Archrock Inc (AROC) 2007 Q3 法說會逐字稿

Good morning. Welcome to the Exterran Holdings Inc. and Exterran Partners LPs third quarter 2007 earnings conference call. At this time I'd like to inform you this conference is being recorded and that all participants are in a listen-only mode. At the request of the companies, we will open the teleconference for questions after the presentation.

Earlier today Exterran Holdings and Exterran Partners released their financial results for the third quarter ended September 30th, 2007. If you have not received a copy you will find the information on the company's website at www.Exterran.com.

During this call, the companies will discuss some non-GAAP measures in reviewing their performance such as EBITDA as adjusted, EBITDA as further adjusted, Gross Margin, Gross Margin as adjusted and distributable cash flow. You will find a reconciliation of these measures to GAAP measures in the summary pages of the Earnings release.

I want to remind listeners that this news release Exterran Holdings and Exterran Partners issued this morning, the company's prepared remarks on this conference call and the related question and answer session including forward-looking statements.

These forward-looking statements include projections and expectations of the company's and represent the company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements.

Information concerning the risk factors, challenges and uncertainties which could cause actual results to differ materially from those in the forward-looking statements can be found in the company's press release as well as the Universal Compression Holdings Annual Report on Form 10-K for the year ended December 31st, 2006, as amended by Amendment No. 1 thereto, Universal Compression partners Annual Report on Form 10-K for the year ended December 31, 2006.

Hanover Compressor Company's Annual Report on Form 10-K for the year ended December 31st, 2006, as amended by Amendment No. 1 thereto and those set forth from time to time in Exterran Holdings' and Exterran Partners' filings with the Securities and Exchange Commission which are currently available at www.Exterran.com.

Except as required by law, the Companies expressly disclaim any intention or obligation to revise or update any forward-looking statements whether as a result of new information, future events or otherwise.

Your host for this morning's call is Steve Snider, President and Chief Executive Officer of Exterran Holdings and also President and Chief Executive Officer and Chairman of Exterran partners. I would now like to turn the call over to Mr. Steve Snider. Mr. Snider, you may begin your conference.

Thank you. Good morning everyone and welcome to the first Earnings call for Exterran Holdings and Exterran Partners. I should warn you this call may be a little more lengthy than usual since we have a lot of first time news to impart to you so bear with us if you will.

Joining me today is Michael Anderson, Chief Financial Officer of Exterran Holdings and Daniel Schlanger, Chief Financial Officer of Exterran Partners. During today's call we will refer to Exterran Holdings as Exterran and to Exterran Partners as Partners or EXLP.

Because we consolidated EXLP's financial results and position into Exterran, the discussion of Exterran will include EXLP unless we otherwise note.

We are excited that we've begun to operate as a combined company and are extremely pleased with the reception of our new company by customers, employees and the financial community. One of the aspects of the merger that I've been most encouraged by has been the response to our new name and corporate identity.

The Exterran name and logo has served as a rallying point for our employees to leave their legacy companies behind and come together to work towards providing world class compression, processing and production services to Exterran customers throughout the world. I'm sure our employees' enthusiasm and hard work will continue and will provide a foundation for further success at Exterran.

First, let me take a moment to provide an overview of our longer term strategy as we are now in our third month of combined operations. This strategic vision came together quickly and logically for our team during our merger planning as the combination of Universal's MLP and U.S. centric strategy with Hanover's international and Total Solutions Focus has blended together better than either of our independent teams had envisioned. Our strategy can be summarized in several quick points.

One, we intend to continue to grow the U.S. contract operations market through an enhanced and more efficient service platform and eventually contribute all of this business to Exterran partners.

Two, we intend to use a large portion of the capital proceeds from anticipated future MLP drop-downs to finance the further expansion of our international business including contract operations and Total Solutions.

And, three, because we believe our customers continue to desire a greater breadth of compression, processing and production solutions, our goal is to build out our worldwide leadership position to be the premiere provider of full field production solutions for our customers throughout the world.

As Hanover historically did, we will refer to any project that includes a bundle offering of our compression, processing and/or production products and services as a Total Solutions Project.

We expect that our Total Solutions offerings will continue to represent an increasing portion of our overall business going forward, particularly in international markets as customers demand integrated solutions to oil and gas production issues.

We believe our extensive product and service platform and proven success in bundling these offerings together into Total Solutions, position us well to capture the growing opportunities to supply energy infrastructure throughout the world.

Before we get into recent highlights, I'd like to make a couple of points of clarification regarding our financial results and operating statistics. The merger of Hanover Compressor Company with Universal Compression Holdings into the new combined company Exterran Holdings was completed on August 20th, 2007.

Although this was clearly a merger of equal, Hanover was the acquirer for accounting purpose, and as a result, Exterran's financial statements include Hanover results for a full quarter but include Universal's results only for the last 42 days of the quarter. The numbers themselves are a little confusing but we will do our best to clarify them for you during our call today.

Secondly, we have adjusted the methodology for the calculation of certain operating metrics such as backlog, available and operating horsepower and fleet utilization to synchronize the modest differences between the company's historical calculations.

As such, the statistics discussed today may not be directly comparable to those presented by both companies in the past. We've also changed the name of some of our operating segments to more accurately reflect the nature of our business operations.

Our newly named U.S. contract operations segment is comprised of Universal's domestic contract compression business and Hanover 's U.S. rental business.

