UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2006

OR

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

For the transition period from           to             

Commission File Numbers: 001-15843

333-48279

UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.

(Exact name of registrants as specified in their charters)

 

(713) 335-7000

(Registrants’ telephone number, including area code)

Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer x	Accelerated Filer o	Non-Accelerated Filer o (Universal Compression Holdings, Inc.)
Large Accelerated Filer o	Accelerated Filer o	Non-Accelerated Filer x (Universal Compression, Inc.)

 

Indicate by check mark whether the registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

UNIVERSAL COMPRESSION, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.

As of November 2, 2006, there were 30,413,014 shares of Universal Compression Holdings, Inc.’s common stock, $0.01 par value, outstanding and 4,910 shares of Universal Compression, Inc.’s common stock, $10.00 par value, outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNIVERSAL COMPRESSION HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

		September 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	16,862		$	39,262
Restricted cash		5,594			4,187
Accounts receivable, net of allowance for bad debts of $4,718 and $3,616 as of September 30, 2006 and December 31, 2005, respectively		199,030			121,642
Inventories, net of reserve for obsolescence of $9,947 and $10,896 as of September 30, 2006 and December 31, 2005, respectively		165,028			108,273
Deferred income taxes		5,581			7,447
Other		21,817			19,787
Total current assets		413,912			300,598
Contract compression equipment		1,688,612			1,567,470
Other property		195,317			167,946
Accumulated depreciation and amortization		(462,010		)	(375,575		)
Net property, plant and equipment		1,421,919			1,359,841
Goodwill		404,653			403,261
Derivative financial instruments		7,586			6,954
Other assets		35,057			24,641
Total assets		$	2,283,127		$	2,095,295
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade		$	85,759		$	55,014
Accrued liabilities		50,517			43,796
Unearned revenue		77,092			36,367
Accrued interest		6,103			2,458
Current portion of long-term debt and capital lease obligations		19,572			18,249
Total current liabilities		239,043			155,884
Capital lease obligations		112			285
Long-term debt		894,432			904,807
Deferred income taxes		204,870			186,632
Derivative financial instruments		4,896			6,006
Other liabilities		12,112			10,369
Total liabilities		1,355,465			1,263,983
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock		328			323
Treasury stock		(100,626		)	(100,011		)
Additional paid-in capital		774,721			759,105
Deferred compensation		—			(6,065		)
Accumulated other comprehensive loss		(4,800		)	(12,428		)
Retained earnings		258,039			190,388
Total stockholders’ equity		927,662			831,312
Total liabilities and stockholders’ equity		$	2,283,127		$	2,095,295

 

See accompanying notes to unaudited consolidated financial statements.

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UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Revenue:
Domestic contract compression		$	101,058		$	81,964		$	296,563		$	238,554
International contract compression		36,251			31,076			104,554			90,115
Fabrication		57,642			28,193			152,479			132,066
Aftermarket services		51,981			39,895			141,120			121,713
Total revenue		246,932			181,128			694,716			582,448
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Domestic contract compression		34,866			29,849			103,572			86,865
International contract compression		8,968			8,087			25,795			22,961
Fabrication		47,594			24,769			131,496			122,737
Aftermarket services		41,304			31,782			113,470			98,110
Depreciation and amortization		31,154			26,439			90,966			76,462
Selling, general and administrative		30,149			21,012			86,191			61,522
Interest expense, net		15,152			13,034			43,814			39,890
Debt extinguishment costs		—			—			—			26,068
Asset impairment expense		—			—			—			3,080
Foreign currency gain		(45		)	(610		)	(355		)	(1,344		)
Other (income) loss, net		3			(524		)	(1,090		)	(1,069		)
Total costs and expenses		209,145			153,838			593,859			535,282
Income before income taxes		37,787			27,290			100,857			47,166
Income tax expense		12,827			9,611			33,206			15,841
Net income		$	24,960		$	17,679		$	67,651		$	31,325
Weighted average common and common equivalent shares outstanding:
Basic		30,037			31,902			29,855			31,889
Diluted		31,163			32,836			31,015			32,864
Earnings per share—Basic		$	0.83		$	0.55		$	2.27		$	0.98
Earnings per share—Diluted		$	0.80		$	0.54		$	2.18		$	0.95

 

See accompanying notes to unaudited consolidated financial statements.

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UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

