Archrock, Inc. - Quarter Report: 2009 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

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

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

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Number of shares of the common stock of the registrant outstanding as of October 30, 2009: 62,517,739 shares.

 

 

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 (Loss)			5
Condensed Consolidated Statements of Equity			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 6. Exhibits			50
SIGNATURES			51
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXTERRAN HOLDINGS, INC.

(In thousands, except par value and share amounts)

(unaudited)

		September 30,				December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	86,194			$	123,906
Restricted cash			4,961				7,563
Accounts receivable, net of allowance of $16,722 and $13,738, respectively			436,054				551,362
Inventory, net			574,768				495,809
Costs and estimated earnings in excess of billings on uncompleted contracts			187,011				219,487
Current deferred income taxes			27,162				36,816
Other current assets			116,615				121,009
Current assets associated with discontinued operations			13,419				139,178
Total current assets			1,446,184				1,695,130
Property, plant and equipment, net			3,436,559				3,436,222
Goodwill, net			195,518				308,024
Intangible and other assets, net			288,220				294,252
Long-term assets held for sale			19,298				—
Investments in non-consolidated affiliates			1,217				83,933
Long-term assets associated with discontinued operations			1,309				275,066
Total assets		$	5,388,305			$	6,092,627
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt		$	102			$	101
Accounts payable, trade			150,421				216,707
Accrued liabilities			326,106				312,270
Deferred revenue			239,232				192,556
Billings on uncompleted contracts in excess of costs and estimated earnings			144,020				157,955
Current liabilities associated with discontinued operations			31,284				37,632
Total current liabilities			891,165				917,221
Long-term debt			2,385,646				2,512,328
Other long-term liabilities			137,824				182,679
Deferred income taxes			174,060				197,525
Long-term liabilities associated with discontinued operations			15,750				54,797
Total liabilities			3,604,445				3,864,550
Commitments and contingencies (Note 15)
Equity:
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; zero issued			—				—
Common stock, $0.01 par value per share, 250,000,000 shares authorized; 68,149,868 and 67,202,109 shares issued, respectively			681				672
Additional paid-in capital			3,430,214				3,354,922
Accumulated other comprehensive loss			(34,399	)			(94,767	)
Accumulated deficit			(1,588,074	)			(1,016,082	)
Treasury stock — 5,622,196 and 5,535,671 common shares, at cost, respectively			(201,978	)			(200,959	)
Total Exterran stockholders’ equity			1,606,444				2,043,786
Noncontrolling interest			177,416				184,291
Total equity			1,783,860				2,228,077
Total liabilities and equity		$	5,388,305			$	6,092,627

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

EXTERRAN HOLDINGS, INC.

(In thousands, except per share amounts)

(unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Revenues:
North America contract operations		$	167,567			$	197,926			$	540,415			$	591,609
International contract operations			96,420				99,680				282,547				278,388
Aftermarket services			75,526				94,044				229,561				266,622
Fabrication			340,193				364,608				1,008,363				1,095,601
			679,706				756,258				2,060,886				2,232,220
Costs and Expenses:
Cost of sales (excluding depreciation and amortization expense):
North America contract operations			74,556				84,440				232,681				259,031
International contract operations			37,850				40,504				108,552				106,753
Aftermarket services			59,360				75,193				180,892				212,454
Fabrication			278,036				292,978				840,311				912,005
Selling, general and administrative			81,600				89,564				253,091				262,643
Merger and integration expenses			—				3,728				—				9,619
Depreciation and amortization			87,781				83,029				255,757				245,339
Fleet impairment			—				1,000				86,684				2,450
Restructuring charges			2,616				—				17,996				—
Goodwill impairment			—				—				150,778				—
Interest expense			33,371				33,401				89,268				96,737
Equity in (income) loss of non-consolidated affiliates			1,011				(6,657	)			92,695				(19,712	)
Other (income) expense, net			(12,768	)			7,835				(25,563	)			(7,823	)
			643,413				705,015				2,283,142				2,079,496
Income (loss) before income taxes			36,293				51,243				(222,256	)			152,724
Provision for income taxes			13,691				27,252				1,477				70,400
Income (loss) from continuing operations			22,602				23,991				(223,733	)			82,324
Income (loss) from discontinued operations, net of tax			(3,834	)			16,070				(345,351	)			34,654
Net income (loss)			18,768				40,061				(569,084	)			116,978
Less: Net income attributable to the noncontrolling interest			(576	)			(3,028	)			(2,908	)			(8,914	)
Net income (loss) attributable to Exterran stockholders		$	18,192			$	37,033			$	(571,992	)		$	108,064
Basic income (loss) per common share:
Income (loss) from continuing operations attributable to Exterran stockholders		$	0.36			$	0.32			$	(3.70	)		$	1.13
Income (loss) from discontinued operations attributable to Exterran stockholders			(0.06	)			0.25				(5.63	)			0.53
Net income (loss) attributable to Exterran stockholders		$	0.30			$	0.57			$	(9.33	)		$	1.66
Diluted income (loss) per common share:
Income (loss) from continuing operations attributable to Exterran stockholders		$	0.35			$	0.32			$	(3.70	)		$	1.12
Income (loss) from discontinued operations attributable to Exterran stockholders			(0.05	)			0.25				(5.63	)			0.52
Net income (loss) attributable to Exterran stockholders		$	0.30			$	0.57			$	(9.33	)		$	1.64
Weighted average common and equivalent shares outstanding:
Basic			61,579				64,940				61,315				65,070
Diluted			77,509				65,423				61,315				66,722

