total liabilities		411,785			424,476
Commitments and contingencies (Note 12)
Partners’ capital:
Limited partner units:
Common units, 12,793,612 and 12,767,462 units issued and outstanding		218,359			221,090
Subordinated units, 6,325,000 units issued and outstanding		(34,843	)		(35,518	)
General partner units, 2% interest with 389,642 units issued and outstanding		6,807			6,805
Accumulated other comprehensive loss		(15,118	)		(16,909	)
Total partners’ capital		175,205			175,468
Total liabilities and partners’ capital	$	586,990		$	599,944

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

3

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit amounts)

(unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
Revenue	$	45,077	$	34,999		$	93,310	$	70,266
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense)		20,176		15,937			42,358		32,080
Depreciation and amortization		8,678		5,811			17,012		11,485
Fleet impairment		2,995		—			2,995		—
Selling, general and administrative		5,551		4,745			11,552		7,746
Interest expense		4,805		3,445			9,624		7,246
Other (income) expense, net		—		(1,129	)		27		(1,139	)
Total costs and expenses		42,205		28,809			83,568		57,418
Income before income taxes		2,872		6,190			9,742		12,848
Income tax expense		134		111			283		222
Net income	$	2,738	$	6,079		$	9,459	$	12,626
General partner interest in net income	$	304	$	186		$	687	$	373
Common units interest in net income	$	1,628	$	3,668		$	5,867	$	7,633
Subordinated units interest in net income	$	806	$	2,225		$	2,905	$	4,620
Weighted average common units outstanding:
Basic		12,782		10,354			12,768		10,354
Diluted		12,788		10,454			12,771		10,451
Weighted average subordinated units outstanding:
Basic		6,325		6,325			6,325		6,325
Diluted		6,325		6,325			6,325		6,325
Earnings per common unit:
Basic	$	0.13	$	0.35		$	0.46	$	0.73
Diluted	$	0.13	$	0.35		$	0.46	$	0.73
Earnings per subordinated unit:
Basic	$	0.13	$	0.35		$	0.46	$	0.73
Diluted	$	0.13	$	0.35		$	0.46	$	0.73

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

4

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
		2009		2008		2009		2008
Net income	$	2,738	$	6,079	$	9,459	$	12,626
Other comprehensive income:
Interest rate swap gain		2,319		8,153		1,791		865
Comprehensive income	$	5,057	$	14,232	$	11,250	$	13,491

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

5

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net income	$	9,459		$	12,626
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		17,012			11,485
Fleet impairment		2,995			—
Amortization of debt issuance cost		186			152
Amortization of fair value of acquired interest rate swaps		75			112
Unit-based compensation expense		365			821
Gain on sale of compression equipment		—			(1,119	)
Changes in assets and liabilities:
Accounts receivable, trade		3,389			(7,735	)
Other assets		94			25
Accounts payable, trade		(90	)		(18	)
Other liabilities		510			(534	)
Net cash provided by operating activities		33,995			15,815
Cash flows from investing activities:
Capital expenditures		(11,353	)		(11,972	)
Proceeds from the sale of compression equipment		—			5,275
Decrease in amounts due from affiliates, net		108			—
Net cash used in investing activities		(11,245	)		(6,697	)
Cash flows from financing activities:
Borrowings under revolving credit facility		6,500			—
Repayments under revolving credit facility		(17,500	)		—
Distributions to unitholders		(18,535	)		(14,582	)
Capital contribution from limited and general partner		4,105			7,073
Increase in amounts due to affiliates, net		—			(3,426	)
Net cash used in financing activities		(25,430	)		(10,935	)
Net decrease in cash and cash equivalents		(2,680	)		(1,817	)
Cash and cash equivalents at beginning of period		3,244			2,835
Cash and cash equivalents at end of period	$	564		$	1,018
Supplemental disclosure of cash flow information:
Non-cash capital contribution from limited and general partner	$	2,366		$	—

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

6

EXTERRAN PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The accompanying unaudited condensed consolidated financial statements of Exterran Partners, L.P. (“we,” “us” or “our”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) are not required in these interim financial statements and have been condensed or omitted. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2008. That report contains a more comprehensive summary of our accounting policies. These interim results are not necessarily indicative of results for a full year.

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

Earnings Per Common and Subordinated Unit

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

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

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

The potentially dilutive securities issued by us are unit options and phantom units, neither of which requires an adjustment to the amount of net income used for dilutive earnings per unit purposes. The aggregate dilutive effect of unit options and phantom units to our earnings per common unit for the three and six months ended June 30, 2009 was 6,204 units and 3,116 units, respectively. The aggregate dilutive effect of unit options and phantom units to our earnings per common unit for the three and six months ended June 30, 2008 was 100,148 units and 96,820 units, respectively. For the three and six months ended June 30, 2009, 580,715 unit options and zero phantom units were excluded from the calculation of diluted earnings per common and subordinated unit because they were anti-dilutive. For the three and six months ended June 30, 2008, zero unit options and phantom units were excluded from the calculation of diluted earnings per common and subordinated unit because they were anti-dilutive.

7

Due To/From Affiliates, Net

We have receivables and payables with Exterran Holdings. A valid right of offset exists related to the receivables and payables with these affiliates and as a result, we present such amounts on a net basis on our consolidated balance sheets. 

The transactions reflected in due to/from affiliates, net primarily consist of centralized cash management activities between us and Exterran Holdings. Because these balances are treated as short-term borrowings between us and Exterran Holdings, serve as a financing and cash management tool to meet our short-term operating needs, are large, turn over quickly and are payable on demand, we present borrowings and repayments with our affiliates on a net basis within the consolidated statements of cash flows. Net receivables from our affiliate are considered advances and changes are presented as investing activities in the consolidated statements of cash flows. Net payables due to our affiliate are considered borrowings and changes are presented as financing activities in the consolidated statements of cash flows.

Fair Value of Financial Instruments

Our financial instruments consist of trade receivables and payables, interest rate swaps and long-term debt. At June 30, 2009 and December 31, 2008, the estimated fair values of such financial instruments, except for debt, approximated their carrying values as reflected in our consolidated balance sheets. As a result of the current credit environment, we believe that the fair value of our debt does not approximate its carrying value as of June 30, 2009 and December 31, 2008 because the applicable margin on our debt was below the market rates as of these dates. The fair value of our debt has been estimated based on similar debt transactions that occurred near June 30, 2009 and December 31, 2008. A summary of the fair value and carrying value of our debt as of June 30, 2009 and December 31, 2008 is shown in the table below:

	As of June 30, 2009				As of December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Long-term debt	$	387,750	$	360,960	$	398,750	$	366,476

Reclassifications

Certain amounts in the prior financial statements have been reclassified to conform to the 2009 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

Subsequent Events

We reviewed for subsequent events as of the issuance of these financial statements on August 6, 2009.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007; however, in February 2008, the FASB issued a FASB Staff Position (“FSP”) that deferred the effective date to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements at fair value on at least an annual basis. We adopted the required undeferred provisions of SFAS No. 157 on January 1, 2008, and the adoption of the undeferred provisions of SFAS No. 157 did not have a material impact on our consolidated financial statements. We adopted the deferred provisions of SFAS No. 157 on January 1, 2009, and the adoption of the deferred provisions of SFAS No. 157 did not have a material impact on our consolidated financial statements.

