Archrock, Inc. - Quarter Report: 2010 March (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

Commission File No. 001-33666

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Number of shares of the common stock of the registrant outstanding as of April 30, 2010: 63,134,652 shares.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive Income (Loss)			5
Condensed Consolidated Statements of Equity			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 5. Other Information			42
Item 6. Exhibits			43
SIGNATURES			44
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
(unaudited)

		March 31,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	67,403			$	83,745
Restricted cash			20,416				14,871
Accounts receivable, net of allowance of $14,533 and $15,342, respectively			405,852				447,504
Inventory, net			488,324				489,982
Costs and estimated earnings in excess of billings on uncompleted contracts			171,035				180,181
Current deferred income taxes			22,510				25,913
Other current assets			107,774				118,813
Current assets associated with discontinued operations			9,093				58,152
Total current assets			1,292,407				1,419,161
Property, plant and equipment, net			3,352,654				3,404,354
Goodwill, net			195,644				195,164
Intangible and other assets, net			263,722				273,883
Long-term assets associated with discontinued operations			7,076				386
Total assets		$	5,111,503			$	5,292,948
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable, trade		$	127,029			$	131,337
Accrued liabilities			298,264				321,412
Deferred revenue			165,830				206,160
Billings on uncompleted contracts in excess of costs and estimated earnings			163,998				156,245
Current liabilities associated with discontinued operations			26,025				21,879
Total current liabilities			781,146				837,033
Long-term debt			2,143,945				2,260,936
Other long-term liabilities			176,547				179,327
Deferred income taxes			170,217				182,126
Long-term liabilities associated with discontinued operations			11,932				16,667
Total liabilities			3,283,787				3,476,089
Commitments and contingencies (Note 12)
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; 68,906,476 and 68,195,447 shares issued, respectively			689				682
Additional paid-in capital			3,440,562				3,434,618
Accumulated other comprehensive loss			(34,095	)			(27,879	)
Accumulated deficit			(1,548,827	)			(1,565,489	)
Treasury stock – 5,754,623 and 5,667,897 common shares, at cost, respectively			(203,605	)			(201,935	)
Total Exterran stockholders’ equity			1,654,724				1,639,997
Noncontrolling interest			172,992				176,862
Total equity			1,827,716				1,816,859
Total liabilities and equity		$	5,111,503			$	5,292,948

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

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

		Three Months Ended
		March 31,
		2010				2009
Revenues:
North America contract operations		$	152,627			$	194,393
International contract operations			109,740				90,679
Aftermarket services			70,323				75,531
Fabrication			243,618				342,609
			576,308				703,212
Costs and Expenses:
Cost of sales (excluding depreciation and amortization expense):
North America contract operations			71,375				83,705
International contract operations			40,855				32,805
Aftermarket services			56,612				59,754
Fabrication			196,873				286,714
Selling, general and administrative			84,051				85,111
Depreciation and amortization			91,775				82,073
Long-lived asset impairment			1,707				5,600
Restructuring charges			—				1,704
Interest expense			32,934				26,734
Equity in loss of non-consolidated affiliates			—				91,117
Other (income) expense, net			(2,183	)			(3,362	)
			573,999				751,955
Income (loss) before income taxes			2,309				(48,743	)
Provision for (benefit from) income taxes			(3,999	)			10,963
Income (loss) from continuing operations			6,308				(59,706	)
Income from discontinued operations, net of tax			10,425				1,806
Net income (loss)			16,733				(57,900	)
Less: Net income attributable to the noncontrolling interest			(71	)			(1,514	)
Net income (loss) attributable to Exterran stockholders		$	16,662			$	(59,414	)
Basic income (loss) per common share:
Income (loss) from continuing operations attributable to Exterran stockholders		$	0.10			$	(1.00	)
Income from discontinued operations attributable to Exterran stockholders			0.17				0.03
Net income (loss) attributable to Exterran stockholders		$	0.27			$	(0.97	)
Diluted income (loss) per common share:
Income (loss) from continuing operations attributable to Exterran stockholders		$	0.10			$	(1.00	)
Income from discontinued operations attributable to Exterran stockholders			0.17				0.03
Net income (loss) attributable to Exterran stockholders		$	0.27			$	(0.97	)
Weighted average common and equivalent shares outstanding:
Basic			61,836				61,209
Diluted			62,546				61,209

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

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(unaudited)

		Three Months Ended
		March 31,
		2010				2009
Net income (loss)		$	16,733			$	(57,900	)
Other comprehensive income, net of tax:
Change in fair value of derivative financial instruments			(867	)			(2,355	)
Foreign currency translation adjustment			(5,408	)			(5,701	)
Comprehensive income (loss)			10,458				(65,956	)
Less: Comprehensive income attributable to the noncontrolling interest			12				2,144
Comprehensive income (loss) attributable to Exterran		$	10,446			$	(68,100	)

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

EXTERRAN HOLDINGS, INC.

