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. 001-33078

EXTERRAN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

Delaware		22-3935108
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
16666 Northchase Drive
Houston, Texas		77060
(Address of principal executive offices)		(Zip Code)

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 þ No o

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

Large accelerated filer o		Accelerated filer þ		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

As of July 28, 2011, there were 32,517,164 common units and 4,743,750 subordinated units outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive Income (Loss)			5
Condensed Consolidated Statements of Partners’ Capital			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 6. Exhibits			32
SIGNATURES			34
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

EXTERRAN PARTNERS, L.P.

(In thousands, except for unit amounts)

(unaudited)

		June 30, 2011				December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	232			$	50
Accounts receivable, trade, net of allowance of $1,004 and $1,232, respectively			27,752				24,550
Due from affiliates, net			—				3,759
Total current assets			27,984				28,359
Property, plant and equipment			1,218,372				953,759
Accumulated depreciation			(395,519	)			(316,806	)
Net property, plant and equipment			822,853				636,953
Goodwill			124,019				124,019
Interest rate swaps			1,963				5,769
Intangibles and other assets, net			24,145				18,245
Total assets		$	1,000,964			$	813,345
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable, trade		$	13			$	166
Due to affiliates, net			1,613				—
Accrued liabilities			10,621				9,347
Accrued interest			1,293				983
Current portion of interest rate swaps			3,402				3,112
Total current liabilities			16,942				13,608
Long-term debt			539,500				449,000
Total liabilities			556,442				462,608
Commitments and contingencies (Note 11)
Partners’ capital:
Limited partner units:
Common units, 32,541,390 and 27,363,451 units issued, respectively			468,230				379,748
Subordinated units, 4,743,750 units issued and outstanding			(28,706	)			(30,702	)
General partner units, 2% interest with 757,722 and 653,318 equivalent units issued and outstanding, respectively			13,189				10,638
Accumulated other comprehensive loss			(7,636	)			(8,673	)
Treasury units, 25,601 and 15,756 common units, respectively			(555	)			(274	)
Total partners’ capital			444,522				350,737
Total liabilities and partners’ capital		$	1,000,964			$	813,345

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

EXTERRAN PARTNERS, L.P.

(In thousands, except per unit amounts)

(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenue		$	71,841			$	53,790			$	140,570			$	106,500
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense)			39,824				29,126				76,876				54,977
Depreciation and amortization			15,459				11,763				29,608				23,641
Long-lived asset impairment			305				—				305				231
Selling, general and administrative			9,927				8,519				20,143				16,214
Interest expense			7,553				5,724				14,628				11,416
Other (income) expense, net			455				(170	)			234				(406	)
Total costs and expenses			73,523				54,962				141,794				106,073
Income (loss) before income taxes			(1,682	)			(1,172	)			(1,224	)			427
Income tax expense			256				173				491				346
Net income (loss)		$	(1,938	)		$	(1,345	)		$	(1,715	)		$	81
General partner interest in net income (loss)		$	676			$	285			$	1,248			$	625
Common units interest in net income (loss)		$	(2,240	)		$	(1,198	)		$	(2,537	)		$	(400	)
Subordinated units interest in net income (loss)		$	(374	)		$	(432	)		$	(426	)		$	(144	)
Weighted average common units outstanding:
Basic			29,089				17,560				28,231				17,553
Diluted			29,089				17,560				28,231				17,553
Weighted average subordinated units outstanding:
Basic			4,744				6,325				4,744				6,325
Diluted			4,744				6,325				4,744				6,325
Loss per common unit:
Basic		$	(0.08	)		$	(0.07	)		$	(0.09	)		$	(0.02	)
Diluted		$	(0.08	)		$	(0.07	)		$	(0.09	)		$	(0.02	)
Loss per subordinated unit:
Basic		$	(0.08	)		$	(0.07	)		$	(0.09	)		$	(0.02	)
Diluted		$	(0.08	)		$	(0.07	)		$	(0.09	)		$	(0.02	)

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

EXTERRAN PARTNERS, L.P.

(In thousands)

(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Net income (loss)		$	(1,938	)		$	(1,345	)		$	(1,715	)		$	81
Other comprehensive income (loss):
Interest rate swap gain (loss)			(5,457	)			1,093				(4,094	)			919
Amortization of payments to terminate interest rate swaps			2,557				—				5,131				—
Total other comprehensive income (loss)			(2,900	)			1,093				1,037				919
Comprehensive income (loss)		$	(4,838	)		$	(252	)		$	(678	)		$	1,000

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

EXTERRAN PARTNERS, L.P.

(In thousands, except for unit amounts)

(unaudited)

		Partners’ Capital																																Accumulated
																		General Partner																Other
		Common Units								Subordinated Units								Units								Treasury Units								Comprehensive
		$				Units				$				Units				$				Units				$				Units				Loss				Total
Balance, December 31, 2009		$	298,010				17,541,965			$	(33,194	)			6,325,000			$	8,457				486,243			$	(108	)			(8,426	)		$	(14,857	)		$	258,308
Issuance of common units for vesting of phantom units							33,373																																—
Treasury units purchased																											(166	)			(7,330	)							(166	)
Transaction costs for the public offering of common units by Exterran Holdings			(4	)							(2	)																											(6	)
Contribution of capital			6,873								4,742								356																				11,971
Excess of purchase price of equipment over Exterran Holdings’ cost of equipment			(558	)							(385	)							(29	)																			(972	)
Cash distributions			(16,233	)							(5,850	)							(1,086	)																			(23,169	)
Unit based compensation expense			438																																				438
Interest rate swap gain																																			919				919
Net income (loss)			(400	)							(144	)							625																				81
Balance, June 30, 2010		$	288,126				17,575,338			$	(34,833	)			6,325,000			$	8,323				486,243			$	(274	)			(15,756	)		$	(13,938	)		$	247,404

		Partners’ Capital																																Accumulated
																		General Partner																Other
		Common Units								Subordinated Units								Units								Treasury Units								Comprehensive
		$				Units				$				Units				$				Units				$				Units				Loss				Total
Balance, December 31, 2010		$	379,748				27,363,451			$	(30,702	)			4,743,750			$	10,638				653,318			$	(274	)			(15,756	)		$	(8,673	)		$	350,737
Issuance of common units for vesting of phantom units							43,764																																—
Treasury units purchased																											(281	)			(9,845	)							(281	)
Net proceeds from issuance of common units			127,672				5,134,175																																127,672
Proceeds from sale of general partner units to Exterran Holdings																			1,316				53,431																1,316
Transaction costs for the public offering of common units by Exterran Holdings			(261	)																																			(261	)
Acquisition of a portion of Exterran Holdings U.S. contract operations business			(24,655	)															767				50,973																(23,888	)
Contribution of capital			13,753								6,928								947																				21,628
Cash distributions			(26,000	)							(4,506	)							(1,727	)																			(32,233	)
Unit based compensation expense			510																																				510
Interest rate swap loss																																			(4,094	)			(4,094	)
Amortization of payments to terminate interest rate swaps																																			5,131				5,131
Net income (loss)			(2,537	)							(426	)							1,248																				(1,715	)
Balance, June 30, 2011		$	468,230				32,541,390			$	(28,706	)			4,743,750			$	13,189				757,722			$	(555	)			(25,601	)		$	(7,636	)		$	444,522

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

EXTERRAN PARTNERS, L.P.

