10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 nos.:	001-15843
	333-48279

Universal Compression Holdings, Inc.
Universal Compression, Inc.

(Exact name of Registrants as Specified in Their Charters)

Delaware	13-3989167
Texas	74-1282680
(States or Other Jurisdictions of Incorporation or Organization)	(I.R.S. Employer Identification Nos.)
4444 Brittmoore Road, Houston, Texas	77041-8004
(Address of Principal Executive Offices)	(Zip Code)

(713) 335-7000

(Registrants’ telephone number, including area code)

Securities of Universal Compression Holdings, Inc. Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $.01 par value	New York Stock Exchange, Inc

Securities of Universal Compression Holdings, Inc. Registered Pursuant to Section 12(g) of the Act:

Title of Each Class

None

Securities of Universal Compression, Inc. Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
None	N/A

Securities of Universal Compression, Inc. Registered Pursuant to Section 12(g) of the Act:

Title of Each Class

None

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

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).

Yes x  No o  (Universal Compression Holdings, Inc.)

Yes o  No x  (Universal Compression, Inc.)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act.

Yes o  No x  (Universal Compression Holdings, Inc.)

Yes o  No x  (Universal Compression, Inc.)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

The aggregate market value of the Common Stock of Universal Compression Holdings, Inc. held by non-affiliates as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter was approximately $1.9 billion. For purposes of the above statements only, all directors, executive officers and 10% stockholders are assumed to be affiliates. This calculation does not reflect a determination that such persons are affiliates for any other purpose.

The number of shares of the Common Stock of Universal Compression Holdings, Inc. outstanding as of February 23, 2007: 30,133,882 shares. All 4,910 outstanding shares of common stock of Universal Compression, Inc., par value $10.00 per share, are owned by Universal Compression Holdings, Inc.

Documents Incorporated by Reference

Portions of Universal Compression Holdings, Inc.’s Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III, as indicated herein.

The Index to Exhibits is on page 47.

Table of Contents

		Page
Part I
Item 1.	Business	2
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Part II
Item 5.	Market for the Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	44
Item 9A.	Controls and Procedures	44
Item 9B.	Other Information	44
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	46
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	46
Item 13.	Certain Relationships and Related Transactions, and Director Independence	46
Item 14.	Principal Accountant Fees and Services	46
Part IV
Item 15.	Exhibits and Financial Statement Schedules	47
	Signatures	II-I

1

PART I

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 otherwise indicated.

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 and Section 21E of the Securities Exchange Act of 1934, as amended. 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 timing and amount of our capital expenditures;

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

·the future value of our equipment;

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

·the ability to successfully complete our anticipated merger with Hanover Compressor Company (“Hanover”).

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report.  Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in Part I, Item 1A (“Risk Factors”) and Part II, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this report and those set forth time to time in our filings with the Securities and Exchange Commission (“SEC”), which are available through our website at www.universalcompression.com and through the SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at www.sec.gov.

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

ITEM 1. Business

General

We are the second-largest natural gas compression services company in the world in terms of compressor fleet horsepower, with a fleet as of December 31, 2006 of approximately 7,100 compressor units comprising approximately 2.7 million horsepower. We provide a full range of natural gas compression services and products, including sales, operations, maintenance

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and fabrication to the natural gas industry, both domestically and internationally. These services and products are essential to the natural gas industry, because gas must be compressed to be delivered from the wellhead to end users.

We operate in four primary business segments: domestic contract compression, international contract compression, fabrication and aftermarket services. Our core business, contract compression, involves providing natural gas compression services to customers utilizing our compression equipment. By outsourcing their compression needs, we believe our contract compression customers generally are able to increase their revenue by producing a higher volume of natural gas through decreased compression downtime and increased compression efficiency. Outsourcing allows our customers to reduce their operating costs, maintenance costs and capital investments and more efficiently meet their changing compression needs.

In addition to contract compression, we provide a broad range of compression services and products to customers who own their compression equipment or use equipment provided by other companies. Our fabrication business involves the design, engineering and assembly of natural gas compressors for sale to third parties or for use in our contract compression fleet. Our ability to fabricate compressors ranging in size from under 100 horsepower to over 5,000 horsepower enables us to provide compressors that are used in all facets of natural gas production, transmission, storage and distribution. Our aftermarket services business sells parts and components, and provides maintenance and operations services to customers who own their compression equipment or use equipment provided by other companies. Our ability to provide a full range of compression services and products broadens our customer relationships and helps us identify potential new customers and cross-selling opportunities with existing customers. As the compression needs of our customers increase due to the growing demand for natural gas throughout the world, we believe our geographic scope and broad range of compression services and products will enable us to participate in that growth.

We maintain 18 field service locations throughout the United States at which we service and overhaul compression equipment.  These locations provide a base from which we deploy operating personnel to service and overhaul our compression equipment and the equipment of customers who either own their own compression equipment or use equipment provided by other companies.  We operate internationally in Argentina, Australia, Bolivia, Brazil, Canada, China, Indonesia, Mexico, Nigeria, Peru, Russia, Singapore, Switzerland, Thailand and Venezuela. Financial information about our business segments and the geographic locations in which we operate is provided in Note 13 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report. Our principal corporate office is located at 4444 Brittmoore Road, Houston, Texas 77041.

Holdings is a Delaware corporation and a holding company that conducts operations through our wholly-owned subsidiary, Universal, a Texas corporation incorporated in 1954. Holdings was formed on December 12, 1997 for the purpose of acquiring Universal’s predecessor, Tidewater Compression Service, Inc. (“TCS”) from Tidewater, Inc. Upon completion of the acquisition in February 1998, TCS became our wholly-owned subsidiary and changed its name to Universal Compression, Inc. Through this subsidiary, our gas compression service operations date back to 1954. Holdings completed an initial public offering of shares of common stock in June 2000.  Primarily during the two year period following Holdings’ initial public offering, we completed several acquisitions that contributed significantly to our growth. Our most significant completed acquisition, through merger, was that of Weatherford Global Compression Services, L.P. and certain related entities, which were subsidiaries of Weatherford International Ltd., in 2001. This acquisition added approximately 950,000 horsepower to our fleet, more than doubling our size at that time.

In October 2006, a subsidiary of Holdings, 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 a 49% limited partner interest in the Partnership. Holdings owns the remaining equity interests in the Partnership.

The Partnership was formed to provide natural gas contract compression services to customers throughout the United States. A subsidiary of Holdings is the general partner of the Partnership, and Holdings consolidates the financial position and results of operations of the Partnership.

In connection with the offering, Holdings 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 at the time of the offering.

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Additional information concerning the Partnership is contained in Note 1 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report and in the Partnership’s current and periodic filings with the SEC.  See “– Available Information”.

In December 2005, Holdings’ board of directors approved a change to our fiscal year end from March 31 to December 31, effective in 2005, which resulted in us preparing a transition report for the nine-month period ended December 31, 2005.  Our fiscal year ended December 31, 2006 represents a twelve-month period.

Recent Developments

In February 2007, we and Hanover Compressor Company entered into a merger agreement. Upon consummation of the transactions set forth in the merger agreement, each common share of Hanover will be converted into 0.325 shares of common stock of a newly created holding company, and each common share of Holdings will be converted into one share of the holding company. Hanover will be treated as the acquirer for accounting purposes.

The merger agreement has been unanimously approved by both companies’ boards of directors. Completion of the merger is subject to a number of conditions, including the approval of the stockholders of both companies and customary regulatory approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Closing of the transaction is currently anticipated in the third quarter of 2007. We believe that our expectation as to timing for the closing of the merger is reasonable, however, no assurances can be given as to the timing of the satisfaction of all closing conditions or that all required approvals will be received.

The merger agreement requires us and Hanover to continue to operate our businesses in the ordinary course of business and to obtain the other party’s consent prior to engaging in certain specified activities, such as issuing or repurchasing securities, acquiring or disposing of businesses above specified thresholds, entering into new debt above specified thresholds and issuing new common stock (other than under employee compensation arrangements).  These agreements are subject to specified exceptions, including those (1) permitting us to repurchase up to an additional $75 million of our common stock in accordance with our previously announced open-market stock repurchase program, (2) permitting the Partnership to make cash distributions in accordance with its partnership agreement, (3) permitting us to make contributions of our domestic compression assets to the Partnership and (4) permitting us to redeem our 7 1/4% senior notes due 2010.

Further information concerning the structure and details of the proposed merger is set forth in our Current Report on Form 8-K dated February 5, 2007, which includes as exhibits the merger agreement and a joint press release from us and Hanover announcing the execution of the merger agreement.

Natural Gas Compression Industry Overview

Natural gas compression is a mechanical process whereby a volume of natural gas at an existing pressure is increased to a desired higher pressure for transportation from one point to another, and is essential to the transportation and production of natural gas. Compression is typically required several times during the natural gas production and transportation cycle, including: (1) at the wellhead; (2) throughout gathering and distribution systems; (3) into and out of processing and storage facilities; and (4) along intrastate and interstate pipelines.

·Wellhead and Gathering Systems - Compression at the wellhead is required because, at some point during the life of an oil or gas well, natural reservoir pressure typically declines as reserves are produced. As the natural reservoir pressure of the well declines below the line pressure of the gas gathering or pipeline system used to transport the gas to market, gas no longer naturally flows into the pipeline. Compression equipment is applied in both field and gathering systems to boost the well’s pressure levels allowing gas to be transported to market.  The continually dropping pressure levels in natural gas fields require periodic modification and variation of on-site compression equipment.  Natural gas compression that is used to transport gas from the wellhead through the gathering system is considered “field compression.”  Compression is also used to reinject natural gas into producing oil wells to maintain reservoir pressure and help lift liquids to the surface, known as secondary oil recovery or gas lift operations. Typically, these applications require portable, low- to mid-range horsepower compression equipment located at or near the wellhead.  Compression equipment is also used to increase the efficiency of a low capacity gas field by providing a central compression point from which the gas can be produced and injected into a pipeline for

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transmission to facilities for further processing. In an effort to reduce costs for wellhead operators, operators of gathering systems tend to keep the pressure of the gathering systems low. As a result, more pressure is often needed to force the gas from the low pressure gathering systems into the higher pressure pipelines.

·Pipeline Transportation Systems - Natural gas compression that is used during the transportation of gas from the gathering systems to storage or the end user is considered “pipeline compression.” Compression equipment is also used to increase the efficiency of a low capacity gas field by providing a central compression point from which the gas can be produced and injected into a pipeline for transmission to facilities for further processing. As gas is transported through a pipeline, compressor units are applied all along the pipeline to allow the natural gas to continue to flow through the pipeline to its destination. These applications generally require larger horsepower compression equipment (1,000 horsepower and higher).

·Storage Facilities - Natural gas compression is used in gas storage projects to inject gas into underground reservoirs during off-peak seasons to withdraw later during periods of high demand.

·Processing Applications - Compressors may also be used in combination with oil and gas production equipment to process and refine oil and gas into more marketable energy sources. In addition, compression services are used for compressing feedstocks in refineries and petrochemical plants, and for refrigeration applications in natural gas processing plants.

Gas producers, transporters and processors historically owned and maintained most of the compression equipment used in their operations. Many producers, transporters and processors have increasingly outsourced their compression services due to the benefits and flexibility of contract compression. Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure or replace their compressor units to optimize the well production or gathering system efficiency.

We believe outsourcing contract compression services offers customers:

·the ability to efficiently meet their changing compression needs over time while limiting their capital investments in compression equipment and the underutilization of their existing compression equipment;

·access to the compression services provider’s specialized personnel and technical skills, including engineers and field service and maintenance employees, which generally leads to improved production rates and/or increased throughput;

·the ability to increase their revenue by transporting or producing a higher volume of natural gas through decreased compression downtime and reduced operating, maintenance and equipment costs by allowing the compression service provider to efficiently manage their changing compression needs; and

·the flexibility to deploy their capital on projects more directly related to their primary business by reducing their compression equipment and maintenance capital requirements.

The international compression market is comprised primarily of large horsepower compressors. A significant portion of this market involves comprehensive installation projects, which include the design, fabrication, delivery, installation, operation and maintenance of compressors and related gas treatment and processing equipment by the contract compression service provider.

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Key Operating and Financial Statistics

The following table illustrates our key operating and financial statistics during the periods as indicated:

	Twelve Months Ended December 31,			Nine Months Ended December 31,			Twelve Months Ended March 31,
	2006			2005			2005
	(In thousands, except percentages)
Domestic horsepower (end of period)	2,069			1,965			1,925
International horsepower (end of period)	607			584			544
Total horsepower (end of period)	2,676			2,549			2,469
Average horsepower utilization rate	90.6		%	91.1		%	88.8		%
Revenue	$	947,707		$	613,647		$	763,070
Percentage of revenue from:
Domestic contract compression	42.0		%	40.5		%	38.8		%
International contract compression	15.0		%	15.5		%	13.4		%
Fabrication	22.8		%	23.4		%	28.0		%
Aftermarket services	20.2		%	20.6		%	19.8		%
Net income - Holdings	$	87,656		$	55,369		$	33,610
EBITDA, as adjusted (1)	$	311,817		$	205,850		$	232,543

(1)EBITDA, as adjusted, is defined, reconciled to net income and discussed within Part II, Item 6 (“Selected Financial Data – Non-GAAP Financial Measures”) of this report.

Financial information relating to the identifiable assets for each business segment is provided in Note 13 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report.

Operations

Contract Compression Fleet

As of December 31, 2006, our fleet consisted of 7,112 compressors, as reflected in the following table:

	Total Horsepower As of		% of Horsepower As of				Number of Units As of
	December 31,	December 31,	December 31,		December 31,		December 31,	December 31,
Horsepower Range	2006	2005	2006		2005		2006	2005
0-99	166,087	167,982	6.2	%	6.6	%	2,188	2,221
100-299	435,449	436,510	16.3		17.1		2,478	2,486
300-599	355,217	364,132	13.3		14.3		929	951
600-999	437,877	431,329	16.4		16.9		603	592
1,000 and over	1,281,446	1,149,324	47.8		45.1		914	818
Total	2,676,076	2,549,277	100	%	100	%	7,112	7,068

Over the last several years, we have undertaken to standardize our compressor fleet around major components and key suppliers. The standardization of our fleet:

·enables us to minimize our fleet operating costs and maintenance capital requirements;

·enables us to minimize inventory costs;

·facilitates low-cost compressor resizing; and

·allows us to develop improved technical proficiency in our maintenance and overhaul operations, which enables us to achieve high run-time rates while maintaining low operating costs.

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Contract Compression

We provide comprehensive contract compression services, which includes our provision at the customer’s location of our personnel, equipment, tools, materials and supplies necessary to provide the amount of gas compression for which the customer has contracted.  Based on the operating specifications at the customer’s location and the customer’s unique compression needs, these services include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining equipment to provide compression to our customers.  When providing contract compression services, we work closely with a customer’s field service personnel so that the compression services can be adjusted to efficiently match changing characteristics of the reservoir and the gas produced. We routinely repackage or reconfigure a portion of our existing fleet to adapt to our customers’ compression services needs.  We utilize both slow and high speed reciprocating compressors driven either by internal combustion engines or electric motors. We also utilize rotary screw compressors for specialized applications.

Our compression equipment is maintained in accordance with daily, weekly, monthly and annual maintenance schedules. These maintenance procedures are updated as technology changes and as our operations group develops new techniques and procedures. In addition, because our field technicians provide maintenance on substantially all of our contract compression equipment, they are familiar with the condition of our equipment and can readily identify potential problems. In our experience, these procedures maximize equipment life and unit availability and minimize avoidable downtime. Generally, each of our compressor units undergoes a major overhaul once every three to nine years, depending on the type and size of the compressor unit. A major overhaul involves the rebuilding of the unit to materially extend its economic useful life or to enhance the unit’s ability to fulfill broader or different contract compression applications.

We believe that our fabrication and aftermarket services businesses, described below, provide us with opportunities to cross-sell our contract compression services.

We and our customers typically contract for our services on an application specific, or site-by-site, basis. We have standard contract compression contracts and fixed monthly rates. These rates and contracts may be modified through negotiations.  At the end of the initial term, which is typically six months, contract compression services can continue on a month-to-month basis at the option of the customer. Our contracts generally run for an average duration of three years.  Our customers generally are required to pay our monthly fee even during periods of limited or disrupted natural gas flows, which enhances the stability and predictability of our cash flows. Additionally, because we do not take title to the natural gas we compress, and because the natural gas we use as fuel for our compressors is supplied by our customers, we have limited exposure to commodity prices.

Domestic Contract Compression Operations.  As of December 31, 2006, we operated a domestic fleet of 6,384 compressors comprising approximately 2.1 million horsepower.  For the twelve months ended December 31, 2006, 42.0% of our total revenue was generated from domestic contract compression operations.

We maintain 18 field service locations in the natural gas producing regions of the United States from which we can service and overhaul our own compressor fleet to provide contract compression services to our customers.  At certain of these locations, we also provide aftermarket services to our customers, as described in more detail below.

International Contract Compression Operations.  As of December 31, 2006, we operated 728 units comprising approximately 607,000 horsepower in international markets.  We operate internationally in Argentina, Australia, Bolivia, Brazil, Canada, China, Indonesia, Mexico, Nigeria, Peru, Russia, Switzerland, Thailand and Venezuela.  We intend to continue to expand our presence in these markets and pursue opportunities in other strategic international areas. For the twelve months ended December 31, 2006, 15.0% of our total revenue was generated from international contract compression operations.

International contract compression service projects usually generate higher gross margin percentages than domestic projects. Our international operations are focused on large horsepower compressor markets and frequently involve longer-term and more comprehensive service projects than our domestic projects.  International projects often require us to provide complete engineering, design and installation services and more investment in facilities and installation, and may involve larger amounts of horsepower, including larger horsepower equipment, more units, or both, at individual sites.  International service agreements can and frequently do differ significantly from domestic service agreements, as individual contracts are negotiated for each project which may include multiple compression units.

Financial information by geographic area for the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 is provided in Note 13 to our consolidated financial statements, included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report.

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Fabrication

As a complement to our contract compression service operations, we design, engineer, fabricate and sell natural gas compressors to engineering and construction firms, exploration and production companies, as well as pipeline and gas transmission companies, both domestically and internationally. We also fabricate compressor units for our own fleet. Our primary fabrication facilities are located in Houston, Texas, Calgary, Alberta, Canada and, as of January 2007, in Singapore as a result of our acquisition of B.T.I. Holdings Pte Ltd, as more fully described in Note 15 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report.

Generally, compressors sold to third parties are assembled according to each customer’s specifications. We purchase components for these compressors from third party suppliers, for many of which we are original equipment manufacturer representatives, including several major engine, compressor and electric motor manufacturers in the industry. We also sell prepackaged compressor units. For the twelve months ended December 31, 2006, 22.8% of our total revenue was generated from fabrication operations.

We do not incur material research and development expenditures, as these activities are not a significant aspect of our industry. Any research and development costs are expensed as incurred.

Aftermarket Services

Our aftermarket services business sells parts and components and provides operation, maintenance, overhaul and reconfiguration services  to customers who own compression equipment or use equipment provided by other companies.

We sell parts to our aftermarket services customers either on an over-the-counter basis through 18 service locations in the United States and five in Canada, on an individual call-in basis, on a bid basis for larger orders or as part of our provision of compressor maintenance services. Our maintenance services are available, onshore and offshore, on an individual call-in basis, on a contract basis (which may cover a particular unit, a particular compression project or all of the customer’s compression projects) or as part of our comprehensive operation and maintenance service.  Outside North America, these services are also available through 12 operating locations around the world.  For the twelve months ended December 31, 2006, 20.2% of our total revenue was generated from aftermarket services operations.

Business Strategy

Our business strategy is to meet the evolving needs of our customers by providing consistent and dependable services and products, and to take advantage of our size and broad geographic scope to expand our customer base. The key elements of our business strategy are described below:

·Provide a wide range of quality compression services and products. We plan to continue to leverage our field compression capabilities to provide services and products to customers in all segments of the natural gas compression market, including field and pipeline compression.

·Utilize the Partnership as our primary vehicle for the growth of our domestic contract compression business. We intend for the Partnership to be the primary growth vehicle for our domestic contract compression business.  As the Partnership has a lower cost of capital due to its partnership structure, we intend to offer the Partnership the opportunity to purchase the remainder of our domestic contract compression fleet over time.  We believe that the Partnership’s lower cost of capital provides us a competitive advantage.

·Seek opportunities in select international markets. We plan to continue to expand our existing international operations and offer our services in other key markets. We believe that our experience in international markets and our reputation for providing reliable contract compression services and fabricating high quality compressors provides us with a solid foundation from which to further expand our business internationally.

·Seek opportunities for preferred relationships. We intend to continue to enter into strategic alliances, preferred vendor and similar long-term relationships to provide our full range of services and products to our customers.  Such alliances typically give us preferential consideration from our alliance customers when they look to satisfy

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contract compression needs.  In exchange, we provide these customers with enhanced service availability and  favorable pricing.

·Expand and leverage our fabrication and aftermarket services business. We have significant fabrication and aftermarket services operations, and we intend to expand these segments of our business. In addition to providing additional sources of revenue, these segments also provide us with an opportunity to cross-sell our contract compression services. This cross-selling potential stems from the natural evolution we typically experience as we enter new regions. Specifically, our fabrication sales frequently result in later aftermarket service work in the form of parts sales and post-warranty services.  Relationships formed through the provision of fabrication sales and aftermarket services may then lead to long-term contract compression service relationships.

·Maintain financial flexibility. We intend to maintain financial flexibility to be able to take advantage of opportunities as we identify them. Historically, during periods of growth, we have utilized our cash flow from operations as well as borrowings under available debt facilities to fund capital expenditures and acquisitions. This spending has allowed us to significantly grow our business and the amount of cash we generate while maintaining our debt at levels we believe are appropriate for our stable business. We believe our financial flexibility positions us to take advantage of future growth opportunities without incurring debt beyond appropriate levels.

·Expand beyond field compression. In addition to our field compression services, we continue to expand our large horsepower compression capabilities in pipeline, processing, storage and offshore markets.