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

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net income (loss)		$	18,768			$	40,061			$	(569,084	)		$	116,978
Other comprehensive income, net of tax:
Change in fair value of derivative financial instruments			(5,723	)			(2,853	)			7,447				1,397
Foreign currency translation adjustment			17,485				4,008				54,025				(8,541	)
Comprehensive income (loss)			30,530				41,216				(507,612	)			109,834
Less: Comprehensive income attributable to the noncontrolling interest			53				2,938				4,012				9,326
Comprehensive income (loss) attributable to Exterran		$	30,477			$	38,278			$	(511,624	)		$	100,508

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

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Exterran Holdings, Inc. Stockholders
										Accumulated
						Additional				Other								Retained Earnings
		Common				Paid-in				Comprehensive				Treasury				(Accumulated				Noncontrolling
		Stock				Capital				Income (Loss)				Stock				Deficit)				Interest				Total
Balance at December 31, 2007		$	666			$	3,317,321			$	13,004			$	(99,998	)		$	(68,733	)		$	191,304			$	3,353,564
Treasury stock purchased															(50,902	)											(50,902	)
Option exercises			1				7,701																				7,702
Shares issued in employee stock purchase plan			1				4,038																				4,039
Stock-based compensation expense, net of forfeitures			3				9,303																(1,126	)			8,180
Income tax benefit from stock compensation expense							6,324																				6,324
Cash distribution to noncontrolling unitholders of the Partnership																							(10,632	)			(10,632	)
Noncontrolling interest of joint venture																							(1,679	)			(1,679	)
Other																							1,381				1,381
Comprehensive income:
Net income																			108,064				8,914				116,978
Derivatives change in fair value, net of tax											985												412				1,397
Foreign currency translation adjustment											(8,541	)															(8,541	)
Total comprehensive income																											109,834
Balance at September 30, 2008		$	671			$	3,344,687			$	5,448			$	(150,900	)		$	39,331			$	188,574			$	3,427,811
Balance at December 31, 2008		$	672			$	3,354,922			$	(94,767	)		$	(200,959	)		$	(1,016,082	)		$	184,291			$	2,228,077
Treasury stock purchased															(1,019	)											(1,019	)
Shares issued in employee stock purchase plan			2				3,178																				3,180
Stock-based compensation expense, net of forfeitures			7				18,043																708				18,758
Income tax expense from stock compensation expense							(2,674	)																			(2,674	)
Cash distribution to noncontrolling unitholders of the Partnership																							(11,589	)			(11,589	)
Issuance of convertible senior notes and purchased call options and warrants sold							56,745																				56,745
Other																							(6	)			(6	)
Comprehensive income (loss):
Net income (loss)																			(571,992	)			2,908				(569,084	)
Derivatives change in fair value, net of tax											6,343												1,104				7,447
Foreign currency translation adjustment											54,025																54,025
Total comprehensive loss																											(507,612	)
Balance at September 30, 2009		$	681			$	3,430,214			$	(34,399	)		$	(201,978	)		$	(1,588,074	)		$	177,416			$	1,783,860

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

EXTERRAN HOLDINGS, INC.

(In thousands)

(unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Net income (loss)		$	(569,084	)		$	116,978
Adjustments:
Depreciation and amortization			255,757				245,340
Fleet impairment			86,684				2,450
Facility impairment			5,600				—
Goodwill impairment			150,778				—
Deferred financing cost amortization			2,855				2,587
(Income) loss from discontinued operations, net of tax			345,351				(34,654	)
Amortization of debt discount			4,559				—
Bad debt expense			4,594				2,593
Gain on sale of property, plant and equipment			(7,931	)			(3,192	)
Gain on sale of business			(3,193	)			—
Equity in (income) loss of non-consolidated affiliates, net of dividends received			92,695				(16,954	)
Interest rate swaps			1,387				2,572
Gain on remeasurement of intercompany balances			(5,087	)			(3,423	)
Stock-based compensation expense			18,670				12,023
Deferred income taxes			(28,194	)			10,119
Changes in assets and liabilities, net of acquisition:
Accounts receivable and notes			121,879				(78,688	)
Inventory			(43,324	)			(84,623	)
Costs and estimated earnings versus billings on uncompleted contracts			16,179				66,232
Prepaid and other current assets			8,902				(7,156	)
Accounts payable and other liabilities			(131,724	)			(28,874	)
Deferred revenue			(3,706	)			89,748
Other			39				15,049
Net cash provided by continuing operating activities			323,686				308,127
Net cash provided by discontinued operations			829				33,515
Net cash provided by operating activities			324,515				341,642
Cash flows from investing activities:
Capital expenditures			(303,560	)			(342,555	)
Proceeds from sale of property, plant and equipment			17,510				44,669
Cash paid in acquisition			—				(133,349	)
Proceeds from sale of business			5,642				—
Cash invested in non-consolidated affiliates			(1,578	)			—
Decrease in restricted cash			2,602				1,500
Net cash used in continuing investing activities			(279,384	)			(429,735	)
Net cash used in discontinued operations			(829	)			(31,700	)
Net cash used in investing activities			(280,213	)			(461,435	)

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from financing activities:
Borrowings on revolving credit facilities			319,000				738,000
Repayments on revolving credit facilities			(548,091	)			(594,000	)
Repayments on term loan			(10,000	)			—
Repayments on asset-backed securitization facility			(135,000	)			—
Borrowings on Partnership credit facility			18,750				74,250
Repayments on Partnership credit facility			(33,000	)			—
Borrowings on Partnership term loan			—				117,500
Repayments on Partnership term loan			—				(9,000	)
Proceeds (repayments) of other debt, net			(37	)			(901	)
Repayments of convertible senior notes due 2008			—				(192,000	)
Proceeds from issuance of convertible senior notes due 2014			355,000				—
Payments for debt issue costs			(10,600	)			(583	)
Proceeds from warrants sold			53,138				—
Payments for call options			(89,408	)			—
Proceeds from stock options exercised			—				7,702
Proceeds from stock issued pursuant to our employee stock purchase plan			3,180				4,039
Purchases of treasury stock			(1,019	)			(50,902	)
Stock-based compensation excess tax benefit			89				6,284
Distributions to non-controlling partners in the Partnership			(11,589	)			(10,632	)
Net cash provided by (used in) continuing financing activities			(89,587	)			89,757
Net cash provided by discontinued operations			—				—
Net cash provided by (used in) financing activities			(89,587	)			89,757
Effect of exchange rate changes on cash and equivalents			7,573				(1,318	)
Net decrease in cash and cash equivalents			(37,712	)			(31,354	)
Cash and cash equivalents at beginning of period			123,906				144,801
Cash and cash equivalents at end of period		$	86,194			$	113,447

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

EXTERRAN HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Effective January 1, 2009, we adopted the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), which requires that minority interests be recharacterized as noncontrolling interests, requires them to be reported as a component of equity, requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires that the interest sold, as well as any interest retained, be recorded at fair value, with any gain or loss recognized in earnings. The consolidated financial statements included in this Quarterly Report on Form 10-Q have been retrospectively adjusted to reflect the changes required by ASC 810.

On August 20, 2007, Hanover Compressor Company (“Hanover”) and Universal Compression Holdings, Inc. (“Universal”) completed their business combination pursuant to a merger. As a result of the merger, each of Universal and Hanover became our wholly-owned subsidiary, and Universal merged with and into us.

Earnings (Loss) Attributable to Exterran Stockholders Per Common Share

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

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Income (loss) from continuing operations		$	22,026			$	20,963			$	(226,641	)		$	73,410
Income (loss) from discontinued operations, net of tax			(3,834	)			16,070				(345,351	)			34,654
Net income (loss) attributable to Exterran stockholders		$	18,192			$	37,033			$	(571,992	)		$	108,064

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Weighted average common shares outstanding-used in basic income per common share			61,579				64,940				61,315				65,070
Net dilutive potential common stock issuable:
On exercise of options and vesting of restricted stock and restricted stock units			571				458				**				599
On settlement of employee stock purchase plan shares			25				25				**				15
On conversion of 4.25% convertible senior notes due 2014			15,334				—				**				—
On conversion of 4.75% convertible senior notes due 2014			**				**				**				1,038
Weighted average common shares and dilutive potential common shares—used in diluted income per common share			77,509				65,423				61,315				66,722