		Nine Months Ended September 30,
		2006			2005
Cash flows from operating activities:
Net income		$	67,651		$	31,325
Adjustments to reconcile net income to cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization		90,966			76,462
Loss on early extinguishment of debt		—			26,068
Loss on asset impairment		—			3,080
Gain on asset sales		(311		)	(731		)
Amortization of debt issuance costs		1,401			1,885
Stock-based compensation expense		5,356			1,242
Increase (decrease) in deferred taxes		22,430			10,101
(Increase) decrease in other assets		(1,632		)	(1,477		)
(Increase) decrease in receivables		(73,793		)	(5,859		)
(Increase) decrease in inventories		(56,548		)	(20,349		)
Increase (decrease) in accounts payable		28,885			3,474
Increase (decrease) in accrued liabilities		4,072			3,075
Increase (decrease) in unearned revenue		40,725			4,663
Increase (decrease) in accrued interest		3,646			(11,307		)
Net cash provided by operating activities		132,848			121,652
Cash flows from investing activities:
Additions to property, plant and equipment		(156,686		)	(118,811		)
Proceeds from sale of property, plant and equipment		10,930			14,279
Cash paid for acquisitions, net of cash acquired		(6,285		)	(1,922		)
Increase in restricted cash		(1,407		)	(4,801		)
Net cash used in investing activities		(153,448		)	(111,255		)
Cash flows from financing activities:
Principal repayments of long-term debt		(77,253		)	(719,221		)
Proceeds from issuance of debt		67,994			693,225
Debt extinguishment premium and costs		—			(19,527		)
Debt issuance costs		(1,455		)	(2,456		)
Proceeds from common stock issuance		9,740			10,510
Purchase of treasury stock		(615		)	—
Payments on capital lease agreements		(64		)	(407		)
Net cash used in financing activities		(1,653		)	(37,876		)
Effect of exchange rate changes on cash and cash equivalents		(147		)	500
Net decrease in cash and cash equivalents		(22,400		)	(26,979		)
Cash and cash equivalents at beginning of period		39,262			53,958
Cash and cash equivalents at end of period		$	16,862		$	26,979

 

See accompanying notes to unaudited consolidated financial statements.

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UNIVERSAL COMPRESSION, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(unaudited)

		September 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents		$	16,862		$	39,262
Restricted cash		5,594			4,187
Accounts receivable, net of allowance for bad debts of $4,718 and $3,616 as of September 30, 2006 and December 31, 2005, respectively		199,030			121,642
Inventories, net of reserve for obsolescence of $9,947 and $10,896 as of September 30, 2006 and December 31, 2005, respectively		165,028			108,273
Deferred income taxes		5,581			7,447
Other		21,817			19,787
Total current assets		413,912			300,598
Contract compression equipment		1,688,612			1,567,470
Other property		195,317			167,946
Accumulated depreciation and amortization		(462,010		)	(375,575		)
Net property, plant and equipment		1,421,919			1,359,841
Goodwill		404,653			403,261
Notes receivable - affiliate		88,535			100,277
Derivative financial instruments		7,586			6,954
Other assets		35,057			24,641
Total assets		$	2,371,662		$	2,195,572
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable, trade		$	85,759		$	55,014
Accrued liabilities		50,517			43,796
Unearned revenue		77,092			36,367
Accrued interest		6,103			2,458
Current portion of long-term debt and capital lease obligations		19,572			18,249
Total current liabilities		239,043			155,884
Capital lease obligations		112			285
Long-term debt		894,432			904,807
Deferred income taxes		206,546			186,729
Derivative financial instruments		4,896			6,006
Other liabilities		12,112			10,369
Total liabilities		1,357,141			1,264,080
Commitments and contingencies (Note 9)
Stockholder’s equity:
Common stock		49			49
Additional paid-in capital		750,746			745,876
Accumulated other comprehensive loss		(4,800		)	(12,428		)
Retained earnings		268,526			197,995
Total stockholder’s equity		1,014,521			931,492
Total liabilities and stockholder’s equity		$	2,371,662		$	2,195,572

 

See accompanying notes to unaudited consolidated financial statements.

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UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(unaudited)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Revenue:
Domestic contract compression		$	101,058		$	81,964		$	296,563		$	238,554
International contract compression		36,251			31,076			104,554			90,115
Fabrication		57,642			28,193			152,479			132,066
Aftermarket services		51,981			39,895			141,120			121,713
Total revenue		246,932			181,128			694,716			582,448
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Domestic contract compression		34,866			29,849			103,572			86,865
International contract compression		8,968			8,087			25,795			22,961
Fabrication		47,594			24,769			131,496			122,737
Aftermarket services		41,304			31,782			113,470			98,110
Depreciation and amortization		31,154			26,439			90,966			76,462
Selling, general and administrative		30,149			21,012			86,191			61,522
Interest expense, net		15,152			13,034			43,814			39,890
Interest income from affiliate		(1,469		)	—			(4,459		)	—
Debt extinguishment costs		—			—			—			26,068
Asset impairment expense		—			—			—			3,080
Foreign currency gain		(45		)	(610		)	(355		)	(1,344		)
Other (income) loss, net		3			(524		)	(1,090		)	(1,069		)
Total costs and expenses		207,676			153,838			589,400			535,282
Income before income taxes		39,256			27,290			105,316			47,166
Income tax expense		13,341			9,611			34,785			15,841
Net income		$	25,915		$	17,679		$	70,531		$	31,325

 

See accompanying notes to unaudited consolidated financial statements.