Competitive Strengths

We believe that we have the following key competitive strengths:

·Comprehensive range of services and products. We provide a wide range of compression services and products to meet the changing compression needs of our customers in the diverse geographic markets that we serve, whether these customers outsource compression services or operate their own compression equipment. For those customers who outsource, we believe our contract compression services generally allow our customers to achieve higher compression and production rates than they would achieve with owned equipment, resulting in increased revenue for our customers. In addition, outsourcing allows our customers flexibility with regard to their changing compression needs while limiting their capital requirements. We continually expand, upgrade and reconfigure our contract compression fleet and provide our operations and maintenance personnel with extensive training. We are able to fabricate compression units ranging in size from under 100 horsepower to over 5,000 horsepower that meet the varying needs of our customers. Additionally, we sell parts and components and provide maintenance and operations services to customers who own their compression equipment or have agreements with other companies. This broad range of compression services and products allows us to expand our customer base and gives us the opportunity to cross-sell our services and products.

·Size and geographic scope. We operate in the primary onshore and offshore natural gas producing regions of the United States and select international markets. As the second largest provider of natural gas compression services, we believe we have sufficient fleet size, personnel, logistical capabilities, geographic scope, fabrication capabilities and range of compression service and product offerings to meet the full service needs of our customers in the domestic and international markets we serve on a timely and cost-effective basis. We believe our size, geographic scope and broad customer base reduce our volatility and provide us with improved fleet utilization opportunities. By increasing our fleet utilization, we are able to improve our operating leverage and increase returns. As a result, due to economies of scale, we believe we have relatively lower operating costs and higher margins than most companies with smaller fleets.

·Experienced management team. Our management team has extensive experience in the compression services business. We believe our management team has successfully demonstrated its ability to maintain our quality standards and commitment to customer service. Our management team has a substantial financial interest in our continued success through direct stock ownership and participation in our incentive stock option and bonus programs which are linked to our performance.

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·Ability to leverage the Partnership.  We believe that the Partnership provides us a lower cost of capital through which we can pursue additional domestic contract compression business.  Through the Partnership, we will attempt to increase the amount of domestic compression that is outsourced.

Oil and Gas Industry Cyclicality and Volatility

Our financial performance is generally less affected by the short-term market cycles and oil and gas price volatility than the financial performance of companies operating in other sectors of the oilfield services industry because:

·our operations are tied primarily to natural gas production and consumption, which are generally less cyclical in nature than exploration activities;

·compression is necessary for gas to be delivered from the wellhead to end users; and

·outsourcing of compression is often economically advantageous for natural gas production, gathering and transportation companies.

Adding to this stability is the fact that we have a broad customer base, we operate in diverse geographic regions and while compressors often must be specifically engineered or reconfigured to meet the unique demands of our customers, the fundamental technology of compression equipment has not experienced significant technological change.

Seasonal Fluctuations

Our results of operations have not historically reflected any material seasonal tendencies, nor do we currently believe that seasonal fluctuations will have a material impact in the foreseeable future.

Customers

Our current customer base consists of over 1,000 domestic and international companies engaged in all aspects of the oil and gas industry, including domestic and international oil and gas companies, international state-owned oil and gas companies and natural gas producers, processors, gatherers and pipelines. We have entered into strategic alliances with some of our customers. These alliances are essentially preferred vendor arrangements and give us preferential consideration for the compression needs of these customers. In exchange, we provide these customers with enhanced product availability, product support and favorable pricing.

In the twelve months ended December 31, 2006, no one customer accounted for more than 10% of our total revenue.

Suppliers

Our principal suppliers include Caterpillar and Waukesha for engines, Air Xchangers for coolers and Ariel for compressors. We also purchase Cooper parts and compressors in Canada for resale to customers.  Although we rely primarily on these suppliers, we believe alternative sources are generally available but at prices that may not be as economically advantageous to us as our existing suppliers. We have not experienced any material supply problems to date, and we believe our relations with our suppliers are good.

Backlog

As of December 31, 2006, we had a compressor unit fabrication backlog for sale to third parties of approximately $289.3 million, compared to $144.5 million as of December 31, 2005. As of February 22, 2007, our backlog was $300.0 million. A majority of the backlog is expected to be completed within a 270-day period.

Insurance

The natural gas service operations business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of gas or well fluids and fires or explosions.  As is customary in the natural gas service operations industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes worldwide property damage, general and commercial automobile liability and other coverage we feel is

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appropriate. We have elected to fully self-insure our offshore assets.  We believe that these insurance coverages are customary for the industry and adequate for our business, however, losses and liabilities not covered by insurance would increase our costs.

Competition

The natural gas contract compression, fabrication and aftermarket services businesses are highly competitive. We face competition from large national and multinational companies with greater financial resources and, on a regional basis, from numerous smaller companies.

Our main competitors in the contract compression business, based on horsepower, are Hanover, J-W Operating Company, Compressor Systems, Inc., USA Compression, Natural Gas Services Group, Inc., CDM Compression, Tetra Technologies, Inc., Enerflex Systems, Ltd. and Valerus Compression Services, LLC.  In our fabrication activities, we currently compete primarily with Hanover, Enerflex Systems, Ltd., Toromont Industries Ltd. and Collicut Energy Services Ltd.  Our aftermarket services business faces competition from manufacturers (including Cooper Energy Services and Dresser-Rand), from distributors of Caterpillar and Waukesha engines, from a number of smaller companies and from Hanover, Enerflex Systems, Ltd., Toromont Industries Ltd. and Collicut Energy Services Ltd.

We believe that we compete effectively on the basis of price and customer service, including the availability of our personnel in remote locations, technical expertise, flexibility in meeting customer needs and quality and reliability of our compressors and related services.

Environmental and Other Regulations

We are subject to stringent and complex foreign, federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of human health and the environment. Compliance with these laws and regulations may affect the costs of our operations. Moreover, failure to comply with these environmental laws and regulations may result in the assessment of administrative, civil, and criminal penalties, imposition of remedial obligations, and the issuance of injunctions delaying or prohibiting operations. We believe that our operations are in substantial compliance with applicable environmental requirements. As part of the regular evaluation of our operations, we update the environmental condition of our existing and acquired properties as necessary. We further believe that the phasing in of more stringent emission controls and other known regulatory requirements at the rate currently contemplated by environmental laws and regulations will not have a material adverse effect on our business, financial condition or results of operations.

Primary federal environmental laws that our operations are subject to include the Clean Air Act and regulations thereunder, which regulate air emissions; the Clean Water Act and regulations thereunder, which regulate the discharge of pollutants in industrial wastewater and storm water runoff; and the Resource Conservation and Recovery Act (“RCRA”) and regulations thereunder, which regulate the management and disposal of solid and hazardous waste. In addition, we are also subject to regulation under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and regulations thereunder, known more commonly as “Superfund,” which regulates the release of hazardous substances in the environment. We are also subject to regulation under the Occupational Safety and Heath Act (“OSHA”) and regulations thereunder, which regulate the protection of the health and safety of workers.  Analogous state laws and regulations may also apply.

The Clean Air Act and related regulations establish limits on the levels of various substances which may be emitted into the atmosphere during the operation of our fleet of natural gas compressors. These substances are regulated in permits, which are applied for and obtained through the various regulatory agencies, either state or federal depending on the level of emissions. While our standard contract typically provides that the customer will assume the permitting responsibilities and environmental risks related to site operations, we have in some cases obtained air permits as the owner and operator of the compressors. Under most of our contract compression service agreements, our customers must indemnify us for certain losses or liabilities we may suffer as a result of the failure to comply with applicable environmental laws, including permit conditions. Increased obligations of operators to reduce air emissions of nitrogen oxides and other pollutants from internal combustion engines in transmission service are anticipated. Any new regulations requiring the installation of more sophisticated emission control compression equipment potentially could have a material adverse impact. However, we believe that in most cases, these obligations would be allocated to our clients under our contracts. In any event, we expect that such requirements would not have any more significant effect on our operations or financial condition than on any similarly situated company providing contract compression services.

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The Clean Water Act and related regulations prohibit the discharge of industrial wastewater without a permit and establish limits on the levels of pollutants contained in these discharges. In addition, the Clean Water Act regulates storm water discharges associated with industrial activities depending on a facility’s primary standard industrial classification. Many of our facilities have applied for and obtained industrial wastewater discharge permits as well as sought coverage under local wastewater ordinances. In addition, many of our facilities have filed notices of intent for coverage under statewide storm water general permits and developed and implemented storm water pollution prevention plans, as required.

The RCRA and related regulations regulate the management and disposal of solid and hazardous waste. These laws and regulations govern the generation, storage, treatment, transfer and disposal of wastes that we generate. These wastes include, but are not limited to, used oil, antifreeze, filters, sludge, paint, solvents, and sandblast materials. The Environmental Protection Agency and various state agencies have limited the approved methods of disposal for these types of wastes.

Under CERCLA and comparable state laws and regulations, strict and joint and several liability can be imposed without regard to fault or the legality of the original conduct on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner and operator of a contaminated site where a hazardous substance release occurred and any company that transported, disposed of, or arranged for the transport or disposal of hazardous substances released at the site. Under CERCLA, such persons may be liable for the costs of remediating the hazardous substances that have been released into the environment and for damages to natural resources. In addition, where contamination may be present it is not uncommon for the neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs.

We currently own or lease, and have in the past owned or leased, a number of properties that have been used, some for many years and some by third parties over whom we have no control, in support of natural gas compression services or other industrial operations. We may be subject to remediation costs and liability under CERCLA, RCRA or other environmental laws for hazardous waste, asbestos or any other toxic or hazardous substance that may exist on or under any of our owned or leased properties, including waste disposed or groundwater contaminated by prior owners or operators. We have performed in the past, are currently performing, and may perform in the future certain remediation activities governed by environmental laws. The cost of this remediation has not been material to date and we currently do not expect it to be material in the future. Former owners and operators are currently undertaking groundwater monitoring activities at certain of our facilities.  Certain of our acquired properties may also warrant groundwater monitoring and other remedial activities in the future. We believe that former owners and operators of many of these properties may be wholly or partly responsible under environmental laws and contractual agreements to pay for or perform remediation, or to indemnify us for our remedial costs. These other entities may fail to fulfill their legal or contractual obligations, which could result in the imposition of response obligations and material costs on us.

We are subject to the requirements of OSHA and comparable state statutes.  These laws and the implementing regulations strictly govern the protection of the health and safety of employees.  In addition, the OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA and similar state statutes require that we organize and/or disclose information about hazardous materials used or produced in our operations.

Stricter standards in environmental or safety legislation or regulations that may affect us may be imposed in the future, such as proposals to make hazardous wastes subject to more stringent and costly handling, disposal and remediation requirements. Accordingly, new environmental laws or regulations or amendments to existing environmental laws or regulations (including, but not limited to, regulations concerning ambient air quality standards, wastewater and storm water discharges, and global climate changes) could require us to undertake significant capital expenditures and could otherwise have a material adverse effect on our business, results of operations and financial condition.

Our international operations are potentially subject to similar governmental controls and restrictions relating to the environment. We believe that we are in substantial compliance with any such foreign requirements pertaining to the environment.

Since 1992, there have been various proposals to impose taxes with respect to the energy industry, none of which have been enacted and all of which have received significant scrutiny from various industry lobbyists. At the present time, given the uncertainties regarding the proposed taxes, including the uncertainties regarding the terms which the proposed taxes might ultimately contain and the industries and persons who may ultimately be the subject of such taxes, it is not possible to determine whether any such tax will have a material adverse effect on us.

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Employees and Labor Relations

As of December 31, 2006, we had approximately 3,095 employees worldwide. We believe our relationship with our employees is good. Approximately 190 of our employees in Argentina, 140 of our employees in Canada and 180 of our employees in Brazil are covered by collective bargaining agreements.

Available Information

Our website address is www.universalcompression.com.  Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website, without charge, as soon as reasonably practicable after they are filed electronically with the SEC. Information contained on our website is not incorporated by reference in this report or any of our other securities filings.  Paper copies of our filings are also available, without charge, from Universal Compression Holdings, Inc., 4444 Brittmoore Road, Houston, Texas 77041, Attention: Investor Relations.  Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.  The SEC’s website address is www.sec.gov.

Additionally, we make available free of charge on our website:

·      our Code of Business Conduct and Ethics;

·      our Corporate Governance Guidelines; and

·      the charters of our audit, compensation, and nominating and corporate governance committees.

ITEM 1A. Risk Factors

As described in “Part I. Disclosure Regarding Forward-Looking Statements,” this report contains forward-looking statements regarding us, our business and our industry. The risk factors described below, among others, could cause our actual results to differ materially from the expectations reflected in the forward-looking statements. If any of the following risks actually occur, our business, financial condition and operating results could be negatively impacted.

We depend on strong demand for natural gas, and a prolonged, substantial reduction in this demand would adversely affect the demand for our services and products.

Natural gas contract compression operations are significantly dependent upon the demand for natural gas. Demand may be affected by, among other factors, natural gas prices, weather, demand for energy and availability of alternative energy sources. Any prolonged, substantial reduction in the demand for natural gas would, in all likelihood, depress the level of production, exploration and development activity and result in a decline in the demand for our contract compression services and products. Similarly, a decrease in capital spending by our customers could result in reduced demand for our fabrication and aftermarket services businesses.  The reduced demand for our services as described above could adversely affect our business, financial condition and operating results.

Our international operations subject us to risks that are difficult to predict.

For the twelve months ended December 31, 2006, we derived 31.6% of our revenues from international operations. We intend to continue to expand our business in our international markets. This may make it more difficult for us to manage our business. Reasons for this include, but are not limited to, the following:

·political and economic instability in foreign markets that could include risks of nationalization of energy related assets, changed fiscal regime or reduced business;

·foreign governments’ restrictive trade policies;

·inconsistent product regulation or sudden policy changes by foreign agencies or governments;

·the burden of complying with multiple and potentially conflicting laws;

·the imposition of duties, taxes or government royalties;

·foreign exchange rate risks;

·difficulty in collecting international accounts receivable;

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·potentially longer payment cycles;

·increased costs in maintaining international manufacturing and marketing efforts;

·the introduction of non-tariff barriers and higher duty rates;

·difficulties in enforcement of contractual obligations;

·restrictions on repatriation of earnings or expropriation of property; and

·the geographic, time zone, language and cultural differences among personnel in different areas of the world.

Any of these factors may cause us to experience economic loss or negatively impact our earnings or net assets.

We face significant competition that may cause us to lose market share and harm our financial performance.

The domestic compression business is highly competitive and there are low barriers to entry for individual projects. In addition, some of our competitors are large national and multinational companies that provide contract compression, aftermarket services and support and fabrication services to third parties, and some of these competitors have greater financial and other resources than we do. Our ability to renew or replace existing contracts with our customers at rates sufficient to maintain current revenue and cash flows could be adversely affected by the activities of our competitors and our customers. If our competitors substantially increase the resources they devote to the development and marketing of competitive services or substantially decrease the price at which they offer their services, we may not be able to compete effectively. Some of these competitors may expand or construct newer or more powerful compression systems that would create additional competition for the services we provide to our customers. In addition, our customers that are significant producers of natural gas may purchase their own compression systems in lieu of using our contract compression services. All of these competitive pressures could have a material adverse effect on our business, results of operations, cash flows and financial condition.

We depend on particular suppliers and are vulnerable to product shortages and price increases.

As a consequence of having a highly standardized contract compression fleet, some of the components used in our products are obtained from a single source or a limited group of suppliers. Our reliance on these suppliers involves several risks, including price increases, inferior component quality and a potential inability to obtain an adequate supply of required components in a timely manner. The partial or complete loss of certain of these sources could have a negative impact on our results of operations and could damage our customer relationships. Further, a significant increase in the price of one or more of these components could have a negative impact on our results of operations.

We do not insure against all potential losses and could be seriously harmed by unexpected liabilities.

Natural gas service operations are subject to inherent risks such as equipment defects, malfunction and failures, and natural disasters that can result in uncontrollable flows of gas or well fluids, fires and explosions. These risks could expose us to substantial liability for personal injury, death, property damage, pollution and other environmental damages. We have obtained insurance against many of these risks, however, our insurance may be inadequate to cover our liabilities. We have elected to fully self-insure our offshore assets.  Further, insurance covering the risks we face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be negatively impacted.

A substantial portion of our cash flow must be used to service our debt obligations, and we are vulnerable to interest rate increases.

As of December 31, 2006, we had approximately $830.2 million in outstanding debt obligations consisting primarily of $171.5 million outstanding under our 7 1/4% senior notes, $186.7 million outstanding under our asset-backed securitization facility (the “ABS facility”) and $472.0 million outstanding under our revolving credit facilities. These debt amounts exclude approximately $28.8 million of standby letters of credit issued on our behalf as of December 31, 2006.

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As of December 31, 2006, approximately $165.7 million of our outstanding debt was subject to interest at floating rates. Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and reducing our funds available to make payments of interest and principal on the notes and for capital investment, operations or other purposes.

Our credit facilities impose restrictions on us that may affect our ability to successfully operate our business.

Our credit facilities include certain covenants that, among other things, restrict our ability to:

·borrow money;

·create liens, other than liens securing our senior secured credit facilities, the ABS facility or in connection with permitted acquisitions;

·make investments, other than in any subsidiary or in connection with permitted acquisitions;

·declare dividends or make certain distributions;

·sell or dispose of property; and

·merge into or consolidate with any third party or sell or transfer all or substantially all of our property.

As of December 31, 2006, we were also required by our credit facilities to maintain various financial ratios, including a total leverage ratio of less than or equal to 5 to 1, an interest coverage ratio of greater than or equal to 2.5 to 1 and a senior secured leverage ratio of less than or equal to 5 to 1.  For descriptions of the required ratios see Note 5 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report.  As of February 23, 2007, we were in compliance with all of these financial covenants. These covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these and other provisions of the credit facilities may be affected by changes in our operating and financial performance, changes in business conditions or results of operations, adverse regulatory developments or other events beyond our control. The breach of any of these covenants could result in a default under our debt, which could cause those obligations to become due and payable. If any of our indebtedness were to be accelerated, we may not be able to repay or refinance it.

Our new enterprise resource planning (“ERP”) system implementation may encounter problems that would negatively impact our business.

We contracted with a third party vendor to assist us with the design and implementation of a new ERP system, which will support substantially all of our operating and financial functions, including our business segment operations, fleet management, billing, estimating, customer management, vendor management, accounting and financial reporting systems. We plan to complete the implementation of this new ERP system in 2007 for our North America operations. A significant implementation problem, if encountered, could negatively impact our business by disrupting our operations. There are inherent limitations in our ability to predict and plan for these risks and estimate the magnitude of their impact. Consequently, it is possible that the occurrence of a significant implementation problem could be material.

We are exposed to exchange rate fluctuations in the foreign markets in which we operate. A decrease in the value of any of these currencies relative to the U.S. dollar could reduce our profits from foreign operations and the value of our foreign net assets.

Our reporting currency is the U.S. dollar. The majority of the Company’s foreign operations have designated the local currency as their functional currency and, as such, gains and losses resulting from financial statement translation of foreign operations are included as a separate component of accumulated other comprehensive loss within stockholders’ equity. Gains and losses from balances that are receivable or payable in currency other than functional currency are included in the consolidated statements of operations. As a result, the U.S. dollar value of our foreign operations has varied, and will continue to vary, with exchange rate fluctuations. In this respect, historically we have been primarily exposed to fluctuations in the exchange rate of the Brazilian real, Mexican peso, Australian dollar and Canadian dollar against the U.S. dollar.

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A fluctuation in the value of any of these currencies relative to the U.S. dollar could reduce our profits from foreign operations and the value of the net assets of our foreign operations when reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars.

In addition, fluctuations in currencies relative to currencies in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our foreign operations, where the local currency is the functional currency, are translated using period-end exchange rates, and the revenues and expenses of our foreign operations are translated using average exchange rates during each period.

We attempt to match costs and revenues in local currencies, however, we anticipate that there may be instances in which costs and revenues will not be matched with respect to currency denomination. As a result, to the extent we continue our expansion on a global basis, we expect that increasing portions of our revenues, costs, assets and liabilities will be subject to fluctuations in foreign currency valuations. We may experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange rate fluctuations. Further, the markets in which we operate could restrict the removal or conversion of the local or foreign currency, resulting in our inability to hedge against these risks.

Our ability to manage our business effectively will be weakened if we lose key personnel or are unable to hire, train and retain a qualified labor force.

We depend on the continuing efforts of our executive officers and senior management. The departure of any of our key personnel could have a significant negative effect on our business, operating results, financial condition and on our ability to compete effectively in the marketplace. We do not maintain key man life insurance coverage with respect to our executive officers or key management personnel. We are not aware of the upcoming retirement of any of our executive officers or senior management personnel, other than upon completion of the anticipated merger with Hanover.

Additionally, we believe our ability to hire, train and retain qualified personnel will continue to be more challenging and important as we continue to grow and if energy industry market conditions continue to be positive. When general industry conditions are good, the supply of experienced operational, fabrication and field personnel, in particular, decreases as other energy, oil field services and manufacturing companies’ needs for the same personnel increases.  Our ability to continue our growth and perhaps even to continue our current level of service to our current customers will be adversely impacted if we are unable to successfully hire, train and retain these important personnel.

We are subject to substantial environmental regulation, and changes in these regulations could increase our costs or liabilities.

We are subject to stringent and complex foreign, federal, state and local laws and regulatory standards, including laws and regulations regarding the discharge of materials into the environment, emission controls and other environmental protection and occupational health and safety concerns. Environmental laws and regulations may, in certain circumstances, impose strict liability for environmental contamination, rendering us liable for remediation costs, natural resource damages and other damages as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners or operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighboring land owners and other third parties to file claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could negatively impact our financial condition or results of operations. Moreover, failure to comply with these environmental laws and regulations may result in the imposition of administrative, civil and/or criminal penalties.