Similarly in the international contract operations segment we include the predecessors contract compression and rental businesses outside the U.S. These name changes better describe the scope of operations including compression processing and production services that we perform for our customers.

We also made the decision to group our aftermarket services, parts and service, used equipment sales and installation businesses into our aftermarket service segment. The rest of our segments remain what they were historically called in Hanover's disclosure documents.

One substantial item to note about our results for the quarter is that we recorded charges of approximately $180 million related to merger integration, the refinancing of substantially all of both companies' outstanding debt and asset impairment charges.

As we said from the announcement of the merger in February, we expect to achieve cost synergies of approximately $50 million on an annualized run rate basis when the integration is completed, which is expected to occur by the end of 2008.

In addition, after completing our debt refinancing and interest rate hedging activities in late September, we have increased our estimate of ongoing interest expense savings based upon current debt and interest rates from $10 to $12 million, up to approximately $25 million per year as we were able to obtain very attractive LIBOR spreads on our credit facility and lock in better interest rates by off-putting the fixed swaps than we had expected.

With all of that as a preamble, now we will go into the third quarter results. In the quarter, Exterran reported revenue and other income of $754 million an EBITDA as adjusted, of $161 million.

Exterran reported a net loss of $75 million, or $1.55 per diluted share including merger activity and asset impairment charges of $180 million or approximately $2.37 per diluted share.

Also during the third quarter, Exterran repurchased $50 million of its common stock consisting of 641,300 shares at an average price of $77.94 per share.

This share repurchase was completed under the $200 million share repurchase program authorized on August 20th of this year by Exterran's Board of Directors. Exterran Partners which was named Universal Compression Partners until its name changed in conjunction with the merger that created Exterran, had strong performance, driven by favorable market condition and the completion of its previously announced acquisition of approximately 282,000-horsepower from Exterran in July.

The majority of the increase in EXLPs results from the third quarter was a result of that acquisition. Exterran Partners reported revenue of $34.7 million and net income of $7.5 million in the third quarter. EBITDA as further adjusted, total %19.1 million in the third quarter compared to $10.4 million in the second quarter.

As a result of its strong performance, EXLP increased cash distributions for the third quarter by 14.3% to $0.40 per unit as compared to the second quarter distribution of $0.35 per unit.

Even accounting for this in increase in distributions, EXLP generated distributable cash flow in the third quarter of approximately two times the amount of cash distributed to unit holders. As I mentioned to start our Earnings call, our strategy continues to include dropping down all of the U.S. contract operations business from Exterran into the MLP.

EXLP currently has approximately 700,000-horsepower or about 16% of the combined U.S. fleet. With the completion of the Hanover-Universal merger , the fleet of additional compression assets in the United States can be offered for sale over time to EXLP from Exterran increased by approximately 2.2 million-horsepower to approximately 3.7 million-horsepower, enhancing the outlook for future growth for EXLP. Exterran owns a 51% ownership interest including all of the general partner interest in EXLP. I will give a bit more background on ex EXLP later in the call.

In our Third Quarter Earnings press release, we have presented results of operations across the following five segments: U.S. contract operations, international contract operations, aftermarket services, compressor and accessory fabrication and production and process equipment fabrication. A bit later Michael will cover our activities in each of these segments.

Now I will take a moment to discuss what we define as our major geographic markets, North America, Latin America and Eastern Hemisphere. From my recent conversations with investors, I realize many are not familiar with the entire Exterran story. As some were familiar with just one or the other of the legacy companies while others are looking at the combined larger entity for the first time.

North America is an important and active market for Exterran. North America comprises about 60% of our revenue base and a similar proportion of gross margin.

Both legacy companies began operations in the U.S. as small regional compression service providers and expanded through a combination of organic growth and market consolidation. We now have a fleet of almost 4.5 million-horsepower in North America. Key drivers for this relatively neuter but still attractive market include ongoing characteristics of natural gas production and of the compression market itself.

With respect to natural gas production in the U.S., an increasing amount of production is from unconventional sources such as tight sands, cold bed methane and shale gas.

These sources require significant compression starting from the initial production and lasting throughout the life of the well, which is great for compression providers. With respect to the compression market in the U.S. the percentage of field compression market that is outsourced to compression service companies like us was about 20% of the market in the early 1990s and is estimated at 35% today.

We plan to use the enhanced operating efficiencies from our merger integration effort and lower cost of capital from EXLP to increase outsourcing penetration in a market that is still owned about 65% of producers and gatherers. Most of our operating cost savings from the merger are expected to be achieved in the U.S. for the legacy companies have field offices and operations in the same general area.

The consolidation of these operations is largely dependent upon a combination of physical facilities in the field and integration of the two company's information systems which is expected to commence in early 2008.

In our contract operations, our costs have been unusually high, somewhat due to our ongoing Service Excellence Initiative. We have increased preventive maintenance today to avoid larger repair and maintenance costs in the future. And also experienced some operating inefficiencies that we were not in a good position to address prior to the August closing of the merger.

Further, we saw that events surrounding the merger including announcing various field and supervisory staff after the close of the merger led to some temporary uncertainty in the field and some understandable operational inefficiencies during the quarter. We do expect, however, that our merger integration activities and our ongoing Service Excellence Initiative will have a positive impact on U.S. margins over the next year or so.