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UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

		Nine Months Ended September 30,
		2006			2005
Cash flows from operating activities:
Net income		$	70,531		$	31,325
Adjustments to reconcile net income to cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization		90,966			76,462
Loss on early extinguishment of debt		—			26,068
Loss on asset impairment		—			3,080
Gain on asset sales		(311		)	(731		)
Amortization of debt issuance costs		1,401			1,885
Stock-based compensation expense		5,356			1,242
Increase (decrease) in deferred taxes		24,009			10,101
(Increase) decrease in other assets		(1,632		)	(1,477		)
(Increase) decrease in receivables		(73,793		)	(5,859		)
(Increase) decrease in inventories		(56,548		)	(20,349		)
Increase (decrease) in accounts payable		28,885			3,474
Increase (decrease) in accrued liabilities		4,072			3,075
Increase (decrease) in unearned revenue		40,725			4,663
Increase (decrease) in accrued interest		3,646			(11,307		)
Net cash provided by operating activities		137,307			121,652
Cash flows from investing activities:
Additions to property, plant and equipment		(156,686		)	(118,811		)
Proceeds from sale of property, plant and equipment		10,930			14,279
Cash paid for acquisitions, net of cash acquired		(6,285		)	(1,922		)
Repayment of loan to affiliate		4,666			—
Increase in restricted cash		(1,407		)	(4,801		)
Net cash used in investing activities		(148,782		)	(111,255		)
Cash flows from financing activities:
Principal repayments of long-term debt		(77,253		)	(719,221		)
Proceeds from issuance of debt		67,994			693,225
Debt extinguishment premium and costs		—			(19,527		)
Debt issuance costs		(1,455		)	(2,456		)
Capital contributions from stockholder		—			10,510
Payments on capital lease agreements		(64		)	(407		)
Net cash used in financing activities		(10,778		)	(37,876		)
Effect of exchange rate changes on cash and cash equivalents		(147		)	500
Net decrease in cash and cash equivalents		(22,400		)	(26,979		)
Cash and cash equivalents at beginning of period		39,262			53,958
Cash and cash equivalents at end of period		$	16,862		$	26,979

 

See accompanying notes to unaudited consolidated financial statements.

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UNIVERSAL COMPRESSION HOLDINGS, INC.

UNIVERSAL COMPRESSION, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

1.     Basis of Presentation

These notes apply to the unaudited consolidated financial statements of both Universal Compression Holdings, Inc. (“Holdings”) and Universal Compression, Inc. (“Universal”) and their subsidiaries. The term “Company” will be used if a statement is applicable to both Holdings and Universal.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements presented in the Company’s Transition Report on Form 10-K for the nine months ended December 31, 2005. That report contains a more comprehensive summary of the Company’s major accounting policies. In the opinion of management, the accompanying unaudited consolidated financial statements contain all appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, considered necessary to present fairly the financial position of the Company and its consolidated subsidiaries and the results of operations and cash flows for the respective periods. Operating results for the three-month and nine-month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2006.

Earnings per share

Net income per share, basic and diluted, is calculated for Holdings in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.”

The only potentially dilutive securities issued by Holdings are stock options and unvested restricted stock grants, neither of which would impact the calculation of net income for dilutive earnings per share purposes.

The dilutive effect of stock options and unvested restricted stock grants outstanding for the three and nine months ended September 30, 2006 was 1,126,000 shares and 1,160,000 shares, respectively.  The dilutive effect of stock options and unvested restricted stock grants outstanding for the three and nine months ended September 30, 2005 was 934,000 shares and 975,000 shares, respectively.  For the three and nine months ended September 30, 2006, outstanding stock options of zero shares and 12,000 shares, respectively, were excluded from the computation of diluted earnings per share as the options’ exercise prices were greater than the average market price of the common stock for such periods.  For the three and nine months ended September 30, 2005, outstanding stock options of 2,000 shares and 191,000 shares, respectively, were excluded from the computation of diluted earnings per share as the options’ exercise prices were greater than the average market price of the common stock for such periods.

Goodwill

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

The Company performs an impairment test for goodwill assets annually, or more often, if indicators of potential impairment exist. The Company’s goodwill impairment test involves a comparison of the fair value of each of its reporting units with their carrying value. The fair value is determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. As of February 2006, the Company performed its annual impairment analysis in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and determined that no impairment had occurred.  If for any reason the fair value of the Company’s goodwill or that of any of its reporting units declines below the carrying value in the future, the Company may incur charges for the impairment.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,” which requires that compensation cost relating to share-based payment transactions be recognized in the financial statements.  That cost will be measured based on the fair value of the equity or liability instruments issued.  Prior to 2006, the Company accounted for stock options in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”.  Under APB 25, stock option expense was not recognized in net income as the exercise price of stock options granted was equal to the market value of the stock on the date of grant.  The Company has previously provided footnote disclosure of pro forma net income and earnings per share amounts as if stock option expense had been recognized based on fair value.

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The Company adopted SFAS No. 123R utilizing the modified prospective transition method.  As a result, prior periods have not been restated to reflect the impact of SFAS No. 123R.  For the three and nine months ended September 30, 2006, the adoption of SFAS No. 123R impacted our results of operation by increasing stock-based compensation expense by $1.2 million ($0.8 million, net of tax) and $3.7 million ($2.5 million, net of tax), respectively, as compared to the expense that would have been recognized under APB 25.  The adoption of SFAS No. 123R decreased each of Holdings’ basic and diluted earnings per share for the three months ended September 30, 2006 by $0.03 per share.  The adoption of SFAS No. 123R decreased each of Holdings’ basic and diluted earnings per share for the nine months ended September 30, 2006 by $0.08 per share.