We routinely deal with natural gas, oil and other petroleum products. As a result of our fabrication and aftermarket services operations, we generate, manage and dispose of or recycle hazardous wastes and substances such as solvents, thinner, waste paint, waste oil, washdown wastes and sandblast material. It is our policy to use generally accepted operating and disposal practices in accordance with applicable environmental laws and regulations, however, hydrocarbons or other hazardous substances or wastes may have been disposed or released on, under or from properties owned, leased or operated by us or on or under other locations where such substances or wastes have been taken for disposal. These properties may be subject to investigatory, remediation and monitoring requirements under foreign, federal, state and local environmental laws and regulations.

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The modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations, or the adoption of new environmental laws or regulations may also negatively impact oil and natural gas exploration and production companies, which in turn could have a negative impact on us and other similarly situated service companies.

Our charter and bylaws contain provisions that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of your shares at a premium to the market price or would otherwise be beneficial to you.

There are provisions in our restated certificate of incorporation and bylaws that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of your shares at a premium to the market price or would otherwise be beneficial to you. For example, our restated certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, provisions of our restated certificate of incorporation, such as a staggered board of directors and limitations on the removal of directors, stockholder actions by written consent, and on stockholder proposals at meetings of stockholders, could make it more difficult for a third party to acquire control of us. Delaware corporation law may also discourage takeover attempts that have not been approved by our board of directors.

Our proposed merger with Hanover is subject to the receipt of consents and approvals from various government entities that may impose conditions on, jeopardize or delay completion of the merger or reduce the anticipated benefits of the merger.

In February 2007, we announced that we had entered into an agreement to merge with Hanover.  Completion of the merger is conditioned upon, among other things, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, and the expiration or termination of any mandatory waiting period under applicable non-U.S. antitrust laws, where the failure to observe that waiting period would be reasonably likely to have a material adverse effect on the combined company after the merger.

There is no assurance that these required consents, orders, approvals and clearances will be obtained.  Even if they are obtained, they may not be obtained before each company’s stockholders vote on the merger. Moreover, if they are obtained, they may impose conditions on, or require divestitures relating to, our divisions, operations or assets or those of Hanover. The merger agreement requires Hanover and us to satisfy any conditions or divestiture requirements imposed upon them unless the conditions or divestitures would be reasonably likely to have a material adverse effect on the combined company after the merger. A substantial delay in obtaining any required approvals or the imposition of any unfavorable conditions or divestitures in connection with the receipt of any required approvals may jeopardize or delay completion of the merger or reduce the anticipated benefits of the merger.

While the merger is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business.

Uncertainty about the effect of the merger on employees, customers and suppliers may have an adverse effect on us and, consequently, on the combined company. We intend to take steps to reduce any adverse effects, however, these uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers, suppliers and others who deal with us to seek to change existing business relationships with us. Employee retention may be particularly challenging during the pendency of the merger because employees may experience uncertainty about their future roles with the combined company. If, despite our retention efforts, key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the combined company’s business could be seriously harmed. In addition, the merger agreement restricts us, without Hanover’s consent and subject to certain exceptions, from making certain acquisitions and taking other specified actions until the merger occurs or the merger agreement terminates. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business that may arise prior to completion of the merger or termination of the merger agreement.

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Failure to complete the merger could negatively impact our stock price and our future business and financial results because of, among other things, the disruption that would occur as a result of uncertainties relating to a failure to complete the merger.

We and Hanover have agreed to use our reasonable best efforts to obtain stockholder approval of the merger, however, our stockholders and Hanover’s stockholders may not approve the merger. In addition, we and Hanover may not receive the required consents, orders, approvals and clearances to complete the merger or satisfy the other conditions to the completion of the merger. If the merger is not completed for any reason, we could be subject to several risks, including the following:

·being required to pay Hanover a termination fee of up to $70 million in certain circumstances, as described further in the next risk factor; and

·having had the focus of our management directed toward the merger and integration planning instead of on our core business and other opportunities that could have been beneficial to us.

In addition, we would not realize any of the expected benefits of having completed the merger. We have incurred and will continue to incur substantial financial advisory, legal and other expenses associated with the merger even if it does not close.

If the merger is not completed, the price of our common stock may decline to the extent that the current market price of our stock reflects a market assumption that the merger will be completed and that the related benefits and synergies will be realized, or as a result of the market’s perceptions that the merger was not consummated due to an adverse change in our business. In addition, our business may be harmed, and the price of our common stock may decline as a result, to the extent that customers, suppliers and others believe that we cannot compete in the marketplace as effectively without the merger or otherwise remain uncertain about our future prospects in the absence of the merger.  Similarly, current and prospective employees may experience uncertainty about their future roles with the resulting company and choose to pursue other opportunities that could adversely affect us if the merger is not completed.  During the pendency of the merger agreement, we may not be able to attract and retain key management, marketing and technical personnel due to this uncertainty, which could harm our businesses and results.  The realization of any of these risks may materially adversely affect our business, financial results, financial condition and stock price.

The merger agreement limits our ability to pursue an alternative acquisition proposal and may require us to pay a termination fee of up to $70 million if we do.

The merger agreement prohibits the parties from soliciting, initiating or encouraging alternative merger or acquisition proposals with any third party.  The merger agreement also provides for the payment by us or Hanover of a termination fee of up to $70 million if the merger agreement is terminated in certain circumstances in connection with a competing acquisition proposal or the withdrawal by the board of directors of one of the companies of its recommendation that the stockholders of that company vote for the merger.

These provisions limit our ability to pursue offers from third parties that could result in greater value to our stockholders. The obligation to make the termination fee payment also may discourage a third party from pursuing an alternative acquisition proposal.

ITEM 1B. Unresolved Staff Comments

None.

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ITEM 2. Properties

The following table describes our material facilities owned or leased as of December 31, 2006:

Location	Square Feet	Acreage	Status	Uses
Houston, Texas	244,000	35.4	Owned	Corporate headquarters, fabrication, contract compression and aftermarket services
Calgary, Alberta, Canada	105,760	9.2	Owned	Fabrication, contract compression and aftermarket services
Yukon, Oklahoma	72,000	14.7	Owned	Contract compression and aftermarket services
Houma, Louisiana	60,000	91.0	Owned	Aftermarket services
Belle Chase, Louisiana	35,000	4.0	Owned	Contract compression and aftermarket services
Schulenberg, Texas	23,000	13.3	Owned	Fabrication, contract compression and aftermarket services
Broussard, Louisiana	24,700	10.0	Leased	Contract compression and aftermarket services

We believe our facilities are suitable for their intended purposes and are adequate for our current and anticipated level of operations.

None of these facilities is pledged as collateral, except for our Houston, Texas corporate headquarters, which has been pledged as collateral to secure our $500 million senior secured credit facility.

ITEM 3. Legal Proceedings

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

ITEM 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2006.

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PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Holdings’ common stock is traded on the New York Stock Exchange under the symbol “UCO.” The following table sets forth the range of high and low sale prices for Holdings’ common stock for the periods indicated.

	Price Range
	High		Low
Quarter Ended:
June 30, 2005	$	39.40	$	33.12
September 30, 2005	41.97		35.54
December 31, 2005	43.84		34.18
March 31, 2006	51.22		40.51
June 30, 2006	63.70		49.83
September 30, 2006	65.21		49.04
December 31, 2006	65.39		50.00

On February 23, 2007, the closing price of Holdings’ common stock was $69.14 per share. As of February 23, 2007, there were approximately 410 holders of record of its common stock.

Holdings has never declared or paid any cash dividends to its stockholders and does not plan to pay any cash dividends in the foreseeable future.

On November 6, 2006, Holdings’ board of directors authorized the repurchase of up to $200 million of its common stock through November 6, 2008. Under the stock repurchase program, we may repurchase shares in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations.  We may also implement all or part of the repurchases under a Rule 10b5-1 trading plan, so as to provide the flexibility to extend share repurchases beyond the quarterly purchasing window set forth in our insider trading policy.  The timing and extent to which we repurchase 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.  Under the terms of the merger agreement between us and Hanover, we may repurchase up to an additional $75 million of our common stock pursuant to the stock repurchase program prior to the consummation of the merger or termination of the merger agreement.

The following table contains information about our purchases of our equity securities during the quarter ended December 31, 2006.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
October 2006	—	$	—	—	$	—
November 2006	106,700	62.37		106,700	193,345,627
December 2006	462,799	63.52		462,799	163,948,514
Total	569,499	$	63.30	569,499	$	163,948,514

The equity compensation plan information is included in Part III, Item 12 (“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”) of this report.

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PERFORMANCE GRAPH

The graph depicted below shows a comparison of cumulative total shareholder returns for Holdings’ common stock to the Standard & Poor’s 500 Stock Index and Standard & Poor’s 500 Energy Equipment & Services Index.  The graph assumes that the value of the investment in our common stock, the S&P 500 Stock Index and the S&P 500 Energy Equipment & Services Index was $100 at March 31, 2001 and that all dividends were reinvested quarterly.

The information contained in the Performance Graph will not be deemed to be “soliciting material” or to be “filed” with the SEC, nor will such information be incorporated by reference into any future filings of the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent that we specifically incorporate it by reference into any such filing.

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ITEM 6. Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA
UNIVERSAL COMPRESSION HOLDINGS, INC.

The following selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes included elsewhere in this report. The selected historical financial and operating data for the twelve months ended December 31, 2006, the nine months ended December 31, 2005 and each of the three years in the period ended March 31, 2005 have been derived from the respective audited financial statements. The consolidated audited financial statements and report thereon, as of December 31, 2006 and December 31, 2005 and for the twelve months ended December 31, 2006, the nine months ended December 31, 2005, and the twelve months ended March 31, 2005 are included elsewhere in this report.

	Twelve Months Ended December 31,			Nine Months Ended December 31,			Twelve Months Ended March 31,
	2006			2005			2005			2004			2003
	(In thousands, except per share data)
Statement of Operations Data:
Revenue	$	947,707		$	613,647		$	763,070		$	688,786		$	625,218
Gross margin(1)	428,651			271,335			310,254			289,481			267,968
Depreciation and amortization	122,701			79,899			93,797			85,650			63,706
Selling, general and administrative expenses	118,762			65,269			75,756			67,516			67,944
Interest expense, net(2)	57,349			40,221			64,188			73,475			36,421
Operating lease expense(2)	—			—			—			—			46,071
Debt extinguishment costs	1,125			—			26,543			14,903			—
Facility consolidation costs	—			—			—			1,821			—
Asset impairment expense	—			—			3,080			—			—
Income tax expense	42,277			31,053			17,213			17,741			20,975
Net income	87,656			55,369			33,610			30,787			33,518
Earnings per share
Basic	$	2.93		$	1.74		$	1.07		$	1.00		$	1.09
Diluted	$	2.82		$	1.69		$	1.04		$	0.98		$	1.08
Weighted average common stock outstanding
Basic	29,911			31,773			31,392			30,848			30,665
Diluted	31,032			32,758			32,224			31,283			30,928
Other Financial Data:
EBITDA, as adjusted(3)	$	311,817		$	205,850		$	232,543		$	223,848		$	201,150
Capital expenditures:
Expansion	$	141,941		$	60,435		$	80,477		$	47,629		$	67,289
Overhauls	46,042			33,458			41,845			27,866			29,198
Other	31,326			24,192			21,343			11,062			24,264
Cash flows provided by (used in):
Operating activities	$	212,211		$	144,873		$	134,056		$	165,248		$	188,591
Investing activities	(213,187		)	(110,464		)	(181,476		)	(46,850		)	(107,704		)
Financing activities	8,380			(34,734		)	(35,589		)	(69,732		)	(13,849		)

	As of December 31,				As of March 31,
	2006		2005		2005		2004		2003
	(In thousands)
Balance Sheet Data:
Cash	$	46,997	$	39,262	$	38,723	$	121,189	$	71,693
Working capital(4)	184,979		144,714		115,836		174,599		158,405
Total assets	2,342,031		2,095,295		2,022,758		1,972,451		1,953,887
Total debt(5)	830,554		923,341		858,096		884,442		945,155
Stockholders’ equity	916,430		831,312		861,672		799,235		744,451

(1)	Gross margin is defined, reconciled to net income and discussed further in Part II, Item 6 (“Selected Financial Data – Non-GAAP Financial Measures”) of this report.
(2)	Operating lease expense related to the operating lease facilities has been recognized as interest expense subsequent to consolidation of the operating lease facilities on December 31, 2002.
(3)	EBITDA, as adjusted, is defined, reconciled to net income and discussed further in Part II, Item 6 (“Selected Financial Data – Non GAAP Financial Measures”) of this report.
(4)	Working capital is defined as current assets minus current liabilities.
(5)	Includes capital lease obligations.

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NON-GAAP FINANCIAL MEASURES

Our definition and use of EBITDA, as adjusted

EBITDA, as adjusted, is defined as net income plus income taxes, interest expense (including debt extinguishment costs and gain on the termination of interest rate swap agreements), operating lease expense, depreciation and amortization, foreign currency gains or losses, minority interest, excluding non-recurring items (including facility consolidation costs).

EBITDA, as adjusted, represents a measure upon which management assesses performance and, as such, we believe that the generally accepted accounting principle (“GAAP”) measure most directly comparable to it is net income or net loss. The manner in which management uses EBITDA, as adjusted, to evaluate our business follows.

EBITDA, as adjusted, as a supplemental measure to review current period operating performance.  Management uses EBITDA, as adjusted, as a supplemental measure to evaluate the current period operating performance of our business. We believe that EBITDA, as adjusted, when viewed with our GAAP results and the accompanying reconciliations and other financial and non-financial measures, provides a useful additional perspective on, and a more complete understanding of, our performance than our GAAP results alone.

·Management uses EBITDA, as adjusted, to evaluate current operating performance and management decisions made during the reporting period, excluding certain expenses that are driven less by current period operating performance and management decisions than by our capital structure and asset base. These excluded expenses, which are primarily financial costs, include depreciation, interest, taxes and foreign currency exchange costs and more reflect prior period transactions and decisions. The operational factors highlighted in the evaluation using EBITDA, as adjusted, include pricing, marketing, utilization rates, maintenance and repair costs and staffing. EBITDA, as adjusted, presents an assessment of the performance and changes in the profitability driven by these operational factors irrespective of changes in the other factors noted, namely interest, taxes and foreign currency exchange costs. See below for further discussion of each of the items excluded from our calculation of EBITDA, as adjusted.

·EBITDA, as adjusted is not the only measure used by management to evaluate performance, but rather a supplemental one used in conjunction with other measures. Management uses several measures to evaluate performance, including both financial and non-financial measures, as well as GAAP and non-GAAP measures, including utilization rates, maintenance and growth capital expenditures, gross margin and return on invested capital.

·Management uses EBITDA, as adjusted, as well as certain other measures, as an intermediate performance measure, similar to the manner in which management uses gross margin, not as an ultimate performance measure, such as net income. Management does not view or use EBITDA, as adjusted, or any other intermediate measure or item in our financial statements, including revenue, gross profit, gross margin or net cash provided by operating activities, as a measure of our full results of operations or as a substitute for net income. Rather, analyzing an intermediate measure such as EBITDA, as adjusted, allows management to evaluate better the reasons underlying net income results. We urge users of our reports and financial statements to read such reports and financial statements in their entirety and not to use any one measure in isolation to evaluate our results or an investment in us.

EBITDA, as adjusted, as a comparability measure.  Management uses EBITDA, as adjusted, to compare the Company’s performance with that of other companies. Although other companies may calculate EBITDA differently, the measure will usually present operating performance on a basis that is meaningful for comparative purposes. We urge the readers of our reports and financial statements, including our disclosure of EBITDA, as adjusted, to review carefully the reconciliation of the non-GAAP measure to net income or loss set forth in the table below.

·Despite definitional differences, management believes that EBITDA, as adjusted, is a meaningful measure to evaluate and compare the performance of one company against another because of the impact of management estimates on the items that are excluded from EBITDA, as adjusted. For example, depreciation expense is dependent upon, among other things, the estimated depreciable lives of a company’s assets, which may vary from company to company depending on management’s maintenance practices and operating philosophies, as we have noted through our prior acquisition activity. EBITDA, as adjusted, provides a measure to review operating performance independent of this management estimate.

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·Management believes that EBITDA, as adjusted, is a meaningful measure to evaluate performance because the amount of depreciation expense in a company’s financial statements may not accurately reflect the costs required to maintain and replenish a company’s operational usage of its assets. Rather, depreciation expense reflects the systematic allocation of the historical fixed asset values over the estimated useful lives of those assets. For example, for the twelve months ended December 31, 2006, we recorded depreciation and amortization expense of $122.7 million, substantially all of which was depreciation expense, and had capital expenditures of $219.3 million for compressor overhauls, our primary maintenance capital expenditure. By excluding depreciation and certain related or consequential costs, including amortization and taxes, EBITDA, as adjusted, provides a measure with which to evaluate the performance independent of, and in a manner that allows one to assess, whether depreciation accurately captures the costs to maintain and replenish our operational usage of our assets.

·We have observed that both equity and debt analysts utilize EBITDA to evaluate the on-going performance of and valuation metrics for a company both over time and relative to its peers. We have observed that several of the analysts who review our company utilize EBITDA as one of the primary valuation metrics. By providing EBITDA, as adjusted, we believe we are providing information and calculations to aid these analysts in more accurately understanding our performance for the benefit of our investors.

EBITDA, as adjusted, as a performance measure for period to period comparisons.  Management uses EBITDA, as adjusted, as a measure of the performance of our business over time and as a tool in identifying key trends.

·EBITDA, as adjusted, by excluding items that are infrequent or uncommon in nature, assists management in identifying and understanding changes in performance from period to period that may not be apparent from solely viewing GAAP measures.

·By excluding infrequent or uncommon items, management believes EBITDA, as adjusted, enhances the transparency of the disclosure regarding our performance. As such, the measure allows management to be more accountable to investors’ expectations by providing the market with additional information with which to assess our performance and make investment decisions.

EBITDA, as adjusted, as a valuation measure.  Just as investors monitor and review a variety of financial and performance indicators, such as the market stock price to earnings ratio and the enterprise value to EBITDA ratio, management monitors these ratios to better understand the value of our company and how to increase that value for our investors. For example, management has routinely utilized an EBITDA measure as a method to value companies when considering potential acquisition targets. This measure is utilized for the reasons discussed above; it allows for an evaluation of the target independent of its historical capital structure, depreciation estimates, tax position, and incurrence of infrequent or more uncommon items. Moreover, management believes investors that desire to evaluate us as a potential target will also utilize our EBITDA, as adjusted, as part of their evaluation.

Below are the items excluded from net income in the calculation of EBITDA, as adjusted, and the reasons for the exclusion:

·Interest expense is excluded from the calculation of EBITDA, as adjusted. Although interest expense is a material expense for us and it reflects an important component of our overall performance, as it reflects costs incurred to finance our operations, interest expense also reflects the performance of our financial arrangements in ways that are unrelated to the shorter-term performance of our operations. For example, the amount of interest expense incurred in any period reflects, among other things, market availability of funds at separate and historical points in time, the overall historical cost of debt and the results of how management, at a past point in time, decided to capitalize the business through the issuance of debt or equity. EBITDA, as adjusted, removes the effect of the performance of these past historical financial transactions, whether beneficial or detrimental to our GAAP results, both in the current period and from period-to-period, so that the performance of the core operations can be more transparently evaluated. For example, despite how management decided to capitalize us either through debt or equity in the past, the measure of EBITDA, as adjusted, would not be impacted and would continue to reflect a consistent measure of the operational performance of the business.

·Income tax expense is excluded from the calculation of EBITDA, as adjusted. Management does not consider tax expense, which is materially impacted by other items excluded from the measure (such as interest expense and

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depreciation and amortization expense) as well as numerous tax regulations and our tax planning, to be a part of the core operations and are not considered directly within the control of operational management and is therefore excluded from the measure.

·Depreciation and amortization is excluded from the calculation of EBITDA, as adjusted. Although, we are a capital-intensive business and depreciation expense is a material expense for us, this expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operational transaction activity. Rather, depreciation expense reflects the systematic allocation of the historical fixed asset values over the estimated useful lives of those assets.

·Operating lease expense is related to the operating lease facilities that, until December 31, 2002, were not included in our consolidated balance sheet and substantively reflected the cost of debt (interest expense) related to these financing arrangements. We excluded the lease expense from EBITDA, as adjusted, as it represents the equivalent of interest expense.  It would potentially be misleading to exclude interest expense from EBITDA, as adjusted, but include lease expense as they both reflect a financial arrangement, not an operational one.

·Gain on termination of interest rate swap agreements relate to the reducing of the notional amount of interest rate swap agreements in connection with a principal reduction related to our ABS facility in June 2004. We do not consider this gain to be part of our core operations. Rather, this gain is a function of our capital structure, which, like interest expense, reflects past capital structure decisions and changes in the cost of debt. Accordingly, this gain is excluded from the calculation of EBITDA, as adjusted.

·Foreign currency gains and losses are primarily attributable to foreign currency exchange rate fluctuations relating to our international operations and are impacted by foreign currency risk mitigation strategies the business may or may not undertake. Although these gains or losses have not been significant, they are not viewed by management as part of the core operations and are not considered directly within the control of operational management. Accordingly, these gains or losses are excluded from the measure for these reasons.

·Facility consolidation costs relate to the transfer of the Tulsa, Oklahoma fabrication activity to the Houston, Texas fabrication facility. These costs were primarily for severance, personnel and relocation costs. We do not consider these costs to be part of our core operations and the consolidation was disclosed in the footnotes to our consolidated financial statements related to the period in which they were incurred.

·Debt extinguishment costs relate primarily to the early extinguishment of debt. Debt extinguishment costs incurred during the twelve month period ended December 31, 2006 related to the early extinguishment of the senior secured credit facility we entered into in January 2005.  Debt extinguishment costs incurred during the nine months ended December 31, 2005 related to the early extinguishment of our seven-year term loan.  Debt extinguishment costs incurred during the twelve months ended March 31, 2005 primarily relate to the early extinguishment of the $82.2 million term loan due 2008 and $440.0 million 8 7/8% senior notes due 2008. Debt extinguishment costs incurred during the twelve months ended March 31, 2004 relate primarily to the early extinguishment of our outstanding $229.8 million 9 7/8% senior discount notes due 2008.  We do not consider these costs to be part of our core operations. Rather, these costs are a function of our capital structure, which, like interest expense, reflects past capital structure decisions and changes in the cost of debt. Accordingly, these costs are excluded from the calculation of EBITDA, as adjusted.