Net income attributable to Exterran stockholders for the diluted earnings per share calculation for the three months ended September 30, 2009 is adjusted to add back interest expense and amortization of financing costs totaling $5.0 million, net of tax, relating to our 4.25% convertible senior notes due 2014. Net income attributable to Exterran stockholders for the diluted earnings per share calculation for the nine months ended September 30, 2008 is adjusted to add back interest expense and amortization of financing costs totaling $1.2 million, net of tax, relating to our 4.75% convertible senior notes due 2014.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net dilutive potential common stock issuable:
On exercise of options where exercise price is greater than average market value for the period			654				582				998				566
On exercise of options and vesting of restricted stock and restricted stock units			—				—				500				—
On settlement of employee stock purchase plan shares			—				—				35				—
On exercise of warrants			2,808				—				1,203				—
On conversion of 4.25% convertible senior notes due 2014			—				—				6,572				—
On conversion of 4.75% convertible senior notes due 2014			3,115				3,115				3,115				2,077
On conversion of convertible senior notes due 2008			—				—				—				399
Net dilutive potential common shares issuable			6,577				3,697				12,423				3,042

Financial Instruments

Our financial instruments include cash, receivables, payables, interest rate swaps, foreign currency hedges and debt. At September 30, 2009 and December 31, 2008, the estimated fair value of such financial instruments, except for debt, approximated their carrying value as reflected in our consolidated balance sheets. As a result of the current credit environment, we believe that the fair value of our floating rate debt does not approximate its carrying value as of September 30, 2009 and December 31, 2008 because the applicable margin on our floating rate debt was below the market rates as of these dates. The fair value of our fixed rate debt has been estimated primarily based on quoted market prices. The fair value of our floating rate debt has been estimated based on similar debt transactions that occurred near September 30, 2009 and December 31, 2008. A summary of the fair value and carrying value of our debt as of

September 30, 2009 and December 31, 2008 is shown in the table below (in thousands):

		As of September 30, 2009								As of December 31, 2008
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Fixed rate debt		$	405,748			$	418,098			$	144,088			$	88,018
Floating rate debt			1,980,000				1,818,628				2,368,341				2,116,588
Total debt		$	2,385,748			$	2,236,726			$	2,512,429			$	2,204,606

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

Reclassifications

Certain amounts in the prior financial statements have been reclassified to conform to the 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 November 5, 2009.

2. DISCONTINUED OPERATIONS

In May 2009, the Venezuelan government enacted a law that reserves to the State of Venezuela certain assets and services related to hydrocarbon primary activities, which included substantially all of our assets and services in Venezuela. The law provides that the reserved activities are to be performed by the State, by the State-owned oil company, Petroleos de Venezuela S.A. (“PDVSA”), or its affiliates or through mixed companies under the control of PDVSA or its affiliates. The law authorizes PDVSA or its affiliates to take possession of the assets and take over control of those operations related to the reserved activities as a step prior to the commencement of an expropriation process, and permits the national executive of Venezuela to decree the total or partial expropriation of shares or assets of companies performing those services.

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

While the law provides that companies whose assets are expropriated in this manner may be compensated in cash or securities, we are unable to predict what, if any, compensation Venezuela will ultimately offer in exchange for any such expropriated assets and, accordingly, we are unable to predict what, if any, compensation we ultimately will receive. We reserve and will continue to reserve the right to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law. In this connection, on June 16, 2009, we delivered to the Venezuelan government and PDVSA an official notice of dispute relating to the seized assets and investments under the Agreement between Spain and Venezuela for the Reciprocal Promotion and Protection of Investments and under Venezuelan law. We maintain insurance for the risk of expropriation of our investments in Venezuela, subject to a policy limit of $50 million. We have not recorded a receivable related to this insurance policy in the third quarter of 2009 because we could not conclude that recovery under this insurance policy was probable as of September 30, 2009. Therefore, a gain will be recorded if we recover under our policy.

As a result of PDVSA taking possession of substantially all of our assets and operations in Venezuela, we recorded asset impairments totaling $380.0 million, primarily related to receivables, inventory, fixed assets and goodwill, in the nine months ended September 30, 2009. These asset impairments are reflected as loss from discontinued operations, net of tax in our consolidated statements of operations. We believe the fair value of our seized Venezuelan operations substantially exceeds the historical cost-based carrying value of the assets, including the goodwill allocable to those operations; however, GAAP requires that our claim be accounted for as a gain contingency with no benefit being recorded until resolved. Accordingly, we did not include any compensation we may receive for our seized assets and operations in recording the loss on expropriation.