2.  Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs - an amendment of ARB 43, Chapter 4.”  SFAS No. 151 provides clarification that abnormal amounts of idle facility expense, freight, handling costs and wasted material be recognized as current period charges. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company’s financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”  FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in an entity’s financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact that the adoption of FIN 48 will have on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on its financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact that the adoption of SAB 108 will have on its financial statements.

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3.  Inventories, Net

Inventories, net consisted of the following (in thousands):

		September 30, 2006			December 31, 2005
Raw materials		$	82,422		$	67,125
Work-in-progress		92,524			50,810
Finished goods		29			1,234
Total inventories		174,975			119,169
Reserve for obsolescence		(9,947		)	(10,896		)
Inventories, net		$	165,028		$	108,273

 

4.  Long-Term Debt

As of September 30, 2006, the Company had approximately $913.7 million in outstanding debt consisting of $468.2 million outstanding under the seven-year term loan, $171.2 million outstanding under the 7 1/4 % senior notes, $190.3 million outstanding under the asset-backed securitization facility (the “ABS Facility”) and $84.0 million outstanding under the revolving credit facility.  Covenants in the credit facilities require that the Company maintain various financial ratios.  As of September 30, 2006, the Company was in compliance with all financial covenants.  See note 11 regarding debt refinancing activities which occurred subsequent to September 30, 2006.

5.  Stock-Based Compensation

The following table presents the stock-based compensation expense included in the Company’s results of operations (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Stock options		$	1,156		$	—		$	3,402		$	—
Restricted stock		652			438			1,749			1,241
Employee Stock Purchase Plan		54			—			304			—
Total stock-based compensation expense		1,862			438			5,455			1,241
Income tax benefit		(632		)	(153		)	(1,770		)	(434		)
Total after-tax stock-based compensation expense		$	1,230		$	285		$	3,685		$	807

 

There was no stock-based compensation cost capitalized during the three or nine-month periods ended September 30, 2006 or 2005.

Stock options

The Company utilizes stock options under its incentive stock option plan in order to motivate and retain key employees.  Stock options granted under the plan are exercisable over a ten-year period. Options generally vest over the following time period:

Year 1		331¤3	%
Year 2		331¤3	%
Year 3		331¤3	%

 

Under the incentive stock option plan, options to purchase common stock may be granted until 2011. Options are granted at fair market value at the date of grant, are exercisable in installments beginning one year from the date of grant, and expire ten years after the date of grant.

10

The weighted average fair values at date of grant for options granted during the nine months ended September 30, 2006 and 2005 were $18.22 and $16.81, respectively, and were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

		Nine Months Ended September 30,
		2006		2005
Expected life in years		6.0		5.9
Risk-free interest rate		4.72	%	4.25	%
Volatility		33.15	%	38.54	%
Dividend yield		0.00	%	0.00	%

 

The expected life represents the period of time the stock options are expected to be outstanding prior to exercise and is based on the simplified model.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a period commensurate with the estimated expected life of the stock options.  Expected volatility is based on the historical volatility of the Company’s stock over the most recent period commensurate with the expected life of the stock options and other factors.  The Company has not historically paid a dividend and does not expect to pay a dividend during the expected life of the stock options.  Under SFAS No. 123R, the Company is required to record compensation cost from stock-based compensation utilizing an estimated forfeiture rate.  Historical data related to forfeitures experienced by the Company was used to estimate forfeiture rates.

The following table presents stock option activity for the nine months ended September 30, 2006 (remaining life in years, intrinsic value in thousands):

		Stock Options		Weighted Average Exercise Price			Weighted Average Remaining Life		Aggregate Intrinsic Value
Options outstanding, December 31, 2005		2,219,014		$	25.92
Granted		318,550		43.87
Exercised		(368,521	)	23.01
Cancelled		(15,639	)	34.34
Options outstanding, September 30, 2006		2,153,404		$	29.42		6.4		$	52,628
Options exercisable at September 30, 2006		1,643,852		$	25.62		5.6		$	45,754

 

Intrinsic value is the difference between the market value of the Company’s stock and the exercise price of each option multiplied by the number of options outstanding.  The total intrinsic value of stock options exercised during the nine months ended September 30, 2006 and 2005 was $12.1 million and $9.6 million, respectively.  The total grant date fair value of stock options that vested during the nine months ended September 30, 2006 and 2005 was $4.5 million and $6.2 million, respectively.  As of September 30, 2006, $6.7 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over the weighted-average period of 1.9 years.

Cash received from stock option exercises during the nine months ended September 30, 2006 and 2005 was $8.5 million and $9.8 million, respectively.

Restricted Stock

The Company utilizes grants of restricted stock as long-term compensation for designated employees. The Company’s restricted stock plan provides for the award of up to 1,350,000 shares of the Company’s common stock to certain officers and designated employees. Generally, common stock subject to restricted stock grants will vest 0% upon the first anniversary of the grant and 25% on each anniversary thereafter through the fifth anniversary.