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

		Exterran Holdings, Inc. Stockholders
										Accumulated
						Additional				Other
		Common				Paid-in				Comprehensive				Treasury				Accumulated				Noncontrolling
		Stock				Capital				Loss				Stock				Deficit				Interest				Total
Balance at December 31, 2008		$	672			$	3,354,922			$	(94,767	)		$	(200,959	)		$	(1,016,082	)		$	184,291			$	2,228,077
Treasury stock purchased															(393	)											(393	)
Shares issued in employee stock purchase plan			1				960																				961
Stock-based compensation expense, net of forfeitures			7				5,965																332				6,304
Income tax expense from stock-based compensation expense							(1,522	)																			(1,522	)
Cash distribution to noncontrolling unitholders of the Partnership																							(3,857	)			(3,857	)
Other																							165				165
Comprehensive income (loss):
Net income (loss)																			(59,414	)			1,514				(57,900	)
Derivatives change in fair value, net of tax											(2,985	)											630				(2,355	)
Foreign currency translation adjustment											(5,701	)															(5,701	)
Balance at March 31, 2009		$	680			$	3,360,325			$	(103,453	)		$	(201,352	)		$	(1,075,496	)		$	183,075			$	2,163,779
Balance at December 31, 2009		$	682			$	3,434,618			$	(27,879	)		$	(201,935	)		$	(1,565,489	)		$	176,862			$	1,816,859
Treasury stock purchased															(1,670	)											(1,670	)
Options exercised							342																				342
Shares issued in employee stock purchase plan			1				649																				650
Stock-based compensation expense, net of forfeitures			6				5,401																(58	)			5,349
Income tax expense from stock-based compensation expense							(448	)																			(448	)
Cash distribution to noncontrolling unitholders of the Partnership																							(3,872	)			(3,872	)
Other																							48				48
Comprehensive income (loss):
Net income																			16,662				71				16,733
Derivatives change in fair value, net of tax											(808	)											(59	)			(867	)
Foreign currency translation adjustment											(5,408	)															(5,408	)
Balance at March 31, 2010		$	689			$	3,440,562			$	(34,095	)		$	(203,605	)		$	(1,548,827	)		$	172,992			$	1,827,716

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

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

(unaudited)

		Three Months Ended
		March 31,
		2010				2009
Net income (loss)		$	16,733			$	(57,900	)
Adjustments:
Depreciation and amortization			91,775				82,073
Amortization of debt discount			3,953				—
Long-lived asset impairment			1,707				5,600
Deferred financing cost amortization			1,280				805
Income from discontinued operations, net of tax			(10,425	)			(1,806	)
Provision for doubtful accounts			950				1,897
Gain on sale of property, plant and equipment			(1,241	)			(710	)
Equity in loss of non-consolidated affiliates, net of dividends received			—				91,117
Interest rate swaps			262				452
(Gain) loss on remeasurement of intercompany balances			1,434				(1,229	)
Stock-based compensation expense			5,349				6,145
Deferred income tax provision			(9,921	)			225
Changes in assets and liabilities:
Accounts receivable and notes			39,409				(82,859	)
Inventory			8,783				(117,814	)
Costs and estimated earnings versus billings on uncompleted contracts			14,324				151,630
Prepaid and other current assets			10,112				(4,545	)
Accounts payable and other liabilities			(25,639	)			(33,858	)
Deferred revenue			(39,921	)			42,472
Other			(1,874	)			(13,497	)
Net cash provided by continuing operations			107,050				68,198
Net cash provided by discontinued operations			—				611
Net cash provided by operating activities			107,050				68,809
Cash flows from investing activities:
Capital expenditures			(47,861	)			(122,500	)
Proceeds from sale of property, plant and equipment			5,386				3,194
Increase in restricted cash			(5,545	)			(3,989	)
Net cash used in continuing operations			(48,020	)			(123,295	)
Net cash provided by (used in) discontinued operations			50,000				(611	)
Net cash provided by (used in) investing activities			1,980				(123,906	)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt			53,000				76,500
Repayments of long-term debt			(173,943	)			(35,022	)
Proceeds from stock options exercised			342				—
Proceeds from stock issued pursuant to our employee stock purchase plan			650				961
Purchases of treasury stock			(1,670	)			(393	)
Stock–based compensation excess tax benefit			734				7
Distributions to noncontrolling partners in the Partnership			(3,872	)			(3,857	)
Net cash provided by (used in) financing activities			(124,759	)			38,196
Effect of exchange rate changes on cash and equivalents			(613	)			536
Net decrease in cash and cash equivalents			(16,342	)			(16,365	)
Cash and cash equivalents at beginning of period			83,745				123,906
Cash and cash equivalents at end of period		$	67,403			$	107,541

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.