We believe disclosure of this non-GAAP measure provides useful information to investors because, when viewed with our GAAP results and accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone. This is the case because this non-GAAP financial measure excludes from earnings financial and other items that have less bearing on operating performance. When using this measure to compare to other companies, which we believe can be a useful tool to evaluate us, please note that an EBITDA measure may be calculated differently between companies, as it is a non-GAAP measure. We cannot ensure that EBITDA, as adjusted, is directly comparable to other companies’ similarly titled measures. We urge the readers of financial statements to review the reconciliation of the non-GAAP measure to the most comparable GAAP measure to understand any differences that may exist between companies. Nonetheless, we have shown EBITDA, as adjusted, its definition and its calculation in order to disclose how management uses it, to present the exclusions made and the limitations of it as a measure.

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EBITDA, as adjusted, has certain material limitations associated with its use as compared to net income. These limitations are primarily due to the exclusion of certain amounts that are material to our consolidated results of operations, as follows:

·EBITDA, as adjusted, does not include interest expense or operating lease expense (including debt extinguishment costs and gain on the termination of interest rate swap agreements). Because we have borrowed money in order to finance our operations, interest expense and operating lease expense are necessary elements of our costs and our ability to generate revenue. Therefore, any measure that excludes interest expense or operating lease expense has this material limitation.

·EBITDA, as adjusted, does not include income tax expense. Because the payment of taxes is a necessary element of our operations, any measure that excludes income tax expense has this material limitation.

·EBITDA, as adjusted, does not include depreciation and amortization expense. Because we use capital assets, depreciation is a necessary element of our costs and our ability to generate revenue. Therefore, any measure that excludes depreciation and amortization expense has this material limitation.

·EBITDA, as adjusted, excludes the impact of foreign currency gains and losses. Because we operate in an international environment, foreign currency gains and losses have a real economic impact on our operations. Therefore, any measure that excludes these effects has this material limitation.

·EBITDA, as adjusted, excludes other costs and expenses, such as non-recurring charges, as discussed above. These costs were excluded primarily because we do not consider these costs to be part of our core operations. Because we will incur costs from time to time that are not part of our core operations, any measure that excludes these costs has this material limitation.

Use of EBITDA, as adjusted, by itself and without consideration of other measures, is not an adequate measure of our performance because this measure excludes certain material items, as noted above. Further, the measure has a limitation in that many users of financial statements believe that EBITDA is a measure of liquidity or of cash flows. We do not use EBITDA, as adjusted, in this way because it excludes interest payments and changes in working capital accounts and therefore, we urge the readers of our financial statements to not use the measure in this way either. Management compensates for these limitations by using EBITDA, as adjusted, as a supplemental measure to other GAAP results to provide a more complete understanding of our performance without considering financial and other items that have less bearing on operating performance. The measure has a limitation, as it does not consider the amount of required reinvestment to maintain similar going forward results. Management mitigates this limitation by reviewing and disclosing our capital and maintenance capital expenditures on a regular basis as yet another supplemental tool to evaluate us.

EBITDA, as adjusted, is not a measure of financial performance under GAAP and should not be considered an alternative to operating income or net income as an indicator of our operating performance or to net cash provided by operating activities as a measure of our liquidity.

Our definition and use of gross margin

We define gross margin as total revenue less cost of sales (excluding depreciation and amortization expense).  Gross margin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and cost of sales (excluding depreciation and amortization expense), which are key components of our operations.  Gross margin differs from gross profit which includes depreciation expense.  We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our selling, general and administrative activities, the impact of our financing methods and income taxes.  As described above, depreciation expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operating activity.  Rather, depreciation expense reflects the systematic allocation of historical fixed asset values over the estimated useful lives.

Gross margin has certain material limitations associated with its use as compared to net income.  These limitations are primarily due to the exclusion of certain expenses.  Each of these excluded expenses is material to our consolidated results of operations.  Because we use capital assets, depreciation expense is a necessary element of our costs and our ability to

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generate revenue and selling, general and administrative expense is a necessary cost to support our operations and required corporate activities.  In order to compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.

As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income as determined in accordance with GAAP.  Our gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate gross margin in the same manner.

Reconciliation

The following table reconciles Holdings’ net income to EBITDA, as adjusted; and gross margin:

	Twelve Months Ended December 31,						Nine Months Ended December 31,						Twelve Months Ended March 31,
	2006			2005			2005			2004			2005			2004			2003
Net income	$	87,656		$	50,879		$	55,369		$	38,100		$	33,610		$	30,787		$	33,518
Interest expense, net	57,349			54,617			40,221			49,792			64,188			73,475			36,421
Income tax expense	42,277			27,483			31,053			20,783			17,213			17,741			20,975
Depreciation and amortization	122,701			104,289			79,899			69,407			93,797			85,650			63,706
Foreign currency (gain) loss	(645		)	(589		)	(692		)	286			389			(529		)	459
Debt extinguishment costs	1,125			26,068			—			475			26,543			14,903			—
Minority interest	1,354			—			—			—			—			—			—
Operating lease expense	—			—			—			—			—			—			46,071
Facility consolidation costs	—			—			—			—			—			1,821			—
Gain on termination of interest rate swap agreements	—			—			—			(3,197		)	(3,197		)	—			—
EBITDA, as adjusted	311,817			262,747			205,850			175,646			232,543			223,848			201,150
Asset impairment expense	—			3,080			—			—			3,080			—			—
Other (income) loss, net	(1,928		)	(681		)	216			(228		)	(1,125		)	(1,883		)	(1,126		)
Selling, general and administrative	118,762			85,341			65,269			55,684			75,756			67,516			67,944
Gross margin	$	428,651		$	350,487		$	271,335		$	231,102		$	310,254		$	289,481		$	267,968

Data for the twelve months ended December 31, 2005 is derived from our audited consolidated financial statements for the nine-month transition period ended December 31, 2005 and our unaudited consolidated financial statements for the three-month period ended March 31, 2005.  Data for the nine months ended December 31, 2004 is derived from our unaudited consolidated financial statements, which were presented in our Form 10-Q for the nine months ended December 31, 2004.

Amounts for the twelve months ended December 31, 2006 are for both Holdings and Universal with the following exceptions:  Universal had interest expense, net of $57.2 million, interest income from an affiliate of $5.7 million, income tax expense of $44.4 million and net income of $91.5 million.  Amounts for the twelve months ended December 31, 2005 are for both Holdings and Universal with the following exceptions:  Universal had interest income from an affiliate of $0.3 million, income tax expense of $27.6 million and net income of $51.1 million.  Amounts for the nine months ended December 31, 2005 are for both Holdings and Universal with the following exceptions:  Universal had interest income from an affiliate of $0.3 million, income tax expense of $31.2 million and net income of $55.5 million.  The results of operations for Holdings

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and Universal were identical for the nine months ended December 31, 2004 and the twelve months ended March 31, 2005, 2004, and 2003.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements, and the notes thereto, and the other financial information appearing elsewhere in this report. The following discussion includes forward-looking statements that involve certain risks and uncertainties. See “Part I. Disclosure Regarding Forward-Looking Statements” and “Part 1. Item 1A. Risk Factors.”

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 otherwise indicated.

Overview

General

We provide a full range of natural gas compression services and products, including sales, operations, maintenance and fabrication to the natural gas industry, both domestically and internationally. Through our core business, contract compression, and our fleet as of December 31, 2006 of approximately 7,100 compressor units comprising approximately 2.7 million horsepower, we provide natural gas compression services to domestic and international customers. Through our equipment fabrication business we design, engineer and assemble natural gas compressors for sale to third parties and for use in our contract compression fleet. Through our aftermarket services business, we sell parts and components and provide maintenance and operations services to customers who own their compression equipment or use equipment provided by other companies. These services and products are essential to the natural gas industry because gas must be compressed to be delivered from the wellhead to end users and, sometimes in the case of declining reservoir pressure, in order to get to the wellhead itself. Our customers consist primarily of domestic and international oil and gas companies, international state-owned oil and gas companies and natural gas producers, processors, gatherers and pipelines.

Generally, our overall business activity and revenue increase as the demand for natural gas increases. In the United States, increases in the demand for compression services and products are driven by growth in the production of natural gas, by declining reservoir pressure in maturing natural gas producing fields and, more recently, by increased demand for compression equipment for growing non-conventional natural gas production, from places such as coal bed methane, tight sands and shale gas. In international markets, increases in the demand for compression services and products are driven by growth in natural gas industry infrastructure, environmental initiatives encouraging the production and consumption of natural gas and the growth in the worldwide transportation and use of natural gas. The demand for compression services is also driven by general increases in the demand for energy fuel stocks, including natural gas, which is generally driven by economic growth, and by increases in the outsourcing of compression needs.

Pending Merger with Hanover Compressor Company

In February 2007, we and Hanover entered into a merger agreement. Upon consummation of the transactions set forth in the merger agreement, each common share of Hanover will be converted into 0.325 shares of common stock of a newly created holding company, and each common share of Holdings will be converted into one share of the holding company.   Closing of the transaction is subject to a number of customary conditions and is currently anticipated in the third quarter of 2007.

The merger agreement requires us and Hanover to continue to operate our businesses in the ordinary course of business and to obtain the other party’s consent prior to engaging in certain specified activities, such as issuing or repurchasing securities, acquiring or disposing of businesses above specified thresholds, incurring new debt other than below specified thresholds or for specified purposes, paying dividends or granting awards with respect to our common stock (other than under employee compensation arrangements). These agreements are subject to specified exceptions, including those (1) permitting us to repurchase up to an additional $75 million of our common stock in accordance with our previously announced open-market stock repurchase program, (2) permitting the Partnership to make cash distributions in accordance with its partnership agreement, (3) permitting us to make contributions of our domestic compression assets to the Partnership and (4) permitting us to redeem our 7 1/4% senior notes due 2010.

Further information concerning the structure and details of the proposed merger is set forth above in Part 1, Item 1

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(“Business”) of this report, and in our Current Report on Form 8-K dated February 5, 2007, which includes as exhibits the merger agreement and a joint press release from us and Hanover announcing the execution of the merger agreement.  The information in this report does not reflect the consummation of the merger or the anticipated business, operations or results of the combined company.

Initial Public Offering of Subsidiary Company

In October 2006, a subsidiary of ours, 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 ours is the general partner of the Partnership.

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, we 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 our domestic contract compression business at that time.  The Partnership assumed $228.4 million in debt from us and we 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 us and to redeem the 825,000 common units it issued to us.

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

We and the Partnership entered into an omnibus agreement, the terms of which include, among other things, our agreement to provide to the Partnership operational staff, corporate staff and support services, the terms under which we may sell to the Partnership newly-fabricated equipment and under which we may transfer to and receive from the Partnership idle compression equipment and an agreement by us 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.

Stock Repurchase Program

On November 6, 2006, Holdings’ board of directors authorized the repurchase of up to $200 million of its common stock through November 6, 2008. Under the stock repurchase program, we may repurchase shares in open market purchases or in privately negotiated transactions in accordance with applicable insider trading and other securities laws and regulations.  We may also implement all or part of the repurchases under a Rule 10b5-1 trading plan, so as to provide the flexibility to extend share repurchases beyond the quarterly purchasing window.  The timing and extent to which we repurchase 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.  Under the terms of the merger agreement between us and Hanover, we may repurchase up to an additional $75 million of our common stock pursuant to the stock repurchase program prior to the consummation of the merger or the termination of the merger agreement.

During the quarter ended December 31, 2006, we repurchased 569,499 shares of our common stock at an aggregate cost of $36.1 million.

Industry Conditions and Trends

Natural Gas Industry.  Worldwide consumption of natural gas increased from approximately 53 trillion cubic feet in 1980 to approximately 95 trillion cubic feet in 2003, although consumption levels in the United States declined in the early 2000s primarily due to an economic slowdown and continue to be relatively flat today. Industry sources expect the long-term growth trend of worldwide gas consumption to continue. We believe the growing demand in electrical power generation is a contributing factor in the worldwide growth of natural gas consumption as natural gas tends to be the fuel of choice for new power plants.

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The United States accounted for an estimated annual production of approximately 19 trillion cubic feet of natural gas in calendar year 2003, or 20% of the worldwide total, compared to an estimated annual production of approximately 76 trillion cubic feet in the rest of the world.  Industry sources estimate that the United States’ natural gas production level will be approximately 21 trillion cubic feet in calendar year 2025, or 13% of the worldwide total, compared to an estimated annual production of approximately 144 trillion cubic feet in the rest of the world.  As of January 1, 2006, the United States natural gas reserves were estimated at 193 trillion cubic feet, or 3.1% of the worldwide total.

Natural Gas Compression Services Industry.  The natural gas compression services industry has experienced a significant increase in the demand for its products and services from the early 1990s. A high level of compression industry capital expenditures and reduced demand due to lackluster economic activity resulted in reduced contract compression fleet utilization beginning in late calendar 2001, continuing into calendar 2002. Industry utilization stabilized in the second half of calendar 2002 and began to increase during calendar 2003 as a result of reduced capital expenditures and increasing demand due to improving economic activity. During calendar 2003 the industry did not materially increase the supply of contract compression units in the United States due to an emphasis on the redeployment of idle units while growth in international markets continued. During calendar years 2004 through 2006, the industry began to increase capital expenditure levels in the United States as increasing utilization levels caused a shortage in the supply of available, large horsepower units, while international growth continued.

We believe the contract compression services industry, particularly in the United States, will continue to have significant growth opportunity due to the following factors:

·aging producing natural gas fields which will require more compression to continue producing the same volume of natural gas; and

·increasing production from unconventional sources, which include tight sands, shale and coal bed methane, which generally require more compression than production from conventional sources to produce the same volume of natural gas.

While the international contract compression services market is currently smaller than the domestic market, we believe there are growth opportunities in international demand for compression services and products due to the following factors:

·implementation of international environmental and conservation laws preventing the practice of flaring natural gas and recognition of natural gas as a clean air fuel;

·a desire by a number of oil exporting nations to replace oil with natural gas as a fuel source in local markets to allow greater export of oil;

·increasing development of pipeline infrastructure, particularly in Latin America and Asia, necessary to transport natural gas to local markets;

·growing demand for electrical power generation, for which the fuel of choice tends to be natural gas; and

·privatization of state-owned energy producers, resulting in increased outsourcing due to the focus on reducing capital expenditures and enhancing cash flow and profitability.

Company Performance Trends and Outlook

The outlook we discuss in this section does not reflect the consummation of our proposed merger with Hanover or the anticipated business, operations or results of the combined company.

For the twelve months ending December 31, 2007, we continue to expect strong demand in the contract compression segment and expect to add a similar amount of horsepower to our existing fleet as we did during 2006.  We expect to spend between $225 million and $250 million during 2007 on capital expenditures, including approximately $50 million to $55 million on maintenance capital expenditures.  Within the domestic contract compression segment, we expect that operating costs will moderate during 2007 and, partially as a result of lesser cost increases, we expect only modest price increases during 2007.  We expect fabrication revenue for 2007 to be in excess of $300 million with approximately 60% of segment revenues to be generated in the second and third quarters of the year.

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We are investing in key initiatives to help support the future growth of our company.  These initiatives include an increased marketing and business development commitment targeted at international expansion and the implementation of our new company-wide enterprise resource planning (“ERP”) system.

We currently intend for the Partnership to be our primary growth vehicle for our domestic contract compression business.  To this end, we may contribute additional domestic contract compression customers to the Partnership in 2007 in exchange for cash and/or additional interests in the Partnership.  Such transactions would depend on, among other things, reaching agreement with the Partnership regarding the terms of the purchase, which will require approval of the conflicts committee of the board of directors of the general partner of the Partnership, and the Partnership’s ability to finance any such purchase.

Certain Key Challenges and Uncertainties

Market conditions in the natural gas industry, competition in the natural gas compression industry and the risks inherent in our on-going international expansion continue to represent key challenges and uncertainties.  In addition to those, we believe the following represent some of the key challenges and uncertainties we will face in the near future.

Proposed Merger with Hanover.  Although we and Hanover have entered a merger agreement, uncertainty remains as to whether the merger will be consummated and, if so, whether it will do so subject to certain restrictions or limitations.  Consummation of the merger is subject to customary conditions, including, among others, the following, some of which our outside our control:

·the approval of our stockholders and Hanover’s stockholders;

·the receipt of required regulatory approvals, including the approval of antitrust authorities;

·the receipt of consents under the parties’ respective bank credit facilities and the arrangement of financings to provide sufficient funds to repay or repurchase any indebtedness required to be repaid upon consummation of the merger; and

·the absence of any material adverse effect with respect to Hanover’s and our business.

We have no assurance that the necessary approvals will be obtained or that there will not be any adverse consequences to our business resulting from conditions that could be imposed in connection with obtaining these approvals, including divestitures or operating restrictions.  This uncertainty could harm our relationships with our current customers, employees and suppliers.

If the merger is completed, the combined company will face a number of other important challenges and uncertainties, including the risks that the anticipated benefits of combining us and Hanover may not be realized, integration of the two companies may be more difficult than anticipated and required refinancings may not be made on favorable terms.

If the merger is not completed, we have incurred, and will continue to incur, substantial legal, financial advisory and other expenses associated with it.  In addition, the provision in the merger agreement under which we have agreed to operate our business  in the “ordinary course” pending the closing of the merger may constrain certain decisions we would make were we not so bound.

Supply of Components.  As we continue to grow and in light of the currently favorable energy industry market conditions, our ability to timely and cost-effectively obtain components necessary to provide comprehensive compression services through each of our business segments has become more challenging and important.  This issue is compounded by the fact that some of the components used in our products are obtained from a single source or a limited group of suppliers. Our reliance on these suppliers involves several risks, including price increases that could have a negative impact on our results of operations,

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inferior component quality that could increase our warranty costs and a potential inability to obtain an adequate supply to timely satisfy customer demand.  We attempt to minimize our exposure to these risks through, among other things, strategic alliances with key vendors, maintaining adequate inventories of long-lead time components and seeking out competitive, quality alternatives to our existing component sources.

Labor.  As we continue to grow both domestically and internationally and in light of the currently favorable energy industry market conditions, we believe our ability to hire, train and retain qualified personnel has become more challenging and important.  In particular, the supply of experienced operational, fabrication and field personnel continues to be tight and our demand for such personnel continues to grow.  Although we have been able to satisfy our personnel needs in these positions thus far, retaining these employees has been a challenge.  To increase retention of qualified operating personnel, we have instituted programs that enhance skills and provide on-going training.    Our ability to continue our growth will depend in part on our success in hiring, training and retaining these employees.

ERP.  The on-going implementation of our enterprise resource planning (“ERP”) system is anticipated to have a continuing impact on our selling, general and administrative expenses until implementation is completed, which we anticipate will be in 2007 for our North America operations.  We expect to see continuing ERP-related expense at current levels through the remainder of 2007.  Moreover, implementation problems, if encountered, could negatively impact our business by disrupting our operations.  Although we currently have no reason to believe that any such significant implementation problems will occur, there are inherent limitations in our ability to predict and plan for these risks and estimate the magnitude of their impact.  Consequently, it is possible that the occurrence of a significant implementation problem could be material to our business operations.

Change in Fiscal Year End

In December 2005, our board of directors approved a change to our fiscal year end from March 31 to December 31, effective in 2005, which resulted in us preparing a transition report for the nine-month period ended December 31, 2005.  Our fiscal year ended December 31, 2006 represents a twelve-month period.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) compares financial information as of and for the twelve months ended December 31, 2006 with financial information as of and for the twelve months ended December 31, 2005 and compares the nine months ended December 31, 2005 with financial information as of and for the nine months ended December 31, 2004.  Note that although consolidated financial statements are not presented as of and for the twelve months ended December 31, 2005 and the nine months ended December 31, 2004, we have included summary information in MD&A for these periods for comparability purposes.

In MD&A, financial information for all periods except as of and for the twelve months ended December 31, 2005 and the nine months ended December 31, 2004 are derived from our audited consolidated financial statements, included elsewhere in this report. Data as of and for the twelve months ended December 31, 2005 is derived from our audited consolidated financial statements for the nine-month transition period ended December 31, 2005 and our unaudited consolidated financial statements for the three-month period ended March 31, 2005.  Data as of and for the nine months ended December 31, 2004 is derived from our unaudited consolidated financial statements, which were presented in our Form 10-Q for the nine months ended December 31, 2004.

Financial Highlights

Some of the more significant financial items for the twelve months ended December 31, 2006 compared to the same period in the prior year, which are discussed below in “Financial Results of Operations,” were as follows:

·Net Income. Net income for the twelve months ended December 31, 2006 increased by $36.8 million, or 72.3%, for Holdings, and $40.4 million, or 79.1 %, for Universal.  A primary driver of the increase in net income for the twelve months ended December 31, 2006 as compared to the prior year period was debt extinguishment cost incurred during the prior year period which reduced net income by $17.2 million.

·Higher Revenue. Total revenue was higher by $140.4 million, or 17.4%, for the twelve months ended December 31, 2006.

·Higher Depreciation and Amortization Expense. Depreciation and amortization expense increased by $18.4 million, or 17.7%, for the twelve months ended December 31, 2006.

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·Higher Selling, General and Administrative Expense. Selling, general and administrative expense (“SG&A”) increased by $33.4 million, or 39.2%, for the twelve months ended December 31, 2006.

Operating Highlights

The following table summarizes total available horsepower, average contracted horsepower, horsepower utilization percentages and fabrication backlog.