Under APB 25, prior to January 1, 2006, deferred compensation was charged for the market value of restricted shares granted. The deferred compensation balance is shown as a reduction to Holdings’ stockholders’ equity in the accompanying consolidated balance sheet at December 31, 2005.  Upon adoption of SFAS No. 123R, the deferred compensation balance at January 1, 2006 was reversed and recorded to additional paid-in capital.  Under both APB 25 and SFAS No. 123R, the market value of the restricted shares granted is amortized ratably over the restricted period of five years.

Prior to January 1, 2006, under APB 25, the Company recorded the effect of forfeitures on compensation expense related to restricted stock as it actually occurred.  Effective January 1, 2006, under SFAS No. 123R, the Company is required to record

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compensation cost from stock-based compensation utilizing an estimated forfeiture rate.  Historical data related to forfeitures experienced by the Company was used to estimate forfeiture rates.  The impact on previously recognized expense from the change in forfeiture rates was immaterial.

The following table presents restricted stock activity for the nine months ended September 30, 2006:

		Shares		Weighted Average Grant-Date Fair Value
Non-vested restricted stock, December 31, 2005		242,194		$	33.01
Granted		137,050		44.00
Vested		(39,250	)	26.20
Cancelled		(6,025	)	43.49
Non-vested restricted stock, September 30, 2006		333,969		$	38.13

 

The total grant date fair value of restricted stock that vested during the nine months ended September 30, 2006 and 2005 was $1.0 million and $0.6 million, respectively. As of September 30, 2006, $9.3 million of unrecognized compensation cost related to non-vested restricted stock is expected to be recognized over the weighted-average period of 3.8 years.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (“ESPP”) is intended to encourage employees to participate in the Company’s growth by providing them the opportunity to acquire an interest in the Company’s long-term performance and success through the purchase of shares of common stock at a price typically less than fair market value. An employee is eligible to participate after completing 90 days of employment. Each quarter, an eligible employee may elect to withhold up to 10% of his or her eligible pay to purchase shares of the Company’s common stock at a price equal to 85% to 100% of the fair market value of the stock as of the first trading day of the quarter or the last trading day of the quarter, whichever is lower. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, except as otherwise extended by authorizing additional shares under the ESPP. At September 30, 2006, 297,818 shares remained available for purchase under the ESPP.  Under SFAS No. 123R, the Company’s ESPP plan is compensatory, and as a result, the amount of the discount from the fair market value of the stock price at the end of the quarter received by the employee upon purchase of the stock is recorded as expense in that quarter.

2005 Pro Forma Results

The following table summarizes results as if the Company had recorded compensation expense under the provisions of SFAS No. 123 (earnings per share information is for Holdings only) (in thousands, except per share amounts):

 

6.  Accounting for Interest Rate Swaps

In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, all derivative instruments must be recognized on the balance sheet at fair value, and changes in such fair values are recognized in earnings unless

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specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

As of September 30, 2006, the Company had interest rate swap agreements with a notional amount of $171.3 million related to the $190.3 million outstanding under the ABS Facility. The swaps outstanding at September 30, 2006 amortize ratably through 2019 and have a weighted average fixed rate of 4.94%.  In accordance with SFAS No. 133, the Company’s balance sheet at September 30, 2006 included a $1.0 million derivative asset related to the interest rate swap agreements.

As of September 30, 2006, the Company had interest rate swap agreements with a notional amount of $300.0 million related to the $468.2 million outstanding under the seven-year term loan. The swaps outstanding at September 30, 2006 amortize ratably from June 2007 through March 2010 and have a weighted average fixed rate of 4.02%.  In accordance with SFAS No. 133, the Company’s balance sheet at September 30, 2006 included a $6.0 million derivative asset related to the interest rate swap agreements.

In August 2006, the Company entered into a forward starting swap agreement related to a notional amount of $125.0 million of the Company’s floating rate debt.  The effective date of the swap agreement is December 1, 2006.  The swap agreement terminates in December 2011 and has a fixed rate of 5.28%.  In accordance with SFAS No. 133, the Company’s balance sheet at September 30, 2006 included a $0.5 million derivative liability related to the interest rate swap agreement.

These swaps, which the Company has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in accumulated other comprehensive income or loss. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in the variable rate and, therefore, the Company currently does not expect any ineffectiveness.

As of September 30, 2006, the Company had interest rate swap agreements to hedge $100.0 million of its 7 1/4% senior notes. The swaps are used to hedge the change in fair value of the debt and, in effect, convert the fixed interest payment to a variable interest payment based on six-month LIBOR in arrears. The swaps are accounted for in accordance with SFAS No. 133 and, as such, are recorded at fair value on the balance sheet. The Company’s balance sheet at September 30, 2006, included a $3.8 million derivative liability related to the interest rate swap agreements. The change in the debt’s fair value for that portion which is hedged is recorded as an adjustment to the carrying value of debt with the offset being recorded to interest expense. The swaps, which the Company has designated as fair value hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in interest expense. For the three and nine months ended September 30, 2006, the change in the debt’s fair value and the change in the swaps’ fair value exactly offset and did not impact net income. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in fair values due to fluctuations in the variable rate and, therefore, the Company currently does not expect any ineffectiveness.

The counterparties to the Company’s interest rate swap agreements are major international financial institutions. The Company monitors the credit quality of these financial institutions and does not expect non-performance by them.