With steady North American market demand, we continue to add large horsepower units to meet the needs of our customers. On a combined basis we expect that Exterran will add approximately 300,000-horsepower of new units in 2007 with more than three quarters of that designated for the U.S. market.

We currently expect continuing growth levels next year although we are in the 2008 business planning process and have not yet determined how much horsepower growth we expect next year.

As discussed in our earlier Earnings call, the market for smaller units has softened over the past year or two, resulting in decreased utilization for such units. Throughout both companies histories, this portion of our business has been a bit more cyclical than our larger horsepower operations.

Since many legacy Hanover investors may not know much about the MLP, I'll try to provide some [unintelligible] EXLP to Exterran. Exterran Partners is an important part of the overall Exterran growth strategy in the US. As an MLP, EXLP makes regular cash distributions that are not taxable at the partnership level, resulting in a favorable cost of capital for the entity.

With its lower cost of capital, we plan to use EXLP as the growth vehicle for our U.S. contract operations business. As I mentioned before, we hope this lower cost of capital, combined with the operating efficiencies we expect to gain from the merger will allow to us increase the outsourced portion of the compression market.

EXLP went public in October of 2006 and successfully completed the purchase of additional assets from Exterran in early July.

EXLPs future growth is expected to be driven by organic growth, additional drop-down of assets from Exterran and potential acquisition of assets from others. The planned drop-down of the remaining 3.7 million-horsepower is expected to generate significant amounts of capital for Exterran Holdings to reinvest into its international and other operations.

Exterran Holdings also benefits from this growth at the MLP level though it is a general partnership, though it's general partnership ownership and its holdings of limited partnership benefits.

Now let me discuss our business outside the U.S. starting with Latin America which is a maturing compressor market and which we have a significant presence.

Latin America currently represents approximately 25% of our gross margin. We intend to leverage our position in the market to continue to increase our contract operations including both compression as well as production and processing.

Starting in the early 1990s, both legacy companies successfully expanded their contract compression operations into Latin America which has embraced the outsourcing model.

We currently have a fleet of approximately 1.3 million-horse power in Latin America working mainly for national oil companies operating from Mexico all the way to Argentina. Industry demand remains strong in Latin America and we have several new projects scheduled to commence operations in the fourth quarter.

Similar to the U.S., we have experienced an increased level of operating expenses in our international contract operations particularly in Argentina. We typically have cost adjustment mechanisms in our contracts and we expect that we will adjust those revenues over time to cover these costs. Despite these challenges, we typically generate higher margins and better returns and have longer term contracts in Latin America than we do in the U.S.

Finally, the Eastern Hemisphere is in early stage contract operations market with significant growth opportunities for Exterran. The Eastern Hemisphere generates approximately 15% of our gross margin. Although both legacy companies had a significant amount of compression sales activity in this region, Exterran currently has a relatively small contract operations presence in this market.

The Eastern Hemisphere produces around two-thirds of the world's natural gas while Exterran has only about 100,000-horsepower operating there serving a total estimated gas production of over 60 trillion cubic feet per year.

With our comprehensive production and processing and compression product lines, extensive operating expertise and strong capital position, we are working to expand our contract operations activities in the Eastern Hemisphere.

Still, the Eastern Hemisphere market has been a successful one for us led by significant sales of equipment and Total Solutions work. In the Eastern Hemisphere, Dubai and Singapore support our production and compression activities.

Our fabrication backlog in the Eastern Hemisphere includes a nice mix of compression, production and processing facilities for Eastern Europe and the Middle East. We continue to see high levels of activity for the new Eastern Hemisphere opportunities.

Our Belleli operations also remain very busy. Based in Italy, the Belleli unit produces critical process equipments for refineries and designs and builds tank farms and desalination plants. Belleli's backlog was $518 million at September 30th.

Belleli had another strong quarter although total production processing margins were impacted by a $9.6 million charge at Belleli for some additional costs from a large project. These additional costs are primarily related to revise estimates to complete this complex job. This is the same job that Bellleli reported rework costs on during the second quarter. We now have modified some of the manufacturing processes and expect to complete this job without further rework or delays.

As reported previously, our Nigerian Cawthorne Channel Project began to process some gas in July. This plant had been off-line in part to gas supply operations despite the new gas flows, we did not report any revenue related to Cawthorne during the quarter but incurred approximately $1 million in project operating costs.

Our goal in the Eastern Hemisphere is to convert a greater portion of our significant sales activities in this region into long-term contract operations relationships particularly in relatively new international markets, our start up strategy often is to sell first, follow up with parts and service work and then over time, add contract operations.

This will be a longer term strategy for Exterran but we believe the Eastern Hemisphere market will be an excellent one for us whether we sell products and provide service or put more of our assets into contract operations.

There is a strong demand for production and processing products and services in newly developed producing fields providing us substantial growth opportunity. Once treated and processed, compression is generally required to transport the natural gas.

We believe we are in a good position to provide the bundled services and service production services due to our complementary product mix and strong market position in the region. Our Total Solutions Group typically orchestrates this activity for Exterran where we are bundling two or more of our products and service offerings.

Additionally we expect to have significant cash from the anticipated asset drop-downs to EXLP that we can utilize to invest in international projects which we believe will enhance the long-term value of Exterran.