8

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 an exception for the accounting for valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions. SFAS No. 141(R) amends SFAS No. 109, “Accounting For Income Taxes,” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141(R) would also apply the provisions of SFAS No. 141(R). We adopted the provisions of SFAS No. 141(R) on January 1, 2009, and the adoption of SFAS No. 141(R) did not have a material impact on our consolidated financial statements, although we are not able to predict its impact on future potential acquisitions.

In March 2008, the FASB’s Emerging Issues Task Force reached a consensus on Issue 07-04, “Application of the Two-Class Method Under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships” (“EITF 07-04”). EITF 07-04 provides guidance on the accounting treatment of cash distributions in excess of earnings and earnings in excess of cash distributions. EITF 07-04 concluded that when earnings are in excess of cash distributions, current-period earnings should be reduced by the amount of distributions to the general partner, limited partners and the incentive distribution rights holder determined in accordance with the contractual terms of the partnership agreement. The remaining undistributed earnings should be allocated to the general partner, limited partners and the incentive distribution rights holder using the distribution waterfall for available cash. When cash distributions are in excess of earnings, the excess should be allocated to the general partner and limited partners on the basis of their respective sharing of losses. The excess will also be allocated to the incentive distribution rights holder if the incentive distribution rights holder has a contractual obligation to share in losses on a basis that is objectively determinable. EITF 07-04 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and should be applied retrospectively for all financial statements presented. We adopted the provisions of EITF 07-04 on January 1, 2009, and the adoption of EITF 07-04 did not have a material impact 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 adopted the provisions of SFAS No. 161 on January 1, 2009, and the adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements; however, we have expanded disclosures regarding our derivative instruments.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), in accordance with GAAP. FSP FAS 142-3 requires an entity to disclose information for a recognized intangible asset that enables users of the financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted the provisions of FSP FAS 142-3 on January 1, 2009, and the adoption of FSP FAS 142-3 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB Opinion No. 28-1 (“FSP FAS 107-1 and APB No. 28-1”), “Interim Disclosures about Fair Value of Financial Instruments”, which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, and requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB No. 28-1 also amend APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods. Prior to issuing FSP FAS 107-1 and APB No. 28-1, fair values for financial instruments were only disclosed once a year. FSP FAS 107-1 and APB No. 28-1 are effective for interim reporting periods ending after June 15, 2009. FSP FAS 107-1 and APB No. 28-1 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, require comparative disclosures only for periods ending after initial adoption. We adopted the provisions of FSP FAS 107-1 and APB No. 28-1 on June 30, 2009, and the adoption of FSP FAS 107-1 and APB No. 28-1 did not have a material impact on our consolidated financial statements.

9

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, and is effective for interim and annual periods ending after June 15, 2009. We adopted the provisions of SFAS No. 165 on June 30, 2009, and the adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the codification carries an equal level of authority. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS No. 168 will have a material impact on our consolidated financial statements; however, we will disclose codification citations to GAAP in place of corresponding references to legacy accounting pronouncements.

3.  JULY 2008 CONTRACT OPERATIONS ACQUISITION

In July 2008, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of approximately 620 compressor units used to provide compression services under those agreements having a net book value of $133.9 million, net of accumulated depreciation of $16.5 million, and comprising approximately 254,000 horsepower, or 6% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “July 2008 Contract Operations Acquisition”). In connection with this acquisition, we assumed $175.3 million of debt from Exterran Holdings and issued to Exterran Holdings’ wholly-owned subsidiaries approximately 2.4 million common units and approximately 49,000 general partner units. Concurrent with the closing of the July 2008 Contract Operations Acquisition, we borrowed $117.5 million under our term loan and $58.3 million under our revolving credit facility, which together were used to repay the debt assumed from Exterran Holdings in the acquisition and to pay other costs incurred in the acquisition.

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

An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the July 2008 Contract Operations Acquisition was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be substantiated. Accordingly, our financial statements include the assets acquired, liabilities assumed, revenues and operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP.

10

Unaudited Pro Forma Financial Information

Pro forma financial information for the three and six months ended June 30, 2008 has been included to give effect to the significant expansion of our compressor fleet and service contracts as the result of the July 2008 Contract Operations Acquisition. The transactions are presented in the pro forma financial information as though the transactions had occurred as of January 1, 2008.

The unaudited pro forma financial information for the three and six months ended June 30, 2008 reflects the following transactions:

• the contribution of customer contracts and equipment used to provide compression services under those contracts transferred in the July 2008 Contract Operations Acquisition from Exterran Holdings to us;

• our assumption of $175.3 million of Exterran Holdings’ debt;

• the issuance of our common units and general partner units to Exterran Holdings’ wholly-owned subsidiaries; and

• our borrowing of $175.8 million under our senior secured credit facility and use of those proceeds to repay the debt assumed from Exterran Holdings.

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

The following table presents pro forma financial information for the three and six months ended June 30, 2008 (in thousands, except per unit amounts):

	Three Months Ended		Six Months Ended
	June 30, 2008
Total revenues	$	48,054	$	96,446
Net income	$	8,328	$	17,488
Earnings per limited partner unit—Basic	$	0.42	$	0.88
Earnings per limited partner unit—Diluted	$	0.42	$	0.88

Pro forma net income per limited partner unit is determined by dividing the pro forma net income that would have been allocated to the common and subordinated unitholders by the weighted average number of common and subordinated units expected to be outstanding after the completion of the transactions included in the pro forma consolidated financial statements. All units were assumed to have been outstanding since the beginning of the periods presented. Pursuant to the partnership agreement, to the extent that the quarterly distributions exceed certain targets, the general partner is entitled to receive certain incentive distributions that will result in more net income proportionately being allocated to the general partner than to the holders of common and subordinated units. The pro forma net earnings per limited partner unit calculations include adjustments for the pro forma incentive distributions to the general partner. A reduction to net income allocable to the limited partners of approximately $7,000 and $0.2 million, respectively, was included for the three and six months ended June 30, 2008 to reflect the amount of additional incentive distributions that would have occurred if the excess of net earnings over actual distributions for the period had been distributed.