7.  Comprehensive Income

Comprehensive income consisted of the following (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Net income		$	24,960		$	17,679		$	67,651		$	31,325
Other comprehensive income, net of tax:
Interest rate swap gain (loss)		(6,282		)	3,963			688			3,181
Cumulative translation adjustment		1,052			6,185			6,940			5,118
Comprehensive income		$	19,730		$	27,827		$	75,279		$	39,624

 

The components of comprehensive income were identical for Holdings and Universal, except for the three and nine months ended September 30, 2006, Universal’s net income was $25.9 million and $70.5 million, respectively, and total comprehensive net income was $20.7 million and $78.2 million, respectively.

8.  Industry Segments

The Company has four principal business segments: domestic contract compression, international contract compression, fabrication and aftermarket services. The domestic contract compression segment provides natural gas compression services to customers in the United States. The international contract compression segment provides natural gas compression services to international

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customers, including those in Canada. The fabrication segment provides services related to the design, engineering and assembly of natural gas compressors for sale to third parties in addition to those that the Company uses in its contract compression fleet. The aftermarket services segment sells parts and components and provides maintenance, operations and repair services to customers who own compression equipment and customers who use equipment provided by other companies. Fabrication and aftermarket services revenue presented in the table below include only sales to third parties.

The Company’s reportable segments are strategic business units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies due to customer specifications. The Company evaluates the performance of its reportable segments based on segment gross margin. Gross margin is defined as total revenue less cost of sales (excluding depreciation and amortization expense). The segment gross margin measure used by management for evaluation purposes excludes inter-segment transactions and, accordingly, there is no inter-segment revenue to be reported.

The following table presents unaudited revenue and gross margin by business segment (in thousands):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Revenue:
Domestic contract compression		$	101,058		$	81,964		$	296,563		$	238,554
International contract compression		36,251			31,076			104,554			90,115
Fabrication		57,642			28,193			152,479			132,066
Aftermarket services		51,981			39,895			141,120			121,713
Total		$	246,932		$	181,128		$	694,716		$	582,448
Gross Margin:
Domestic contract compression		$	66,192		$	52,115		$	192,991		$	151,689
International contract compression		27,283			22,989			78,759			67,154
Fabrication		10,048			3,424			20,983			9,329
Aftermarket services		10,677			8,113			27,650			23,603
Total		$	114,200		$	86,641		$	320,383		$	251,775

 

No one customer accounted for more than 10% of total revenue for any of the periods presented.

The table below presents unaudited revenue and gross margin by geographic location (in thousands).  The basis of attributing revenue and gross margin to specific geographic locations is primarily based upon the geographic location of the sale, service or where the assets are utilized.

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Revenue:
United States		$	170,287		$	128,001		$	479,231		$	411,559
Canada		28,425			21,360			86,142			58,469
Argentina		16,739			14,442			51,103			53,010
Other international		31,481			17,325			78,240			59,410
Total		$	246,932		$	181,128		$	694,716		$	582,448
Gross Margin:
United States		$	79,371		$	60,073		$	222,760		$	175,784
Canada		8,262			6,235			22,834			17,871
Argentina		12,008			9,493			34,884			26,808
Other international		14,559			10,840			39,905			31,312
Total		$	114,200		$	86,641		$	320,383		$	251,775

 

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

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Net income		$	24,960		$	17,679		$	67,651		$	31,325
Depreciation and amortization		31,154			26,439			90,966			76,462
Selling, general and administrative expense		30,149			21,012			86,191			61,522
Interest expense, net		15,152			13,034			43,814			39,890
Debt extinguishment costs		—			—			—			26,068
Asset impairment expense		—			—			—			3,080
Foreign currency (gain) loss		(45		)	(610		)	(355		)	(1,344		)
Other (income) loss, net		3			(524		)	(1,090		)	(1,069		)
Income tax expense		12,827			9,611			33,206			15,841
Gross margin		$	114,200		$	86,641		$	320,383		$	251,775

 

Amounts for the three months ended September 30, 2006 are for both Holdings and Universal with the following exceptions:  Universal had interest income from an affiliate of $1.5 million, income tax expense of $13.3 million and net income of $25.9 million.  Amounts for the nine months ended September 30, 2006 are for both Holdings and Universal with the following exceptions:  Universal had interest income from an affiliate of $4.5 million, income tax expense of $34.8 million and net income of $70.5 million.  The results of operations for Holdings and Universal were identical for the three and nine months ended September 30, 2005.

9.  Commitments and Contingencies

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

On May 1, 2006, the Bolivian government announced the nationalization of the country’s hydrocarbon reserves. The Company owns and operates a natural gas liquids extraction facility in Bolivia that processes natural gas owned by its customer. The Company currently believes that the nationalization includes the ownership of the natural gas reserves of its customer but does not impact the Company’s ownership or control of its facility. To date, there has been no impact on our operations or cash flows. The Company cannot currently estimate the future impact, if any, that the nationalization of its customer’s natural gas reserves will have on its contract for this facility. The Company’s net investment in Bolivia was $13.3 million at September 30, 2006.