The expropriation of our business in Venezuela meets the criteria established for recognition as discontinued operations under ASC 205, “Presentation.” Therefore, our Venezuela contract operations and aftermarket services businesses are now reflected as discontinued operations in our consolidated statements of operations.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues		$	976			$	39,704			$	68,322			$	116,042
Expenses and selling, general and administrative			2,830				32,682				60,913				92,874
Loss attributable to expropriation			2,135				—				380,026				—
Other (income) loss, net			(162	)			(2,146	)			(4,655	)			(8,497	)
Provision for (benefit from) income taxes			7				(6,902	)			(22,611	)			(2,989	)
Income (loss) from discontinued operations, net of tax		$	(3,834	)		$	16,070			$	(345,351	)		$	34,654

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

		September 30,				December 31,
		2009				2008
Cash		$	7,430			$	2,485
Accounts receivable			219				73,994
Inventory			421				31,290
Other current assets			5,349				31,409
Total current assets associated with discontinued operations			13,419				139,178
Property, plant and equipment, net			851				237,644
Goodwill, net			—				32,602
Intangibles and other long-term assets			458				4,820
Total assets associated with discontinued operations		$	14,728			$	414,244
Accounts payable		$	12,773			$	7,467
Accrued liabilities			18,511				25,115
Deferred revenues			—				5,050
Total current liabilities associated with discontinued operations			31,284				37,632
Deferred income taxes			—				28,273
Other long-term liabilities			15,750				26,524
Total liabilities associated with discontinued operations		$	47,034			$	92,429

3. BUSINESS ACQUISITIONS

In January 2008, we acquired GLR Solutions Ltd. (“GLR”), a Canadian provider of water treatment products for the upstream petroleum and other industries, for approximately $25 million plus certain working capital adjustments and contingent payments based on the performance of GLR. In April 2009, we paid approximately $3.6 million Canadian based on GLR’s performance for the year ended December 31, 2008 and we may be required to pay up to an additional $18.4 million Canadian based on GLR’s performance in 2009 and 2010. Under the purchase method of accounting, the total purchase price was allocated to GLR’s net tangible and intangible assets based on their estimated fair value at the purchase date. This allocation resulted in goodwill and intangible assets of $14.7 million and $15.3 million, respectively. The intangible assets for customer relationships and patents are being amortized through 2027 based on the present value of expected income to be realized from these assets. The intangible assets for non-compete agreements and backlog are being amortized over five years and one year, respectively. The goodwill and intangible assets from this acquisition are not deductible for Canadian income tax purposes.

In July 2008, we acquired EMIT Water Discharge Technology, LLC (“EMIT”), a leading provider of contract water management and processing services to the coalbed methane industry, for approximately $108.6 million. Under the purchase method of accounting, the total purchase price was allocated to EMIT’s net tangible and intangible assets based on their estimated fair value at the purchase date. This allocation resulted in goodwill and intangible assets of $45.8 million and $41.7 million, respectively. Goodwill associated with this acquisition was written off in the fourth quarter of 2008 in connection with the goodwill impairment of our North America contract operations business. The intangible assets for contracts and customer relationships are being amortized through 2017 and

2019, respectively, based on the present value of expected income to be realized from these assets. The intangible assets for non-compete agreements and technology will be amortized through 2013 and 2027, respectively. The goodwill and intangible assets from this acquisition are deductible for U.S. federal income tax purposes.

4. INVENTORY

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

		September 30,				December 31,
		2009				2008
Parts and supplies		$	299,758			$	290,858
Work in progress			230,611				187,579
Finished goods			44,399				17,372
Inventory, net of reserves		$	574,768			$	495,809

As of September 30, 2009 and December 31, 2008, we had inventory reserves of $19.4 million and $16.3 million, respectively.

5. PROPERTY, PLANT AND EQUIPMENT

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

		September 30,				December 31,
		2009				2008
Compression equipment, facilities and other fleet assets		$	4,310,311			$	4,314,566
Land and buildings			176,460				175,204
Transportation and shop equipment			205,710				182,402
Other			123,612				108,170
			4,816,093				4,780,342
Accumulated depreciation			(1,379,534	)			(1,344,120	)
Property, plant and equipment, net		$	3,436,559			$	3,436,222

6. GOODWILL

Goodwill acquired in connection with business combinations represents the excess of consideration over the fair value of tangible and identifiable intangible net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting units.

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

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

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

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

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

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

The table below presents the change in the net carrying amount of goodwill for the nine months ended September 30, 2009 (in thousands):

						Purchase
						Adjustments/
		December 31,				Acquisitions/				Impact of Foreign				Goodwill				September 30,
		2008				Dispositions				Currency Translation				Impairment				2009
North America contract operations		$	—			$	—			$	—			$	—			$	—
International contract operations			142,909				—				7,869				(150,778	)			—
Aftermarket services			60,368				(1,528	)			3,645				—				62,485
Fabrication			104,747				19,122				9,164				—				133,033
Total		$	308,024			$	17,594			$	20,678			$	(150,778	)		$	195,518

7. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

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

Our ownership interest and location of each equity method investee at September 30, 2009 is as follows:

Ownership

Interest

Location

Type of Business

PIGAP II

30.0

%

Venezuela

Gas Compression Plant

El Furrial

33.3

%

Venezuela

Gas Compression Plant

SIMCO/Harwat Consortium

35.5

%

Venezuela

Water Injection Plant

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Revenues		$	681			$	55,481			$	8,160			$	160,547
Operating income (loss)			(103,722	)			28,118				(397,955	)			82,990
Net income (loss)			(107,910	)			10,869				(337,450	)			40,813

Due to unresolved disputes with its only customer, PDVSA, SIMCO sent a notice to PDVSA in the fourth quarter of 2008 stating that SIMCO may not be able to continue to fund its operations if some of its outstanding disputes are not resolved and paid in the near future. On February 25, 2009, the Venezuelan National Guard occupied SIMCO’s facilities and during March transitioned the operation of SIMCO, including the hiring of SIMCO’s employees, to PDVSA. We are unable to predict what, if any, compensation will ultimately be offered in exchange for any such assets assumed and, accordingly, we are unable to predict what, if any, compensation we ultimately will receive.

During the first quarter of 2009, we determined that the expected proceeds from our investment in the SIMCO/Harwat Consortium would be less than the book value of our investment and, as a result, that the fair value of our investment had declined and the loss in value was not temporary. Therefore, we recorded an impairment charge in the first quarter of 2009 of $6.5 million, which is reflected as a charge in equity in (income) loss of non-consolidated affiliates in our consolidated statements of operations. At September 30, 2009, our investment in the SIMCO/Harwat Consortium was $1.2 million.

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

Because we have written off the majority of our investment in non-consolidated affiliates, we currently do not expect to have significant, if any, equity earnings in non-consolidated affiliates in the future from these investments.

8. DEBT

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

		September 30,				December 31,
		2009				2008
Revolving credit facility due August 2012		$	40,500			$	269,591
Term loan			790,000				800,000
2007 asset-backed securitization facility notes due July 2012			765,000				900,000
Partnership’s revolving credit facility due October 2011			267,000				281,250
Partnership’s term loan facility due October 2011			117,500				117,500
4.75% convertible senior notes due January 2014			143,750				143,750
4.25% convertible senior notes due June 2014 (presented net of the unamortized discount of $93.3 million as of September 30, 2009)			261,699				—
Other, interest at various rates, collateralized by equipment and other assets			299				338
			2,385,748				2,512,429
Less current maturities			(102	)			(101	)
Long-term debt		$	2,385,646			$	2,512,328

In June 2009, we issued under our shelf registration statement $355.0 million aggregate principal amount of 4.25% convertible senior notes due June 2014 (the “4.25% Notes”), including $30.0 million principal amount issued pursuant to the underwriter’s overallotment option. The 4.25% Notes are convertible into shares of our common stock at an initial conversion rate of 43.1951 shares of our common stock per $1,000 principal amount of the convertible notes, equivalent to an initial conversion price of approximately $23.15 per share of common stock. The conversion rate will be subject to adjustment following certain dilutive events and certain corporate transactions. The 4.25% Notes’ intrinsic value exceeded their principal amount as of September 30, 2009 by $9.0 million. We may not redeem the notes prior to the maturity date of the notes.

ASC 470-20, “Debt — Debt with Conversion and Other Options” (“ASC 470-20”), requires that the liability and equity components of certain convertible debt instruments that may be settled in cash upon conversion be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. Our 4.25% Notes are being accounted for under ASC 470-20, and $97.9 million was recorded as a debt discount and reflected in equity related to the convertible feature of these notes. The unamortized discount on the 4.25% Notes will be amortized using the effective interest method through June 30, 2014. During the three months ended September 30, 2009, we recognized $3.8 million of interest expense related to the contractual interest coupon and $3.7 million of amortization of the debt discount, respectively. During the nine months ended September 30, 2009, we recognized $4.6 million of interest expense related to the contractual interest coupon and $4.6 million of amortization of the debt discount, respectively. The effective interest rate on the debt component of these notes was 11.67% for the three and nine months ended September 30, 2009.

The 4.25% Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 4.25% Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and liabilities incurred by our subsidiaries. The 4.25% Notes are not guaranteed by any of our subsidiaries.

In connection with the offering of the 4.25% Notes, we purchased call options on our stock at approximately $23.15 per share of common stock and sold warrants on our stock at approximately $32.67 per share of common stock. These transactions economically adjust the effective conversion price to $32.67 for $325.0 million of the 4.25% Notes and therefore are expected to reduce the potential dilution to our common stock upon any such conversion.

We used $36.3 million of the net proceeds from this debt offering and the full $53.1 million of the proceeds from the warrants sold to pay the cost of the purchased call options, and the remaining net proceeds from this debt offering to repay approximately $173.8 million of indebtedness under our revolving credit facility and approximately $135.0 million of indebtedness outstanding under our asset-backed securitization facility.