(In thousands)

(unaudited)

		Six Months Ended
		June 30,
		2011				2010
Cash flows from operating activities:
Net income (loss)		$	(1,715	)		$	81
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization			29,608				23,641
Long-lived asset impairment			305				231
Amortization of debt issuance cost			638				471
Amortization of fair value of acquired interest rate swaps			—				74
Amortization of payments to terminate interest rate swaps			5,131				—
Unit based compensation expense			517				448
Provision for doubtful accounts			29				32
Gain on sale of compression equipment			(327	)			(417	)
Changes in assets and liabilities:
Accounts receivable, trade			(3,231	)			(192	)
Accounts payable, trade			(153	)			5
Other liabilities			1,318				1,648
Net cash provided by operating activities			32,120				26,022
Cash flows from investing activities:
Capital expenditures			(23,820	)			(17,541	)
Payment to Exterran Holdings for a portion of the June 2011 Contract Operations Acquisition			(62,217	)			—
Proceeds from the sale of compression equipment			1,268				793
Increase in restricted cash			—				(540	)
Decrease in amounts due from affiliates, net			5,329				—
Net cash used in investing activities			(79,440	)			(17,288	)
Cash flows from financing activities:
Borrowings under long-term debt			474,500				7,000
Repayments under long-term debt			(543,434	)			(9,000	)
Distributions to unitholders			(32,233	)			(23,169	)
Net proceeds from issuance of common units			127,672				—
Net proceeds from sale of general partner units			1,316				—
Debt issuance costs			(980	)			—
Purchase of treasury units			(281	)			(166	)
Capital contribution from limited partners and general partner			19,329				9,171
Increase in amounts due to affiliates, net			1,613				7,291
Net cash provided by (used in) financing activities			47,502				(8,873	)
Net increase (decrease) in cash and cash equivalents			182				(139	)
Cash and cash equivalents at beginning of period			50				203
Cash and cash equivalents at end of period		$	232			$	64
Supplemental disclosure of cash flow information:
Non-cash capital contribution from limited and general partner		$	594			$	198
Non-cash capital contribution for contract operations equipment acquired/exchanged, net		$	193,069			$	2,602
Intangible assets allocated in acquisition		$	6,400			$	—
Debt assumed in acquisition		$	159,434			$	—
Non-cash capital distribution due to the June 2011 Contract Operations Acquisition		$	24,655			$	—
General partner units issued to general partner due to the June 2011 Contract Operations Acquisition		$	767			$	—

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

EXTERRAN PARTNERS, L.P.

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The accompanying unaudited condensed consolidated financial statements of Exterran Partners, L.P. (“we,” or the “Partnership”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) are not required in these interim financial statements and have been condensed or omitted. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2010. That report contains a more comprehensive summary of our accounting policies. These interim results are not necessarily indicative of results for a full year.

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

Fair Value of Financial Instruments

Our financial instruments consist of cash, trade receivables and payables, interest rate swaps and long-term debt. At June 30, 2011 and December 31, 2010, the estimated fair values of those financial instruments approximated their carrying values as reflected in our condensed consolidated balance sheets. The fair value of our debt has been estimated based on similar debt transactions that occurred near the valuation dates.

Earnings Per Common and Subordinated Unit

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

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

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

the assumed incentive distribution rights, is allocated between the general partner, common and subordinated units based on how our partnership agreement allocates net income.

The potentially dilutive securities issued by us include phantom units, which do not require an adjustment to the amount of net income (loss) used for dilutive loss per common unit purposes. The table below indicates the potential common units that were included in computing the dilutive potential common units used in diluted loss per common unit (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Weighted average common units outstanding — used in basic loss per common unit			29,089				17,560				28,231				17,553
Net dilutive potential common units issuable:
Phantom units			**				**				**				**
Weighted average common units and dilutive potential common units — used in diluted loss per common unit			29,089				17,560				28,231				17,553

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Net dilutive potential common units issuable:
Phantom units			9				11				6				8
Net dilutive potential common units issuable			9				11				6				8

2. JUNE 2011 AND AUGUST 2010 CONTRACT OPERATIONS ACQUISITION

In June 2011, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of 407 compressor units used to provide compression services under those agreements, comprising approximately 289,000 horsepower, or 8% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “June 2011 Contract Operations Acquisition”). In addition, the acquired assets included 207 compressor units, comprising approximately 98,000 horsepower previously leased from Exterran Holdings to us, and a natural gas processing plant with a capacity of 8 million cubic feet per day used to provide processing services pursuant to a long-term services agreement. At the date of acquisition, the acquired fleet assets had a net book value of $191.4 million, net of accumulated depreciation of $85.5 million. Total consideration for the transaction was approximately $223.0 million, excluding transaction costs. In connection with this acquisition, we assumed $159.4 million of Exterran Holdings debt, paid $62.2 million in cash and issued approximately 51,000 general partner units to our general partner, a wholly-owned subsidiary of Exterran Holdings.

In connection with this acquisition, we were allocated $6.4 million finite life intangible assets associated with customer relationships of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. These intangible assets are being amortized through 2024, based on the present value of expected income to be realized from these intangible assets.

In August 2010, we acquired from Exterran Holdings contract operations customer service agreements with 43 customers and a fleet of approximately 580 compressor units used to provide compression services under those agreements having a net book value of $121.8 million, net of accumulated depreciation of $53.6 million, and comprising approximately 255,000 horsepower, or 6% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “August 2010 Contract Operations Acquisition”) for approximately $214.0 million, excluding transaction costs. In connection with this acquisition, we issued approximately 8.2 million common units and approximately 167,000 general partner units to Exterran Holdings’ wholly-owned subsidiaries.