4. MERGER BETWEEN UNIVERSAL AND HANOVER

On August 20, 2007, Universal Compression Holdings, Inc. (“Universal”) and Hanover Compressor Company (“Hanover”) completed their merger transaction. In connection with the merger, Universal and Hanover became wholly-owned subsidiaries of Exterran Holdings, and Universal then merged with and into Exterran Holdings. As a result of the merger, Exterran Holdings became the indirect owner of our general partner, which as of June 30, 2009, owned 389,642 general partner units, representing a 2% general partner interest, and all the incentive distribution rights in us. As of June 30, 2009, Exterran Holdings owned 4,428,067 common units and 6,325,000 subordinated units which, together with the general partner interest, represent a 57% total ownership interest in us.

11

5. RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

• Exterran Holdings’ obligation to indemnify us for certain liabilities and our obligation to indemnify Exterran Holdings for certain liabilities.

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

During the six months ended June 30, 2009, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 48 compressor units, totaling approximately 24,000 horsepower with a net book value of approximately $12.0 million to Exterran Holdings. In exchange, Exterran Holdings transferred ownership to us of 108 compressor units totaling approximately 27,100 horsepower with a net book value of approximately $15.1 million. During the six months ended June 30, 2008, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 52 compressor units, totaling approximately 24,600 horsepower with a net book value of approximately $11.3 million to Exterran Holdings. In exchange, Exterran Holdings transferred ownership to us of 133 compressor units totaling approximately 27,100 horsepower with a net book value of approximately $11.3 million. During the six months ended June 30, 2009 and 2008, we recorded an equity contribution of approximately $3.1 million and zero, respectively, related to the difference in net book value on the compression equipment that was exchanged with us. No customer contracts were included in the transfers. Under the terms of the Omnibus Agreement, such transfers must be of equal appraised value, as defined in the Omnibus Agreement, with any difference being settled in cash. As a result, we paid a nominal amount to Exterran Holdings for the difference in fair value of the equipment in connection with the transfers. We recorded the compressor units received at the historical book basis of Exterran Holdings. The units we received from Exterran Holdings were being utilized to provide services to our customers on the date of the transfers and, prior to the transfers, had been leased by us from Exterran Holdings. The units we transferred to Exterran Holdings were being utilized to provide services to customers of Exterran Holdings on the date of the transfers, and prior to the transfers had been leased by Exterran Holdings from us.

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

For the three months ended June 30, 2009 and 2008, our cost of sales exceeded the cap provided in the Omnibus Agreement by $1.5 million and $3.5 million, respectively. For the six months ended June 30, 2009 and 2008, our cost of sales exceeded the cap provided in the Omnibus Agreement by $4.1 million and $7.1 million, respectively. For the three and six months ended June 30, 2009 and 2008, our SG&A expenses did not exceed the cap provided in the Omnibus Agreement. The excess amounts over the caps are included in

12

the consolidated statements of operations as cost of sales or SG&A expense. The cash received for the amounts over the caps has been accounted for as a capital contribution in our consolidated balance sheets and consolidated statements of cash flows.

Pursuant to the Omnibus Agreement, we are permitted to purchase newly fabricated compression equipment from Exterran Holdings or its affiliates at Exterran Holdings’ cost to fabricate such equipment plus a fixed margin of 10%, which may be modified with the approval of Exterran Holdings and the conflicts committee of Exterran GP LLC’s board of directors. During the six months ended June 30, 2009 and 2008, we purchased $1.3 million and $8.0 million, respectively, of new compression equipment from Exterran Holdings. Under GAAP, transfers of assets and liabilities between entities under common control are to be initially recorded on the books of the receiving entity at the carrying value of the transferor. Any difference between consideration given and the carrying value of the assets or liabilities is treated as an equity distribution or contribution. Transactions between us and Exterran Holdings and its affiliates are transactions between entities under common control. As a result, the equipment purchased during the six months ended June 30, 2009 and 2008 was recorded in our consolidated balance sheet as property, plant and equipment of $1.2 million and $7.2 million, respectively, which represents the carrying value of the Exterran Holdings affiliates that sold it to us, and as a distribution of equity of $0.1 million and $0.8 million, respectively, which represents the fixed margin we paid above the carrying value in accordance with the Omnibus Agreement. During the six months ended June 30, 2009 and 2008, Exterran Holdings contributed $1.1 million and zero, respectively, related to the completion of overhauls on compression equipment that was exchanged with us or contributed to us and where overhauls were in progress on the date of exchange or contribution.

Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith that there exists a need on the part of Exterran Holdings’ contract operations services business or on our part to lease compression equipment between Exterran Holdings and us so as to fulfill the compression services obligations of either Exterran Holdings or us, such equipment may be leased if it will not cause us to breach any existing compression services contracts or to suffer a loss of revenue under an existing compression services contract or incur any unreimbursed costs. At June 30, 2009, we had equipment on lease to Exterran Holdings with an aggregate cost and accumulated depreciation of $8.7 million and $2.0 million, respectively.

For the six months ended June 30, 2009 and 2008, we had revenues of $0.5 million and $0.9 million, respectively, from Exterran Holdings related to the lease of our compression equipment. For the six months ended June 30, 2009 and 2008, we had cost of sales of $5.4 million and $3.7 million, respectively, with Exterran Holdings related to the lease of Exterran Holdings’ compression equipment.

6. DEBT

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

	June 30, 2009		December 31, 2008
Revolving credit facility due October 2011	$	270,250	$	281,250
Term loan facility due October 2011		117,500		117,500
Long-term debt	$	387,750	$	398,750

Our senior secured credit facility contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the credit agreement) to Total Interest Expense (as defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of Total Debt (as defined in the credit agreement) to EBITDA of not greater than 5.0 to 1.0. As of June 30, 2009, we maintained a 4.5 to 1.0 EBITDA to Total Interest Expense ratio and a 4.4 to 1.0 Total Debt to EBITDA ratio. As of June 30, 2009, we were in compliance with all financial covenants under the credit agreement.

13

7. CASH DISTRIBUTIONS

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

• first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

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

• third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter;

• fourth, 85% to all common and subordinated unitholders, pro rata, and 15% to our general partner, until each unit has received a distribution of $0.4375;

• fifth, 75% to all common and subordinated unitholders, pro rata, and 25% to our general partner, until each unit has received a total of $0.525; and

• thereafter, 50% to all common and subordinated unitholders, pro rata, and 50% to our general partner.

The following table summarizes our distributions per unit for 2007, 2008 and 2009:

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

________

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

On July 30, 2009, the board of directors of Exterran GP LLC approved a cash distribution of $0.4625 per limited partner unit, or approximately $9.3 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from April 1, 2009 through June 30, 2009. The record date for this distribution is August 10, 2009 and payment is expected to occur on August 14, 2009.

8. UNIT-BASED COMPENSATION

Long-Term Incentive Plan

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

14

Unit options will have an exercise price that is not less than the fair market value of the units on the date of grant and will become exercisable over a period determined by the Plan Administrator. Phantom units are notional units that entitle the grantee to receive a common unit upon the vesting of the phantom unit or, at the discretion of the Plan Administrator, cash equal to the fair value of a common unit.