10.  Income Taxes

In May 2006, the State of Texas enacted a law which modifies its existing franchise tax.  The tax is considered an income tax and is accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.”  As a result, during the three months ended June 30, 2006, the Company recorded a deferred tax asset and related deferred tax benefit of $1.0 million.

In May 2006, the United States Congress passed the Tax Increase Prevention and Reconciliation Act of 2005.  This Act had the impact of reducing the Company’s Subpart F income from applying a new look-through rule between related controlled foreign corporations.  As a result, during the three months ended June 30, 2006, the Company recorded a reduction in its deferred tax liability and a related deferred tax benefit of $0.6 million.

In May and June 2006, reductions in the Alberta, Canada and Canadian Federal income tax rates were enacted.  As a result, during the three months ended June 30, 2006, the Company recorded a reduction of its deferred tax liability and a deferred tax benefit of $0.9 million.

11.  Subsequent Events

Initial Public Offering of Subsidiary Company

In October 2006, a subsidiary of the Company, Universal Compression Partners, L.P. (along with its subsidiaries “the Partnership”), completed an initial public offering of 6,325,000 common units at a price of $21.00 per unit, representing limited partner interests in the Partnership, including 825,000 common units sold pursuant to the exercise of the underwriters’ overallotment option. All of the units were issued by the Partnership.  The Partnership was formed to provide natural gas contract compression services to customers throughout the United States. A subsidiary of the Company is the general partner of the Partnership.

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The net proceeds of the offering were $120.7 million after deducting underwriting discounts and commissions and expenses associated with the offering.  In connection with the offering, the Company contributed to the Partnership contract compression services contracts with nine customers and a fleet of compressor units to service those customers, comprising approximately 330,000 horsepower, or approximately 17% (by available horsepower) of the Company’s domestic contract compression business, the Partnership assumed $228.4 million in debt from the Company and the Company received 825,000 common units and 6,325,000 subordinated units representing limited partner interests in the Partnership.  The Partnership used the aggregate net proceeds from the offering to repay a portion of the debt it assumed from the Company and to redeem the 825,000 common units it issued to the Company.

The common units sold to the public represent a 49% limited partner interest in the Partnership. The Company owns the remaining equity interests in the Partnership.  The Company will consolidate the financial position and results of operations of the Partnership.

The Company and the Partnership entered into an omnibus agreement, the terms of which include, among other things, the Company’s agreement to provide to the Partnership operational staff, corporate staff and support services, the terms under which the Company may sell to the Partnership newly fabricated equipment and under which it may transfer to and receive from the Partnership idle compression equipment and an agreement by the Company to provide caps on the amount of cost of sales and selling, general and administrative costs that the Partnership must pay.  The caps are determined on a quarterly basis and expire on December 31, 2008.

Debt Refinancing

On October 20, 2006, Holdings, and three of its wholly owned subsidiaries, Universal (together with Holdings the “US Borrowers”) and UC Canadian Partnership Holdings Company and Universal Compression Canada, Limited Partnership (together with the US Borrowers, the “Borrowers”), entered into a senior secured credit agreement.  The new credit facility under the credit agreement consists of a five-year $500 million revolving credit facility. Borrowings under the credit agreement are secured by substantially all of the personal property assets of the US Borrowers. In addition, all of the capital stock of the domestic restricted subsidiaries, except for subsidiaries used in connection with the ABS Facility, and 65% of the capital stock of the first tier foreign subsidiaries has been pledged to secure the obligations under the credit agreement. The new credit facility is not secured by the capital stock of the Partnership or any assets owned by the Partnership. Under the credit agreement, the revolving credit facility currently bears interest at the Borrowers’ option, the Administrative Agent’s prime rate plus 0.25%, or LIBOR plus 1.25%.

The US Borrowers used approximately $330 million advanced under the credit agreement, together with debt assumed by the Partnership in connection with its initial public offering and proceeds received from the Partnership in connection with the redemption by the Partnership of 825,000 common units representing limited partner interests in the Partnership issued to the Company in connection with the initial public offering, to repay all balances under the prior senior secured credit facility. The prior senior secured credit facility was subsequently terminated.  The Company will record in the three months ended December 31, 2006 a write-off of unamortized debt issuance costs of $1.1 million associated with the refinancing.

Additionally, approximately $28 million of the letter of credit subfacility to the revolving credit facility was utilized to replace the letters of credit outstanding under the prior revolving credit facility. The US Borrowers intend to use the remainder of the proceeds of the credit agreement for working capital, acquisitions and general corporate purposes.

Under the credit agreement, the Borrowers are subject to certain limitations, including limitations on their ability: to incur additional debt or sell assets, with restrictions on the use of proceeds; to make certain investments and acquisitions; to grant liens; and to pay dividends and distributions. In addition, the Borrowers will be required to pay down the facility under certain circumstances if they sell certain assets or property. The credit agreement contains certain affirmative covenants to provide guarantees from any domestic subsidiary with gross assets exceeding $50 million. The Borrowers are also subject to financial covenants which include a total debt to EBITDA ratio, interest coverage ratio and a senior secured leverage ratio. The credit agreement specifies a number of events of default (many of which are subject to applicable cure periods), including, among others, the failure to make payments when due, defaults under other agreements or instruments of indebtedness, change of control and noncompliance with covenants. Upon the occurrence of an event of default, the lenders may terminate the facility and declare all amounts outstanding to be immediately due and payable.