In connection with this acquisition, we were allocated $5.9 million finite life intangible assets associated with customer relationships of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the

net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. These intangible assets are being amortized through 2024, based on the present value of expected income to be realized from these intangible assets.

An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be substantiated. Accordingly, our financial statements include the assets acquired, liabilities assumed, revenues and direct operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP.

Unaudited Pro Forma Financial Information

Pro forma financial information for the three and six months ended June 30, 2011 and 2010 has been included to give effect to the expansion of our compressor fleet and service contracts and addition of a natural gas processing plant as a result of the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. The June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition are presented in the pro forma financial information as though the transactions occurred as of January 1, 2010. The unaudited pro forma financial information reflect the following transactions:

As related to the June 2011 Contract Operations Acquisition:

	•		our acquisition in June 2011 of certain contract operations customer service agreements, compression equipment and a natural gas processing plant from Exterran Holdings;
	•		our assumption of $159.4 million of Exterran Holdings’ long-term debt;
	•		our payment of $62.2 million in cash to Exterran Holdings; and
	•		our issuance of approximately 51,000 general partner units to our general partner, a wholly-owned subsidiary of Exterran Holdings.

As related to the August 2010 Contract Operations Acquisition:

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

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

The following table presents unaudited pro forma financial information for the three and six months ended June 30, 2011 and 2010 (in thousands, except per unit amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenue		$	82,295			$	79,677			$	164,276			$	158,693
Net income (loss)		$	(1,841	)		$	3,586			$	(1,191	)		$	10,850
Basic earnings (loss) per common and subordinated limited partner unit		$	(0.07	)		$	0.10			$	(0.07	)		$	0.30
Diluted earnings (loss) per common and subordinated limited partner unit		$	(0.07	)		$	0.10			$	(0.07	)		$	0.30

Pro forma net income (loss) per limited partner unit is determined by dividing the pro forma net income (loss) that would have been allocated to the common and subordinated unitholders by the weighted average number of common and subordinated units expected to be outstanding after the completion of the transactions included in the pro forma consolidated financial statements. All units issued in connection with the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition were assumed to have been outstanding since the beginning of the period presented. Pursuant to our partnership agreement, to the extent that the quarterly distributions exceed certain targets, our general partner is entitled to receive certain incentive distributions that will result in more net income proportionately being allocated to our general partner than to the holders of our common and subordinated units. The pro forma net earnings (loss) per limited partner unit calculations reflect pro forma incentive distributions to our general partner. There was no additional pro forma reduction of net income (loss) allocable to our limited partners, including the amount of additional incentive distributions that would have occurred, for the three and six months ended June 30, 2011. The pro forma net earnings (loss) per limited partner unit calculations reflect pro forma incentive distributions to our general partner, including an additional pro forma reduction of net income (loss) allocable to our limited partners of approximately $0.1 million and $0.3 million for the three and six months ended June 30, 2010, respectively, which includes the amount of additional incentive distributions that would have occurred during the period.

3. RELATED PARTY TRANSACTIONS

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

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

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

During the six months ended June 30, 2011, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 73 compressor units, totaling approximately 29,200 horsepower with a net book value of approximately $14.7 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership of 75 compressor units, totaling approximately 32,000 horsepower

with a net book value of approximately $16.7 million, to us. During the six months ended June 30, 2010, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 65 compressor units, totaling approximately 35,700 horsepower with a net book value of approximately $16.2 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership of 134 compressor units, totaling approximately 31,500 horsepower with a net book value of approximately $18.8 million, to us. During the six months ended June 30, 2011 and 2010, we recorded capital contributions of approximately $2.0 million and $2.6 million, respectively, related to the differences in net book value on the compression equipment that was exchanged with us. No customer contracts were included in the transfers. Under the terms of the Omnibus Agreement, such transfers must be of equal appraised value, as defined in the Omnibus Agreement, with any difference being settled in cash. As a result, Exterran Holdings paid to us a nominal amount for the difference in fair value of the equipment in connection with the transfers.

Under the Omnibus Agreement, Exterran Holdings has agreed that, for a period that will terminate on December 31, 2012, our obligation to reimburse Exterran Holdings for (i) any cost of sales that it incurs in the operation of our business will be capped (after taking into account any such costs we incur and pay directly); and (ii) any cash selling, general and administrative (“SG&A”) costs allocated to us will be capped (after taking into account any such costs we incur and pay directly). Cost of sales was capped at $21.75 per operating horsepower per quarter from July 30, 2008 through June 30, 2011. SG&A costs were capped at $6.0 million per quarter from July 30, 2008 through November 9, 2009, at $7.6 million per quarter from November 10, 2009 through June 9, 2011, and at $9.0 million per quarter from June 10, 2011 through June 30, 2011. These caps may be subject to future adjustment or termination in connection with expansions of our operations through the acquisition or construction of new assets or businesses.

For the three months ended June 30, 2011 and 2010, our cost of sales exceeded the cap provided in the Omnibus Agreement by $8.3 million and $5.7 million, respectively. For the six months ended June 30, 2011 and 2010, our cost of sales exceeded the cap provided in the Omnibus Agreement by $15.2 million and $8.5 million, respectively. For the three months ended June 30, 2011 and 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $1.9 million and $0.7 million, respectively. For the six months ended June 30, 2011 and 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $4.2 million and $0.7 million, respectively. The excess amounts over the caps are included in the consolidated statements of operations as cost of sales or SG&A expense. The cash received for the amounts over the caps has been accounted for as a capital contribution in our consolidated balance sheets and consolidated statements of cash flows.

Pursuant to the Omnibus Agreement, we are permitted to purchase newly-fabricated compression equipment from Exterran Holdings or its affiliates at Exterran Holdings’ cost to fabricate such equipment plus a fixed margin of 10%, which may be modified with the approval of Exterran Holdings and the conflicts committee of Exterran GP LLC’s board of directors. During the six months ended June 30, 2011, we did not purchase any newly-fabricated compression equipment from Exterran Holdings. During the six months ended June 30, 2010, we purchased $9.8 million of newly-fabricated compression equipment from Exterran Holdings. Under GAAP, transfers of assets and liabilities between entities under common control are to be initially recorded on the books of the receiving entity at the carrying value of the transferor. Any difference between consideration given and the carrying value of the assets or liabilities is treated as a capital distribution or contribution. Transactions between us and Exterran Holdings and its affiliates are transactions between entities under common control. As a result, the equipment purchased during the six months ended June 30, 2010 was recorded in our consolidated balance sheet as property, plant and equipment of $8.8 million, which represents the carrying value of the Exterran Holdings affiliates that sold it to us, and as a distribution of equity of $1.0 million, which represents the fixed margin we paid above the carrying value in accordance with the Omnibus Agreement. During the six months ended June 30, 2011 and 2010, Exterran Holdings contributed to us $0.6 million and $0.2 million, respectively, primarily related to the completion of overhauls on compression equipment that was exchanged with us or contributed to us and where overhauls were in progress on the date of exchange or contribution.

Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith that there exists a need on the part of Exterran Holdings’ contract operations services business or on our part to lease compression equipment between Exterran Holdings and us to fulfill the compression services obligations of either Exterran Holdings or us, such equipment may be leased if it will not cause us to breach any existing compression services contracts or to suffer a loss of revenue under an existing compression services contract or to incur any unreimbursed costs. At June 30, 2011, we had equipment on lease to Exterran Holdings with an aggregate cost and accumulated depreciation of $7.7 million and $1.3 million, respectively.

For each of the six months ended June 30, 2011 and 2010, we had revenues of $0.6 million from Exterran Holdings related to the lease of our compression equipment. For the six months ended June 30, 2011 and 2010, we had cost of sales of $7.9 million and $6.7 million, respectively, with Exterran Holdings related to the lease of Exterran Holdings’ compression equipment.

4. DEBT

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

		June 30, 2011				December 31, 2010
Revolving credit facility due November 2015		$	389,500			$	299,000
Term loan facility due November 2015			150,000				150,000
Long-term debt		$	539,500			$	449,000

On November 3, 2010, we entered into an amendment and restatement of our senior secured credit agreement (as so amended and restated, the “Credit Agreement”) to provide for a new five-year, $550.0 million senior secured credit facility consisting of a $400.0 million revolving credit facility and a $150.0 million term loan facility. In March 2011, the revolving borrowing capacity under this facility was increased by $150.0 million to $550.0 million.

As of June 30, 2011, we had undrawn capacity of $160.5 million under our revolving credit facility.

5. CASH DISTRIBUTIONS

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

	•		first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;
	•		second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
	•		third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter;
	•		fourth, 98% to all common and subordinated unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.4025;
	•		fifth, 85% to all common and subordinated unitholders, pro rata, and 15% to our general partner, until each unit has received a distribution of $0.4375;
	•		sixth, 75% to all common and subordinated unitholders, pro rata, and 25% to our general partner, until each unit has received a total of $0.525; and
	•		thereafter, 50% to all common and subordinated unitholders, pro rata, and 50% to our general partner.

The following table summarizes our distributions per unit for 2010 and 2011:

				Distribution per
				Limited Partner
Period Covering		Payment Date		Unit				Total Distribution (1)
1/1/2010 — 3/31/2010		May 14, 2010		$	0.4625			$	11.6	million
4/1/2010 — 6/30/2010		August 13, 2010			0.4625				11.6	million
7/1/2010 — 9/30/2010		November 12, 2010			0.4675				15.7	million
10/1/2010 — 12/31/2010		February 14, 2011			0.4725				16.0	million
1/1/2011 — 3/31/2011		May 13, 2011			0.4775				16.2	million

On July 29, 2011, Exterran GP LLC’s board of directors approved a cash distribution of $0.4825 per limited partner unit, or approximately $19.1 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from April 1, 2011 through June 30, 2011. The record date for this distribution is August 9, 2011 and payment is expected to occur on August 12, 2011.

6. UNIT-BASED COMPENSATION

Long-Term Incentive Plan

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

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

Phantom Units

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

The following table presents phantom unit activity for the six months ended June 30, 2011:

						Weighted
						Average
						Grant-Date
		Phantom				Fair Value
		Units				per Unit
Phantom units outstanding, December 31, 2010			98,537			$	19.23
Granted			20,851				28.50
Vested			(43,764	)			18.90
Phantom units outstanding, June 30, 2011			75,624			$	21.98

As of June 30, 2011, $1.5 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 1.8 years.

Unit Options

As of June 30, 2011 and December 31, 2010, we had no unit options outstanding.

7. ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS

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

Interest Rate Risk

At June 30, 2011, we were party to interest rate swaps pursuant to which we pay fixed payments and receive floating payments on a notional value of $250.0 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 in November 2015. As of June 30, 2011, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income and is included in accumulated other comprehensive loss to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and, therefore, we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. For the three and six months ended June 30, 2011 and 2010, there was no ineffectiveness related to interest rate swaps. We estimate that $3.4 million of deferred pre-tax losses from existing interest rate swaps will be realized as an expense during the next twelve months. Cash flows from derivatives designated as hedges are classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total notional value of $285.0 million and a weighted average effective fixed interest rate of 4.4%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive loss. The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive loss will be amortized into interest expense over the original term of the swaps. We estimate that $5.7 million of deferred pre-tax losses from these terminated interest rate swaps will be amortized into interest expense during the next twelve months.

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

		June 30, 2011
				Fair Value
				Asset
		Balance Sheet Location		(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Interest rate swaps		$	1,963
Interest rate hedges		Current portion of interest rate swaps			(3,402	)
Total derivatives				$	(1,439	)

		December 31, 2010
				Fair Value
				Asset
		Balance Sheet Location		(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges		Interest rate swaps		$	5,769
Interest rate hedges		Current portion of interest rate swaps			(3,112	)
Total derivatives				$	2,657

Three Months Ended June 30, 2011

Six Months Ended June 30, 2011

Gain (Loss)

Location of Gain

Gain (Loss)

Location of Gain

Gain (Loss)

Recognized in

(Loss) Reclassified

Reclassified from

Gain (Loss)

(Loss) Reclassified

Reclassified from

Other

from Accumulated

Accumulated Other

Recognized in Other

from Accumulated

Accumulated Other

Comprehensive

Other Comprehensive

Comprehensive

Comprehensive

Other Comprehensive

Comprehensive

Income (Loss) on

Income (Loss) into

Income (Loss) into

Income (Loss) on

Income (Loss) into

Income (Loss) into

Derivatives

Income (Loss)

Income (Loss)

Derivatives

Income (Loss)

Income (Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(6,433

)

Interest expense

$

(3,533

)

$

(5,844

)

Interest expense

$

(6,881

)

Three Months Ended June 30, 2010

Six Months Ended June 30, 2010

Location of Gain

Gain (Loss)

Location of Gain

Gain (Loss)

Gain (Loss)

(Loss) Reclassified

Reclassified from

Gain (Loss)