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

We have granted unit options to individuals who are not our employees, but who are employees of Exterran Holdings and its subsidiaries who provide services to us. We have also granted phantom units to directors of Exterran GP LLC and to employees of Exterran Holdings and its subsidiaries. Because we grant unit options and phantom units to non-employees, we are required to re-measure the fair value of these unit options and phantom units each period and record a cumulative adjustment of the expense previously recognized. We recorded $37,000 and $39,000, respectively, in SG&A expense related to the re-measurement of fair value of the phantom units for the three and six months ended June 30, 2009. We recorded $0.9 million in SG&A expense during the three months ended June 30, 2008 and a reduction to expense of $0.3 million during the six months ended June 30, 2008 related to the re-measurement of fair value of the unit options and phantom units.

Unit Options

As of June 30, 2009, we had 580,715 outstanding unit options. The unit options vested and became exercisable on January 1, 2009, and expire on December 31, 2009.

The following table presents unit option activity for the six months ended June 30, 2009 (remaining life in years):

	Unit Options			Weighted Average Exercise Price		Weighted Average Remaining Life		Aggregate Intrinsic Value
Unit options outstanding, December 31, 2008		591,429		$	23.77
Cancelled		(10,714	)		25.94
Unit options outstanding, June 30, 2009		580,715		$	23.73		0.5	$	—
Unit options exercisable, June 30, 2009		580,715		$	23.73		0.5	$	—

Intrinsic value is the difference between the market value of our units and the exercise price of each unit option multiplied by the number of unit options outstanding for those unit options where the market value exceeds their exercise price.

Phantom Units

During the six months ended June 30, 2009, we granted 80,624 phantom units to officers and directors of Exterran GP LLC and certain employees of Exterran Holdings and its subsidiaries, which settle 33 1/3% on each of the first three anniversaries of the grant date.

The following table presents phantom unit activity for the six months ended June 30, 2009:

	Phantom Units			Weighted Average Grant-Date Fair Value per Unit
Phantom units outstanding, December 31, 2008		48,152		$	30.98
Granted		80,624			11.74
Vested		(34,576	)		24.02
Cancelled		(4,305	)		18.31
Phantom units outstanding, June 30, 2009		89,895		$	17.01

15

As of June 30, 2009, $1.0 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 2.4 years.

9. ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS

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

Interest Rate Risk

At June 30, 2009, we were party to three interest rate swaps in which we pay fixed payments and receive floating payments on a notional value of $205.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire over varying dates through December 2011. The weighted average effective fixed interest rate payable on our interest rate swaps was 5.3% as of June 30, 2009. 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 (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. For the three and six months ended June 30, 2009 and 2008, there was no ineffectiveness related to these swaps. We estimate that $7.8 million of deferred pre-tax losses from the interest rate swaps will be realized as an expense during the next twelve months. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

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

	June 30, 2009
	Balance Sheet Location	Fair Value Asset (Liability)
Derivatives designated as hedging instruments under SFAS No. 133:
Interest rate hedges	Current portion of interest rate swaps	$	(7,839	)
Interest rate hedges	Interest rate swaps		(8,057	)
Total derivatives		$	(15,896	)

	Three Months Ended June 30, 2009						Six Months Ended June 30, 2009
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives		Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)			Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives		Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)
Derivatives designated as cash flow hedges under SFAS No. 133:
Interest rate hedges	$	2,319	Interest expense	$	(2,181	)	$	1,791	Interest expense	$	(3,962	)

16

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

10. FAIR VALUE MEASUREMENTS

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 interest rate swaps and impaired fleet units under SFAS No. 157 pricing levels as of June 30, 2009 (in thousands):

	Total			Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs(Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swaps asset (liability)	$	(15,896	)	$	—	$	(15,896	)	$	—
Impaired fleet units		197			—		—			197

The fair value of our impaired fleet units is included in the table above because we recorded an impairment charge related to these assets in the second quarter of 2009. For a discussion of the fleet impairment charge, see Note 11.

Our interest rate swaps are recorded at fair value utilizing a combination of the market and income approach to fair value. We use discounted cash flows and market based methods to compare similar interest rate swaps. Our estimate of the fair value of the impaired fleet units was based on the estimated component value of the equipment, because we plan to recover the remaining value from these assets in the future by selling the components to Exterran Holdings.

11. FLEET IMPAIRMENT

As a result of a decline in market conditions and operating horsepower, during the second quarter of 2009, we reviewed the idle compression fleet used in our business for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. As a result of that review, we decided that 50 units representing 8,700 horsepower would be retired from the fleet.

We performed a cash flow analysis of the expected proceeds from the disposition of these units to determine the fair value of the fleet assets we will no longer utilize in our operations. The net book value of these assets exceeded the fair value by $3 million, and the difference was recorded as a long-lived asset impairment in the second quarter of 2009. The impairment is recorded in Fleet impairment expense in the consolidated statements of operations.

17

12. COMMITMENTS AND CONTINGENCIES

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

13. SUBSEQUENT EVENT

In July 2009, we entered into an interest rate swap agreement that was designated as a cash flow hedge to hedge the risk of variability in interest rate payments related to LIBOR-based variable rate debt. The interest rate swap agreement has a notional amount of $50.0 million and converted floating rate debt to fixed rate debt at 2.0%.

18

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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

• our business growth strategy and projected costs;

• our future financial position;

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

• the expected timing and amount of our capital expenditures;

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

• the future value of our equipment;

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

• any potential contribution of additional assets from Exterran Holdings, Inc. (individually, and together with its wholly-owned subsidiaries, “Exterran Holdings”) to us.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. These forward-looking statements are also affected by the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2008, 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 website at www.sec.gov. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

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

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

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

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

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

• an Internal Revenue Service challenge to our valuation methodologies, which may result in a shift of income, gains, losses and/or deductions between our general partner and our unitholders;

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

19

• the financial condition of our customers;

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

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

• integrating acquired businesses;

• generating sufficient cash;

• accessing the capital markets at an acceptable cost;

• purchasing additional contract operation contracts and equipment from Exterran Holdings; and

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

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

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

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

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

GENERAL

We are a publicly held Delaware limited partnership formed on June 22, 2006 to acquire certain contract operations customer service agreements and a compressor fleet used to provide compression services under those agreements. We completed our initial public offering in October 2006.

In August 2007, we changed our name from Universal Compression Partners, L.P. to Exterran Partners, L.P. concurrent with the closing of the merger of Hanover Compressor Company (“Hanover”) and Universal Compression Holdings, Inc. (“Universal”). In connection with the merger, Universal and Hanover became wholly-owned subsidiaries of Exterran Holdings, a new company formed in anticipation of the merger, and Universal was merged with and into Exterran Holdings. As of June 30, 2009, public unitholders held a 43% ownership interest in us and Exterran Holdings owned our remaining equity interests, including the general partner interests and all of our incentive distribution rights.