Overall, our international contract operations backlog currently totals approximately 100,000-horsepower. These projects are scheduled to begin during the fourth quarter and throughout 2008.

And include operations bundling both compression and processing capability. Inquiry and bid activity for new international contract operations projects remains strong for both compression and processing, especially in the Eastern Hemisphere, Brazil and Mexico.

I will now turn the call over to Michael for more financial results.

Alright, thanks a lot, Steve, and good morning everyone. I'm sure that you all had a chance to review our press release that we issued earlier this morning.

So what I will try to do is provide a summary of one merger related event and then secondly, discuss the financial performance for both Exterran Holdings and also for Exterran Partners. As Steve mentioned we incurred merger activity and asset impairment charges totaling $180 million in the third quarter; relating to the combination of Hanover and Universal.

Now these charges included $34 million for merger and integration expense, $77 million for debt extinguishment and swaps-related charges, $62 million for asset impairment charges and $7 million in impairment of an investment in a nonconsolidated affiliate.

Now we decided that our guidance last quarter that we expected to incur the merger and refinancing charges similar to the amounts that we actually incurred. With respect to the asset impairment charges, what happened was our newly combined fleet marketing and operations staff evaluated our compressor fleet and our operating strategy and came to the conclusion that it will not make financial sense to repackage certain older units in the combined fleet given Exterran's new financial resources and strategy and also to, in an attempt to standardize fleet operations and reduce costs.

So as a result of this decision we took an asset impairment charge of about $62 million in the third quarter and that related to approximately 200,000-horsepower. The additional $7 million impairment charge relates to the book value of the minority ownership position in the Venezuelan joint venture. Now this business saw some operating deterioration during the quarter and our impairment marked the investment to our current estimate of fair value.

The merger expenses consisted of severance and change of control expenses, accelerated investing of employee stock option and restricted share awards and other deal related costs. We will have some additional merger expenses after the third quarter largely related to employee retention payments and some severance costs. We still expect to achieve cost synergies of about $50 million on an annualized run rate basis when the integration is complete and, of course, that's expected to incur by the end of 2008.

Now we do think we've already made some good progress in the first 75 days or so of operations. We've enacted the steps necessary to achieve the majority of the $15 million in SG&A savings. As Steve had mentioned most of the field operating cost savings will be realized in 2008.

As you know on August 20th of this year, we completed a refinancing of much of the outstanding debt of both Hanover and Universal by closing two new debt facilities.

As a reminder, we entered into a $1.65 billion new senior secured credit facility, that consists of an $850 million, five-year revolving line of credit and also an $800 million six-year term loan. We also entered into a $1 billion asset backed securitization facility.

As a result of these new credit facilities, substantially all of the debt of the legacy companies has been retired or refinanced other than Hanover's convertible debt security and also the credit facility of Exterran Partners. Now of course we undertook the refinancing for two primary reasons.

First was to reduce our borrowing cost. We think we've done a good job on that front. And secondly, we also want to do create the necessary financial flexibility for Exterran to continue to execute the MLP drop-down strategy.

We completed our debt refinancing just before many of the summers' credit issues and we were able obtain very attractive pricing that, for a majority of our debt actually dropped even further on October 1st to LIBOR plus 82.5 basis points.

Based upon the final borrowing costs and also some attractive fixed rated hedging activity that we completed, we now expect the ongoing annualized interest expense savings of about $25 million per year.

So let's now turn a little bit to the Exterran results. As a reminder the merger was completed on the 20th of August and as a result, the Exterran financial statements include Universal's results for only the last 42 days of the quarter, financials prior to the merger reflect only Hanover results.

In my summary of the results for the third quarter I'll use a comparison period of the second quarter of 2007 and also the third quarter of 2006. And, of course, both of those are Hanover only periods.

I will also attempt to give some additional information about how each legacy company performed in relation to the guidance that was provided for each company last quarter.

So, total revenue and other income was $754 million in the third quarter. That compares to $516 in the second quarter and $424 million in the year ago quarter. In looking at our U.S. contract operations business, revenue was $146 million in the third quarter. And that compares to $100 million in the second quarter and $98 million in the year ago quarter. Now, about $47 million of this quarters' increase is due to the inclusion of Universal's results.

In the third quarter, gross margin percentage in the U.S. contract operations segment was 57%. Now that's a decrease from 60% in the second quarter and also the year ago periods.

As Steve mentioned, we continue to see some higher maintenance and repair expense and increased preventive maintenance cost associated with the implementation of our Service Excellence Program and we also believe we have some inefficiencies associated with the merger closing and integration.

But generally, we expect margin improvement both next quarter and in 2008. Within the U.S. contract operations segment, the revenue results for both legacy companies were very much in line with the guidance that was provided last quarter while the margins for both companies were just a little bit below the guidance.

As Steve mentioned, both companies calculated horsepower information slightly differently and as a result historical statistics are not necessarily going to be comparable for us.

Within the U.S. market however, one important metric is that our Pro Forma combined operating horsepower declined by about 25,000-horsepower during the quarter as larger horsepower units were produced and went to work while we continued to see some returns from smaller and mid-range units. The horsepower decline during the quarter equates to about one half of 1% of the U.S. fleet.

So at the end of the quarter, our total U.S. fleet horsepower was 4,365,000, and the U.S. spot utilization rate on September 30th was 83%.