Our debt agreements contain various covenants with which we must comply, including, but not limited to, limitations on incurrence of indebtedness, investments, liens on assets, transactions with affiliates, mergers, consolidations, sales of assets and other provisions customary in similar types of agreements. We must also maintain, on a consolidated basis, required leverage and interest coverage ratios. We were in compliance with our debt covenants as of September 30, 2009.

Long-term Debt Maturity Schedule

Contractual maturities of long-term debt (excluding interest to be accrued thereon) at September 30, 2009 are as follows (in thousands):

		September 30, 2009
2009		$	10,102	(1)
2010			40,115	(1)
2011			444,548
2012			1,165,533
2013			320,000
Thereafter			498,750	(2)
Total debt		$	2,479,048

9. ACCOUNTING FOR DERIVATIVES

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

Interest Rate Risk

At September 30, 2009, we were a party to 23 interest rate swaps in which we pay fixed payments and receive floating payments on a notional value of $1,470.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire over varying dates, with interest rate swaps having a notional amount of $1,399.7 million expiring through January 2013 and the remaining interest rate swaps expiring through October 2019. The weighted average effective fixed interest rate payable on our interest rate swaps was 4.2% as of September 30, 2009. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. We recorded approximately $50,000 and $0.5 million of interest expense in the three and nine months ended September 30, 2009, respectively, due to the ineffectiveness related to these swaps. We recorded approximately $0.8 million and $1.6 million of interest expense for the three and nine months ended September 30, 2008, respectively, due to the ineffectiveness related to these swaps. We estimate that approximately $48.9 million of deferred pre-tax losses, included in our accumulated other comprehensive loss at September 30, 2009, will be reclassified into earnings as interest expense at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

Foreign Currency Exchange Risk

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

Foreign currency hedges that meet the hedging requirements or that qualify for hedge accounting treatment are accounted for as cash flow hedges. Changes in the fair value of foreign currency cash flow hedges that meet the hedging requirements or that qualify for hedge accounting treatment are recognized as a component of comprehensive income (loss) and are included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The amounts recognized as a component of other comprehensive income (loss) will be reclassified into earnings (loss) in the periods in which the underlying foreign currency exchange exposure is realized. We estimate that approximately $0.1 million of deferred losses, included in our accumulated other comprehensive income (loss) at September 30, 2009, will be reclassified into earnings at then-current values during the next twelve months as the underlying hedged transactions occur. For hedges that do not qualify for hedge accounting treatment, gains and losses on the foreign currency hedge are included in other (income) expense, net in our condensed consolidated statements of operations. At September 30, 2009, the remaining notional amount of our foreign currency hedge that did not meet the requirements for hedge accounting was approximately 1.9 million Kuwaiti Dinars. At September 30, 2009, the remaining notional amount of our foreign currency hedge that did meet the requirements for hedge accounting was approximately 1.2 million Euros.

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

		September 30, 2009
						Fair Value
		Balance Sheet Location				Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Intangibles and other assets				$	225
Interest rate hedges		Accrued liabilities					(48,884	)
Interest rate hedges		Other long-term liabilities					(42,487	)
Foreign currency hedge		Other current liabilities					(106	)
							(91,252	)
Derivatives not designated as hedging instruments:
Foreign currency hedge		Accrued liabilities					(62	)
Total derivatives						$	(91,314	)

Three Months Ended September 30, 2009

Nine Months Ended September 30, 2009

Gain (Loss)

Reclassified

Gain (Loss)

Location of Gain

from

Location of Gain

Reclassified from

(Loss) Reclassified

Accumulated

Gain (Loss)

(Loss) Reclassified

Accumulated

Gain (Loss)

from Accumulated

Other

Recognized in

from Accumulated

Other

Recognized in Other

Other

Comprehensive

Other

Other

Comprehensive

Comprehensive

Comprehensive

Income (Loss)

Comprehensive

Comprehensive

Income (Loss)

Income (Loss) on

Income (Loss) into

into Income

Income (Loss)

Income (Loss) into

into Income

Derivatives

Income (Loss)

(Loss)

on Derivatives

Income (Loss)

(Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(5,200

)

Interest expense

$

(7,058

)

$

5,089

Interest expense

$

(32,642

)

Foreign currency hedge

—

Fabrication revenue

(105

)

1,254

Fabrication revenue

(329

)

Total

$

(5,200

)

$

(7,163

)

$

6,343

$

(32,971

)

Three Months Ended September 30, 2009

Nine Months Ended September 30, 2009

Amount of Gain

Amount of Gain

(Loss)

(Loss)

Location of Gain (Loss)

Recognized in

Location of Gain (Loss)

Recognized in

Recognized in Income (Loss)