July 2008 Contract Operations Acquisition

In July 2008, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of approximately 620 compressor units used to provide compression services under those agreements having a net book value of $133.9 million, net of accumulated depreciation of $16.5 million, and comprising approximately 254,000 horsepower, or 6% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “July 2008 Contract Operations Acquisition”). In connection with this acquisition, we assumed $175.3 million of debt from Exterran Holdings and issued to Exterran Holdings’ wholly-owned subsidiaries approximately 2.4 million common units and approximately 49,000 general partner units. Concurrent with the closing of the July 2008 Contract Operations Acquisition, we borrowed $117.5 million under our term loan and $58.3 million under our revolving credit facility, which together were used to repay the debt assumed from Exterran Holdings in the acquisition and to pay other costs incurred in the acquisition.

20

Omnibus Agreement

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

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

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

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

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

The Omnibus Agreement was amended in connection with the July 2008 Contract Operations Acquisition to increase the cap on our reimbursement of selling, general, and administrative (“SG&A”) expenses allocable from Exterran Holdings to us based on such costs incurred by Exterran Holdings on our behalf from $4.75 million per quarter to $6.0 million per quarter (after taking into account any such costs that we incur and pay directly) and to increase the cap on our reimbursement of cost of sales allocable from Exterran Holdings to us based on such costs incurred by Exterran Holdings on our behalf from $18.00 per operating horsepower per quarter to $21.75 per operating horsepower per quarter (after taking into account any such costs that we incur and pay directly). This amendment also extended the date on which the caps expire from December 31, 2008 to December 31, 2009. For further discussion of the Omnibus Agreement, please see Note 5 to the Condensed Consolidated Financial Statements included in Part I, Item 1 (“Financial Statements”) of this report.

OVERVIEW

Industry Conditions and Trends

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

Natural gas consumption in the United States of America (“U.S.”) for the twelve months ended April 30, 2009 decreased by approximately 2.4% over the twelve months ended April 30, 2008. Total natural gas consumption is projected by the Energy Information Administration (“EIA”) to decline by 1.8% in 2009 and remain relatively unchanged in 2010, and is expected to increase by an average of 0.7% per year until 2030. For 2007, the U.S. accounted for an estimated annual production of approximately 19 trillion cubic feet of natural gas. The EIA estimates that the U.S.’s natural gas production level will be approximately 20 trillion cubic feet in calendar year 2030.

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

• increased production from unconventional sources, which include tight sands, shales and coal beds, generally requires more compression than production from conventional sources to produce the same volume of natural gas.

21

Our Performance Trends and Outlook

Beginning in the second half of 2008, there were severe disruptions in the credit and capital markets and reductions in global economic activity which have had a significant adverse impact on oil-and-gas-related commodity prices. Currently, we believe the decline in commodity prices and the uncertain credit and capital market conditions resulting from the global financial crisis will continue to negatively impact the level of spending by our customers in 2009 compared with 2008 levels.

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

Given the current economic environment in the U.S. and anticipated impact of lower natural gas prices and capital spending by customers, we expect a further reduction in demand and profitability in our business. We believe that lower demand, in addition to the available supply of idle and underutilized compression equipment owned by our customers and competitors will continue to negatively impact our ability to maintain or improve our horsepower utilization and revenues in the near term. In addition, because we initially purchased only contracted equipment from Exterran Holdings, we anticipate that the average utilization of our contract operations fleet will decrease over time as some units become idle due to the termination of contract operations service agreements. A 1% decrease in average utilization of our contract operations fleet would result in a decrease in our revenue and gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for the six months ended June 30, 2009 of approximately $0.9 million and $0.5 million, respectively.

Our level of capital spending depends on the demand for our services and the equipment we require to render those services to our customers. While our contract operations services business has historically experienced more stable demand than that for certain other energy service products and services, our total operating horsepower decreased by approximately 8% from December 31, 2008 to June 30, 2009, and we expect further horsepower declines during the remainder of 2009.

Pursuant to the Omnibus Agreement between us and Exterran Holdings, our obligation to reimburse Exterran Holdings for cost of sales and SG&A expenses is capped through December 31, 2009 (see Note 5 to the Financial Statements). During the three months ended June 30, 2009 and 2008, our cost of sales exceeded this cap by $1.5 million and $3.5 million, respectively. During the six months ended June 30, 2009 and 2008, our cost of sales exceeded this cap by $4.1 million and $7.1 million, respectively.

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

22

Operating Highlights

The following table summarizes total available horsepower, total operating horsepower, average operating horsepower and horsepower utilization percentages:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Total Available Horsepower (at period end)		1,033,840			741,859			1,033,840			741,859
Total Operating Horsepower (at period end)		839,527			650,735			839,527			650,735
Average Operating Horsepower		859,200			652,174			878,370			656,331
Horsepower Utilization:
Spot (at period end)		81	%		88	%		81	%		88	%
Average		83	%		89	%		85	%		90	%

FINANCIAL RESULTS OF OPERATIONS

The three months ended June 30, 2009 compared to the three months ended June 30, 2008

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

	Three Months Ended June 30,
	2009			2008
Revenue	$	45,077		$	34,999
Gross margin (1)		24,901			19,062
Gross margin percentage		55	%		54	%
Expenses:
Depreciation and amortization	$	8,678		$	5,811
Fleet impairment		2,995			—
Selling, general and administrative		5,551			4,745
Interest expense		4,805			3,445
Other (income) expense, net		—			(1,129	)
Income tax expense		134			111
Net income	$	2,738		$	6,079

____________

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

Revenue.  Average monthly operating horsepower was 859,200 and 652,174 for the three months ended June 30, 2009 and 2008, respectively. The increase in revenue and average monthly operating horsepower was primarily due to the inclusion of the results from the assets acquired in the July 2008 Contract Operations Acquisition. The inclusion of the results from the assets acquired in the July 2008 Contract Operations Acquisition accounted for approximately $14.7 million of the increase in revenue, partially offset by a decrease in horsepower utilization, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

Gross Margin.  The increase in gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 was primarily due to the inclusion of the results from the assets acquired in the July 2008 Contract Operations Acquisition and due to an improved focus on managing operating costs, partially offset by a decrease in horsepower utilization, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

Depreciation and Amortization.  The increase in depreciation and amortization expense was primarily due to the additional depreciation on the assets acquired in the July 2008 Contract Operations Acquisition.

23

Fleet Impairment. As a result of a decline in market conditions and operating horsepower, during the second quarter of 2009, we reviewed the idle compression assets used in our business for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. As a result of that review, we decided that 50 units representing 8,700 horsepower would be retired from the fleet.

We performed a cash flow analysis of the expected proceeds from the disposition of these units to determine the fair value of the fleet assets we will no longer utilize in our operations. The net book value of these assets exceeded the fair value by $3 million, and the difference was recorded as a long-lived asset impairment in the second quarter of 2009. The impairment is recorded in Fleet impairment expense in the consolidated statements of operations.