(Loss) Reclassified

Reclassified from

Recognized in Other

from Accumulated

Accumulated Other

Recognized in Other

from Accumulated

Accumulated Other

Comprehensive

Other Comprehensive

Comprehensive

Comprehensive

Other Comprehensive

Comprehensive

Income (Loss) on

Income (Loss) into

Income (Loss) into

Income (Loss) on

Income (Loss) into

Income (Loss) into

Derivatives

Income (Loss)

Income (Loss)

Derivatives`

Income (Loss)

Income (Loss)

Derivatives designated as cash flow hedges:

Interest rate hedges

$

(1,884

)

Interest expense

$

(2,977

)

$

(4,963

)

Interest expense

$

(5,882

)

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

8. FAIR VALUE 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 long-lived assets as of and for the six months ended June 30, 2011 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)		$	(1,439	)		$	—			$	(1,439	)		$	—
Impaired long-lived assets			156				—				—				156

The following table summarizes the valuation of our interest rate swaps and impaired long-lived assets as of and for the six months ended June 30, 2010 with pricing levels as of the date of valuation (in thousands):

						Quoted
						Market				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Interest rate swaps asset (liability)		$	(14,716	)		$	—			$	(14,716	)		$	—
Impaired long-lived assets			21				—				—				21

On a quarterly basis, our interest rate swaps are recorded at fair value utilizing a combination of the market approach and income approach to estimate fair value. Our estimate of the fair value of the impaired long-lived assets was based on the estimated component value of the equipment that we plan to use.

9. UNIT TRANSACTIONS

In June 2011, we completed the June 2011 Contract Operations Acquisition from Exterran Holdings. In connection with this acquisition, we issued approximately 51,000 general partner units to our general partner, a wholly-owned subsidiary of Exterran Holdings.

In May 2011, we sold, pursuant to a public underwritten offering, 5,134,175 common units representing limited partner interests in us, including 134,175 common units sold pursuant to an over-allotment option. The net proceeds from this offering were used (i) to repay approximately $64.8 million of borrowings outstanding under the revolving credit facility and (ii) for general partnership purposes, including to fund a portion of the consideration for the June 2011 Contract Operations Acquisition from Exterran Holdings. In connection with this sale and as permitted under the partnership agreement, we issued approximately 53,000 general partner units to our general partner in consideration of the continuation of its approximate 2.0% general partner interest in us. Our general partner made a capital contribution to us in the amount of $1.3 million as consideration for such units.

In March 2011, Exterran Holdings sold, pursuant to a public underwritten offering, 5,914,466 common units representing limited partner interests in us, including 664,466 common units sold pursuant to an over-allotment option. We did not sell any common units in this offering and did not receive any proceeds from the sale of the common units by Exterran Holdings. In connection with our initial issuance of these units to Exterran Holdings, we agreed to pay certain costs relating to their future public sale. These costs have been recorded as a reduction to partners’ capital.

As of June 30, 2011, Exterran Holdings owned 7,751,641 common units, 4,743,750 subordinated units and 757,722 general partner units, collectively representing a 35% interest in us.

10. RECENT ACCOUNTING DEVELOPMENTS

In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This standard update clarifies that, when presenting comparative financial statements, public companies should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The update is effective prospectively for business combinations entered into in fiscal years beginning on or after December 15, 2010. Our adoption of this new guidance did not have a material impact on our condensed consolidated financial statements.

In May 2011, the FASB issued an update to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This update changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This update is effective for interim and annual periods beginning on or after December 15, 2011. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.

In June 2011, the FASB issued an update on the presentation of other comprehensive income. Under this update, entities will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This update is effective for interim and annual periods beginning on or after December 15, 2011. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.

11. COMMITMENTS AND CONTINGENCIES

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

12. SUBSEQUENT EVENT

All of our 4,743,750 subordinated units are owned by a wholly-owned subsidiary of Exterran Holdings. As of June 30, 2011, we met the requirements under our partnership agreement for early conversion of 1,581,250 of those subordinated units into common units. Accordingly, we expect that 1,581,250 of our subordinated units will convert to common units in August 2011. Additionally, all remaining subordinated units will convert to common units following any quarter, beginning with the quarter ending September 30, 2011, during which we meet each of the tests prescribed in the partnership agreement.

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations; the sufficiency of available cash flows to make cash distributions; the expected amount of our capital expenditures; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; plans and objectives of our management for our future operations; and any potential contribution of additional assets from Exterran Holdings, Inc. (individually, and together with its wholly-owned subsidiaries, “Exterran Holdings”) to us. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. These forward-looking statements are also affected by the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2010, and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”), which are available through our website at www.exterran.com and through the SEC’s Electronic Data Gathering and Retrieval System at www.sec.gov. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

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

	•		growing our asset base and utilization, particularly for our fleet of compressors;
	•		integrating acquired businesses;

	•		generating sufficient cash;
	•		accessing the capital markets at an acceptable cost; and
	•		purchasing additional contract operation contracts and equipment from Exterran Holdings;

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

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

GENERAL

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

June 2011 Contract Operations Acquisition

In June 2011, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of 407 compressor units used to provide compression services under those agreements, comprising approximately 289,000 horsepower, or 8% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “June 2011 Contract Operations Acquisition”). In addition, the acquired assets included 207 compressor units, comprising approximately 98,000 horsepower previously leased from Exterran Holdings to us, and a natural gas processing plant with a capacity of 8 million cubic feet per day used to provide processing services pursuant to a long-term services agreement. At the date of acquisition, the acquired fleet assets had a net book value of $191.4 million, net of accumulated depreciation of $85.5 million. Total consideration for the transaction was approximately $223.0 million, excluding transaction costs. In connection with this acquisition, we assumed $159.4 million of Exterran Holdings debt, paid $62.2 million in cash and issued approximately 51,000 general partner units to our general partner, a wholly-owned subsidiary of Exterran Holdings.

August 2010 Contract Operations Acquisition

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

Omnibus Agreement

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

•

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

	•		Exterran Holdings’ obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below;
	•		the terms under which we, Exterran Holdings and our respective affiliates may transfer compression equipment among one another; and
	•		the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings’ affiliates.