Earnings (Loss) Attributable to Exterran 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 March 31,
		2010				2009
Income (loss) from continuing operations		$	6,237			$	(61,220	)
Income from discontinued operations, net of tax			10,425				1,806
Net income (loss) attributable to Exterran stockholders		$	16,662			$	(59,414	)
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 March 31,
		2010				2009
Weighted average common shares outstanding-used in basic income (loss) per common share			61,836				61,209
Net dilutive potential common stock issuable:
On exercise of options and vesting of restricted stock and restricted stock units			695				**
On settlement of employee stock purchase plan shares			15				**
On exercise of warrants			**				—
On conversion of 4.25% convertible senior notes due 2014			**				—
On conversion of 4.75% convertible senior notes due 2014			**				**
Weighted average common shares and dilutive potential common shares-used in diluted income per common share			62,546				61,209

There were no adjustments to net income attributable to Exterran stockholders for the diluted earnings per share calculation for the three months ended March 31, 2010 or 2009.

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 March 31,
		2010				2009
Net dilutive potential common shares issuable:
On exercise of options where exercise price is greater than average market value for the period			1,496				1,830
On exercise of options and vesting of restricted stock and restricted stock units			—				433
On settlement of employee stock purchase plan shares			—				46
On exercise of warrants			2,808				—
On conversion of 4.25% convertible senior notes due 2014			15,334				—
On conversion of 4.75% convertible senior notes due 2014			3,114				3,114
Net dilutive potential common shares issuable			22,752				5,423

Financial Instruments

Our financial instruments include cash, restricted cash, receivables, payables, interest rate swaps, foreign currency hedges and debt. At March 31, 2010 and December 31, 2009, the estimated fair value of such financial instruments, except for debt, approximated their carrying value as reflected in our consolidated balance sheets. 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 March 31, 2010 and December 31, 2009 because the applicable margin on our floating rate debt was below the market rates as of these dates. The fair value of our fixed rate debt has been estimated primarily based on quoted market prices. The fair value of our floating rate debt has been estimated based on similar debt transactions that occurred near March 31, 2010 and December 31, 2009. A summary of the fair value and carrying value of our debt as of March 31, 2010 and December 31, 2009 is shown in the table below (in thousands):

		As of March 31, 2010								As of December 31, 2009
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Fixed rate debt		$	413,445			$	447,206			$	409,506			$	423,696
Floating rate debt			1,730,500				1,642,589				1,851,430				1,739,456
Total debt		$	2,143,945			$	2,089,795			$	2,260,936			$	2,163,152

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

Reclassifications

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

2. DISCONTINUED OPERATIONS

In May 2009, the Venezuelan government enacted a law that reserves to the State of Venezuela certain assets and services related to hydrocarbon 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. By the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela.

While the law provides that companies whose assets are expropriated in this manner may be compensated in cash or securities, we are unable to predict what, if any, compensation Venezuela will ultimately offer in exchange for any such expropriated assets and, accordingly, we are unable to predict what, if any, compensation we ultimately will receive. We reserve and will continue to reserve the right to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law. In this connection, on June 16, 2009, we delivered to the Venezuelan government and PDVSA an official notice of dispute relating to the seized assets and investments under the Agreement between Spain and Venezuela for the Reciprocal Promotion and Protection of Investments and under Venezuelan law. On March 23, 2010, we filed a request for the institution of an arbitration proceeding against Venezuela with the International Centre for Settlement of Investment Disputes related to the seized assets and investments. We maintained insurance for the risk of expropriation of our investments in Venezuela, subject to a policy limit of $50 million. During the year ended December 31, 2009, we recorded a receivable of $50 million related to this insurance policy because we determined that recovery under this policy of a portion of our loss was probable. We collected the $50 million under our policy in January 2010. Under the terms of the insurance policy, certain compensation we may receive from the Venezuelan government or PDVSA for our expropriated assets and operations will be applied first to the reimbursement of out-of-pocket expenses incurred by us and the insurance company, second to the insurance company until the $50 million payment has been repaid and third to us.

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

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

In January 2010, the Venezuelan government announced a devaluation of the Venezuelan bolivar. This devaluation resulted in a translation gain of approximately $12.2 million on the remeasurement of our net liability position in Venezuela. The functional currency of our Venezuela subsidiary is the U.S. dollar and we had more liabilities than assets denominated in bolivars in Venezuela at the time of the devaluation. The exchange rate used to remeasure our net liabilities changed from 2.15 bolivars per U.S. dollar at December 31, 2009 to 4.3 bolivars per U.S. dollar in January 2010.

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

		Three Months Ended
		March 31,
		2010				2009
Revenues		$	228			$	34,681
Expenses and selling, general and administrative			1,056				31,047
Expropriation related loss (recovery)			(300	)			—
Other (income) loss, net			(12,141	)			(4,299	)
Provision for income taxes			1,188				6,127
Income from discontinued operations, net of tax.		$	10,425			$	1,806

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

		March 31,				December 31,
		2010				2009
Cash		$	5,560			$	1,841
Accounts receivable			127				177
Political risk insurance receivable			—				50,000
Inventory			125				169
Other current assets			3,281				5,965
Total current assets associated with discontinued operations			9,093				58,152
Property, plant and equipment, net			611				386
Other long-term assets			6,465				—
Total assets associated with discontinued operations		$	16,169			$	58,538
Accounts payable		$	3,886			$	9,543
Accrued liabilities			13,070				12,336
Deferred revenues			9,069				—
Total current liabilities associated with discontinued operations			26,025				21,879
Other long-term liabilities			11,932				16,667
Total liabilities associated with discontinued operations		$	37,957			$	38,546