SG&A.  SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings. The increase in SG&A expense was primarily due to the increased costs associated with the increase in revenues after the July 2008 Contract Operations Acquisition. SG&A expenses represented 12% and 14% of revenues for the three months ended June 30, 2009 and 2008, respectively. The decrease in SG&A expense as a percentage of revenue was primarily due to the difference in the impact of the re-measurement of fair value of our unit options and phantom units. We recorded $37,000 in SG&A expense related to the re-measurement of fair value of the phantom units for the three months ended June 30, 2009 and we recorded $0.9 million in SG&A expense related to the re-measurement of fair value of the unit options for the three months ended June 30, 2008. We have granted unit options and phantom units to individuals who are not our employees, but who are employees of Exterran Holdings and its subsidiaries that provide services to us. Because we grant unit options and phantom units to non-employees, we are required to re-measure the fair value of the unit options and certain phantom units each period and to record a cumulative adjustment of the expense previously recognized.

Interest Expense.  The increase in interest expense was primarily due to a higher average balance of long-term debt for the second quarter of 2009 resulting from the additional debt incurred for the July 2008 Contract Operations Acquisition. This increase was partially offset by a decrease in our weighted average effective interest rate, including the impact of interest rate swaps, to 4.7% for the three months ended June 30, 2009 from 6.0% for the three months ended June 30, 2008.

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

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

The six months ended June 30, 2009 compared to the six months ended June 30, 2008

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

	Six Months Ended June 30,
	2009			2008
Revenue	$	93,310		$	70,266
Gross margin (1)		50,952			38,186
Gross margin percentage		55	%		54	%
Expenses:
Depreciation and amortization	$	17,012		$	11,485
Fleet impairment		2,995			—
Selling, general and administrative		11,552			7,746
Interest expense		9,624			7,246
Other (income) expense, net		27			(1,139	)
Income tax expense		283			222
Net income	$	9,459		$	12,626

____________

(1) For a reconciliation of gross margin to net income, its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read Part I, Item 2 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measure”) of this report.

24

Revenue.  Average monthly operating horsepower was 878,370 and 656,331 for the six months ended June 30, 2009 and 2008, respectively. The increase in revenue and average monthly operating horsepower was primarily due to the inclusion of the results from the assets acquired in the July 2008 Contract Operations Acquisition. The inclusion of the results from the assets acquired in the July 2008 Contract Operations Acquisition accounted for approximately $31.3 million of the increase in revenue, partially offset by a decrease in horsepower utilization, for the six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Gross Margin.  The increase in gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was primarily due to the inclusion of the results from the assets acquired in the July 2008 Contract Operations Acquisition and an improved focus on managing operating costs, partially offset by a decrease in horsepower utilization, for the six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Depreciation and Amortization.  The increase in depreciation and amortization expense was primarily due to the additional depreciation on the assets acquired in the July 2008 Contract Operations Acquisition.

Fleet Impairment. As a result of a decline in market conditions and operating horsepower, during the second quarter of 2009, we reviewed the idle compression assets used in our business for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. As a result of that review, we decided that 50 units representing 8,700 horsepower would be retired from the fleet.

We performed a cash flow analysis of the expected proceeds from the disposition of these units to determine the fair value of the fleet assets we will no longer utilize in our operations. The net book value of these assets exceeded the fair value by $3 million, and the difference was recorded as a long-lived asset impairment in the second quarter of 2009. The impairment is recorded in Fleet impairment expense in the consolidated statements of operations.

SG&A.  SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings. The increase in SG&A expense was primarily due to the increased costs associated with the increase in revenues after the July 2008 Contract Operations Acquisition. SG&A expenses represented 12% and 11% of revenues for the six months ended June 30, 2009 and 2008, respectively. The increase in SG&A expense as a percentage of revenue was primarily due to the difference in the impact of the re-measurement of fair value of our unit options and phantom units. We recorded $39,000 in SG&A expense related to the re-measurement of fair value of the phantom units for the six months ended June 30, 2009 and we recorded a reduction to SG&A expense of $0.3 million related to the re-measurement of fair value of the unit options for the six months ended June 30, 2008. We have granted unit options and phantom units to individuals who are not our employees, but who are employees of Exterran Holdings and its subsidiaries that provide services to us. Because we grant unit options and phantom units to non-employees, we are required to re-measure the fair value of the unit options and certain phantom units each period and to record a cumulative adjustment of the expense previously recognized.

Interest Expense.  The increase in interest expense was primarily due to a higher average balance of long-term debt for the six months ended June 30, 2009 resulting from the additional debt incurred for the July 2008 Contract Operations Acquisition. This increase was partially offset by a decrease in our weighted average effective interest rate, including the impact of interest rate swaps, to 4.7% for the six months ended June 30, 2009 from 6.4% for the six months ended June 30, 2008.

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

Income Tax Expense.  Income tax expense primarily reflects taxes recorded under the Texas margins tax. The increase in income tax expense for the six months ended June 30, 2009 was primarily due to an increase in our revenue earned within the states of Texas and Michigan.

25

LIQUIDITY AND CAPITAL RESOURCES

The following tables summarize our sources and uses of cash for the six months ended June 30, 2009 and 2008, and our cash and working capital as of the end of the periods presented (in thousands):

	Six Months Ended June 30,
	2009			2008
Net cash provided by (used in):
Operating activities	$	33,995		$	15,815
Investing activities		(11,245	)		(6,697	)
Financing activities		(25,430	)		(10,935	)
Net change in cash and cash equivalents	$	(2,680	)	$	(1,817	)

	June 30, 2009		December 31, 2008
Cash and cash equivalents	$	564	$	3,244
Working capital		13,492		22,284

Operating Activities.  The increase in net cash provided by operating activities was primarily the result of additional cash flow from operating activities generated from increased activity after the July 2008 Contract Operations Acquisition and an increase in cash provided by accounts receivable collections for the six months ended June 30, 2009 compared to cash used for accounts receivable for the six months ended June 30, 2008.

Investing Activities.  The increase in cash used in investing activities during the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was primarily attributable to $5.3 million in proceeds from the sale of used compression equipment in the six months ended June 30, 2008. Capital expenditures for the six months ended June 30, 2009 were $11.4 million, consisting of $3.1 million for fleet growth capital and $8.3 million for compressor maintenance activities. Included in our capital expenditures for the six months ended June 30, 2009 were new compression equipment purchases of $1.3 million from Exterran Holdings.  

Financing Activities.  The increase in cash used in financing activities during the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was primarily the result of an increase in distributions to our unitholders and net repayments under our revolving credit facility during the six months ended June 30, 2009.

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

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

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

We currently plan to spend approximately $21 million to $30 million in net capital expenditures during 2009 including (1) $5 million to $10 million on growth capital for fleet equipment and (2) approximately $16 million to $20 million on equipment maintenance capital.