Our international contract operations revenue was $92 million in the quarter. Now that compares to $70 million in the second quarter and $64 million a year ago. About $19 million of this increase is due to the inclusion of universal's results in the quarter, the third quarter results also benefited from the new contract processing plant in Mexico that went online in June.

International contract operations gross margin was 60% in the quarter. That's unchanged compared to the June quarter in the year ago period. If we compare the results to last quarters guidance, the Hanover side of the business was slightly below expectations due to some project delays and also some additional start-up cost on a Middle East project.

The Universal business was on target compared to guidance with regard to both revenues and margins. As we look forward, we do expect to see improved margins beginning next quarter for the international contract operations business.

Internationally, the Pro Forma combined horsepower was basically flat from beginning to end of the quarter increasing by about 5,000-horsepower. So at September 30th, our international fleet totaled 1,550,000-horsepower, and international spot utilization was 89%.

The change in the utilization rate compared to historical numbers is really only related to changes in the calculation methodology. Summarizing our total operating stats, our overall spot contract utilization which includes both U.S. and international was 85% at September 30th.

Shifting over to compression and accessory fabrication operations, third quarter revenue was $174 million. That compares to $140 million in the second quarter, and $90 million in the year ago period. Gross margin was 23%. That compares to 24% in the second quarter, and 17% a year ago.

For the 42 days of operations, the Universal business contributed about $30 million in revenue at a 17% margin. Please keep in mind that the Universal contribution this segment was diluted both by having only 42 days of operations as well as by a change to the percentage of the completion accounting that eliminated the recognition of some revenue.

Compared to guidance, the Hanover business exceeded guidance for both revenues and margins while the Universal business was in line with guidance for both revenues and guidance. Of course, that's based on Universal's old accounting methodology.

This change in accounting methodology not only reduced the Universal Compressor Fabrication revenue for the quarter but it also reduced the stated Universal portion of the backlog. But still, our compressor fabrication backlog was pretty healthy at the end of the quarter at $395 million. That compares to $299 million at June 30th, and $192 million a year ago.

The production and processing segment recorded strong levels of revenue while gross margin was impacted a bit by some cost overruns on the Belleli project and purchase accounting effects that cost a profitable Universal project to actually be recognized at zero margin.

So, production and processing equipment revenue was $192 million in the third quarter. That compares to $123 million in the second quarter and $116 million in the year ago period. The gross margin was 14%. That compares to 15% in the second quarter, 16% in the year ago period.

If you look at Belleli, the revenues there decreased from $81 million in the second quarter to $76 million this quarter while gross margin in the third quarter and second quarter periods were negatively impacted by about $9.6 million, and $6.7 million respectively of some cost overruns associated with one project.

Now despite the Belleli cost issue, the Hanover side of the business produced revenues in excess of guidance in margins that were still consistent with guidance. That due to the purchase accounting effects, the Universal contribution in the segment was $30 million in revenue and then zero margin. The actual economic profit on that specific job however, was in line with expectations.

Looking at production and processing backlog, it was $720 million at September 30th, and that compares to $732 million at the end of the second quarter, highlighted by strong demand in the Eastern Hemisphere. Belleli contributed approximately $518 million at the backlog. And total backlog was $1.1 billion at September 30th, versus $1.03 billion at the end of the second quarter. If we look at aftermarket services, the third quarter revenue there was $150 million. That compares to $73 million in the second quarter and $48 million in the year ago period. So strong revenues there. The gross margin percentage was 15%. So a little bit below compared to the second quarter which is 23% and 21% in the year ago period.

The margin dilution really was the result of a $66 million installation project in the Eastern Hemisphere which was completed at a 3% margin. So, if you tear that out and you look only at the base aftermarket services businesses for both companies, both contributed revenue and margins that were actually above the guidance levels that we provided 90 days ago.

For the 42 days or so of combined operations, the Universal business contributed about $25 million of revenues at a 24% margin. SG&A expenses increased from $56 million in the second quarter to $73 million in the third quarter. Universal had added about $16 million in SG&A during its 42 days of operations for the combined entity.

If you look at SG&A as a percentage of revenues, it was 10% in the third quarter and that compares to 11% that we had last quarter. EBITDA Steve had mentioned was $161 million in the third quarter. That compares to $125 million in the second quarter. And $98 million a year ago.

Interest expense was $37 million in the third quarter. And that included the termination of interest rate swap charges which was $7 million in the quarter. Effective tax rate was about 35% and at this point we expect tax rate in the mid to high 30s in the fourth quarter.

So in the third quarter we did reported diluted loss per share of $1.55. That included the charges of about $2.37 per share for merger activity and asset impairments. In the second quarter, the comparable number was diluted earnings per share of $0.71 which did include merger expenses of about $3 million.

Looking at the share count, the total count of 49 million basic and diluted shares in our third quarter results reflect only 42 days of the shares issued to Universal shareholders. We expect the dilutive share count for the fourth quarter, which will be a full quarter having combined operations, that number should be just under 70 million shares on a diluted basis.

CapEx, the net CapEx for the quarter, $82 million, that compares to $60 million in the second quarter, $50 million a year ago.

During the 42 days of the combined operations, Universal added about $22 million to the quarters capital spending. Total CapEx during the quarter was about $53 million in growth CapEx, $25 million in maintenance and we also had about $13 million of other expenditures.