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

OVERVIEW

Industry Conditions and Trends

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

Natural gas consumption in the U.S. for the twelve months ended April 30, 2011 increased by approximately 5% over the twelve months ended April 30, 2010, is expected to increase by 2.0% in 2011 and is expected to increase by an average of 0.3% per year thereafter until 2035 according to the Energy Information Administration (“EIA”). In 2009, the U.S. accounted for an estimated annual production of approximately 22 trillion cubic feet of natural gas. The EIA expects total U.S. marketed natural gas production to increase by 4.5% in 2011. The EIA estimates that the natural gas production level in the U.S. will be approximately 23 trillion cubic feet in calendar year 2035. Natural gas marketed production in the U.S. for the twelve months ended April 30, 2011 increased by approximately 6% compared to the twelve months ended April 30, 2010.

Our Performance Trends and Outlook

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

Our revenue, earnings, financial position and capital spending are affected by, among other things, (i) market conditions that impact demand and pricing for natural gas compression, (ii) our customers’ decisions to utilize our services rather than utilize products or services from our competitors, (iii) our customers’ decisions regarding whether to own and operate the equipment themselves, and (iv) the timing and consummation of acquisitions of additional contract operations customer contracts and equipment from Exterran Holdings. In particular, many of our contracts with customers have short initial terms; we cannot be certain that these contracts will be renewed after the end of the initial contractual term, and any such nonrenewal, or renewal at a reduced rate, could adversely impact our results of operations and cash available for distribution. As we believe there will be increased activity in certain U.S. natural gas plays, we anticipate investing in more new fleet units, and therefore investing more capital, in 2011 than we have in the recent past.

During the last twelve months, we have seen an increase in drilling activity. Our total operating horsepower increased by approximately 3%, excluding the impact of the June 2011 Contract Operations Acquisition, during the six months ended June 30, 2011. We believe these activity levels around the natural gas industry in the U.S. will continue in 2011, particularly in shale plays and areas focused on the production of oil and natural gas liquids. However, we believe that due to (i) the continued uncertainty around natural gas prices and (ii) the current available supply of idle and under-utilized compression equipment in the industry, as well as new investment of capital in equipment, combined with (iii) the modest growth in demand for our services in the U.S., we may not be able

to significantly improve our horsepower utilization and pricing and therefore revenues in the near term (excluding the impact of potential transfers of additional contract operations customer contracts and equipment from Exterran Holdings to us). Our contract operations services business has historically experienced more stable demand than that of certain other energy service products and services. A 1% decrease in average utilization of our contract operations fleet would result in a decrease in our revenue and gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for the six months ended June 30, 2011 of approximately $1.4 million and $0.6 million, respectively.

Pursuant to the Omnibus Agreement between us and Exterran Holdings, our obligation to reimburse Exterran Holdings for cost of sales and selling, general and administrative (“SG&A”) expenses is capped through December 31, 2012 (see Note 3 to the Financial Statements). During the three months ended June 30, 2011 and 2010, our cost of sales exceeded this cap by $8.3 million and $5.7 million, respectively. During the six months ended June 30, 2011 and 2010, our cost of sales exceeded this cap by $15.2 million and $8.5 million, respectively. For the three months ended June 30, 2011 and 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $1.9 million and $0.7 million, respectively. For the six months ended June 30, 2011 and 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $4.2 million and $0.7 million, respectively.

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

Operating Highlights

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Total Available Horsepower (at period end)(1)			1,905				1,366				1,905				1,366
Total Operating Horsepower (at period end)(1)			1,684				1,092				1,684				1,092
Average Operating Horsepower			1,442				1,076				1,419				1,069
Horsepower Utilization: Spot (at period end)			88	%			80	%			88	%			80	%
Average			87	%			80	%			87	%			80	%

Summary of Results

Net income (loss). We recorded a net loss of $1.9 million and $1.3 million for the three months ended June 30, 2011 and 2010, respectively. We recorded a net loss of $1.7 million and net income of $0.1 million for the six months ended June 30, 2011 and 2010, respectively.

EBITDA, as further adjusted. Our EBITDA, as further adjusted, was $32.0 million and $22.9 million for the three months ended June 30, 2011 and 2010, respectively. Our EBITDA, as further adjusted, was $63.2 million and $45.3 million for the six months ended June 30, 2011 and 2010, respectively. The increase in EBITDA, as further adjusted, during the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 was primarily caused by the inclusion of the results from the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. For a reconciliation of EBITDA, as further

adjusted, to net income (loss), its most directly comparable financial measure, calculated and presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”), please read “— Non-GAAP Financial Measures.”

FINANCIAL RESULTS OF OPERATIONS

The three months ended June 30, 2011 compared to the three months ended June 30, 2010

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

		Three Months Ended
		June 30,
		2011				2010
Revenue		$	71,841			$	53,790
Gross margin(1)			32,017				24,664
Gross margin percentage			45	%			46	%
Expenses:
Depreciation and amortization		$	15,459			$	11,763
Long-lived asset impairment			305				—
Selling, general and administrative			9,927				8,519
Interest expense			7,553				5,724
Other (income) expense, net			455				(170	)
Income tax expense			256				173
Net income (loss)		$	(1,938	)		$	(1,345	)

Revenue. Average monthly operating horsepower was approximately 1,442,000 and 1,076,000 for the three months ended June 30, 2011 and 2010, respectively. The increase in revenue and average monthly operating horsepower was primarily due to the inclusion of the results from the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Gross Margin. The increase in gross margin during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily due to the inclusion of results from the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Depreciation and Amortization. The increase in depreciation and amortization expense during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily due to additional depreciation on compression equipment additions, including the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Long-lived Asset Impairment. Long-lived asset impairment in the three months ended June 30, 2011 was $0.3 million, and resulted from impairments that were recorded on idle compression units.

SG&A. SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings to us pursuant to the terms of the Omnibus Agreement. The increase in SG&A expense was primarily due to increased costs associated with the impact of the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. In addition, SG&A expenses for the three months ended June 30, 2010 included $0.8 million in additional sales taxes as a result of a state tax ruling received in June 2010 that applies retroactively to July 2007 to certain contract compression transactions. SG&A expenses represented 14% and 16% of revenues for the three months ended June 30, 2011 and 2010, respectively.

Interest Expense. The increase in interest expense for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, was primarily due to the refinancing of our senior secured credit agreement at a higher interest rate than the debt it replaced. The increase in interest expense was also due to a higher average balance of long-term debt for the three months ended June 30, 2011 compared to the three months ended June 30, 2010.

Other (Income) Expense, Net. Other (income) expense, net for the three months ended June 30, 2011 included $0.5 million of transaction costs associated with the June 2011 Contract Operations Acquisition. Additionally, other (income) expense, net for the three month periods ended June 30, 2011 and 2010 included a $0.1 million and $0.2 million gain on the sale of used compression equipment, respectively.