	Twelve Months Ended December 31,				Nine Months Ended December 31,
	2006		2005		2005		2004
	(Horsepower in thousands)
Total available horsepower (at period end):
Domestic contract compression	2,069		1,965		1,965		1,908
International contract compression	607		584		584		518
Total	2,676		2,549		2,549		2,426
Average contracted horsepower:
Domestic contract compression	1,802		1,748		1,760		1,662
International contract compression	546		515		525		412
Total	2,348		2,263		2,285		2,074
Horsepower utilization:
Spot (at period end)	88.9	%	92.3	%	92.3	%	89.9	%
Average	90.6	%	90.9	%	91.1	%	88.4	%

	As of December 31,
	2006		2005		2004
	(In millions)
Fabrication backlog	$	289.3	$	144.5	$	91.6

The increase in domestic available horsepower as of December 31, 2006 compared to December 31, 2005 was primarily attributable to large horsepower units added to our fleet to meet the incremental demand by our customers.   The increase in international horsepower during the same period was primarily attributable to horsepower that was added in Latin America in response to new projects.

Domestic average contracted horsepower increased by 3.1% for the twelve months ended December 31, 2006 compared to the twelve months ended December 31, 2005. International average contracted horsepower increased by 6.0% for the twelve months ended December 31, 2006 compared to the twelve months ended December 31, 2005.  These increases were primarily attributable to higher customer demand as well as larger horsepower units added to the fleet.

Fabrication backlog fluctuates period to period due to, among other things, the timing of receipt of orders placed by customers and the timing of revenue recognition. The backlog of fabrication projects at February 22, 2007 was approximately $300.0 million. A majority of the backlog is expected to be completed within a 270-day period.

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Financial Results of Operations

Twelve Months Ended December 31, 2006 Compared to Twelve Months Ended December 31, 2005

The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net income:

	Twelve Months Ended
	December 31,
	2006 (1)			2005 (1)
	(Dollars in thousands)
Revenue:
Domestic contract compression	$	398,189		$	325,332
% of revenue	42.0		%	40.3		%
International contract compression	$	142,448		$	123,570
% of revenue	15.0		%	15.3		%
Fabrication	$	215,825		$	191,747
% of revenue	22.8		%	23.8		%
Aftermarket services	$	191,245		$	166,634
% of revenue	20.2		%	20.6		%
Total revenue	$	947,707		$	807,283
Gross margin (2):
Domestic contract compression	$	254,318		$	207,934
International contract compression	106,052			92,847
Fabrication	29,361			17,232
Aftermarket services	38,920			32,474
Total gross margin	$	428,651		$	350,487
Gross margin percentage:
Domestic contract compression	63.9		%	63.9		%
International contract compression	74.4		%	75.1		%
Fabrication	13.6		%	9.0		%
Aftermarket services	20.4		%	19.5		%
Total gross margin percentage	45.2		%	43.4		%
Expenses:
Depreciation and amortization	$	122,701		$	104,289
Selling, general and administrative	118,762			85,341
Interest expense, net	57,349			54,617
Debt extinguishment costs	1,125			26,068
Foreign currency gain	(645		)	(589		)
Other income, net	(1,928		)	(681		)
Asset impairment expense	—			3,080
Minority interest	1,354			—
Income tax expense	42,277			27,483
Net income	$	87,656		$	50,879

(1)Amounts for the twelve months ended December 31, 2006 are for both Holdings and Universal with the following exceptions:  Universal had interest expense, net of $57.2 million, interest income from affiliate of $5.7 million, income taxes of $44.4 million and net income of $91.5 million.  Amounts for the twelve months ended December 31, 2005 are for both Holdings and Universal with the following exceptions:  Universal had interest income from affiliate of $0.3 million, income taxes of $27.6 million and net income of $51.1 million.

(2)For a reconciliation of gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read Part II, Item 6 (“Selected Historical Financial and Operating Data — Non-GAAP Financial Measures”) of this report.

Revenue.  Domestic contract compression revenue increased due to higher average contract prices and increased operating horsepower in the twelve months ended December 31, 2006.  Revenue per average operating horsepower increased to $18.41 per month in the twelve months ended December 31, 2006.  This was an 18.8% increase from the prior year period amount of $15.50 per horsepower per month.  Average operating horsepower increased to 1,802,085 for the twelve months ended

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December 31, 2006.  This represented a 3.0% increase from the prior year period.  International contract compression revenue increased primarily as a result of additional business in Argentina and Bolivia of $11.0 million and $6.0 million, respectively.  Fabrication revenue increased in the current year period due primarily to increased pricing to customers.  Aftermarket services revenue was higher due primarily to acquisitions in Europe and Africa that contributed $16.6 million of additional revenue for the twelve months ended December 31, 2006 and an increase in our Canadian operations of $5.1 million.

Gross Margin.  The higher domestic contract compression gross margin (defined as total revenue less cost of sales, excluding depreciation and amortization expense) was primarily attributable to the revenue increases in the current year period and higher current year period contracted horsepower, each of which is discussed above, partially offset by higher expenses in the current year period including labor and benefits cost, parts cost, lubricant cost, field supply cost, vehicle fuel cost and remote monitoring cost due to additional installation.  International contract compression gross margin was higher due primarily to the increased business in Argentina and Bolivia discussed above.  The higher fabrication gross margin was attributable primarily to the revenue increases discussed above and the implementation of process improvements in the current year period.  Aftermarket services gross margin was higher due to the Europe and Africa acquisitions completed in 2006.  Gross margin is reconciled to net income within Part II, Item 6, (“Selected Financial Data – Non GAAP Financial Measures”) of this report.

Gross Margin Percentage.  Gross margin percentage (defined as gross margin as a percentage of revenue) for domestic and international contact compression and aftermarket services were relatively stable for the twelve months ended December 31, 2006 as compared to the prior year period.  The higher fabrication gross margin percentage primarily resulted from the revenue increases and process improvements discussed above.

Depreciation and Amortization.  The increase in depreciation and amortization expense for the twelve months ended December 31, 2006 compared to the prior year primarily resulted from on-going capital expenditures, consisting primarily of additions to our contract compression fleet and compressor overhauls.

SG&A Expenses.  The increase in SG&A expenses for the twelve months ended December 31, 2006 was due primarily to the inclusion of reimbursable property taxes that are offset in revenue, the on-going implementation of our ERP system and the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” relating to stock-based compensation.  SG&A expenses represented 12.5% and 10.6% of revenues for the twelve months ended December 31, 2006 and 2005, respectively.

Interest Expense, net.  The increase in interest expense, net, for the twelve months ended December 31, 2006 relates to higher total debt levels partly related to a $100 million share repurchase completed in December 2005, and increased interest rates in the current year period.

Debt Extinguishment Costs.  For the twelve months ended December 31, 2006, debt extinguishment costs were primarily due to the early extinguishment of amounts outstanding under the senior secured credit facility we entered into in January 2005.  Debt extinguishment costs for the twelve months ended December 31, 2005 relate primarily to the early extinguishment of our term loan due 2008 and 8 7/8% senior notes due 2008.  As a result of the early extinguishment of debt in 2005, a charge of $26.1 million was recognized resulting from the call premium of $19.5 million and write-off of unamortized debt issuance costs of $6.6 million.

Asset Impairment.  During the twelve month period ended December 31, 2005 we recorded a $3.1 million loss on the impairment of our 136,000 square foot Tulsa, Oklahoma fabrication facility. With the fabrication difficulties experienced during the period, including cost overruns on certain complex fabrication jobs, we undertook a significant analysis of our fabrication assets and business, and made a decision to permanently discontinue operations and dispose of our Tulsa fabrication facility. The carrying value of this facility was written down to its estimated market value, which was determined by us based upon recent appraisals.

Minority Interest.  Minority interest reflects the portion of the Partnership’s earnings which are applicable to the 49% limited partnership interest not owned by the Company.

Income Tax Expense.  The increase in income tax expense for the twelve months ended December 31, 2006 primarily relates to increased income before taxes as compared to the prior year due to the items mentioned above.  The effective tax rate for the twelve months ended December 31, 2006 and 2005 was 32.5% and 35.1%, respectively.  This decrease in the effective tax rate was primarily due to recording the effect of the passage by the State of Texas of its Margin Tax ($0.8 million tax benefit), a

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reduction in Subpart F income from applying the new look-through rule included in the Tax Increase Prevention and Reconciliation Act of 2005 ($1.6 million tax benefit) and the enactment of reductions in Alberta, Canada and Canadian federal income tax rates ($1.6 million tax benefit).

Nine Months Ended December 31, 2005 Compared to Nine Months Ended December 31, 2004

The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net income:

	Nine Months Ended
	December 31,
	2005 (1)			2004 (1)
	(Dollars in thousands)
Revenue:
Domestic contract compression	$	248,414		$	219,321
% of revenue	40.5		%	38.5		%
International contract compression	$	94,831		$	73,428
% of revenue	15.5		%	12.9		%
Fabrication	$	143,710		$	165,957
% of revenue	23.4		%	29.1		%
Aftermarket services	$	126,692		$	110,728
% of revenue	20.6		%	19.5		%
Total revenue	$	613,647		$	569,434
Gross margin(2):
Domestic contract compression	$	160,256		$	139,187
International contract compression	71,075			56,676
Fabrication	14,191			12,244
Aftermarket services	25,813			22,995
Total gross margin	$	271,335		$	231,102
Gross margin percentage:
Domestic contract compression	64.5		%	63.5		%
International contract compression	74.9		%	77.2		%
Fabrication	9.9		%	7.4		%
Aftermarket services	20.4		%	20.8		%
Total gross margin percentage	44.2		%	40.6		%
Expenses:
Depreciation and amortization	$	79,899		$	69,407
Selling, general and administrative	65,269			55,684
Interest expense, net	40,221			49,792
Debt extinguishment costs	—			475
Foreign currency (gain) loss	(692		)	286
Other (income) loss, net	216			(228		)
Gain on termination of interest rate swap agreements	—			(3,197		)
Income tax expense	31,053			20,783
Net income	$	55,369		$	38,100

(1)Amounts for the nine months ended December 31, 2005 are for both Holdings and Universal with the following exceptions:  Universal had interest income from affiliate of $0.3 million, income taxes of $31.2 million and net income of $55.5 million.  The results of operations for Holdings and Universal were identical for the nine months ended December 31, 2004.

(2)For a reconciliation of gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read Part II, Item 6 (“Selected Historical Financial and Operating Data — Non-GAAP Financial Measures”) of this report.

Revenue.  Domestic contract compression revenue increased due to higher average contract prices and higher operating horsepower in the nine months ended December 31, 2005. Revenue per average operating horsepower increased to $15.68 per month in the nine months ended December 31, 2005. This was a 7.0% increase from the prior year period amount of $14.66 per horsepower per month. Average operating horsepower increased to 1,759,949 for the nine months ended

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December 31, 2005. This represented a 5.9% increase from the prior year period.  International contract compression revenue increased primarily as a result of the acquisition of the contract compression fleet in Canada in November 2004 and additional compression business in Argentina and Mexico, which contributed to increases of $7.5 million, $7.6 million and $2.8 million, respectively. Fabrication revenue decreased $19.5 million in the Asia Pacific region, $10.8 million in Canada and $3.6 million in the United States as we maintained greater pricing discipline and focused on more standard compression packages in the nine months ended December 31, 2005.  This decrease was partially offset by an increase of $11.6 million in Latin America related to installation projects.  Aftermarket services revenue was higher primarily due to increases within the United States and Latin America of $11.1 million and $4.9 million, respectively.

Gross Margin.  The changes in contract compression gross margin (defined as total revenue less cost of sales excluding depreciation and amortization) for the nine months ended December 31, 2005 compared to the same period in the prior year were primarily attributable to the revenue increases discussed above for domestic contract compression and international contract compression, which offset the somewhat higher expenses, including lubricant cost, fleet automation cost due to additional installations, vehicle fuel cost and labor cost. The higher gross margin experienced in fabrication, despite the decreased revenues, primarily reflects the higher warranty costs and cost overruns experienced on certain relatively complex projects in the prior year period. Aftermarket services gross margin was higher due to revenue increases discussed above.  Gross margin is reconciled to net income  within Part II, Item 6 (“Selected Financial Data – Non-GAAP Financial Measures”) of this report.

Gross Margin Percentage.  Gross margin percentage for domestic contract compression and aftermarket services for the nine months ended December 31, 2005 remained relatively stable compared to the same period in the prior year. Gross margin percentage for fabrication was higher due to the above-mentioned higher direct costs in the prior year period.  Gross margin percentage for international contract compression was lower due to the above-mentioned increases in costs, primarily in Argentina, during the nine months ended December 31, 2005.

Depreciation and Amortization.  The increase in depreciation and amortization expense for the nine months ended December 31, 2005 compared to the prior year period primarily resulted from on-going capital expenditures, consisting primarily of additions to our contract compression fleet and compressor overhauls, and the acquisition of the contract compression fleet in Canada in November 2004.

SG&A Expenses.  The increase in SG&A expenses for the nine months ended December 31, 2005 relates to the increased expenses within the United States of $7.7 million due primarily to the on-going implementation of our new ERP system and increased marketing and business development activities.  SG&A expenses in Latin America increased $1.9 million due to our on-going investment in our international infrastructure and growing international revenue taxes.  SG&A expenses represented 10.6% and 9.8% of revenues for the nine months ended December 31, 2005 and 2004, respectively.

Interest Expense, net.The decrease in interest expense for the nine months ended December 31, 2005 is primarily related to our debt refinancing and restructuring activities.  This decrease was partially offset by an increase in interest expense due to higher total debt levels outstanding during the nine months ended December 31, 2005, largely due to the acquisition of the contract compression fleet in Canada in November 2004.

Gain on Termination of Interest Rate Swap Agreements. A $3.2 million gain on the termination of interest rate swap agreements was recognized for the nine months ended December 31, 2004. This gain was the result of reducing the notional amount of interest rate swap agreements by $84.8 million on our asset backed securitization facility (“ABS facility”) in connection with a principal reduction of $80.0 million in June 2004.

Income Tax Expense.  The increase in income tax expense for the nine months ended December 31, 2005 primarily relates to increased income before taxes as compared to the nine months ended December 31, 2004 due to the items mentioned above.

Effects of Inflation

In recent years, inflation has been modest and has not had a material impact upon the results of our operations, nor do we currently have reason to believe it will have a material impact in the foreseeable future.

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Liquidity and Capital Resources

Universal meets the conditions set forth in General Instruction I(1) of Form 10-K and as a result is not required to include a discussion of its liquidity and capital resources in this Form 10-K.  The discussion below of liquidity and capital resources relates to Holdings only and all references to “our,” “we” and “us” when used in this discussion refer to Holdings and its subsidiaries.

Our primary sources of cash are operating activities and financing activities. Our primary uses of cash are operating expenditures, capital expenditures, long-term debt repayments and purchases of our common stock. The following table summarizes our sources and uses of cash for the twelve months ended December 31, 2006 and 2005, and our cash and working capital as of the end of such periods (in thousands):

	Twelve Months Ended December 31,
	2006			2005
Net cash provided by (used in):
Operating activities	$	212,211		$	166,706
Investing activities	(213,187		)	(144,666		)
Financing activities	8,380			(37,250		)

	As of December 31,
	2006		2005
Cash	$	46,997	$	39,262
Working capital, net of cash and restricted cash	133,681		101,265

Operations.  Net cash provided by operating activities increased $45.5 million, or  27.3%, for the twelve months ended December 31, 2006 compared to the same period in the prior year primarily as a result of increased earnings.

Capital Expenditures.  Capital expenditures for the twelve months ended December 31, 2006 were $219.3 million, consisting of $141.9 million for fleet additions, $46.0 million for compressor overhauls, $14.9 million for service trucks and $16.5 million for machinery, equipment, information technology equipment and other items. Based on current market conditions, we expect to continue to invest in fleet additions, compressor overhauls and maintenance and other capital requirements. We expect net capital expenditures (defined as capital expenditures less proceeds from asset sales) of approximately $225 million to $250 million for the twelve months ending December 31, 2007, including approximately $50 million to $55 million for compression fleet maintenance capital.

Stock Repurchase Program.  On November 6, 2006, Holdings’ board of directors authorized the repurchase of up to $200 million of its common stock through November 6, 2008. During the quarter ended December 31, 2006, we repurchased 569,499 shares of our common stock at an aggregate cost of $36.1 million.  Under the terms of the merger agreement between us and Hanover, we may repurchase up to an additional $75 million of our common stock pursuant to the stock repurchase plan prior to the consummation of the merger or the termination of the merger agreement.

Long-term Debt.  As of December 31, 2006, we had approximately $830.2 million in outstanding debt obligations consisting primarily of $171.5 million outstanding under our 7 1/4% senior notes, $186.7 million outstanding under our ABS facility, $347.0 million outstanding under our $500 million revolving credit facility and $125 million outstanding under the Partnership’s revolving credit facility.

Historically, we have financed capital expenditures with net cash provided by operating and financing activities. Based on current market conditions, we expect that net cash provided by operating activities will be sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt repayments through the 2007 calendar year. To the extent that net cash provided by operating activities is not sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt repayments through the 2007 calendar year, we may borrow additional funds under our revolving credit facility or we may obtain additional debt or equity financing.

Debt Covenants and Availability.  As of December 31, 2006, covenants in our credit facilities required that we maintain various financial ratios, including a total leverage ratio of less than or equal to 5 to 1, an interest coverage ratio

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of greater than or equal to 2.5 to 1 and a senior secured leverage ratio of less than or equal to 5.0 to 1.  For descriptions of the required ratios see Note 5 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report.  As of December 31, 2006, we were in compliance with all financial covenants.

As of December 31, 2006, due to restrictive covenants and after giving effect to $28.8 million of outstanding letters of credit under our financing agreements, we had an aggregate unused credit availability of approximately $124.2 million under our $500 million revolving credit facility and $100 million under the Partnership’s $225 million revolving credit facility.

Partnership Distributions to Unitholders.  The Partnership’s partnership agreement requires it to distribute all of its “available cash” quarterly. Under the partnership agreement, available cash is defined to generally mean, for each fiscal quarter, (1) cash on hand at the Partnership at the end of the quarter in excess of the amount of reserves its general partner determines is necessary or appropriate to provide for the conduct of its business, to comply with applicable law, any of its debt instruments or other agreements or to provide for future distributions to its unitholders for any one or more of the upcoming four quarters, plus, (2) if the Partnership’s general partner so determines, all or a portion of the Partnership’s cash on hand on the date of determination of available cash for the quarter.

Under the terms of the Partnership’s partnership agreement, there is no guarantee that unitholders will receive quarterly distributions from the Partnership. The Partnership’s distribution policy is subject to certain restrictions and may be changed at any time, including restrictions contained in (1) the Partnership’s $225 million revolving credit facility, (2) the general partner of the Partnership’s establishment of reserves to fund future operations or cash distributions to the Partnership’s unitholders, (3) restrictions contained in the Delaware Revised Uniform Limited Partnership Act or (4) the Partnership’s lack of sufficient cash to pay distributions.

The general partner of the Partnership has adopted a cash distribution policy that will require the Partnership to pay distributions at an initial distribution rate of $0.35 per unit per fiscal quarter, or $1.40 per unit per year, no later than 45 days after the end of each fiscal quarter through the quarter ending September 30, 2007 to the extent that the Partnership has sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to its general partner and affiliates. This equates to an aggregate cash distribution of $4.5 million per quarter or $18.1 million per year, in each case based on the number of common units, subordinated units and general partner units that were outstanding immediately after completion of the initial public offering.

Through our ownership of all 6,325,000 of the subordinated units and all of the equity interests in the general partner of the Partnership, we expect to receive cash distributions from the Partnership.   Our rights to receive distributions of cash from the Partnership as holder of subordinated units are subordinated to the rights of the common unitholders to receive such distributions.  Based on the number of units outstanding as of December 31, 2006, if the quarterly distribution from the Partnership equals the initial distribution rate, the Company will receive $2.3 million of the $4.5 million distributed by the Partnership.

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Contractual Obligations.  The following table summarizes our cash contractual obligations as of December 31, 2006 (in thousands):

	Payments Due by Period
	Total		Less Than 1 Year		2—3 Years		4—5 Years		After 5 Years
Total debt (1)	$	833,666	$	14,545	$	29,090	$	676,090	$	113,941
Estimated interest payments (2)	259,423		55,070		107,662		82,921		13,770
Capital leases (3)	292		292		—		—		—
Purchase obligations (4)	271,849		271,849		—		—		—
Total contractual cash obligations	$	1,365,230	$	341,756	$	136,752	$	759,011	$	127,711

(1)Amounts represent the expected cash payments for principal on our total debt and do not include any deferred issuance costs or fair market valuation of our debt.

(2)Interest amounts calculated using the interest rates in effect as of December 31, 2006, including the effect of interest rate swap agreements.

(3)Amounts represent the expected cash payments under capital lease obligations.

(4)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation is based upon our consolidated financial statements. We prepare these financial statements in conformity with United States generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies we believe require management’s most difficult, subjective or complex judgments and are the most critical to our reporting of results of operations and financial position are as follows:

Allowances and Reserves

Our customers are evaluated for credit worthiness prior to the extension of credit. We maintain an allowance for bad debts based on specific customer collection issues and historical experience. On an on-going basis, we conduct an evaluation of the financial strength of our customers based on payment history and make adjustments to the allowance as necessary.

We record a reserve against our inventory balance for estimated obsolescence. This reserve is based on specific identification and historical experience.

We accrue amounts for estimated warranty claims based upon current and historical product warranty costs and any other related information known to us.

Depreciation

Property, plant and equipment are carried at cost. Depreciation for financial reporting purposes is computed on the straight-line basis using estimated useful lives and salvage values.

Business Combinations and 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.

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We perform an impairment test for goodwill assets annually or earlier if indicators of potential impairment exist. Our goodwill impairment test involves a comparison of the fair value of each of our 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. During February 2006, we performed an impairment analysis in accordance with SFAS No. 142 and determined that no impairment had occurred.  During the twelve months ended December 31, 2006, no event occurred or circumstances changed that would more likely than not reduce the fair value of a reporting unit below its carrying value.  As a result, an interim test for goodwill impairment between our annual test dates was not performed.  If for any reason the fair value of our goodwill or that of any of our reporting units’ declines below the carrying value in the future, we may incur charges for the impairment.