On the balance sheet side of things, the total debt was $2.25 billion at September 30th. And debt to capitalization was 42%. We are certainly pleased with our capital structure in terms of both overall cost and financial flexibility. We are currently 67% fixed within all in cost of debt of about 6.25%.

The Exterran revolving credit facility had $87 million drawn against it at September 30th and that left about $500 million of available liquidity after letter of credit usage. We also have another $200 million of undrawn capacity at the ABS Facility and Exterran Partners had $95 million of capacity available under its credit facility.

What I'd like to do now is talk a little bit about the guidance for the fourth quarter that we expect for December 30th, 2007. Looking at U.S. contract operations, we expect revenue to be in the $200 million range in the fourth quarter with gross margin percentage expected to be slightly improved over third quarter results.

We expected overall horsepower in the U.S. should be relatively flat except for about a 40,000-horsepower that came to the end of a long-term project early in the fourth quarter. So that will effect us as we look at fourth quarter revenues.

International contract operations revenues expected to be $115 to $118 million in the quarter with improved GMs in the mid to high 60s. Compressor and accessory fabrication revenue during the fourth quarter, we expect that to be $190 to $200 million GMs in the high teens.

If you look at production and processing equipment fabrication, we expect fourth quarter revenues to be $160 to $170 million; with GMs in the mid to high teens. Base after service market revenues is expected to be in the $85 to $90 million range with a gross margin percentage in the lower 20s.

So for all of 2007 from a CapEx standpoint, after sales of PP&E, we expect that net CapEx will be $325 million to $350 million in 2007 and this would include about $110 to $120 million of maintenance capital.

Let's look for a minute now at Exterran Partners. As discussed on previous calls on the Universal side, EXLPs operating cost trends rules have been very similar to Exterran's U.S. contract operations segment. And although costs have been higher, the Omnibus Agreement between Exterran and EXLP have capped EXLP's operating cost. at $18 per horsepower per quarter and also capped SG&A at $4.75 million per quarter and that's all effective upon the drop-down transaction that was completed in early July.

Given the performance in the quarter, the SG&A cost caps were not exceeded while the operating costs caps exceeded -- excuse me, the operating costs exceeded the caps by approximately $2.8 million during the quarter.

With the cost caps that existed during the quarter, EXLP generated EBITDA as further adjusted, at $19.1 million and distributable cash flow of $13.5 million in the quarter. This distributable cash flow was sufficient to cover the $0.40 per unit distribution we declared for the third quarter by about two times.

Even without the benefit of the cost caps, EXLP generated distributable cash flow sufficient to cover distributions by about 1.55 times. Comparatively in the second quarter with the cost caps, EBITDA was $10.4 million and distributable cash flow was $6.9 million and coverage was 1.2 times.

In the third quarter, the Exterran Partners fleet average operating horsepower was 632,000. That's up by about 280,000-horsepower or 82% from the second quarter levels, again due to the acquisition.

At September 30, 2007, EXLP had total available horsepower of 7037, a spot utilization rate of 94.5%. About 1.2 million-horsepower of Exterran's and EXLP's combined contract fleet are now covered by contracts converted to service agreements,the total horsepower converted to the new contract form represents about 27% of Exterran's total available U.S. contract compression horsepower and it's about one-third of the working horsepower in the United States.

EXLP's debt ratios continues to be within our target ranges for the third quarter. Total debt to annualized EBITDA was about 2.9 times while EBITDA covered interest expenses by about 5.4 times.

On October 30th, a few days ago, EXLP announced a cash distribution of $0.40 per unit for the third quarter. That is an increase of 14% over the $0.35 in the second quarter. This increase is EXLP's first distribution increase since going public in October, 2006.

We certainly continue to be excited about the prospects for EXLP and believe the merger is a great opportunity for Exterran Partners given the significantly larger pool of contract compression assets that can be offered to EXLP over time. We do expect to file the Exterran Holdings' and Exterran Partners' 10-Qs early next week.

So wrapping up the prepared portion of our call today we are certainly pleased with the progress we made as a combined company in a very short period of time.

We've been able to create an organization of very talented people from both predecessor companies, established a strong operating culture and also set forth our key strategies for moving the company forward.

We certainly had our share of issues and challenges and growing pains during the first partial quarter of combined operations but overall we certainly believe we've performed quite well haven't established a solid platform for growth moving forward. We certainly had our share of issues and challenges and growing pains during the first partial quarter of combined operations but overall we certainly believe we've performed quite well and have established a solid platform for growth moving forward. So at this time operator, we'd like to conclude our remarks and open up the call for questions.

(OPERATOR INSTRUCTIONS). We'll go first to Kevin Pollard with JP Morgan.

Good morning, guys.

Good morning.

Good morning.

Oh yes,I guess I kind of would like to try to pin you down on this domestic margin a little bit more. I think it did come in a little lower than most people were expecting.

And it sounds like there's a lot of good reasons for it, it was somehow expected with the merger. But how quickly do you think you can get back, to the kind of, upper 50, 58, 59% range? Is that as early as next quarter or is that going to take into '08?

Well, it's been a slow progress over the last year interrupted definitely by the merger, Kevin. As I said in my comments, we had plenty of distractions around the merger time which were part of our issue in this last quarter.

With our Service Excellence Program that we've implemented, we've really set a long-term goal to convert the operations over to the maximum efficiency.