Income (Loss)

Recognized in Income (Loss)

Income (Loss)

on Derivative

on Derivative

on Derivative

on Derivative

Derivatives not designated as hedging instruments:

Foreign currency hedge

Other income (expense), net

$

155

Other income (expense), net

$

(137

)

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

10. FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.

•

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

•

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

•

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

The following table summarizes the valuation of our interest rate swaps and foreign currency derivatives under ASC 820 pricing levels as of September 30, 2009 (in thousands):

						Quoted
						Market				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(91,146	)		$	—			$	(91,146	)		$	—
Foreign currency derivatives asset (liability)			(168	)			—				(168	)			—

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

11. FLEET IMPAIRMENT

As a result of a decline in market conditions and operating horsepower in North America during the second quarter of 2009, we reviewed the idle compression assets used in our contract operations segments for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. As a result of that review, we decided that 1,156 units representing 251,500 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 $86.7 million, and the difference was recorded as a long-lived asset impairment in the second quarter of 2009.

During the first quarter of 2008, management identified certain fleet units that will not be used in our contract operations business in the future and recorded a $1.5 million impairment in the first quarter of 2008. During the three months ended September 30, 2008, we recorded a $1.0 million impairment related to the loss sustained on offshore units that were on platforms which capsized during Hurricane Ike. These fleet impairments are recorded in Fleet impairment expense in the consolidated statements of operations.

12. RESTRUCTURING CHARGES

As a result of the reduced level of demand for our products and services, our management approved a plan in March 2009 to close certain facilities to consolidate our compression fabrication activities in our fabrication segment. These actions were the result of significant fabrication capacity stemming from the 2007 merger that created Exterran and the lack of consolidation of this capacity since that time, as well as the anticipated continuation of current weaker global economic and energy industry conditions. The consolidation of those compression fabrication activities was completed in September 2009. In August 2009, we announced our plan to consolidate certain fabrication operations in Houston including the closure of two facilities in Texas. However, due to a subsequent improvement in bookings for certain of our production and processing equipment products, we have recently decided to close only one of the fabrication facilities in Texas. In addition, our management also implemented cost reductions programs during the first nine months of 2009 primarily related to workforce reductions across all of our segments.

We currently estimate that we will incur charges in 2009 with respect to these restructuring charges discussed above of approximately $20 million to $22 million, of which $2.6 million and $18.0 million, respectively, was expensed in the three and nine months ended September 30, 2009. These charges are reflected as Restructuring charges in our consolidated statements of operations. Approximately $12 million to $14 million of the charges are severance, retention and employee benefit costs, approximately $5.6 million is a facility impairment charge and the remaining amount is for other facility closure and moving costs. Of the total estimated charges, approximately $14 million to $16 million will result in cash expenditures.

The following table summarizes the changes to our accrued liability balance related to restructuring charges for the nine months ended September 30, 2009 (in thousands):

		Restructuring
		Charges Accrual
Beginning balance at December 31, 2008		$	—
Additions for costs expensed			17,996
Non-cash facility impairment			(5,600	)
Reductions for payments			(12,099	)
Ending balance at September 30, 2009		$	297

13. STOCK-BASED COMPENSATION

Stock Incentive Plan

On August 20, 2007, we adopted the Exterran Holdings, Inc. 2007 Stock Incentive Plan (as amended and restated, the “2007 Plan”), which previously had been approved by the stockholders of Hanover and Universal and provides for the granting of stock-based awards in the form of options, restricted stock, restricted stock units, stock appreciation rights and performance awards to our employees and directors. In April, 2009, our stockholders approved an amendment to the 2007 Plan which increased the aggregate number of shares of common stock that may be issued under the 2007 Plan to 6,750,000 from 4,750,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and each share of restricted stock and restricted stock unit granted counts as two shares against the aggregate share limit. Awards granted under the 2007 Plan that are subsequently cancelled, terminated or forfeited are available for future grant.

Stock Options

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

The weighted average fair value at date of grant for options granted during the nine months ended September 30, 2009 was $5.87, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

		Nine Months
		Ended
		September 30, 2009
Expected life in years			4.5
Risk-free interest rate			1.84	%
Volatility			40.51	%
Dividend yield			0.00	%

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

The following table presents stock option activity for the nine months ended September 30, 2009 (in thousands, except per share data and remaining life in years):

										Weighted
						Weighted				Average				Aggregate
		Stock				Average				Remaining				Intrinsic
		Options				Exercise Price				Life				Value
Options outstanding, December 31, 2008			2,027			$	41.50
Granted			987				16.29
Cancelled			(91	)			34.84
Options outstanding, September 30, 2009			2,923			$	33.18				5.1			$	8,855
Options exercisable, September 30, 2009			1,709			$	37.51				4.4			$	2,351