Long-Lived Assets

Long-lived assets, which include property, plant and equipment, finite-lived intangibles and other assets comprise a significant amount of our total assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets to be held and used by us are reviewed to determine whether any events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate the carrying amount of the asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows.

Self-Insurance

We are self-insured up to certain levels, excluding our offshore assets, for general liability, vehicle liability, group medical and for workers’ compensation claims for certain of our employees. We have elected to fully self-insure our offshore assets. We record self-insurance accruals based on claims filed and an estimate for significant claims incurred but not reported. We regularly review estimates of reported and unreported claims and provide for losses through insurance reserves. Although we believe adequate reserves have been provided for expected liabilities arising from our self-insured obligations, it is reasonably possible our estimates of these liabilities will change over the near term as circumstances develop.

Income Taxes

We provide a wide range of services to a global market and as such, are subject to taxation not only in the United States but also in numerous foreign jurisdictions.  The determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and tax authority practices and procedures in each jurisdiction.  Changes in the operating environment including changes in the tax law could impact our estimate of tax liabilities in a given year.

The realizability of our deferred tax assets or the need for associated valuation allowances is reliant upon our estimates of future domestic and foreign source taxable income and the reversal of taxable temporary differences, such as accelerated depreciation.  Numerous judgments and assumptions are inherent in the determination of future domestic and foreign source taxable income, including assumptions on future operating conditions and asset utilization.  The judgment and assumptions used to determine future taxable income are consistent with those used for other financial statement purposes.

Another item that affects income taxes is the permanent reinvestment of the earnings of our foreign subsidiaries.  The assumptions related to this permanent reinvestment are analyzed and reviewed annually for changes in our international and domestic business outlook.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8 (“Financial Statements and Supplementary Data”) of this report.

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Variable Rate Debt

We are exposed to market risk due to variable interest rates under our financing and interest rate swap arrangements.

As of December 31, 2006, we had $347.0 outstanding under our $500 million revolving credit facility.  The interest rate under the $500 million revolving credit facility at December 31, 2006 was based upon LIBOR plus 1.00%. As of February 23, 2007, the applicable rate was one month LIBOR, which was 5.32% and the applicable margin was 1.00%.  We have entered into interest rate swap agreements, which are described below in “– Interest Rate Swap Arrangements.”  As of December 31, 2006, after giving effect to these interest rate swap agreements, $47.0 million of this debt remains effectively subject to a variable interest rate.

As of December 31, 2006, we had $186.7 million outstanding under our ABS facility that was subject to a variable interest rate at one month LIBOR, which was 5.32% as of February 23, 2007, plus 0.74%. We have entered into interest rate swap agreements, which are described below in “– Interest Rate Swap Arrangements.”  As of December 31, 2006, after giving effect to these interest rate swap agreements, only $18.7 million of the ABS facility remains effectively subject to a variable interest rate.

As of December 31, 2006, $100.0 million of our 7 1/4% senior notes are subject to interest rate swap agreements which convert the fixed rate to a variable rate which are described below in “– Interest Rate Swap Agreements.”  The variable rate under these interest rate swap agreements is six month LIBOR, in arrears, plus an average applicable margin of 3.21%. As of February 23, 2007, six month LIBOR was 5.39%.

As of December 31, 2006, the Partnership had $125.0 million outstanding under its $225 million revolving credit facility that was subject to interest at LIBOR plus 1.25%.  As of February 23, 2007, the applicable rate was one month LIBOR, which was 5.32%.  We have entered into an interest rate swap agreement, which is described below in “– Interest Rate Swap Agreements,” which effectively fixes the interest rate on all of the outstanding balance under the Partnership’s credit facility at December 31, 2006.

As of December 31, 2006, we had approximately $165.7 million of outstanding indebtedness that was effectively subject to floating interest rates and a 1.0% increase in interest rates would result in an approximate $1.7 million annual increase in our interest expense.

Interest Rate Swap Arrangements

We are a party to interest rate swap agreements which are recorded at fair value in our financial statements.  A change in the underlying interest rates may also result in a change in their recorded value.

As of December 31, 2006, the notional amount of the interest rate swap agreements related to our variable rate debt, excluding the ABS facility and the Partnership’s debt, was $300.0 million. The fair value of these interest rate swap agreements was an asset of approximately $5.6 million, which was recorded as a derivative asset.  The interest rate swap agreements amortize ratably from June 2007 through March 2010.  The weighted average fixed rate of these interest rate swap agreements is 4.02%.

As of December 31, 2006, the notional amount of the interest rate swap agreements related to our ABS facility was $168.0 million and the fair value of these interest rate swap agreements was an asset of approximately $1.1 million, which was recorded as a derivative asset.  The interest rate swap agreements amortize ratably through 2019. The average fixed rate of these interest rate swap agreements is 4.94%.

As of December 31, 2006, the notional amount of the interest rate swap agreement related to the Partnership’s variable rate debt was $125 million, and the fair value of this interest rate swap agreement was a liability of approximately $1.5 million, which was recorded as a derivative liability.  The swap agreement terminates in December 2011 and has a fixed rate of 5.28%.

As of December 31, 2006, the notional amount of the interest rate swap agreements related to our 7 1/4% senior notes was $100.0 million.  The fair value of these interest rate swap agreements as of December 31, 2006 was a liability of approximately $3.5 million, which is recorded as a derivative liability.  These interest rate swap agreements terminate in May 2010.

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ITEM 8. Financial Statements and Supplementary Data

The consolidated statements of Holdings and Universal included in this Report beginning on page F-1 are incorporated herein by reference.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), Holdings, and Universal’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated as of December 31, 2006, the effectiveness of their disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of Holdings and Universal concluded that their disclosure controls and procedures, as of December 31, 2006, were effective for the purpose of ensuring that information required to be disclosed by Holdings and Universal in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Management’s Annual Report on Internal Control Over Financial Reporting

As required by Exchange Act Rule 13a-15(c) and 15d-15(c), Holdings’ management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on the results of management’s evaluation described above, management concluded that Holdings’ internal control over financial reporting was effective as of December 31, 2006.

The assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report found on the following page of this report.

Changes in Internal Control Over Financial Reporting

There were no changes in Holdings’ internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, their internal control over financial reporting.

ITEM 9B. Other Information

None.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Universal Compression Holdings, Inc.
Houston, TX

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Universal Compression Holdings, Inc. and subsidiaries (“Holdings”) maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Holdings’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Holdings’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Holdings maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, Holdings maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the twelve months ended December 31, 2006 of Holdings and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated financial statements and includes an explanatory paragraph relating to Holdings’ change in its method of accounting for stock-based compensation.

/s/ DELOITTE & TOUCHE LLP

Houston, TX

March 1, 2007

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PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

The information required in Part III – Item 10 of this report will be incorporated by reference to our definitive proxy statement under the captions “Election of Directors” and “Corporate Governance” to be filed with the SEC, or filed with the SEC as an amendment to this Form 10-K, within 120 days of the end of our fiscal year.

On May 19, 2006, we submitted to the New York Stock Exchange a certification of our Chairman and Chief Executive Officer that he was not aware of any violation by the Company of the New York Stock Exchange’s corporate governance listing standards as of the date of certification.

ITEM 11. Executive Compensation

The information required in Part III – Item 11 of this report will be incorporated by reference to our definitive proxy statement under the caption “Executive Compensation” to be filed with the SEC, or filed with the SEC as an amendment to this Form 10-K, within 120 days of the end of our fiscal year.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required in Part III – Item 12 of this report will be incorporated by reference to our definitive proxy statement under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” to be filed with the SEC, or filed with the SEC as an amendment to this Form 10-K, within 120 days of the end of our fiscal year.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required in Part III – Item 13 of this report will be incorporated by reference to our definitive proxy statement under the caption “Certain Relationships and Related Transactions” and “Director Independence” to be filed with the SEC, or filed with the SEC as an amendment to this Form 10-K, within 120 days of the end of our fiscal year.

ITEM 14. Principal Accountant Fees and Services

The information required in Part III – Item 14 of this report will be incorporated by reference to our definitive proxy statement under the caption “Ratification of Appointment of Independent Auditors” to be filed with the SEC, or filed with the SEC as an amendment to this Form 10-K, within 120 days of the end of our fiscal year.

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PART IV

ITEM 15. Exhibits and Financial Statement Schedules

(a)The following documents are filed as part of this Report:

1.Financial Statements—The financial statements of Holdings and Universal listed in the accompanying Index to Consolidated Financial Statements on page F-1 are filed as part of this annual report and such Index to Consolidated Financial Statements is incorporated herein by reference.

2.Financial Statement Schedules—Schedule I Universal Compression Holdings, Inc. (Parent Company Only) Condensed Financial Statements begin on page E-2 and Schedule II Valuation and Qualifying Accounts is included on page E-6. All other schedules have been omitted as the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto.

(b)Exhibits

EXHIBIT INDEX

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated February 5, 2007, by an among Hanover Compressor Company, Universal Compression Holdings, Inc., Iliad Holdings, Inc., Hector Sub, Inc., and Ulysses Sub, Inc. (incorporated by reference to Exhibit 2.1 of Universal Compression Holdings, Inc.’s Current Report on From 8-K filed February 5, 2007).
3.1	Restated Certificate of Incorporation of Universal Compression Holdings, Inc. (incorporated by reference to Exhibit 3.1 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
3.2	Restated Bylaws of Universal Compression Holdings, Inc. (incorporated by reference to Exhibit 3.2 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
	7 1/4% Senior Notes due 2010
4.1	Indenture, dated May 27, 2003, by and between Universal Compression, Inc., as Issuer, and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.11 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2003).
4.2	Specimen of Universal Compression, Inc.’s 7 1/4% Senior Notes due 2010 (incorporated by reference to Exhibit 4.11 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2003).
	ABS Facility
10.1	Indenture, dated October 28, 2005, between UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National Association, as Indenture Trustee, with respect to the $225,000,000 ABS facility consisting of $200,000,000 of Series 2005-1 Notes and $25,000,000 of Series 2005-2 Notes (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.2	Amendment Number 1 to Indenture dated July 31, 2006 by and between UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National Association, as Indenture Trustee (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
10.3	Series 2005-1 Supplement, dated as of October 28, 2005, to Indenture, dated as of October 28, 2005,

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	between UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National Association, as Indenture Trustee, with respect to the $200,000,000 of Series 2005-1 Notes with regard to the ABS facility (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.4	Series 2005-2 Supplement, dated as of October 28, 2005, to Indenture, dated as of October 28, 2005, between UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National Association, as Indenture Trustee, with respect to the $25,000,000 of Series 2005-2 Notes with regard to the ABS facility (incorporated by reference to Exhibit 10.3 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.5	Guaranty, dated as of October 28, 2005 issued by Universal Compression Holdings, Inc. for the benefit of UCO Compression 2005 LLC, as Issuer, and Wells Fargo Bank, National Association, as Indenture Trustee (incorporated by reference to Exhibit 10.4 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.6	Management Agreement, dated as of October 28, 2005, by and between Universal Compression, Inc., as Manager and UCO Compression 2005 LLC, as Issuer (incorporated by reference to Exhibit 10.5 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.7	Amendment Number 1 to Management Agreement dated July 31, 2006 by and between UCO Compression 2005 LLC, as Issuer, and Universal Compression, Inc., as Manager (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
10.8	Back-up Management Agreement, dated as of October 28, 2005, by and among Caterpillar Inc., as Back-up Manager, UCO Compression 2005 LLC, as Issuer and Universal Compression, Inc., as Manager (incorporated by reference to Exhibit 10.6 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.9	Insurance and Indemnity Agreement, dated as of October 28, 2005, by and among Ambac Assurance Corporation, as Insurer, UCO Compression 2005 LLC, as Issuer, Universal Compression, Inc., as Contributor and Manager, UCO Compression 2002 LLC, as Old Lessee, and Wells Fargo Bank, National Association, as Indenture Trustee (incorporated by reference to Exhibit 10.7 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.10	Intercreditor and Collateral Agency Agreement dated as of October 28, 2005, by and among Universal Compression, Inc., in its individual capacity and as Manager, UCO Compression 2005 LLC, as Issuer, Wells Fargo Bank, National Association, as Indenture Trustee, Wachovia Bank, National Association, as Bank Agent, the Various Financing Institutions that from time to time may become parties thereto as UCI Lenders and JP Morgan Chase Bank, N.A., in its individual capacity and as Intercreditor Collateral Agent (incorporated by reference to Exhibit 10.8 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
	Bank Agreements
10.11	$650,000,000 Senior Secured Credit Agreement, dated as January 14, 2005, among Universal Compression, Inc., as Co-US Borrower and Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and Guarantor, UC Canadian Partnership Holdings Company, as Canadian Borrower, Wachovia Bank, National Association, as US Administrative Agent, Congress Financial Corporation (Canada), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities Inc., The Bank of Nova Scotia and The Royal Bank of Scotland plc as Co-Documentation Agents and the Lenders signatory thereto arranged by Wachovia Capital Markets, LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Runners and Deutsche

48

	Bank Securities Inc. as Co-Arranger (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004).
10.12	First Amendment to Senior Secured Credit Agreement dated as of September 22, 2005, among Universal Compression, Inc., as Co-US Borrower and Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and Guarantor, UC Canadian Partnership Holdings Company, as Canadian Borrower, Wachovia Bank, National Association, as US Administrative Agent, Congress Financial Corporation (Canada), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities Inc., The Bank of Nova Scotia and The Royal Bank of Scotland plc as Co-Documentation Agents and the Lenders signatory thereto arranged by Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Runner (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.13	Collateral Agreement, dated as of January 14, 2005, made by Universal Compression, Inc. and Universal Compression Holdings, Inc. in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004).
10.14	Pledge and Security Agreement (Assignment of Pledged Securities), dated as of January 14, 2005, made by Universal Compression International, Inc., Enterra Compression Investment Company, Universal Compression Services, LLC and Universal Compression Canadian Holdings, Inc., as Pledgors to Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.3 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004).
10.15	Supplement to Collateral Agreement, dated as of February 15, 2005, made by Universal Compression Holdings, Inc. in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.13 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2005).
10.16	Supplement to Pledge Agreement dated as of February 15, 2005, made by Universal Compression International, Inc. and Universal Compression Services, LLC in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.14 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2005).
10.17	Supplement to Pledge Agreement dated as of February 15, 2005, made by Universal Compression Services, LLC in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.15 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2005).
10.18	Senior Secured Credit Agreement, dated October 20, 2006, by and among Universal Compression, Inc., as Co-US Borrower and Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and Guarantor, Universal Compression Canada, Limited Partnership, as Co-Canadian Borrower, UC Canadian Partnership Holdings Company, as Co-Canadian Borrower, Wachovia Bank, National Association, as US Administrative Agent, Wachovia Capital Finance Corporation (Canada), as Canadian Administrative Agent, Deutsche Banc Trust Company Americas, as Syndication Agent, JPMorgan Chase Bank, N.A. and The Bank of Nova Scotia, as Co-Documentation Agents and the other lenders signatory thereto (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K filed October 26, 2006).
10.19*	Guaranty Agreement dated as of October 20, 2006 made by UCI Compressor Holding, L.P. as Guarantor and UCI MLP LP LLC, as Guarantor and each of the other Guarantors in favor of Wachovia Bank, National Association, as Administrative Agent.
10.20*	Pledge and Security Agreement (Assignment of Pledged Securities) made by Universal Compression International, Inc., Enterra Compression Investment Company, Universal Compression Services,

49

	LLC, Universal Compression Canadian Holdings, Inc., UCI GP LP LLC, and UCO GP, LLC, as Pledgors to Wachovia Bank, National Association, as US Administrative Agent effective as of October 20, 2006.
10.21*	Collateral Agreement dated as of October 20, 2006 made by Universal Compression, Inc., Universal Compression Holdings, Inc., UCI Compressor Holding, L.P., and UCI MLP LP LLC in favor of Wachovia Bank, National Association, as US Administrative Agent.
	Executive Compensation Plans and Arrangements
10.22†	Universal Compression Holdings, Inc. Incentive Stock Option Plan (incorporated by reference to Exhibit 10 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 1998).
10.23†	Amendment Number One to Incentive Stock Option Plan, dated April 20, 2000 (incorporated by reference to Exhibit 10.3 of Amendment No. 2, filed with the SEC on May 22, 2000, to Universal Compression Holdings, Inc.’s Registration Statement on Form S-1 (File No. 333-34090)).
10.24†	Amendment Number Two to Incentive Stock Option Plan, dated May 15, 2000 (incorporated by reference to Exhibit 10.4 of Amendment No. 2, filed with the SEC on May 22, 2000, to Universal Compression Holdings, Inc.’s Registration Statement on Form S-1 (File No. 333-34090)).
10.25†	Amendment Number Three to Incentive Stock Option Plan, dated November 27, 2000 (incorporated by reference to Exhibit 4.7 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on February 9, 2001 (File No. 333-55260)).
10.26†	Amendment Number Four to Incentive Stock Option Plan, dated August 15, 2002 (incorporated by reference to Exhibit 4.8 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on September 12, 2002 (File No. 333-99473)).
10.27†	Amendment Number Five to Incentive Stock Option Plan, dated July 23, 2004 (incorporated by reference to Exhibit 4.9 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on October 29, 2004 (File No. 333-120108)).
10.28†	Form of Non-Qualified Stock Option Agreement under the Incentive Stock Option Plan for outside directors of Universal Compression Holdings, Inc.’s Board of Directors (incorporated by reference to Exhibit 10.22 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2005).
10.29†	Form of Non-Qualified Stock Option Agreement under the Incentive Stock Option Plan for employees (incorporated by reference to Exhibit 10.23 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2005).
10.30†	Form of Incentive Stock Option Agreement under the Incentive Stock Option Plan (incorporated by reference to Exhibit 10.24 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2005).
10.31†	Universal Compression Holdings, Inc. Restricted Stock Plan for Executive Officers (incorporated by reference to Exhibit 4.2 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on August 17, 2001 (File No. 333-67784)).
10.32†	Amendment Number One to Restricted Stock Plan for Executive Officers, dated July 23, 2004 (incorporated by reference to Exhibit 4.11 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on October 29, 2004 (File No. 333-120108)).
10.33†	Form of Restricted Stock Agreement under the Restricted Stock Plan for Executive Officers (incorporated by reference to Exhibit 10.8 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

50

10.34†	Universal Compression Holdings, Inc. Directors’ Stock Plan (incorporated by reference to Exhibit 4.3 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on August 17, 2001 (File No. 333-67784)).
10.35†	Universal Compression, Inc. Employees’ Supplemental Savings Plan as revised and restated effective January 1, 2005 (incorporated by reference to Exhibit 10.29 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.36†	Amendment Number One to Employees’ Supplemental Savings Plan (as revised and restated effective January 1, 2005), dated March 2, 2006, and generally effective as of January 1, 2006 (incorporated by reference to Exhibit 10.30 of Universal Compression Holdings, Inc.’s Transition Report on Form 10-K for the transition period from April 1, 2005 to December 31, 2005).
10.37†	Universal Compression Holdings, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 of Universal Compression Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on August 17, 2001 (File No. 333- 67784)).
10.38†	Amendment Number One to Employee Stock Purchase Plan, dated December 20, 2001 (incorporated by reference to Exhibit 10.56 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2002).
10.39†*	Amendment Number Two to the Universal Compression Holdings, Inc. Employee Stock Purchase Plan effective April 19, 2006.
10.40†	Form of Indemnification Agreement for executive officers and directors of Universal Compression Holdings, Inc. (incorporated by reference to Exhibit 10.27 of Amendment No. 1, filed with the SEC on May 3, 2000, to Universal Compression Holdings, Inc.’s Registration Statement on Form S-1 (File No. 333-34090)).
10.41†	Form of Change of Control Agreement for executive officers of Universal Compression Holdings, Inc. (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.42†	Letter dated March 15, 2001, with respect to certain retirement benefits to be provided to Stephen A. Snider (incorporated by reference to Exhibit 10.43 of Universal Compression Holdings, Inc.’s Annual Report on Form 10-K for the twelve months ended March 31, 2001).
10.43†	Summary of Officers’ Incentive Plan for Fiscal Year 2006 (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K filed August 3, 2005).
10.44†*	Summary Compensation Sheet for Directors and Executive Officers .
10.45†	Summary of Officers’ Incentive Plan for the period beginning April 1, 2006 and ending December 31, 2006 (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K filed May 5, 2006).
10.46†	Summary of Officers’ Incentive Plan for the period beginning April 1, 2006 and ending December 31, 2006 (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K filed June 29, 2006).
10.47†	Summary of Officers’ Incentive Plan for the calendar year 2007 (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K filed February 27, 2007).
	Registration Rights Agreements
10.48	Registration Rights Agreement, dated February 20, 1998 by and among Universal Compression Holdings, Inc., Castle Harlan Partners III, L.P. and each other party listed as signatory thereto (incorporated by reference to Exhibit 10.14 to Universal Compression Holdings, Inc.’s Registration Statement on Form S-4 dated March 19, 1998 (File No. 333-48283)).

51

10.49	Form of Instruments of Accession to Registration Rights Agreement for each of Richard W. FitzGerald and Valerie L. Banner (incorporated by reference to Exhibit 4.10 to Universal Compression Holdings, Inc.’s Registration Statement on Form S-1 (File No. 333-34090)).
10.50	Instrument of Accession to Registration Rights Agreement, dated April 28, 2000, for Energy Spectrum Partners LP (incorporated by reference to Exhibit 10.19 to Amendment No. 2 dated May 22, 2000, to Universal Compression Holdings, Inc.’s Registration Statement on Form S-1 (File No. 333-34090)).
	Miscellaneous
10.51	Purchase Agreement dated December 9, 2005 by and between Universal Compression Holdings, Inc. and J.P. Morgan Securities, Inc. (incorporated by reference to Exhibit 10.1 of Universal Compression Holdings, Inc.’s Form 8-K filed December 12, 2005).
10.52	Omnibus Agreement, dated October 20, 2006, by and among Universal Compression Partners, L.P., UC Operating Partnership, L.P., UCO GP, LLC, UCO General Partner, LP, Universal Compression, Inc., Universal Compression Holdings, Inc. and UCLP OLP GP LLC (incorporated by reference to Exhibit 10.2 of Universal Compression Holdings, Inc.’s Form 8-K filed October 26, 2006).
21.1*	List of Subsidiaries.
23.1*	Consent of Deloitte & Touche LLP.
24.1*	Powers of attorney (set forth on the signature page hereof).
31.1*	Rule 13a-14(a) Certifications of the CEO.
31.2*	Rule 13a-14(a) Certifications of the CFO.
31.3*	Rule 15d-14(a) Certification of the CEO.
31.4*	Rule 15d-14(a) Certification of the CFO.
32.1*	Section 1350 Certifications.
32.2*	Section 1350 Certifications.