And to offer a better level of service to our customers. And we've said that we'd like to get back up into what we would call respectable operating margins in the low 60s by the end of 2008 but show some steady progress from now toward that. So that's going to be our goal and kind of our expectation.

Okay, so you do think you'll begin that process of moving in that direction as soon as the next quarter, though?

Yes, I think it's going to be small but you'll see some improvements in the next quarter.

Thank you. We'll go next to Mike Urban with Deutsche Bank.

Thanks, good morning.

Good morning.

Wanted to stick with the domestic business here a little bit. With the reorganization, recategorizing some things, on the compression, the gas processing business, I guess there's more of that international, is there any of that or much of that in the U.S. that's now kind of in that U.S. line that you report?

There is some in the sales side that's U.S. based. None on the contract side that's U.S. based at this point in time.

Okay, and kind of going forward along the lines of the last question, I mean, do you have a sense for how much cost is being incurred as a part of Service Excellence versus inefficiency? I realize it's difficult to calibrate precisely but I guess the point is, one, you are going to have a lot more control over and the other might take a little more time. So, I am just trying to get a sense for the rough orders of magnitude there and what's driving the margin?

I think the answer is that, no, we don't know how much came from both segments. It's really hard to tell.

We had certainly, some disorientation in the field for a few weeks right around the merger and then, with the Service Excellence we are incurring some costs now to avoid big costs in the future but it takes time to work through that. That's why I think just the slow steady progress is the best estimate that we can probably give you.

Okay. That's fair. And moving over to the international side, kind of a granular question on Nigeria, you did move some gas there in the quarter. What's the status of that project now, will you be able to book revenues?

No, we've said early on, or actually Hanover said on the last conference call, it's not our intention to book revenues until we've clear out the accounts receivable side. So, any cash we are generating right now is going to clear out receivables and we won't go to booking revenue until we get down to zero on the receivables. That will be awhile. But it is continuing to accept gas and processed gas and off load products. So we are beginning to see that project come a little bit more into fruition. It's not in full capacity but it's doing better.

Thank you. Next we'll go to Jeff Kieburtz with Citi.

Good morning.

Good morning.

Quick housekeeping, Michael, if you could, what should we expect for D&A and interest expense in the fourth quarter?

Well, the D&A number is moving around a little bit but because of the purchase accounting adjustments but right now I would say that just kind of holding it flat compared to what both companies were doing, which probably gets you somewhere in the $90 million or so level is a decent assumption at this point.

Some of those purchase accounting adjustments are still subject to change but that's as good a target as any right now. The interest expense, if you just simply take the $2.25 billion at 6.25%, all in, you get to about $35 million a quarter.

Right. And on the international side, you've made several comments about, sort of, specific items and you've given us an idea of what you expect in terms of the margins. Can you -- you've talked about a start-up delays, Argentina costs, can you break out any of those specifically and give us a sense of how you get from 60 to high 60s in one quarter?

It's hard to break out all the little pieces that make up that number. But I think it's fair to say that the merger got us a little bit during the quarter and we think we're going to recover from that in the next quarter.

Yes, and also I think a lot of the international deterioration was really more on the Hanover side of things related to the, one of the projects in the Middle East that has been starting up. So a higher start-up expenses there. The Nigeria barge doesn't help a lot because we book no revenues ,and we incurred costs. So those are things that we think as we kind of get our feet under us with regards to some of those projects. That side of the equation will improve a bit.

And If you go back a couple of quarters and you just look at what each of the businesses were doing respectively, Hanover side was in the mid 60s, Universal side was in the low 70s, so a blend is going to be in the mid to high 60s. So, we think after we get through some of these issues and you get a full quarter of Universal operations in there, that, that's where the blended margins comes out.

Thank you. Next, we'll go to Mark Malloy with Dahlman Rose.

Good morning.

Good morning.

Good morning.

Could you talk a little bit more about EXLP and the potential to make some penetration into the compression domestically that's owned not by the contract compression providers?

Yes, it really ties together the EXLP story along with Service Excellence. And I think they're truly linked, in that, Service Excellence is designed to, kind of, reinvent the way we go to market with our service in the U.S.

And when we are successful at that I think we'll have a compelling story on efficiency of operation in the U.S. which will allow us then to go to some of the customers who prefer to own their own equipment and tell a better story on the service side while we have the EXLP model with its lower cost to capital to help us, maybe, be a little bit more aggressive in pursuing some of the assets that we can bring over from a customer. So that's part of the model.

And the other is just continued penetration of the existing accounts that we have and keep them in the contract compression level.

And then should we look for an acceleration in terms of the drop-downs, now that the integration is going on between the former Universal and Hanover?

Yes, Mark, one thing that we will say is that the drop-down that we did back in July for the new, the EXLP and Exterran is going to be a little bit on the small side of things. So we haven't talked about timing and acceleration in terms of the size of the drop-downs. They will be bigger than the one that we did in July in all likelihood.

Thank you. Next question, we'll go to Sharon Lu with Wachovia.

Hi there. Good morning.

Good morning.

Good morning.

Maybe you guys can touch on, out of the remaining 3.7 million-horsepower holdings, what percentage has overlapped with the partnership's existing customers?

I don't know the specific number, Sharon, but that number is probably -- well, I think I can say I don't know. We are going to have to get back to you on that.