Income Tax Expense. Income tax expense primarily reflects taxes recorded under the Texas margins tax and the Michigan business tax. The increase in income tax expense for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was primarily due to an increase in our revenue earned within the state of Texas.

The six months ended June 30, 2011 compared to the six months ended June 30, 2010

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

		Six Months Ended
		June 30,
		2011				2010
Revenue		$	140,570			$	106,500
Gross margin(1)			63,694				51,523
Gross margin percentage			45	%			48	%
Expenses:
Depreciation and amortization		$	29,608			$	23,641
Long-lived asset impairment			305				231
Selling, general and administrative			20,143				16,214
Interest expense			14,628				11,416
Other (income) expense, net			234				(406	)
Income tax expense			491				346
Net income (loss)		$	(1,715	)		$	81

Revenue. Average monthly operating horsepower was approximately 1,419,000 and 1,069,000 for the six months ended June 30, 2011 and 2010, respectively. The increase in revenue and average monthly operating horsepower was primarily due to the inclusion of the results from the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Gross Margin. The increase in gross margin during the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was primarily due to the inclusion of results from the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. The decrease in gross margin percentage was primarily caused by an increase in our field operating expenses.

Depreciation and Amortization. The increase in depreciation and amortization expense during the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was primarily due to additional depreciation on compression equipment additions, including the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Long-lived Asset Impairment. Long-lived asset impairments in the six months ended June 30, 2011 and 2010 were $0.3 million and $0.2 million, respectively, and resulted from impairments that were recorded on idle compression units.

SG&A. SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings to us pursuant to the terms of the Omnibus Agreement. The increase in SG&A expense was

primarily due to increased costs associated with the impact of the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. In addition, SG&A expenses for the six months ended June 30, 2010 included $0.8 million in additional sales taxes as a result of a state tax ruling received in June 2010 that applies retroactively to July 2007 to certain contract compression transactions. SG&A expenses represented 14% and 15% of revenues for the six months ended June 30, 2011 and 2010, respectively.

Interest Expense. The increase in interest expense for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, was primarily due to the refinancing of our senior secured credit agreement at a higher interest rate than the debt it replaced. The increase in interest expense was also due to a higher average balance of long-term debt for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.

Other (Income) Expense, Net. Other (income) expense, net for the six months ended June 30, 2011 included $0.5 million of transaction costs associated with the June 2011 Contract Operations Acquisition. Additionally, other (income) expense, net for the six month periods ended June 30, 2011 and 2010 included a $0.3 million and $0.4 million gain on the sale of used compression equipment, respectively.

Income Tax Expense. Income tax expense primarily reflects taxes recorded under the Texas margins tax and the Michigan business tax. The increase in income tax expense for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 was primarily due to an increase in our revenue earned within the state of Texas.

LIQUIDITY AND CAPITAL RESOURCES

The following tables summarize our sources and uses of cash for the six months ended June 30, 2011 and 2010, and our cash and working capital as of the end of the periods presented (in thousands):

		Six Months Ended June 30,
		2011				2010
Net cash provided by (used in):
Operating activities		$	32,120			$	26,022
Investing activities			(79,440	)			(17,288	)
Financing activities			47,502				(8,873	)
Net change in cash and cash equivalents		$	182			$	(139	)
		June 30,				December 31,
		2011				2010
Cash and cash equivalents		$	232			$	50
Working capital			11,042				14,751

Operating Activities. Net cash provided by operating activities increased in the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, primarily due to the increase in business levels resulting from the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition.

Investing Activities. The increase in cash used in investing activities was primarily attributable to a $62.2 million increase in cash used to pay a portion of the purchase price for the June 2011 Contract Operations Acquisition. In addition, cash used for investing activities increased for the six months ended June 30, 2011, compared to the six months ended June 30, 2010, due to a $6.3 million increase in capital expenditures that was partially offset by a $5.3 million decrease in amounts due from affiliates. Capital expenditures for the six months ended June 30, 2011 were $23.8 million, consisting of $9.9 million for fleet growth capital and $13.9 million for compressor maintenance activities.

Financing Activities. The increase in net cash provided by financing activities during the six months ended June 30, 2011, compared to the six months ended June 30, 2010, was primarily due to the $127.7 million in net proceeds we received from a public offering of common units, a portion of which we used to repay borrowings under our debt facility.

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

	•		maintenance capital expenditures, which are capital expenditures made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets; and
	•		expansion capital expenditures, which are capital expenditures made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition or modification.

Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently plan to spend approximately $26.5 million to $30.5 million on equipment maintenance capital during 2011. Exterran Holdings manages its and our respective U.S. fleets as one pool of compression equipment from which we can each readily fulfill our respective customers’ service needs. When we or Exterran Holdings are advised of a contract operations services opportunity, Exterran Holdings reviews both our and its fleet for an available and appropriate compressor unit. Given that the substantial majority of the idle compression equipment has been and is currently held by Exterran Holdings, much of the idle compression equipment required for these contract operations services opportunities has been held by Exterran Holdings. Under the Omnibus Agreement, the owner of the equipment being transferred is required to pay the costs associated with making the idle equipment suitable for the proposed customer and then has generally leased the equipment to the recipient of the equipment or exchanged the equipment for other equipment of the recipient. Because Exterran Holdings has owned the substantial majority of such equipment, Exterran Holdings has generally had to bear a larger portion of the maintenance capital expenditures associated with making transferred equipment ready for service. For equipment that is then leased, the maintenance capital cost is a component of the lease rate that is paid under the lease. As we acquire more compression equipment, we expect that more of our equipment will be available to satisfy our or Exterran Holdings’ customer requirements. As a result, we expect that our maintenance capital expenditures will increase (and that lease expense will be reduced).

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

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

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

Long-term Debt. On November 3, 2010, we entered into an amendment and restatement of our senior secured credit agreement (as so amended and restated, the “Credit Agreement”) to provide for a new five-year, $550.0 million senior secured credit facility consisting

of a $400.0 million revolving credit facility and a $150.0 million term loan facility. In March 2011, the revolving borrowing capacity under this facility was increased by $150.0 million to $550.0 million.