3. INVENTORY

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

		March 31,				December 31,
		2010				2009
Parts and supplies		$	272,241			$	284,849
Work in progress			168,971				154,763
Finished goods			47,112				50,370
Inventory, net of reserves		$	488,324			$	489,982

As of March 31, 2010 and December 31, 2009, we had inventory reserves of $17.9 million and $18.4 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

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

		March 31,				December 31,
		2010				2009
Compression equipment, facilities and other fleet assets		$	4,367,794			$	4,355,915
Land and buildings			172,122				174,004
Transportation and shop equipment			206,385				207,035
Other			127,799				125,435
			4,874,100				4,862,389
Accumulated depreciation			(1,521,446	)			(1,458,035	)
Property, plant and equipment, net		$	3,352,654			$	3,404,354

5. INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

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

Our ownership interest and location of each equity method investee at March 31, 2010 is as follows:

		Ownership
		Interest				Location		Type of Business
PIGAP II			30.0%			Venezuela		Gas Compression Plant
El Furrial			33.3%			Venezuela		Gas Compression Plant

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

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

		Three Months Ended
		March 31,
		2010				2009
Revenues		$	—			$	6,824
Operating income (loss)			16,733				(243,167	)
Net income (loss)			14,599				(225,960	)

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

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

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

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

6. DEBT

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

		March 31,				December 31,
		2010				2009
Revolving credit facility due August 2012		$	—			$	68,929
Term loan			770,000				780,000
2007 asset-backed securitization facility notes due July 2012			530,000				570,000
Partnership’s revolving credit facility due October 2011			283,000				285,000
Partnership’s term loan facility due October 2011			117,500				117,500
Partnership’s asset-backed securitization facility notes due July 2013			30,000				30,000
4.75% convertible senior notes due January 2014			143,750				143,750
4.25% convertible senior notes due June 2014 (presented net of the unamortized discount of $85.6 million and $89.5 million, respectively)			269,422				265,469
Other, interest at various rates, collateralized by equipment and other assets			273				288
Long-term debt		$	2,143,945			$	2,260,936

In June 2009, we issued under our shelf registration statement $355.0 million aggregate principal amount of 4.25% convertible senior notes due June 2014 (the “4.25% Notes”), including $30.0 million principal amount issued pursuant to the underwriter’s overallotment option. The 4.25% Notes are convertible upon the occurrence of certain conditions into shares of our common stock at an initial conversion rate of 43.1951 shares of our common stock per $1,000 principal amount of the convertible notes, equivalent to an initial conversion price of approximately $23.15 per share of common stock. The conversion rate will be subject to adjustment following certain dilutive events and certain corporate transactions. The 4.25% Notes’ intrinsic value exceeded their principal amount as of March 31, 2010 by $15.6 million. We may not redeem the notes prior to the maturity date of the notes.

GAAP requires that the liability and equity components of certain convertible debt instruments that may be settled in cash upon conversion be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. Upon issuance of our 4.25% Notes, $97.9 million was recorded as a debt discount and reflected in equity related to the convertible feature of these notes. The unamortized discount on the 4.25% Notes will be amortized using the effective interest method through June 30, 2014. During the three months ended March 31, 2010, we recognized $3.8 million of interest expense related to the contractual interest coupon and $4.0 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 months ended March 31, 2010.

As of March 31, 2010, our senior secured borrowings consisted of our asset-backed securitization facility (the “2007 ABS Facility”), the term loan and our revolving credit facility. At March 31, 2010, we had undrawn capacity of $566.0 million and $270.0 million under our revolving credit facility and 2007 ABS Facility, respectively. Our senior secured credit agreement (the “Credit Agreement”) limits our total outstanding Senior Secured Debt to EBITDA ratio (as defined in the Credit Agreement) to be not greater than 4.0 to 1.0. Due to this limitation, only $668.5 million of the combined $836.0 million of undrawn capacity under both facilities was available for additional borrowings as of March 31, 2010. Further, as of March 31, 2010, only $108.5 million of the $270.0 million in unfunded commitments under our 2007 ABS Facility was available due to certain covenant limitations under the facility, assuming such facility was fully funded with all eligible contract compression assets available at that time. If our operations within Exterran ABS 2007 LLC (along with its subsidiary, “Exterran ABS”) experience additional reductions in cash flows, the amount available for additional borrowings could be further reduced. If the outstanding borrowings exceed the amount allowed based on the limitations, we can utilize either certain cash flows from Exterran ABS’s operations or borrowings under our revolving credit facility, or a combination of both, to reduce the amount of borrowings outstanding to the amount allowed pursuant to the limitations.