On October 20, 2006, the Partnership, as guarantor, and UC Operating Partnership, L.P., a wholly owned subsidiary of the Partnership (“Operating Partnership”), entered into a senior secured credit agreement The new credit facility under the credit agreement consists of a five-year $225 million revolving credit facility, of which approximately $125 million was drawn at closing. Borrowings under the credit agreement are secured by substantially all of the personal property assets of the Operating Partnership and the Partnership. In addition, all of the capital stock of the Partnership’s domestic restricted subsidiaries, except for subsidiaries used in connection

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with any asset backed securitization facility, has been pledged to secure the obligations under the credit agreement. Under the credit agreement, the revolving credit facility currently bears interest at the Operating Partnership’s option, the Administrative Agent’s prime rate plus 0.25% or LIBOR plus 1.25%, in each case based upon the Partnership’s total leverage ratio.

The Operating Partnership used approximately $125 million advanced under the credit agreement to repay indebtedness assumed by the Operating Partnership and the Partnership from the Company in connection with the Operating Partnership’s acquisition of a portion of the Company’s domestic contract compression business.

Under the credit agreement, the Operating Partnership and the Partnership are subject to certain limitations, including limitations on their ability: to incur additional debt or sell assets, with restrictions on the use of proceeds; to make certain investments and acquisitions; to grant liens; and to pay dividends and distributions. The credit agreement contains certain affirmative covenants to deliver capital stock of newly created subsidiaries, and to provide guarantees from the Partnership and any domestic subsidiary which generates EBITDA (which is defined for the purposes of determining guarantors as gross revenues of such domestic subsidiary for such period less the cost of sales (excluding depreciation expenses to the extent such expenses were deducted)) exceeding 7.5% of the EBITDA of the Partnership and all of its subsidiaries taken as a whole. The Operating Partnership and the Partnership are also subject to financial covenants which include a total debt to EBITDA ratio and an interest coverage ratio. The credit agreement specifies a number of events of default (many of which are subject to applicable cure periods), including, among others, the failure to make payments when due, defaults under other agreements or instruments of indebtedness, change of control and noncompliance with covenants. Upon the occurrence of an event of default, the lenders may terminate the facility and declare all amounts outstanding to be immediately due and payable.

Stock Repurchase Program

On November 6, 2006, Holdings’ Board of Directors authorized the repurchase of up to $200 million of Holdings’ common stock through November 6, 2008. Under the stock repurchase program, Holdings may repurchase shares in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations.  Holdings may also implement all or part of the repurchases under a Rule 10b5-1 trading plan, so as to provide the flexibility to extend its share repurchases beyond the quarterly purchasing window.  The timing and extent to which Holdings repurchases its shares will depend upon market conditions and other corporate considerations, and will be in management’s discretion.  Repurchases under the program may commence or be suspended at any time without prior notice.  The stock repurchase program may be funded through cash provided by operating activities or borrowings.

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

The terms “our,” “Company,” “we” and “us” when used in this report refer to Universal Compression Holdings, Inc. (“Holdings”) and Universal Compression, Inc. (“Universal”) and their subsidiaries, except where indicated.  The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, appearing elsewhere in this report, as well as the consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our Transition Report on Form 10-K for the nine months ended December 31, 2005.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding future financial position, business strategy, proposed acquisitions, budgets, litigation, projected costs and plans and objectives of management for future operations. You can identify many of these statements by looking for words such as “believes,” “expects,” “will,” “intends,” “projects,” “anticipates,” “estimates,” “continues” or similar words or the negative thereof.

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

·                                          our business growth strategy and projected costs;

·                                          our future financial position;

·                                          the sufficiency of available cash flows to fund continuing operations;

·                                          the expected amount of our capital expenditures;

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

·                                          the future value of our equipment; and

·                                          plans and objectives of our management for our future operations.

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. These forward looking statements are also affected by the risk factors and forward looking statements described in our Transition Report on Form 10-K for the nine months ended December 31, 2005 and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”), which are available through our website and through the SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at http://www.sec.gov. 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. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

·                                          conditions in the oil and gas industry, including a sustained decrease in the level of supply or demand for natural gas and the impact on the price of natural gas;

·                                          competition among the various providers of natural gas compression services;

·                                          the success of our subsidiary, Universal Compression Partners, L.P., which recently completed its initial public offering;

·                                          employment workforce factors, including our ability to hire, train and retain key employees;

·                                          our ability to timely and cost-effectively obtain components necessary to conduct our business;

·                                          our ability to timely and cost-effectively implement our enterprise resource planning (“ERP”) system;

·                                          changes in safety and environmental regulations pertaining to the production and transportation of natural gas;

·                                          changes in political or economic conditions in key operating markets, including international markets;

·                                          acts of war or terrorism or governmental or military responses thereto;

·                                          introduction of competing technologies by other companies;

·                                          our ability to retain and grow our customer base;

·                                          our level of indebtedness and ability to fund our business;

·                                          currency exchange rate fluctuations; and

·                                          liability claims related to the use of our products and services.

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