As of June 30, 2011, we had undrawn capacity of $160.5 million under our revolving credit facility. Our Credit Agreement limits our Total Debt to EBITDA ratio (as defined in the Credit Agreement) to not greater than 4.75 to 1.0. The Credit Agreement allows for our Total Debt to EBITDA ratio to be increased from 4.75 to 1.0 to 5.25 to 1.0 during a quarter when an acquisition meeting certain thresholds is completed and for the following two quarters after such an acquisition closes. Therefore, because the June 2011 Contract Operations Acquisition closed in the second quarter of 2011, the maximum allowed ratio of Total Debt to EBITDA is 5.25 to 1.0 through December 31, 2011, reverting to 4.75 to 1.0 for the quarter ending March 31, 2012 and subsequent quarters.

The revolving credit facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin for revolving loans varies (i) in the case of LIBOR loans, from 2.25% to 3.25% and (ii) in the case of base rate loans, from 1.25% to 2.25%. The base rate is the highest of the prime rate announced by Wells Fargo Bank, National Association, the Federal Funds Effective Rate plus 0.5% and one-month LIBOR plus 1.0%. At June 30, 2011, all amounts outstanding under the revolving credit facility were LIBOR loans and the applicable margin was 2.5%. The weighted average annual interest rate on the outstanding balance of our revolving credit facility at June 30, 2011, excluding the effect of interest rate swaps, was 2.7%.

The term loan facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin for term loans varies (i) in the case of LIBOR loans, from 2.5% to 3.5% and (ii) in the case of base rate loans, from 1.5% to 2.5%. At June 30, 2011, all amounts outstanding under the term loan facility were LIBOR loans and the applicable margin was 2.75%. The average annual interest rate on the outstanding balance of the term loan at June 30, 2011, excluding the effect of interest rate swaps, was 3.0%.

Borrowings under the Credit Agreement are secured by substantially all of the U.S. personal property assets of us and our Significant Domestic Subsidiaries (as defined in the Credit Agreement), including all of the membership interests of our Domestic Subsidiaries (as defined in the Credit Agreement).

The Credit Agreement contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay dividends and distributions. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the Credit Agreement) to Total Interest Expense (as defined in the Credit Agreement) of not less than 3.0 to 1.0 (which will decrease to 2.75 to 1.0 following the occurrence of certain events specified in the Credit Agreement) and a ratio of Total Debt (as defined in the Credit Agreement) to EBITDA of not greater than 4.75 to 1.0. As discussed above, because the June 2011 Contract Operations Acquisition closed during the second quarter of 2011, our Total Debt to EBITDA ratio was temporarily increased from 4.75 to 1.0 to 5.25 to 1.0 during the quarter ended June 30, 2011 and will continue at that level through December 31, 2011, reverting to 4.75 to 1.0 for the quarter ending March 31, 2012 and subsequent quarters. As of June 30, 2011, we maintained a 6.5 to 1.0 EBITDA to Total Interest Expense ratio and a 3.7 to 1.0 Total Debt to EBITDA ratio. The Credit Agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers and debt issuances. If we experience a material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our ability to perform our obligations under the Credit Agreement, this, among other things, could lead to a default under that agreement. As of June 30, 2011, we were in compliance with all financial covenants under the Credit Agreement.

We have entered into interest rate swap agreements related to a portion of our variable rate debt. In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total notional value of $285.0 million and a weighted average rate of 4.4%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive loss. The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive loss will be amortized into interest expense over the original term of the swaps. Of the total amount included in accumulated other comprehensive loss, $5.1 million was amortized into interest expense during the six months ended June 30, 2011 and we expect $5.1 million to be amortized into interest expense during the remainder of 2011. See Note 7 to the Financial Statements for further discussion of our interest rate swap agreements.

Distributions to Unitholders. Our partnership agreement requires us to distribute all of our “available cash” quarterly. Under the partnership agreement, available cash is defined generally to mean, for each fiscal quarter, (i) our cash on hand at the end of the

quarter in excess of the amount of reserves our general partner determines is necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters, plus, (ii) if our general partner so determines, all or a portion of our cash on hand on the date of determination of available cash for the quarter.

On July 29, 2011, Exterran GP LLC’s board of directors approved a cash distribution of $0.4825 per limited partner unit, or approximately $19.1 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from April 1, 2011 through June 30, 2011. The record date for this distribution is August 9, 2011 and payment is expected to occur on August 12, 2011.

NON-GAAP FINANCIAL MEASURES

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

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

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income (loss)		$	(1,938	)		$	(1,345	)		$	(1,715	)		$	81
Depreciation and amortization			15,459				11,763				29,608				23,641
Long-lived asset impairment			305				—				305				231
Selling, general and administrative			9,927				8,519				20,143				16,214
Interest expense			7,553				5,724				14,628				11,416
Other (income) expense, net			455				(170	)			234				(406	)
Income tax expense			256				173				491				346
Gross margin		$	32,017			$	24,664			$	63,694			$	51,523

We define EBITDA, as further adjusted, as net income (loss) plus income taxes, interest expense (including debt extinguishment costs and gain or loss on termination of interest rate swaps), depreciation and amortization expense, impairment charges, non-cash SG&A costs and any amounts by which cost of sales, other charges, and SG&A costs are reduced as a result of caps on these costs contained in the Omnibus Agreement, which amounts are treated as capital contributions from Exterran Holdings for accounting purposes. We believe EBITDA, as further adjusted, is an important measure of operating performance because it allows management, investors and others to evaluate and compare our core operating results from period to period by removing the impact of our capital structure (interest expense from our outstanding debt), asset base (depreciation and amortization expense, impairment charges), tax consequences, caps on operating and SG&A costs, non-cash SG&A costs and reimbursements. Management uses EBITDA, as further adjusted, as a supplemental measure to review current period operating performance, comparability measures and performance

measures for period to period comparisons. Our EBITDA, as further adjusted, may not be comparable to a similarly titled measure of another company because other entities may not calculate EBITDA in the same manner.

EBITDA, as further adjusted, is not a measure of financial performance under GAAP, and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from EBITDA, as further adjusted, are significant and necessary components to the operations of our business, and, therefore, EBITDA, as further adjusted, should only be used as a supplemental measure of our operating performance.

The following table reconciles our net income (loss) to EBITDA, as further adjusted (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income (loss)		$	(1,938	)		$	(1,345	)		$	(1,715	)		$	81
Income tax expense			256				173				491				346
Depreciation and amortization			15,459				11,763				29,608				23,641
Long-lived asset impairment			305				—				305				231
Cap on operating and selling, general and administrative costs provided by Exterran Holdings			10,200				6,376				19,329				9,171
Non-cash selling, general and administrative costs			153				258				517				448
Interest expense			7,553				5,724				14,628				11,416
EBITDA, as further adjusted		$	31,988			$	22,949			$	63,163			$	45,334