As of March 31, 2010, our subsidiary, Exterran Partners L.P. (together with its subsidiaries, the “Partnership”), had undrawn capacity of $32.0 million and $120.0 million under its revolving credit facility and asset-backed securitization facility, respectively. Due to limitations under the Partnership’s senior secured credit agreement (the “Partnership Credit Agreement”) on the Partnership’s total outstanding senior secured borrowings, only approximately $106.7 million of the combined $152.0 million of undrawn capacity under both facilities would have been available for additional borrowings as of March 31, 2010.

Our bank credit facilities, asset-backed securitization facilities and the agreements governing certain of our other indebtedness include various covenants with which we must comply, including, but not limited to, limitations on incurrence of indebtedness, investments,

liens on assets, transactions with affiliates, mergers, consolidations, sales of assets and other provisions customary in similar types of agreements. For example, under our Credit Agreement we must maintain various consolidated financial ratios including a ratio of EBITDA (as defined in the Credit Agreement) to Total Interest Expense (as defined in the Credit Agreement) of not less than 2.25 to 1.0, a ratio of consolidated Total Debt (as defined in the Credit Agreement) to EBITDA of not greater than 5.0 to 1.0 and a ratio of Senior Secured Debt (as defined in the Credit Agreement) to EBITDA of not greater than 4.0 to 1.0. As of March 31, 2010, we maintained a 5.7 to 1.0 EBITDA to Total Interest Expense ratio, a 3.5 to 1.0 consolidated Total Debt to EBITDA ratio and a 2.7 to 1.0 Senior Secured Debt to EBITDA ratio. If we fail to remain in compliance with our financial covenants we would be in default under our credit agreements. In addition, if we experienced a material adverse effect on our assets, liabilities, financial condition, business, operations or prospects that, taken as a whole, impacts our ability to perform our obligations under our credit agreements, this could lead to a default under our credit agreements. A default under one or more of our debt agreements, including a default by the Partnership under its credit facilities, would trigger cross-default provisions under certain of our debt agreements, which would accelerate our obligation to repay our indebtedness under those agreements. As of March 31, 2010, we were in compliance with all financial covenants under our credit agreements.

The Partnership Credit Agreement contains various covenants with which the Partnership must comply, including restrictions on the use of proceeds from borrowings and limitations on its ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. The Partnership must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the Partnership Credit Agreement) to Total Interest Expense (as defined in the Partnership Credit Agreement) of not less than 2.5 to 1.0, and a ratio of Total Debt (as defined in the Partnership Credit Agreement) to EBITDA of not greater than 5.0 to 1.0. The Partnership Credit Agreement allows for the Partnership’s Total Debt to EBITDA ratio to be increased from 5.0 to 1.0 to 5.5 to 1.0 during a quarter when an acquisition meeting certain thresholds is completed and for the following two quarters after the acquisition closes. Therefore, because the November 2009 Contract Operations Acquisition (as defined in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below) closed in the fourth quarter of 2009 and met the applicable thresholds, the maximum allowed ratio of Total Debt to EBITDA was increased from 5.0 to 1.0 to 5.5 to 1.0 for the quarters ending December 31, 2009, March 31, 2010 and June 30, 2010. After June 30, 2010, the Partnership’s required Total Debt to EBITDA ratio will revert back to 5.0 to 1.0. As of March 31, 2010, the Partnership maintained a 4.7 to 1.0 EBITDA to Total Interest Expense ratio and a 4.4 to 1.0 Total Debt to EBITDA ratio. If the Partnership experiences a deterioration in the demand for its services and is unable to consummate further acquisitions from us, amend its senior secured credit facility or restructure its debt, it estimates that it could be in violation of the maximum Total Debt to EBITDA covenant ratio contained in its senior secured credit facility in 2010. A violation of the Partnership’s Total Debt to EBITDA covenant would be an event of default under the Partnership Credit Agreement which would trigger cross-default provisions under certain of our debt agreements. As of March 31, 2010, the Partnership was in compliance with all financial covenants under the Partnership Credit Agreement.

7. 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 March 31, 2010, we were a party to interest rate swaps in which we pay fixed payments and receive floating payments on a notional value of $1,450.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire over varying dates, with interest rate swaps having a notional amount of $1,379.7 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 4.1% as of March 31, 2010. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. We recorded approximately $0.1 million and $0.2 million of interest expense for the three months ended March 31, 2010 and 2009, respectively, due to the ineffectiveness related to these swaps. We estimate that approximately $49.3 million of deferred pre-tax

losses, included in our accumulated other comprehensive loss at March 31, 2010 will be reclassified into earnings as interest expense at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

Foreign Currency Exchange Risk

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

Foreign currency hedges that meet the hedging requirements or that qualify for hedge accounting treatment are accounted for as cash flow hedges and changes in the fair value are recognized as a component of comprehensive income (loss) to the extent the hedge is effective. The amounts recognized as a component of other comprehensive income (loss) will be reclassified into earnings (loss) in the periods in which the underlying foreign currency exchange transaction is recognized. For foreign currency hedges that do not qualify for hedge accounting treatment, changes in fair value and gains and losses on settlement are included in other (income) expense, net in our condensed consolidated statements of operations.