Because it is, there are two overlaps, it's the ones that are already in the MLP and also the ones that are owned contracts of that already been converted that I think that are important to quote and the once that are already in the MLP and the overlap is somewhere in the neighborhood of 300 to 400,000-horsepower.

But it's also the ones that have been converted already within the Exterran system that had legacy Hanover horsepower as well that are as an important factor and I don't know that number off the top of my head.

Okay. I guess also for the partnership, I'm looking at SG&A and maintenance Capex for the quarter and it looks about, it looks a little light, do you guys have some good run rates going forward?

Yes, I think with what we experienced in the second quarter are better run rates on a per horsepower basis. The light SG&A had some non-cash items that affected it but the light maintenance CapEx had something to do with the allocation of cost and the drop-down.

So, I think on a per horsepower basis, you can look back on what the second quarter is like and I think that's a better answer than what happened in the third quarter.

Thank you. Next, Louis Shammy with Zimmer Lucas.

Hi, everybody. My question was, kind of, a follow up on previous questions. How does cost improvements on the company as a whole for the U.S. contract compression, translate into margin improvements at the EXLP level?

I'm sorry, could you repeat that question?

Sure. I'm just wondering, as you achieve your synergies and your cost improvements on the U.S. contract compression segment for Exterran as a whole, how does that improve the margin, the gross margin percentage at EXLP?

The way that we allocate costs from Exterran to Exterran Partners is based on the costs that are actually incurred to operate those units. As we get efficiencies in the field of operating the units at the Exterran level that directly benefits Exterran Partners because any reduction in cost will flow directly to the partnership. And so with that, we should get higher GMs at the partnership along with just having higher GMs at the company as well.

Okay, and on the long-term level you see your GMs settling in, let's say, the low 60s or high 50s? What do you think a good target for that would be?

Low 60s I think in the long-term is a good target for that.

Certainly over the long-term Exterran Partners gross margin will be the same as Exterran's.

Sure. And low 60s, in terms of hitting that target, you think 2000, late 2008, early 2009 would kind of, be the time frame or is it further out than that?

End of '08 is what we're shooting for.

Okay. Great. Thanks a lot.

Thank you. Next we'll go to with Samuel Jaghwani with Catapult.

Yes. Hi, good morning, guys.

Good morning.

I just-- This may be kind of an, off the wall question, but I want to try to understand your relationship with a company like Ingersoll Rand and how, what you can tell me and educate me a little bit about the actual purchases of compression equipment for your fabrication business and I guess I'm a little murky on the actual relationship and how the business works.

Yes. Well, we have relationships with the providers of the manufacturers of all the major components, whether engines or compressors or coolers, and then we buy those for specific jobs based upon that relationship. And as a major user of compression, we of course, have a user discount that we get from them or a price that we get from them, I should say, that's negotiated out. We buy some compressors from Ingersoll Rand. We buy some compressors from a company in Ohio called Aeroel and we buy some compressors from Cooper every now and then.

So, given that, how do you, can you portray the current status of the equipment or the market for you in terms of the lead times and short at this point, et cetera.

The lead times on compressors are generally running somewhere in the 20 to 26 week range now and the lead time on engines, on the very large engines still remain at about a year. So the components have got to be ordered, well in advance of the need for compression.

Thank you. We have time for one final questioner and we will take Robert Christensen with Buckingham Research.

Yes, good morning. Of the production and processing backlog increase ex-Belleli was very strong sequentially, $200 million, how much of that production processing backlog is Eastern Hemisphere?

Almost all of it.

Beautiful. And, you know, Hanover used to give us a sense of the sort of bids outstanding in that segment. I think last time they spoke it was, they were quoting $1 billion or $1.1 billion of business. Would you care to offer how the opportunity set, for lack of a better word, is out there in the world you're bidding on?

Yes, well, if you take all of the opportunities that are out there, it comes out to be a really big number like you just quoted and then you take what really turns into jobs later. But it's still in that same kind of activity space that you talked about, there's probably $1 billion worth of jobs supported at any given point in time.

And I guess my last on the U.S. compression business, you mentioned that there's sort of an extraordinary effort preventive maintenance right now. What is that costing the company now, maybe, quarterly that might not repeat itself once it's in place?

It's costing us two percentage points on gross margin. You can kind of run the math on that, and getting it back to, the cost of getting that caught up and getting ahead of the schedule.

Well, thank you very much.

Sure.

Thank you, and that does conclude today's question and answer part of the call. I would like to turn the program back over to Mr. Snider for any additional or closing comments.

Thanks. I would just like to make a couple of comments to you. I am surely excited about how this merger is coming together. The combined teams is really functioning well and we think that Exterran is uniquely provisioned to be the provider of choice for all the production opportunities throughout the world and the business opportunities are accelerating as we are hitting our stride as an operating company now among three.

I'd also like to thank all of the Exterran employees, each and every one of them for the hard work and dedication that's just been essential in getting all of this put together and successfully completing the merger.

They have worked tirelessly in the integration effort and they have certainly committed to our synergy goals and are working to implement our business strategies so we can take advantage of the market opportunities.

So thanks to all of the employee base and thanks to you for participating in our inaugural Earnings conference call. We look forward to talking to you early next year. Bye bye.

That does conclude today's call. You may disconnect the line at this time.