*Filed herewith.

†Management Contract or Compensatory Plan or Arrangement.

52

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets – Universal Compression Holdings, Inc	F-3
Consolidated Statements of Operations – Universal Compression Holdings, Inc	F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income – Universal Compression Holdings,Inc	F-5
Consolidated Statements of Cash Flows – Universal Compression Holdings, Inc	F-6
Consolidated Balance Sheets – Universal Compression, Inc	F-7
Consolidated Statements of Operations – Universal Compression, Inc	F-8
Consolidated Statements of Stockholder’s Equity and Comprehensive Income – Universal Compression, Inc	F-9
Consolidated Statements of Cash Flows – Universal Compression, Inc	F-10
Notes to Consolidated Financial Statements	F-11
Report of Independent Registered Public Accounting Firm	E-1
Schedule I—Parent Company Only Financials	E-2
Schedule II—Valuation and Qualifying Accounts	E-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Universal Compression Holdings, Inc.

Houston, TX

We have audited the accompanying consolidated balance sheets of Universal Compression Holdings, Inc. and subsidiaries (“Holdings”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the twelve months ended December 31, 2006, the nine months ended December 31, 2005 and the twelve months ended March 31, 2005.  We have also audited the accompanying consolidated balance sheets of Universal Compression, Inc. and subsidiaries (“Universal”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholder’s equity and comprehensive income, and cash flows for the twelve months ended December 31, 2006, the nine months ended December 31, 2005 and the twelve months ended March 31, 2005.  These financial statements are the responsibility of Holdings’ and Universal’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Universal is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit of Universal included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Universal’s internal control over financial reporting.  Accordingly, we express no such opinion on Universal’s internal control over financial reporting.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Holdings and Universal at December 31, 2006 and 2005, and the results of each of their operations and each of their cash flows for the twelve months ended December 31, 2006, the nine months ended December 31, 2005 and the twelve months ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 8 to the consolidated financial statements, Holdings and Universal changed their method of accounting for stock-based compensation.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Holdings’ internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of Holdings’ internal control over financial reporting and an unqualified opinion on the effectiveness of Holdings’ internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Houston, TX

March 1, 2007

F-2

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	46,997		$	39,262
Restricted cash	4,301			4,187
Accounts receivable, net of allowance for bad debts of $4,686 and $3,616 as of December 31, 2006 and 2005, respectively	193,968			121,642
Inventories, net of reserve for obsolescence of $9,158 and $10,896 as of December 31, 2006 and 2005, respectively	175,812			108,273
Deferred income taxes	7,310			7,447
Other	21,800			19,787
Total current assets	450,188			300,598
Contract compression equipment	1,715,266			1,567,470
Other property	199,835			167,946
Accumulated depreciation and amortization	(468,591		)	(375,575		)
Net property, plant and equipment	1,446,510			1,359,841
Goodwill	412,122			403,261
Derivative financial instruments	7,269			6,954
Other assets	25,942			24,641
Total assets	$	2,342,031		$	2,095,295
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	92,063		$	55,014
Accrued liabilities	61,315			43,796
Unearned revenue	93,332			36,367
Accrued interest	3,583			2,458
Current portion of long-term debt and capital lease obligations	14,916			18,249
Total current liabilities	265,209			155,884
Capital lease obligations	—			285
Long-term debt	815,638			904,807
Deferred income taxes	205,133			186,632
Derivative financial instruments	5,528			6,006
Other liabilities	12,013			10,369
Total liabilities	1,303,521			1,263,983
Commitments and contingencies (Note 12)
Minority interest	122,080			—
Stockholders’ equity:
Preferred stock, $.01 par value, 50,000 shares authorized, zero outstanding as of December 31, 2006 and 2005, respectively	—			—
Common stock, $.01 par value, 200,000 and 200,000 shares authorized, 33,153 and 32,306 shares issued, 30,130 and 29,866 shares outstanding as of December 31, 2006 and 2005, respectively	331			323
Treasury stock, 3,023 and 2,440 shares at cost outstanding as of December 31, 2006 and 2005, respectively	(136,844		)	(100,011		)
Additional paid-in capital	786,663			759,105
Deferred compensation	—			(6,065		)
Accumulated other comprehensive loss	(11,764		)	(12,428		)
Retained earnings	278,044			190,388
Total stockholders’ equity	916,430			831,312
Total liabilities and stockholders’ equity	$	2,342,031		$	2,095,295

See accompanying notes to consolidated financial statements.

F-3

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Twelve Months Ended December 31, 2006			Nine Months Ended December 31, 2005			Twelve Months Ended March 31, 2005
Revenue:
Domestic contract compression	$	398,189		$	248,414		$	296,239
International contract compression	142,448			94,831			102,167
Fabrication	215,825			143,710			213,994
Aftermarket services	191,245			126,692			150,670
Total revenue	947,707			613,647			763,070
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Domestic contract compression	143,871			88,158			109,374
International contract compression	36,396			23,756			23,719
Fabrication	186,464			129,519			198,709
Aftermarket services	152,325			100,879			121,014
Depreciation and amortization	122,701			79,899			93,797
Selling, general and administrative	118,762			65,269			75,756
Interest expense, net	57,349			40,221			64,188
Debt extinguishment costs	1,125			—			26,543
Gain on termination of interest rate swap agreements	—			—			(3,197		)
Asset impairment expense	—			—			3,080
Foreign currency (gain) loss	(645		)	(692		)	389
Minority interest	1,354			—			—
Other (income) loss, net	(1,928		)	216			(1,125		)
Total costs and expenses	817,774			527,225			712,247
Income before income taxes	129,933			86,422			50,823
Income tax expense	42,277			31,053			17,213
Net income	$	87,656		$	55,369		$	33,610
Weighted average common and common equivalent shares outstanding:
Basic	29,911			31,773			31,392
Diluted	31,032			32,758			32,224
Earnings per share—Basic	$	2.93		$	1.74		$	1.07
Earnings per share—Diluted	$	2.82		$	1.69		$	1.04

See accompanying notes to consolidated financial statements.

F-4

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(In thousands, except share amounts)

	Common Stock Shares		Common Stock Amount		Additional Paid-in Capital			Retained Earnings		Treasury Stock			Deferred Compensation			Accumulated Other Comprehensive Loss			Total
Balance, March 31, 2004	31,293,000		$	313	$	734,124		$	101,409	$	(11	)	$	(1,256	)	$	(35,344	)	$	799,235
Option exercises	433,838		4		8,420														8,424
Shares issued in employee benefit plans	80,591		1		2,438														2,439
Restricted stock transactions	194,636		2		6,916								(7,147		)				(229		)
Amortization of deferred compensation													965						965
Comprehensive income:
Net income								33,610
Interest rate swap agreement gain, net of tax																8,813
Foreign currency translation adjustment, net of tax																8,415
Total comprehensive income																			50,838
Balance, March 31, 2005	32,002,065		$	320	$	751,898		$	135,019	$	(11	)	$	(7,438	)	$	(18,116	)	$	861,672
Option exercises	246,315		2		5,224														5,226
Shares issued in employee benefit plans	58,205		1		2,034														2,035
Restricted stock transactions	(1,556	)			(51		)						51
Amortization of deferred compensation													1,322						1,322
Treasury stock purchased	(2,439,024	)								(100,000		)							(100,000		)
Comprehensive income:
Net income								55,369
Interest rate swap agreement loss, net of tax																(971		)
Foreign currency translation adjustment, net of tax																6,659
Total comprehensive income																			61,057
Balance, December 31, 2005	29,866,005		$	323	$	759,105		$	190,388	$	(100,011	)	$	(6,065	)	$	(12,428	)	$	831,312
Option exercises	623,439		6		14,308														14,314
Shares issued in employee benefit plans	87,058		1		4,102														4,103
Amortization of deferred compensation					(6,065		)						6,065
Stock-based compensation	137,122		1		15,213														15,214
Treasury stock purchased	(583,135	)								(36,833		)							(36,833		)
Comprehensive income:
Net income								87,656
Interest rate swap agreement loss, net of tax																(510		)
Foreign currency translation adjustment, net of tax																1,174
Total comprehensive income																			88,320
Balance, December 31, 2006	30,130,489		$	331	$	786,663		$	278,044	$	(136,844	)	$	—		$	(11,764	)	$	916,430

See accompanying notes to consolidated financial statements.

F-5

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Twelve Months Ended December 31, 2006			Nine Months Ended December 31, 2005			Twelve Months Ended March 31, 2005
Cash flows from operating activities:
Net income	$	87,656		$	55,369		$	33,610
Adjustments to reconcile net income to cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization	122,701			79,899			93,797
Minority interest	1,354			—			—
Non-cash gain from interest rate swap agreement settlement	—			—			(3,197		)
Loss on early extinguishment of debt	1,125			—			26,543
Loss on asset impairment	—			—			3,080
Gain on asset sales	(1,202		)	(92		)	(1,972		)
Amortization of debt issuance costs	1,941			1,671			3,974
Stock-based compensation expense	7,441			1,322			965
Increase (decrease) in deferred taxes	26,154			24,988			8,213
(Increase) decrease in other assets	(7,623		)	(5,898		)	(7,114		)
(Increase) decrease in receivables	(68,730		)	(4,212		)	(35,847		)
(Increase) decrease in inventories	(67,224		)	(12,582		)	(2,204		)
Increase (decrease) in accounts payable	35,188			(2,928		)	12,489
Increase (decrease) in accrued liabilities	15,340			6,331			428
Increase (decrease) in unearned revenue	56,965			4,166			6,605
Increase (decrease) in accrued interest	1,125			(3,161		)	(5,314		)
Net cash provided by operating activities	212,211			144,873			134,056
Cash flows from investing activities:
Additions to property, plant and equipment	(219,309		)	(118,085		)	(143,665		)
Proceeds from sale of property, plant and equipment	12,522			11,808			24,070
Cash paid for acquisitions, net of cash acquired	(6,286		)	—			(61,881		)
Increase in restricted cash	(114		)	(4,187		)	—
Net cash used in investing activities	(213,187		)	(110,464		)	(181,476		)
Cash flows from financing activities:
Principal repayments of long-term debt	(720,390		)	(89,905		)	(711,419		)
Proceeds from issuance of debt	631,994			155,000			693,225
Debt extinguishment premium and cost	—			—			(19,927		)
Proceeds from common stock issuance	15,814			5,995			9,349
Net proceeds from issuance of units in subsidiary	120,693			—			—
Interest rate swap agreement settlement	—			—			(3,067		)
Debt issuance costs	(2,821		)	(5,399		)	(2,456		)
Purchase of treasury stock	(36,833		)	(100,000		)	—
Payments on capital lease agreements	(77		)	(425		)	(1,294		)
Net cash provided by (used in) financing activities	8,380			(34,734		)	(35,589		)
Effect of exchange rate changes on cash and cash equivalents	331			864			543
Net increase (decrease) in cash and cash equivalents	7,735			539			(82,466		)
Cash and cash equivalents at beginning of period	39,262			38,723			121,189
Cash and cash equivalents at end of period	$	46,997		$	39,262		$	38,723
Supplemental disclosure of cash flow information:
Cash paid for interest	$	56,224		$	41,697		$	67,779
Cash paid for income taxes	$	11,222		$	6,425		$	13,457

See accompanying notes to consolidated financial statements.

F-6

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	46,099		$	39,262
Restricted cash	4,301			4,187
Accounts receivable, net of allowance for bad debts of $4,686 and $3,616 as of December 31, 2006 and 2005, respectively	193,968			121,642
Inventories, net of reserve for obsolescence of $9,158 and $10,896 as of December 31, 2006 and 2005, respectively	175,812			108,273
Deferred income taxes	7,310			7,447
Other	21,800			19,787
Total current assets	449,290			300,598
Contract compression equipment	1,715,266			1,567,470
Other property	199,835			167,946
Accumulated depreciation and amortization	(468,591		)	(375,575		)
Net property, plant and equipment	1,446,510			1,359,841
Goodwill	412,122			403,261
Note receivable – affiliate	78,063			100,277
Derivative financial instruments	7,269			6,954
Other assets	25,942			24,641
Total assets	$	2,419,196		$	2,195,572
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable, trade	$	92,063		$	55,014
Accrued liabilities	61,315			43,796
Unearned revenue	93,332			36,367
Accrued interest	3,472			2,458
Current portion of long-term debt and capital lease obligations	14,916			18,249
Total current liabilities	265,098			155,884
Capital lease obligations	—			285
Long-term debt	778,638			904,807
Deferred income taxes	207,254			186,729
Derivative financial instruments	5,528			6,006
Other liabilities	12,013			10,369
Total liabilities	1,268,531			1,264,080
Commitments and contingencies (Note 12)
Minority interest	122,080			—
Stockholder’s equity:
Common stock, $10 par value, 5.0 shares authorized, 4.9 issued and outstanding as of December 31, 2006 and 2005	49			49
Additional paid-in capital	750,838			745,876
Accumulated other comprehensive loss	(11,764		)	(12,428		)
Retained earnings	289,462			197,995
Total stockholder’s equity	1,028,585			931,492
Total liabilities and stockholder’s equity	$	2,419,196		$	2,195,572

See accompanying notes to consolidated financial statements.

F-7

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

	Twelve Months Ended December 31, 2006			Nine Months Ended December 31, 2005			Twelve Months Ended March 31, 2005
Revenue:
Domestic contract compression	$	398,189		$	248,414		$	296,239
International contract compression	142,448			94,831			102,167
Fabrication	215,825			143,710			213,994
Aftermarket services	191,245			126,692			150,670
Total revenue	947,707			613,647			763,070
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense):
Domestic contract compression	143,871			88,158			109,374
International contract compression	36,396			23,756			23,719
Fabrication	186,464			129,519			198,709
Aftermarket services	152,325			100,879			121,014
Depreciation and amortization	122,701			79,899			93,797
Selling, general and administrative	118,762			65,269			75,756
Interest expense, net	57,187			40,221			64,188
Interest income from affiliate	(5,730		)	(277		)	—
Debt extinguishment costs	1,125			—			26,543
Gain on termination of interest rate swap agreements	—			—			(3,197		)
Asset impairment expense	—			—			3,080
Foreign currency (gain) loss	(645		)	(692		)	389
Minority interest	1,354			—			—
Other (income) loss, net	(1,928		)	216			(1,125		)
Total costs and expenses	811,882			526,948			712,247
Income before income taxes	135,825			86,699			50,823
Income tax expense	44,358			31,150			17,213
Net income	$	91,467		$	55,549		$	33,610

See accompanying notes to consolidated financial statements.

F-8

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

AND COMPREHENSIVE INCOME

(In thousands)

	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Total
Balance, March 31, 2004	$	49	$	725,694	$	108,836	$	(35,344	)	$	799,235
Capital contribution from stockholder			11,599							11,599
Comprehensive income:
Net income					33,610
Foreign currency translation adjustment, net of tax							8,415
Interest rate swap agreement gain, net of tax							8,813
Total comprehensive income										50,838
Balance, March 31, 2005	$	49	$	737,293	$	142,446	$	(18,116	)	$	861,672
Capital contribution from stockholder			8,583							8,583
Comprehensive income:
Net income					55,549
Foreign currency translation adjustment, net of tax							6,659
Interest rate swap agreement loss, net of tax							(971		)
Total comprehensive income										61,237
Balance, December 31, 2005	$	49	$	745,876	$	197,995	$	(12,428	)	$	931,492
Capital contribution from stockholder			4,962							4,962
Comprehensive income:
Net income					91,467
Foreign currency translation adjustment, net of tax							1,174
Interest rate swap agreement gain, net of tax							(510		)
Total comprehensive income										92,131
Balance, December 31, 2006	$	49	$	750,838	$	289,462	$	(11,764	)	$	1,028,585

See accompanying notes to consolidated financial statements.

F-9

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Twelve Months Ended December 31, 2006			Nine Months Ended December 31, 2005			Twelve Months Ended March 31, 2005
Cash flows from operating activities:
Net income	$	91,467		$	55,549		$	33,610
Adjustments to reconcile net income to cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization	122,701			79,899			93,797
Minority interest	1,354			—			—
Non-cash gain from interest rate swap agreement settlement	—			—			(3,197		)
Loss on early extinguishment of debt	1,125			—			26,543
Loss on asset impairment	—			—			3,080
Gain on asset sales	(1,202		)	(92		)	(1,972		)
Amortization of debt issuance costs	1,941			1,671			3,974
Stock-based compensation expense	7,441			1,322			965
Increase (decrease) in deferred taxes	28,178			25,085			8,213
(Increase) decrease in other assets	(7,623		)	(5,898		)	(7,114		)
(Increase) decrease in receivables	(68,730		)	(4,212		)	(35,847		)
(Increase) decrease in inventories	(67,224		)	(12,582		)	(2,204		)
Increase (decrease) in accounts payable	35,188			(2,928		)	12,489
Increase (decrease) in accrued liabilities	15,340			6,331			428
Increase (decrease) in unearned revenue	56,965			4,166			6,605
Increase (decrease) in accrued interest	1,014			(3,438		)	(5,314		)
Net cash provided by operating activities	217,935			144,873			134,056
Cash flows from investing activities:
Additions to property, plant and equipment	(219,309		)	(118,085		)	(143,665		)
Proceeds from sale of property, plant and equipment	12,522			11,808			24,070
Cash paid for acquisitions, net of cash acquired	(6,286		)	—			(61,881		)
Payment from (loans to) affiliate on notes receivable	9,359			(100,000		)	—
Increase in restricted cash	(114		)	(4,187		)	—
Net cash used in investing activities	(203,828		)	(210,464		)	(181,476		)
Cash flows from financing activities:
Principal repayments of long-term debt	(720,390		)	(89,905		)	(711,419		)
Proceeds from issuance of debt	594,994			155,000			693,225
Debt extinguishment premium and cost	—			—			(19,927		)
Capital contribution from stockholder	—			5,995			9,349
Net proceeds from issuance of units in subsidiary	120,693			—			—
Interest rate swap agreement settlement	—			—			(3,067		)
Debt issuance costs	(2,821		)	(5,399		)	(2,456		)
Payments on capital lease agreements	(77		)	(425		)	(1,294		)
Net cash (used in) provided by financing activities	(7,601		)	65,266			(35,589		)
Effect of exchange rate changes on cash and cash equivalents	331			864			543
Net increase (decrease) in cash and cash equivalents	6,837			539			(82,466		)
Cash and cash equivalents at beginning of period	39,262			38,723			121,189
Cash and cash equivalents at end of period	$	46,099		$	39,262		$	38,723
Supplemental disclosure of cash flow information:
Cash paid for interest	$	56,173		$	41,697		$	67,779
Cash paid for income taxes	$	11,222		$	6,425		$	13,457

See accompanying notes to consolidated financial statements.

F-10

UNIVERSAL COMPRESSION HOLDINGS, INC.

UNIVERSAL COMPRESSION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies

Organization

These notes apply to the 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.  Holdings is a holding company, which conducts its operations through its wholly-owned subsidiary, Universal.

Nature of Operations

The Company is the second largest natural gas compression services company in the world in terms of compressor fleet horsepower, with a fleet as of December 31, 2006 of approximately 7,100 compressor units comprising approximately 2.7 million horsepower.  Natural gas compression is a mechanical process whereby a volume of natural gas at an existing pressure is increased to a desired higher pressure for transportation from one point to another, and is essential to the transportation and production of natural gas. Compression is typically required several times during the natural gas production and transportation cycle, including: (1) at the wellhead; (2) throughout gathering and distribution systems; (3) into and out of processing and storage facilities; and (4) along intrastate and interstate pipelines.  The Company provides a full range of natural gas compression services and products including sales, operations, maintenance and fabrication to the natural gas industry, both domestically and internationally.

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 (“U.S.”). A subsidiary of the Company is the general partner of the Partnership.

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 consolidates 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 expire on December 31, 2008.

F-11

Principles of Consolidation

The accompanying consolidated financial statements include the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Results of Operations for Universal

Universal’s results of operations were identical to Holdings for the twelve months ended December 31, 2006, except as follows: Holdings’ income before taxes and income tax expense were $5.9 million and $2.1 million, respectively, lower than the corresponding amounts for Universal.  For the nine months ended December 31, 2005, the only differences were Holdings’ income before taxes and income tax expense were $0.3 million and $0.1 million, respectively, lower than the corresponding amounts for Universal.  Universal’s results of operations were identical to Holdings for the twelve months ended March 31, 2005.  The impact of these differences for purposes of disclosures is immaterial and therefore separate disclosures for Universal that would be impacted by these differences have not been presented in these notes.

Fiscal Year

In December 2005, Holdings’ board of directors approved a change to its fiscal year end from March 31 to December 31, effective in 2005.  As a result of this change, the Company is reporting a nine-month transition period ended December 31, 2005.  The fiscal year ended December 31, 2006 represents a twelve-month period.

F-12

Consolidated comparative financial data for the twelve months ended December 31, 2006 and 2005 and for the nine months ended December 31, 2005 and 2004 are summarized below (shares outstanding and earnings per share information is for Holdings only) (in thousands, except per share amounts).  Data for the twelve months ended December 31, 2005 is derived from the Company’s audited financial statements for the nine-month transition period ended December 31, 2005 and the Company’s unaudited financial statements for the three-month period ended March 31, 2005.  Data for the nine months ended December 31, 2004 is derived from the Company’s unaudited financial statements, which were presented in its Form 10-Q for the nine months ended December 31, 2004.