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

		March 31, 2010
				Fair Value
		Balance Sheet Location		Asset (Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Intangibles and other assets		$	170
Interest rate hedges		Accrued liabilities			(49,277	)
Interest rate hedges		Other long-term liabilities			(35,757	)
Total derivatives				$	(84,864	)

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

		Three Months Ended March 31, 2010
								Gain (Loss)
								Reclassified
								from
		Gain (Loss)						Accumulated
		Recognized in						Other
		Other				Location of Gain (Loss)		Comprehensive
		Comprehensive				Reclassified from Accumulated		Income (Loss)
		Income (Loss) on				Other Comprehensive Income		into Income
		Derivatives				(Loss) into Income (Loss)		(Loss)
Derivatives designated as cash flow hedges:
Interest rate hedges		$	(15,179	)		Interest expense		$	(14,312	)

		Three Months Ended March 31, 2009
								Gain (Loss)
								Reclassified
								from
		Gain (Loss)						Accumulated
		Recognized in						Other
		Other				Location of Gain (Loss)		Comprehensive
		Comprehensive				Reclassified from Accumulated		Income (Loss)
		Income (Loss) on				Other Comprehensive Income		into Income
		Derivatives				(Loss) into Income (Loss)		(Loss)
Derivatives designated as cash flow hedges:
Interest rate hedges		$	(15,552	)		Interest expense		$	(12,395	)
Foreign currency hedge			549			Fabrication revenue			(253	)
Totals		$	(15,003	)				$	(12,648	)

		Three Months Ended March 31, 2009
				Amount of Gain
				(Loss)
		Location of Gain (Loss)		Recognized in
		Recognized in Income (Loss) on		Income (Loss)
		Derivative		on Derivative
Derivatives not designated as hedging instruments:
Foreign currency hedge		Other income (expense), net		$	(380	)

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

8. FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.

•		Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.
•		Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.
•		Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.

The following table summarizes the valuation of our interest rate swaps and impaired assets as of and for the three months ended March 31, 2010 with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market
						Prices in				Significant				Significant
						Active				Other				Unobservable
						Markets				Observable				Inputs
		Total				(Level 1)				Inputs (Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(84,864	)		$	—			$	(84,864	)		$	—
Impairment of long-lived assets			360				—				—				360

The following table summarizes the valuation of our interest rate swaps and impaired assets as of and for the three months ended March 31, 2009 with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(104,570	)		$	—			$	(104,570	)		$	—
Foreign currency derivatives asset (liability)			(2,331	)			—				(2,331	)			—
Investments in non-consolidated affiliates			1,217				—				—				1,217
Impairment of manufacturing facilities			8,400				—				8,400				—

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. Our estimate of the fair value of the long-lived assets impaired was based on the estimated component value of the equipment that we plan to use. Our estimate of the fair value of our investments in non-consolidated affiliates was based on discounted cash flow models that use probability weighted estimated cash flows to estimate the fair value of our investment in these non-consolidated affiliates. The primary inputs for the cash flow models were estimates of cash flows from operations we received from management of the joint ventures and our estimates of final proceeds that we would ultimately receive. Our estimate of the fair value of the impaired manufacturing facilities was based on sales of similar assets.

9. LONG-LIVED ASSET IMPAIRMENT

As a result of a decline in market conditions in North America during 2010 and 2009, we reviewed for impairment our compression assets that had been previously removed from our available fleet and were to be disposed of. We performed a cash flow analysis of the expected proceeds from the disposition of these units to determine the fair value of the assets. For the first quarter of 2010, the net book value of these assets exceeded the fair value by $1.7 million and was recorded as a long-lived asset impairment.

In the first quarter of 2009, our management approved a plan to close certain fabrication facilities and consolidate our compression fabrication activities (see Note 10). As a result, we reviewed the facilities to be closed for impairment and the net book value of these facilities exceeded the fair value by $5.6  million and was recorded as a long-lived asset impairment. The consolidation of those compression fabrication activities was completed in September 2009.

10. RESTRUCTURING CHARGES

As a result of the reduced level of demand for our products and services, our management approved a plan in March 2009 to close certain facilities to consolidate our compression fabrication activities. These actions were the result of significant fabrication capacity stemming from the 2007 merger that created Exterran and the lack of consolidation of this capacity since that time, as well as the anticipated continuation of weaker global economic and energy industry conditions. The consolidation of those compression fabrication activities was completed in September 2009. Restructuring charges in the first quarter of 2009 included a $5.6 million facility impairment charge which was reflected in our consolidated statement of operations as a Long-lived asset impairment (see Note 9). Additionally, we reduced the size of our workforce at our two manufacturing locations in Houston, Texas to support the forecasted level of new fabrication work.