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

26

Our Ability to Grow Depends on Our Ability to Access External Expansion Capital.  We expect that we will rely primarily upon external financing sources, including our revolving credit facility and the issuance of debt and equity securities, rather than cash reserves established by our general partner to fund our acquisitions and expansion capital expenditures. As a result of the tightening of the credit markets and the economic slowdown, 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. Additionally, our ability to utilize the issuance of equity securities as a source of expansion capital is currently limited by our credit agreement, which requires us to use the proceeds from any equity offering first to repay our $117.5 million term loan facility in full.We expect that we will distribute all of our available cash to our unitholders. Available cash is reduced by cash reserves established by our general partner to provide for the proper conduct of our business, including future capital expenditures. To the extent we are unable to finance growth externally and we are unwilling to establish cash reserves to fund future acquisitions, our cash distribution policy will significantly impair our ability to grow. Because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may impact the available cash that we have to distribute for each unit. There are no limitations in our partnership agreement or in the terms of our revolving credit facility on our ability to issue additional units, including units ranking senior to our common units.

Credit and Financial Industry Environment.  The credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition. If any lender under our revolving credit facility is not able to perform its obligations under our revolving credit facility, our borrowing capacity under this facility would be reduced by such lender’s pro rata portion of the unfunded commitments.

The financial crisis could also have an impact on our remaining interest rate swap agreements if the counterparties are unable to perform their obligations under those agreements. At June 30, 2009, the combined liability related to our outstanding swap agreements was $15.9 million and was all in favor of our counterparties.

Long- term Debt.  In October 2006, we, as guarantor, and EXLP Operating LLC, our wholly-owned subsidiary, entered into a five-year senior secured credit agreement. The revolving credit facility under the credit agreement initially consisted of a $225 million revolving credit facility that was expanded to $315 million in July 2007.

Our revolving credit facility bears interest at a base rate, or LIBOR, at our option, plus an applicable margin, as defined in the credit agreement. At June 30, 2009, all amounts outstanding were LIBOR loans and the applicable margin was 1.5%. The weighted average interest rate on the outstanding balance at June 30, 2009, excluding the effect of interest rate swaps, was 2.3%.

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

The term loan bears interest at a base rate or LIBOR, at our option, plus an applicable margin. At June 30, 2009, all amounts outstanding were LIBOR loans and the applicable margin was 2.0%. Borrowings under the term loan are subject to the same credit agreement covenants as our revolving credit facility, except for an additional covenant requiring mandatory prepayment of the term loan from net cash proceeds of any future equity offerings, on a dollar-for-dollar basis. The weighted average interest rate on the outstanding balance of the term loan at June 30, 2009, excluding the effect of interest rate swaps, was 2.3%.

As of June 30, 2009, we had approximately $270.3 million outstanding and $44.8 million available under our revolving credit facility. All amounts under the revolving credit facility mature in October 2011.

Our senior secured credit facility contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on our ability to: incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the credit agreement) to Total Interest Expense (as defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of

27

Total Debt (as defined in the credit agreement) to EBITDA of not greater than 5.0 to 1.0. As of June 30, 2009, we maintained a 4.5 to 1.0 EBITDA to Total Interest Expense ratio and a 4.4 to 1.0 Total Debt to EBITDA ratio. As of June 30, 2009, we were in compliance with all financial covenants under the credit agreement. For further information regarding the covenants of our senior secured credit facility, see Part II, Item 1A “Risk Factors” of this report.

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

On July 30, 2009, the board of directors of Exterran GP LLC approved a cash distribution of $0.4625 per limited partner unit, or approximately $9.3 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from April 1, 2009 through June 30, 2009. The record date for this distribution is August 10, 2009 and payment is expected to occur on August 14, 2009.

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

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

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

		Three Months Ended June 30,					Three Months Ended June 30,
		2009		2008			2009		2008
Net income	$	2,738	$	6,079		$	9,459	$	12,626
Depreciation and amortization		8,678		5,811			17,012		11,485
Fleet impairment		2,995		—			2,995		—
Selling, general and administrative		5,551		4,745			11,552		7,746
Interest expense		4,805		3,445			9,624		7,246
Other (income) expense, net		—		(1,129	)		27		(1,139	)
Income tax expense		134		111			283		222
Gross margin	$	24,901	$	19,062		$	50,952	$	38,186

OFF-BALANCE SHEET ARRANGEMENTS

We have no material off-balance sheet arrangements.

28

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 June 30, 2009, after taking into consideration interest rate swaps, we had approximately $182.8 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 $1.8 million.

For further information regarding our use of interest rate swap agreements to manage our exposure to interest rate fluctuations on a portion of our debt obligations, see Notes 9, 10 and 13 to the Financial Statements.

ITEM 4. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

29

PART II.  OTHER INFORMATION

ITEM 1.  Legal Proceedings

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

ITEM 1A. Risk Factors

There have been no material changes or updates in our risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008, except as follows:

Covenants in our debt agreements may impair our ability to operate our business.

Our credit facility includes covenants limiting our ability to make distributions, incur indebtedness, grant liens, merge, make loans, acquisitions, investments or dispositions and engage in transactions with affiliates. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the credit agreement) to Total Interest Expense (as defined in the credit agreement) of not less than 2.5 to 1.0, and a ratio of Total Debt (as defined in the credit agreement) to EBITDA of not greater than 5.0 to 1.0. As of June 30, 2009, we maintained a 4.5 to 1.0 EBITDA to Total Interest Expense ratio and a 4.4 to 1.0 Total Debt to EBITDA ratio. As of June 30, 2009, we were in compliance with all financial covenants under our credit agreement.

If we continue to experience a significant deterioration in the demand for our services, we may not be able to comply with certain of the covenants associated with our indebtedness before the end of 2009. The breach of any of our covenants could result in a default under our credit agreement which could cause our indebtedness under our credit agreement to become due and payable. If the repayment obligations on any of our indebtedness were to be so accelerated, we may not be able to repay the debt or refinance the debt on acceptable terms, and our financial position would be materially adversely affected.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, judicial interpretations of the U.S. federal income tax laws may have a direct or indirect impact on our status as a partnership and, in some instances, a court’s conclusions may heighten the risk of a challenge regarding our status as a partnership. Moreover, members of Congress have considered substantive changes to the existing U.S. federal income tax laws that would have affected publicly traded partnerships. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively. Although the legislation considered would not have appeared to affect our tax treatment as a partnership, we are unable to predict whether any of these changes, or other proposals, will be reconsidered or will ultimately be enacted. Any such changes or differing judicial interpretations of existing laws could negatively impact the value of an investment in our common units.

New proposed regulations under the Clean Air Act, if implemented, could result in increased compliance costs.