11. 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 Compressor Company and Universal Compression Holdings, Inc. 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 May 2010, our stockholders approved an amendment to the 2007 Plan which increased the aggregate number of shares of common stock that may be issued under the 2007 Plan from 6,750,000 to 9,750,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and each share of restricted stock and restricted stock unit granted counts as two shares against the aggregate share limit. Awards granted under the 2007 Plan that are subsequently cancelled, terminated or forfeited are available for future grant.

Stock Options

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

The weighted average fair value at date of grant for options granted during the three months ended March 31, 2010 was $8.71, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

		Three Months
		Ended
		March 31, 2010
Expected life in years			4.5
Risk-free interest rate			2.16	%
Volatility			42.90	%
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 three months ended March 31, 2010 (in thousands, except per share data and remaining life in years):

										Weighted
						Weighted				Average				Aggregate
		Stock				Average				Remaining				Intrinsic
		Options				Exercise Price				Life				Value
Options outstanding, December 31, 2009			2,833			$	33.37
Granted			669				22.77
Exercised			(26	)			16.25
Cancelled			(78	)			43.27
Options outstanding, March 31, 2010			3,398			$	31.18				5.0			$	9,598
Options exercisable, March 31, 2010			1,990			$	35.91				4.2			$	4,362

Intrinsic value is the difference between the market value of our stock and the exercise price of each option multiplied by the number of options outstanding for those options where the market value exceeds their exercise price. The total intrinsic value of stock options exercised during the three months ended March 31, 2010 was $0.3 million. As of March 31, 2010, $17.8 million of unrecognized compensation cost related to unvested stock options is expected to be recognized over the weighted-average period of 2.3 years.

Restricted Stock and Restricted Stock Units

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

The following table presents restricted stock and restricted stock unit activity for the three months ended March 31, 2010 (in thousands, except per share data):

						Weighted
						Average
						Grant-Date
						Fair Value
		Shares				Per Share
Non-vested restricted stock and restricted stock units, December 31, 2009			1,162			$	28.15
Granted			747				22.82
Vested			(371	)			28.50
Cancelled			(25	)			31.74
Non-vested restricted stock and restricted stock units, March 31, 2010			1,513			$	25.38

As of March 31, 2010, $25.3 million of unrecognized compensation cost related to unvested restricted stock and restricted stock units is expected to be recognized over the weighted-average period of 2.3 years.

The compensation committee’s practice is to grant equity-based awards once a year, in late February or early March after fourth quarter earnings information for the prior year has been released for at least two full trading days. The schedule for making equity-based awards is typically established several months in advance, and is not set based on knowledge of material nonpublic information or in response to our stock price. This practice results in awards being granted on a regular, predictable annual cycle, after annual earnings information has been disseminated to the marketplace. Equity-based awards are occasionally granted at other times during the year, such as upon the hiring of a new employee or following the promotion of an employee. In some instances, the compensation committee may be aware, at the time grants are made, of matters or potential developments that are not ripe for public disclosure at that time but that may result in public announcement of material information at a later date. In February 2010, the compensation committee of our board of directors authorized annual long-term incentive awards of stock options, restricted stock, restricted stock units and performance shares to our executive officers, other employees and non-employee directors.

Employee Stock Purchase Plan

On August 20, 2007, we adopted the Exterran Holdings, Inc. Employee Stock Purchase Plan (“ESPP”), which is intended to provide employees with an opportunity to participate in our long-term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. The ESPP is designed to comply with Section 423 of the Internal Revenue Code of 1986, as amended. Each quarter, an eligible employee may elect to withhold a portion of his or her salary up to the lesser of $25,000 per year or 10% of his or her eligible pay to purchase shares of our common stock at a price equal to 85% to 100% of the fair market value of the stock as of the first trading day of the quarter, the last trading day of the quarter or the lower of the first trading day of the quarter and the last trading day of the quarter, as the compensation committee of our board of directors may determine. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. A total of 650,000 shares of our common stock have been authorized and reserved for issuance under the ESPP. At March 31, 2010, 342,938 shares remained available for purchase under the ESPP. Our ESPP plan is compensatory and, as a result, we record an expense on our consolidated statements of operations related to the ESPP. Effective July 1, 2009, the purchase discount under the ESPP was reduced from 15% to 5% of the fair market value of our common stock on the first trading day of the quarter or the last trading day of the quarter, whichever is lower.

Partnership Long-Term Incentive Plan

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

Unit options will have an exercise price that is not less than the fair market value of a common unit 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.

Partnership Phantom Units

During the quarter ended March 31, 2010, the Partnership granted 29,634 phantom units to officers and directors of Exterran GP LLC and certain of our employees, 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 three months ended March 31, 2010:

						Weighted
						Average
						Grant-Date
		Phantom				Fair Value
		Units				per Unit
Phantom units outstanding, December 31, 2009			91,124			$	17.06
Granted			29,634				22.88
Vested			(33,373	)			18.18
Cancelled			(2,065	)			17.26
Phantom units outstanding, March 31, 2010			85,320			$	18.60

As of March 31, 2010, $1.5 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 2.2 years.