In March 2009, the Environmental Protection Agency (“EPA”) formally proposed new regulations under the Clean Air Act (“CAA”) to control emissions of hazardous air pollutants from existing stationary reciprocal internal combustion engines. The rule, if and when finalized by the EPA, may require us to undertake significant expenditures, including expenditures for installing pollution control equipment such as oxidation catalysts or non-selective catalytic reduction equipment, imposing more stringent maintenance practices, and implementing additional monitoring practices on a significant percentage of our natural gas compressor engine fleet. At this point, we cannot predict the final regulatory requirements or the cost to comply with such requirements. The comment period on the proposed regulation ended on June 3, 2009. Under the proposal, compliance will be required by three years from the effective date of the final rule. This proposed rule and any other new regulations requiring the installation of more sophisticated emission control equipment could have a material adverse impact on our business, financial condition, results of operations and cash flows.

30

Climate change legislation and regulatory initiatives could result in increased compliance costs.

Scientific studies suggest that emissions of certain gases, commonly referred to as “greenhouse gases,” such as carbon dioxide and methane, may be contributing to climatic changes in the Earth’s atmosphere. In response to such studies, President Obama has expressed support for, and it is anticipated that the U.S. Congress will continue actively to consider, legislation to restrict or regulate emissions of greenhouse gases. The American Clean Energy and Security Act of 2009, narrowly approved by the U.S. House of Representatives on June 26, 2009, could if enacted by the full Congress require greenhouse gas emissions reductions by covered sources of as much as 17% from 2005 levels by 2020 and by as much as 83% by 2050. The debate over federal climate legislation has moved on to the Senate, which has now commenced committee hearings and consideration of related legislation, with the Senate's leadership targeting this legislation for further action toward the end of September 2009. In addition, more than one-third of the states, either individually or through multi-state regional initiatives, have begun to address greenhouse gas emissions, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs. Although most of the state-level initiatives have to date been focused on large sources of greenhouse gas emissions, such as electric power plants, it is possible that small sources such as gas-fired compressors could be subject to greenhouse gas-related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for greenhouse gas emissions resulting from our operations.

Also, as a result of the U.S. Supreme Court’s decision on April 2, 2007 in Massachusetts, et al. v. EPA, the EPA may regulate greenhouse gas emissions from mobile sources such as new motor vehicles, even if Congress does not adopt new legislation specifically addressing emissions of greenhouse gases. The Court’s holding in Massachusetts that greenhouse gases including carbon dioxide fall under the CAA’s definition of “air pollutant” may also result in future regulation of carbon dioxide and other greenhouse gas emissions from stationary sources. In July 2008, the EPA released an “Advance Notice of Proposed Rulemaking” regarding possible future regulation of greenhouse gas emissions under the CAA, in response to the Supreme Court’s decision in Massachusetts. In the notice, the EPA evaluated the potential regulation of greenhouse gases under several different provisions of the CAA, but did not propose any specific, new regulatory requirements for greenhouse gases. The notice and two recent developments suggest that the EPA is beginning to pursue a path toward the regulation of greenhouse gas emissions under its existing CAA authority. First, in April 2009, the EPA proposed a new rule requiring approximately 13,000 facilities comprising a substantial percentage of annual U.S. greenhouse gas emissions to inventory and report their greenhouse gas emissions to the EPA beginning in 2011. Second, also in April 2009, the EPA responded to the Massachusetts case by issuing a proposed “endangerment finding” under section 202(a)(1) of the CAA concluding that greenhouse gas emissions from new motor vehicles are reasonably anticipated to endanger public health and welfare. If finalized, this finding may trigger a variety of regulatory consequences including obligations on the EPA to impose limits on greenhouse gas emissions from new motor vehicles. Further, the endangerment finding could be used by the EPA as a basis to impose limits on greenhouse gas emissions from certain categories of stationary sources. Both proposals are subject to a period of public comment, may or may not be adopted in the form proposed, and may be subject to judicial challenges upon adoption. Although it is not possible at this time to predict how Congressional or state legislation that may be enacted or new EPA or other regulations that may be adopted to address greenhouse gas emissions would impact our business, any such new federal, state or local regulation of carbon dioxide or other greenhouse gas emissions that may be imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

31

ITEM 6. Exhibits

Exhibit No.			Description
	2.1		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 to the Registrant’s Current Report on Form 8-K filed on June 26, 2008
	3.1		Certificate of Limited Partnership of Universal Compression Partners, L.P., incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on June 27, 2006
	3.2		Certificate of Amendment to Certificate of Limited Partnership of Universal Compression Partners, L.P. (now Exterran Partners, L.P.), dated as of August 20, 2007, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 24, 2007
	3.3		First Amended and Restated Agreement of Limited Partnership of Exterran Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on form 10-Q for the quarter ended March 31, 2008
	3.4		Certificate of Partnership of UCO General Partner, LP, incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1 filed on June 27, 2006
	3.5		Amended and Restated Limited Partnership Agreement of UCO General Partner, LP, incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on October 26, 2006
	3.6		Certificate of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-1 filed June 27, 2006
	3.7		Amended and Restated Limited Liability Company Agreement of UCO GP, LLC, incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed on October 26, 2006
	31.1	*	Certification of the Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934
	31.2	*	Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934
	32.1	*	Certification of the Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	*	Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________

* Filed herewith.

32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Exterran Partners, L.P.
	By: EXTERRAN GENERAL PARTNER, L.P.
	its General Partner
	By: EXTERRAN GP LLC
	its General Partner
Date: August 6, 2009	By:	/s/ DAVID S. MILLER
		David S. Miller
		Vice President and Chief Financial Officer (Principal Financial Officer)
	By:	/s/ KENNETH R. BICKETT
		Kenneth R. Bickett
		Vice President — Finance and Accounting (Principal Accounting Officer)

33

Index to Exhibits

Exhibit No.			Description
	2.1		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 to the Registrant’s Current Report on Form 8-K filed on June 26, 2008
	3.1		Certificate of Limited Partnership of Universal Compression Partners, L.P., incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed on June 27, 2006
	3.2		Certificate of Amendment to Certificate of Limited Partnership of Universal Compression Partners, L.P. (now Exterran Partners, L.P.), dated as of August 20, 2007, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 24, 2007
	3.3		First Amended and Restated Agreement of Limited Partnership of Exterran Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on form 10-Q for the quarter ended March 31, 2008
	3.4		Certificate of Partnership of UCO General Partner, LP, incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1 filed on June 27, 2006
	3.5		Amended and Restated Limited Partnership Agreement of UCO General Partner, LP, incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on October 26, 2006
	3.6		Certificate of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-1 filed June 27, 2006
	3.7		Amended and Restated Limited Liability Company Agreement of UCO GP, LLC, incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed on October 26, 2006
	31.1	*	Certification of the Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934
	31.2	*	Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934
	32.1	*	Certification of the Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	*	Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________

* Filed herewith.