12. COMMITMENTS AND CONTINGENCIES

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

						Maximum Potential
						Undiscounted
						Payments as of
		Term				March 31, 2010
Performance guarantees through letters of credit(1)			2010 – 2013			$	294,161
Standby letters of credit			2010 – 2011				19,449
Commercial letters of credit			2010				1,032
Bid bonds and performance bonds(1)			2010 – 2016				123,372
Maximum potential undiscounted payments						$	438,014

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

In January 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 2010.

See Note 2 and Note 5 for a discussion of gain contingencies related to our claims for assets and investments that were expropriated in Venezuela.

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

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

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, we believe 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. Because of the inherent uncertainty of

litigation, however, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows for the period in which the resolution occurs.

13. RECENT ACCOUNTING DEVELOPMENTS

In June 2009, the Financial Accounting Standards Board issued new guidance to require an entity to perform an analysis to determine whether the entity’s variable interest gives it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the entity that has both the power to direct the activities that most significantly impact the variable interest entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the variable interest entity. The new guidance also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The new guidance is effective for fiscal years beginning after November 15, 2009. Our adoption of this new guidance on January 1, 2010 did not have a material impact on our consolidated financial statements.

14. REPORTABLE SEGMENTS

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

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

The following table presents sales and other financial information by industry segment for the three months ended March 31, 2010 and 2009 (in thousands):

		North
		America				International												Reportable
		Contract				Contract				Aftermarket								Segments
Three months ended		Operations				Operations				Services				Fabrication				Total
March 31, 2010:
Revenue from external customers		$	152,627			$	109,740			$	70,323			$	243,618			$	576,308
Gross margin(1)			81,252				68,885				13,711				46,745				210,593
March 31, 2009:
Revenue from external customers		$	194,393			$	90,679			$	75,531			$	342,609			$	703,212
Gross margin(1)			110,688				57,874				15,777				55,895				240,234

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. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) 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.

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

		Three Months Ended
		March 31,
		2010				2009
Net income (loss)		$	16,733			$	(57,900	)
Selling, general and administrative			84,051				85,111
Depreciation and amortization			91,775				82,073
Long-lived asset impairment			1,707				5,600
Restructuring charges			—				1,704
Interest expense			32,934				26,734
Equity in loss of non-consolidated affiliates			—				91,117
Other (income) expense, net			(2,183	)			(3,362	)
Provision for (benefit from) income taxes			(3,999	)			10,963
Income from discontinued operations, net of tax			(10,425	)			(1,806	)
Gross margin		$	210,593			$	240,234

15. CONSOLIDATING FINANCIAL STATEMENTS

Exterran Energy Corp., a wholly owned subsidiary of Exterran Holdings, Inc., is the issuer of our 4.75% Notes. Exterran Holdings, Inc. agreed to fully and unconditionally guarantee the obligations of Exterran Energy Corp. relating to our 4.75% Notes and as a result of this guarantee, we are presenting the following condensed consolidating financial information pursuant to Rule 3-10 of Regulation S-X. These schedules are presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.

Condensed Consolidating Balance Sheet
March 31, 2010

						Subsidiary				Other
		Parent				Issuer				Subsidiaries				Eliminations				Consolidation
		(in thousands)
ASSETS
Current assets		$	1,463			$	786			$	1,283,260			$	(2,195	)		$	1,283,314
Current assets associated with discontinued operations			—				—				9,093				—				9,093
Total current assets			1,463				786				1,292,353				(2,195	)			1,292,407
Property, plant and equipment, net			—				—				3,352,654				—				3,352,654
Goodwill, net			—				—				195,644				—				195,644
Investments in affiliates			2,027,845				2,180,013				—				(4,207,858	)			—
Other assets			864,235				844,684				248,373				(1,693,570	)			263,722
Long-term assets associated with discontinued operations			—				—				7,076				—				7,076
Total long-term assets			2,892,080				3,024,697				3,803,747				(5,901,428	)			3,819,096
Total assets		$	2,893,543			$	3,025,483			$	5,096,100			$	(5,903,623	)		$	5,111,503
LIABILITIES AND EQUITY
Current liabilities		$	15,993			$	2,854			$	737,474			$	(1,200	)		$	755,121
Current liabilities associated with discontinued operations			—				—				26,025				—				26,025
Total current liabilities			15,993				2,854				763,499				(1,200	)			781,146
Long-term debt			1,039,422				143,750				960,773				—				2,143,945
Intercompany payables			—				851,034				802,784				(1,653,818	)			—
Other long-term liabilities			10,412				—				377,099				(40,747	)			346,764
Long-term liabilities associated with discontinued operations			—				—				11,932				—				11,932
Total liabilities			1,065,827				997,638				2,916,087				(1,695,765	)			3,283,787
Total equity			1,827,716				2,027,845				2,180,013				(4,207,858	)			1,827,716
Total liabilities and equity		$	2,893,543			$	3,025,483			$	5,096,100			$	(5,903,623	)		$	5,111,503