	Twelve Months Ended December 31,						Nine Months Ended December 31,
	2006			2005			2005			2004
				(Unaudited)						(Unaudited)
Revenue:
Domestic contract compression	$	398,189		$	325,332		$	248,414		$	219,321
International contract compression	142,448			123,570			94,831			73,428
Fabrication	215,825			191,747			143,710			165,957
Aftermarket services	191,245			166,634			126,692			110,728
Total revenue	947,707			807,283			613,647			569,434
Costs and expenses:
Cost of sales (excluding depreciation and amortization expense:
Domestic contract compression	143,871			117,398			88,158			80,134
International contract compression	36,396			30,723			23,756			16,752
Fabrication	186,464			174,515			129,519			153,713
Aftermarket services	152,325			134,160			100,879			87,733
Depreciation and amortization	122,701			104,289			79,899			69,407
Selling, general and administrative	118,762			85,341			65,269			55,684
Interest expense, net	57,349			54,617			40,221			49,792
Debt extinguishment costs	1,125			26,068			—			475
Gain on termination of interest rate swap agreements	—			—			—			(3,197		)
Asset impairment expense	—			3,080			—			—
Foreign currency (gain) loss	(645		)	(589		)	(692		)	286
Minority interest	1,354			—			—			—
Other (income) loss, net	(1,928		)	(681		)	216			(228		)
Total costs and expenses	817,774			728,921			527,225			510,551
Income before income taxes	129,933			78,362			86,422			58,883
Income tax expense	42,277			27,483			31,053			20,783
Net income	$	87,656		$	50,879		$	55,369		$	38,100
Weighted average common and common equivalent shares outstanding:
Basic	29,911			31,799			31,773			31,330
Diluted	31,032			32,615			32,758			31,998
Earnings per share—Basic	$	2.93		$	1.60		$	1.74		$	1.22
Earnings per share—Diluted	$	2.82		$	1.56		$	1.69		$	1.19

Use of Estimates

In preparing the Company’s financial statements, management makes estimates and assumptions that affect the amounts reported in the financial statements and related disclosures. Actual results may differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash flows are computed using the indirect method.

F-13

Revenue Recognition

Revenue is recognized by the Company’s four reportable business segments using the following criteria: (a) persuasive evidence of an exchange arrangement exists; (b) delivery has occurred or services have been rendered; (c) the buyer’s price is fixed or determinable and (d) collectibility is reasonably assured.

Revenue from contract compression service is recorded when earned, which generally occurs monthly at the time the monthly compression service is provided to customers in accordance with the contracts. Aftermarket services revenue is recorded as products are delivered or services are performed for the customer. Fabrication revenue is recognized using the completed-contract method which recognizes revenue upon completion of the contract. This method is used because the typical contract is completed within two to three months.

Concentration of Credit Risk

Trade accounts receivable are due from companies of varying size engaged principally in oil and gas activities in the U.S. and in international locations including Canada, Latin America, Europe, Africa and the Asia Pacific region. The Company reviews the financial condition of customers prior to extending credit and periodically updates customer credit information. Payment terms are on a short-term basis and in accordance with industry standards. No single customer accounted for 10% or more of the Company’s revenue for the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005. For the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005, the Company wrote off bad debts, net of recoveries totaling $0.6 million, $0.6 million and $1.8 million, respectively.

Inventories

Inventories are recorded at the lower of average cost or market (net realizable value). Some items of compression equipment are acquired and placed in inventories for subsequent sale.

A reserve is recorded against inventory balances for estimated obsolescence. This reserve is based on specific identification and historical experience.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation for financial reporting purposes is computed on the straight-line basis using estimated useful lives. For compression equipment, depreciation begins with the first compression service.  The estimated useful lives as of December 31, 2006 were as follows:

Buildings	20-35 years
Compression equipment	5-30 years
Other properties and equipment	2-25 years

Maintenance and repairs are charged to expense as incurred. Overhauls and major improvements that increase the value or extend the life of contract compressor units are capitalized and depreciated over the estimated useful life of up to 6.5 years.

Depreciation expense for the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months March 31, 2005 was $122.0 million, $79.0 million and $92.7 million, respectively.

Property, plant and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable based upon undiscounted cash flows. Any impairment losses are measured based upon the excess of the carrying value over the fair value. Included within net income for the twelve months ended March 31, 2005 is a $3.1 million loss on the impairment of the Company’s Tulsa, Oklahoma fabrication facility due to the decision to permanently discontinue operations and dispose of this facility. The carrying value of this facility was written down to estimated market value, which was determined by the Company based upon recent appraisals at that time.

F-14

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 earlier 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. In February 2006, the Company performed an impairment analysis in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and determined that no impairment had occurred.  During the twelve months ended December 31, 2006, no event occurred or circumstances changed that would more likely than not reduce the fair value of a reporting unit below its carrying value.  As a result, an interim test for goodwill impairment between our annual test dates was not performed.  If for any reason the fair value of the goodwill or that of any of the Company’s reporting units declines below the carrying value in the future, the Company may incur charges for the impairment.

Note Receivable — Affiliate (Universal only)

In December 2005, Universal entered into a revolving loan agreement with Holdings.  The balance of loans to Holdings, including accrued interest, at December 31, 2006 and 2005 was $78.1 million and $100.3 million, respectively.  The revolving loan agreement and all accrued interest are due in December 2007.  The revolving loan agreement bears interest at LIBOR plus 1.00%. Holdings may borrow up to a total of $115 million during the term of the agreement.  Holdings can prepay amounts outstanding under the revolving loan agreement at anytime without penalty.  Universal has classified this note receivable as long-term due to Holdings having the ability and capacity to refinance the amount outstanding under the five-year $500 million revolving credit facility (see Note 5) entered into in October 2006.

Other Assets

Included in other assets are debt issuance costs, net of accumulated amortization, totaling approximately $15.5 million and $14.5 million at December 31, 2006 and 2005, respectively. Such costs are amortized over the period of the respective debt agreements on a straight-line method which approximates the effective interest method.

Warranty

The Company accrues amounts for estimated warranty claims based upon current and historical product warranty costs and any other related information known.

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 is 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.

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 twelve months ended December 31, 2006, the adoption of SFAS No. 123R impacted our results of operation by increasing stock-based compensation expense by $5.0 million ($3.4 million, net of tax) 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 twelve months ended December 31, 2006 by $0.11 per share.

F-15

Income Taxes

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, all expected events are considered other than future enactments of changes in the tax laws or rates.

The Company provides compression services to a global market. As such, the Company is subject to taxation not only in the U.S. but also in numerous foreign jurisdictions. Having to consider these different jurisdictions complicates the estimate of future domestic and foreign source taxable income, which in turn determines the realizability of its deferred tax assets. Numerous judgments and assumptions are inherent in the determination of future domestic and foreign source taxable income, including assumptions on future operating conditions and asset utilization. The judgments and assumptions used to determine future taxable income are consistent with those used for other financial statement purposes.

Additionally, the Company must consider any prudent and feasible tax planning strategies that would minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets. A tax planning strategy that the Company employs is the permanent reinvestment of the earnings of foreign subsidiaries. The assumptions related to the permanent reinvestment of the foreign earnings are analyzed and reviewed annually for changes in our international and domestic business outlook.

Foreign Currency Translation

The majority of the Company’s foreign subsidiaries have designated the local currency as their functional currency and, as such, gains and losses resulting from financial statement translation of foreign operations are included as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. Gains and losses from balances that are receivable or payable in currency other than functional currency are included in the consolidated statements of operations during the period incurred.

Fair Value of Financial Instruments

The Company’s financial instruments consist of trade receivables and payables (which have carrying values that approximate fair value) and long-term debt. The fair value of the Company’s revolving credit facilities (see Note 5) as of December 31, 2006 and 2005 are representative of their carrying values based upon variable rate terms. The fair value of the $175 million face value 7 1/4% senior notes approximated their carrying values of $171.5 million and $171.1 million at December 31, 2006 and 2005, respectively.   The carrying value of $186.7 and $200.0, respectively, for the notes under the asset-back securitization facility (“ABS facility”) approximated their fair values as of December 31, 2006 and 2005, respectively.  The estimated fair value amounts have been determined by the Company using appropriate valuation methodologies and information available to management as of December 31, 2006 and 2005.

Hedging and Use of Derivative Instruments

The Company utilizes interest rate swap agreements to hedge the exposure to variable cash flows on its floating rate debt (cash flow hedge) and hedge the exposure to changes in the fair value of its fixed rate debt (fair value hedge).  The swaps are not used for trading or speculative purposes.  In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the Company records these interest rate swap agreements on the balance sheet as either derivative assets or derivative liabilities measured at their fair value.  Fair value was estimated using a discounted cash flow approach.  These instruments qualify for hedge accounting as they either reduce the interest rate risk of the underlying hedged item and are designated as a cash flow hedge at inception or they reduce the risk related to changes in the fair value of the hedged item and are designated as a fair value hedge at inception. These swaps result in financial impacts that are inversely correlated to those of the items being hedged. Changes in the fair value of the swaps designated as cash flow hedges are deferred in accumulated other comprehensive loss, net of tax, to the extent the contracts are effective as hedges until settlement of the underlying hedged transaction. Changes in the fair value of the swaps designated as fair value hedges are recorded to interest expense in the period of change together with the offsetting gain or loss on the fair value of the underlying debt and any ineffective portion of the gain or loss is recognized in earnings.  To qualify for hedge accounting treatment, companies must formally document, designate and assess the effectiveness of the transactions. If the necessary correlation ceases to exist or if physical delivery of the hedged item becomes improbable, the Company would discontinue hedge accounting and apply mark-to-market

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accounting. Amounts paid or received from interest rate swap agreements are charged or credited to interest expense and matched with the cash flows and interest expense of the debt being hedged, resulting in an adjustment to the effective interest rate.

Environmental Liabilities

The costs to remediate and monitor environmental matters are accrued when such liabilities are considered probable and a reasonable estimate of such costs is determinable.

Minority Interests

Minority interest reflects the portion of the Partnership’s capital and earnings which are applicable to the 49% limited partnership interest not owned by the Company.

Earnings Per Share

Earnings per share, basic and diluted, is calculated for Holdings in accordance with 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 twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 were 1,121,000, 985,000, and 832,000 shares, respectively. For the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 outstanding stock options of zero, 194,000, and 239,000, 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.

New 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 affected 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 June 2006, the FASB’s Emerging Issues Task Force reached a consensus on Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” that concludes that the presentation of taxes within the Issue’s scope is an accounting policy decision that should be disclosed. If the taxes are reported on a gross basis, companies are required to disclose the amounts of those taxes if such amounts are deemed significant. This pronouncement is effective for interim and annual reporting periods

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beginning after December 15, 2006. The Company is evaluating this pronouncement to determine what disclosures will be required in 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 adoption of SAB 108 did not have a material impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  SFAS No. 159 will be effective for the Company on January 1, 2008.  The Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its financial statements.

2. Goodwill and Intangible Assets

The Company’s acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired businesses are included in the accompanying financial statements from the dates of acquisition. Goodwill has been recognized for the amount of the excess of the purchase price over the fair value of the net assets acquired and is accounted for in accordance with SFAS No. 142.

The changes in the carrying amount of goodwill from March 31, 2005 to December 31, 2006, are as follows (in thousands):

	Domestic Contract Compression		International Contract Compression		Aftermarket Services		Fabrication		Total
Balance as of March 31, 2005	$	261,752	$	61,689	$	48,795	$	29,042	$	401,278
Purchase price adjustments and other	—		97		892		—		989
Impact of foreign currency translation	—		994		—		—		994
Balance as of December 31, 2005	261,752		62,780		49,687		29,042		403,261
Acquisitions	—		—		8,541		—		8,541
Impact of foreign currency translation	—		320		—		—		320
Balance as of December 31, 2006	$	261,752	$	63,100	$	58,228	$	29,042	$	412,122

During February 2006, the Company performed an impairment analysis on its goodwill in accordance with SFAS No. 142 and determined that no impairment had occurred.

At December 31, 2006 and 2005, the Company had intangible assets with a gross carrying value of $8.1 million and $8.6 million, respectively, which relate to acquired customer contracts and non-compete agreements. The carrying amount net of accumulated amortization at December 31, 2006 was $3.3 million. Intangible assets are amortized on a straight-line basis with useful lives ranging from 10 months to 15 years. Amortization expense was $0.7 million, $0.9 million and $1.1 million for the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005, respectively.  In addition, the Company had an intangible asset with a gross carrying value of $0.4 million at December 31, 2006 related to an acquired registration certificate. This asset is not being amortized as it has been deemed to have an indefinite life.

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3.  Business Acquisitions

In November 2004, the Company purchased the Canadian contract compression fleet of Hanover Compressor Company for $56.9 million in cash. As a result of the acquisition, the Company recorded $46.2 million in property, plant and equipment, $3.1 million in identifiable intangible assets and $7.6 million in goodwill. At the time of the acquisition, the acquired fleet totaled approximately 83,000 horsepower. The acquisition was funded by $50.0 million in borrowings under the revolving credit facility and $6.9 million in cash. The pro forma information set forth below assumes the acquisition is accounted for as if the purchase occurred at the beginning of the twelve months ended March 31, 2005. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated at that time (in thousands, except per share amounts):

	Twelve Months Ended March 31, 2005
	As Reported		Pro Forma as Adjusted
			(unaudited)
Revenue	$	763,070	$	771,288
Net income	33,610		36,199
Earnings per common share-basic	1.07		1.15
Earnings per common share-diluted	1.04		1.12

4. Inventories, Net

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

	As of December 31,
	2006			2005
Raw materials	$	83,688		$	67,125
Work-in-progress	100,866			50,810
Finished goods	416			1,234
Total inventories	184,970			119,169
Reserve for obsolescence	(9,158		)	(10,896		)
Inventories, net	$	175,812		$	108,273

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5. Long-Term Debt

The Company’s debt consisted of the following (in thousands):

	As of December 31,
	2006		2005
Notes due October 2025, bearing interest at a variable rate of LIBOR plus 0.74% (see “ABS Facility” below) (1)	$	186,667	$	200,000
Senior notes, bearing interest at 7 1/4% per annum, due 2010 (see“7 1/4% Senior Notes” below) (2)	171,516		171,078
Seven-year term loan due February 2012, bearing interest at a variable rate of LIBOR plus 1.50% (see “2005 Credit Facility” below) (3)	—		471,812
Revolving credit facility due 2010, bearing interest at a variable rate of LIBOR plus 1.25% (see “2005 Credit Facility” below)	—		80,000
Revolving credit facility due 2011, bearing interest at a variable rate of LIBOR plus 1.00% (see “2006 Credit Facility” below) (4)	347,000		—
Revolving credit facility of the Partnership due 2011, bearing interest at a variable rate of LIBOR plus 1.25% (see “Partnership Credit Facility” below) (5)	125,000		—
Total debt	830,183		922,890
Less current maturities	14,545		18,083
Total long-term debt	$	815,638	$	904,807

(1)As of December 31, 2006, approximately $168.0 million of this facility had LIBOR effectively fixed at 4.94% through the use of interest rate swap agreements.

(2)Face value outstanding is $175.0 million as of December 31, 2006 and 2005.  Of the amount outstanding as of December 31, 2006 and 2005, $100.0 million had been hedged through interest rate swap agreements which hedge the change in the fair value of the debt.  As a result, changes in the fair value of the portion of the debt that is hedged are recorded as adjustments to the carrying value of the debt (see Note 1 “Hedging and Use of Derivative Instruments”).

(3)LIBOR was fixed at a weighted average rate of 4.02% for $300.0 million of this debt through the use of interest rate swap agreements as of December 31, 2005.

(4)LIBOR is fixed at a weighted average rate of 4.02 % for $300.0 million of this debt through the use of interest rate swap agreements as of December 31, 2006.

(5)LIBOR is fixed at a weighted average rate of 5.28% for $125.0 million of this debt through the use of an interest rate swap agreement as of December 31, 2006.

ABS Facility

In February 2001, the Company entered into a $200.0 million asset-backed securitization operating facility (the “ABS facility”). In October, 2005, the Company completed the planned restructuring of the ABS facility. Under the restructured ABS facility, the notes will amortize based on the revenues of the secured assets, which is expected to result in a fourteen year amortization.  The Company has pledged compression equipment with a carrying value of $242.8 million as of December 31, 2006 as collateral for the ABS facility.  Under the ABS facility, the Company had $4.3 million of restricted cash as of December 31, 2006.

7 1/4% Senior Notes

In May 2003, the Company issued $175.0 million of 7 1/4% senior notes. The net proceeds from the sale, together with other available funds, were used to repurchase or redeem the outstanding $229.8 million of 97/8% senior discount notes due 2008.

2005 Credit Facility

In January 2005, Holdings, Universal and their wholly-owned subsidiary, UC Canadian Partnership Holdings Company, closed a $650.0 million senior secured credit facility (the “2005 Credit Facility”) with a syndicate of lenders and financial institutions consisting of a $250.0 million, five-year revolving credit facility and a $400.0 million seven-year term loan.  In

F-20

October 2006, all amounts outstanding under the 2005 Credit Facility were repaid using $330 million advanced under the 2006 Credit Facility, together with debt assumed by the Partnership in connection with its initial public offering and proceeds received from 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.  The 2005 Credit Facility was subsequently terminated.  The Company recorded a write-off of unamortized debt issuance costs of $1.1 million in 2006 associated with the termination of the 2005 Credit Facility.

The 2005 Credit Facility bore interest, if the borrowings were in U.S. dollars, at the Company’s option, of a base rate or LIBOR plus a margin or, if the borrowings were in Canadian dollars, at the Company’s option, of Canadian prime rate plus a variable amount depending on its leverage ratio or the CDOR rate plus a specified amount depending on the lender. The 2005 Credit Facility was secured by substantially all of the domestic assets of the Company (except for the assets pledged to the ABS facility), as well as all the capital stock of the direct and indirect U.S. subsidiaries of Universal and 65% of the capital stock of Universal’s first tier foreign subsidiaries.

In September 2005, the Company entered into an amendment to the 2005 Credit Facility (the “Amendment”). The Amendment, among other things, reduced the interest rate applicable to the Company’s seven-year term loan by 0.25%, resulting in a rate of LIBOR plus 1.50% and reduced the borrowing capacity under the revolving credit facility by $75.0 million to $175.0 million. In addition, under the terms of the Amendment, in October 2005, $75.0 million of the Company’s outstanding revolving credit facility balance was funded to the seven-year term loan.

The Company used approximately $508.6 million under the 2005 Credit Facility, together with $100 million under the ABS facility, to repay and redeem the outstanding $522.0 million under the then outstanding operating facility and to repay $50.0 million in debt under the Company’s now terminated $125.0 million revolving credit facility. Due to this early extinguishment of debt, the Company recognized expenses of $26.1 million in the twelve months ended March 31, 2005 consisting primarily of redemption premiums of $19.5 million and the write-off of unamortized debt issuance costs of $6.6 million.

2006 Credit Facility

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 “2006 Credit Facility”).  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 and a mortgage of the Borrowers’ Houston, Texas real property. 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.

At December 31, 2006, approximately $28.8 million of letters of credit were outstanding.

Under the 2006 Credit Facility, 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 leverage ratio (total debt of the Borrowers to earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses), an interest coverage ratio (earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses to total interest expense of the Borrowers) and a senior secured leverage ratio (total senior secured debt of the Borrowers to earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses).   For the purposes of calculating the foregoing required ratios, the debt, interest expense

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and earnings of the Partnership are excluded and cash distributions actually received by the Borrowers from the Partnership are included as additional earnings.

Partnership Credit Facility

On October 20, 2006, the Partnership, as guarantor, and UC Operating Partnership, L.P., a wholly owned subsidiary of the Partnership (“Operating Partnership” and together the “Partnership Borrowers”), 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 the closing of its initial public offering. Borrowings under the credit agreement are secured by substantially all of the personal property assets of the Partnership Borrowers. In addition, all of the capital stock of the Partnership’s domestic restricted subsidiaries has been pledged to secure the obligations under the credit agreement.

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 Partnership Borrowers are also subject to financial covenants which include a total leverage ratio (total debt of the Partnership Borrowers to earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses) and an interest coverage ratio (earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses to total interest expense of the Partnership Borrowers).

Debt Restrictions and Other Terms

Certain of Holdings’ subsidiaries have restrictions on their ability to pay dividends and make intercompany loans and advances pursuant to their financing arrangements. The amount of restricted net assets of Holdings’ subsidiaries as of December 31, 2006 is approximately $808.8 million.

The Company has pledged property and compression equipment with a carrying value of $938.0 million and $166.0 million as of December 31, 2006 as collateral for the 2006 Credit Facility and the Partnership’s credit facility, respectively.

Covenants in our credit facilities require that we maintain various financial ratios.  As of December 31, 2006, the Company was in compliance with all financial covenants.

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Maturities of Long-Term Debt

The maturities of long-term debt outstanding as of December 31, 2006 for the twelve months ending December 31 of the periods indicated are shown below (in thousands).  We expect to pay these principal payments through cash generated by operations and debt refinancing activity.

2007	$	14,545
2008	14,545
2009	14,545
2010	186,062
2011	486,545
Thereafter	113,941
Total	$	830,183

6. Capital Leases

Property, plant and equipment include the following amounts for capitalized leases (in thousands):

	As of December 31,
	2006			2005
Compression equipment	$	720		$	563
Less accumulated depreciation	(144		)	(212		)
Net assets under capital leases	$	576		$	351

Future minimum lease payments under non-cancelable capital leases as of December 31, 2006 are $0.3 million and are payable in 2007.

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7. Income Taxes

The components of income before income taxes were as follows (in thousands):

	Twelve Months Ended December 31,		Nine Months Ended December 31,		Twelve Months Ended March 31,
	2006		2005		2005
United States	$	72,030	$	52,363	$	20,211
Foreign	57,903		34,059		30,612
Consolidated income before income taxes	$	129,933	$	86,422	$	50,823

Income tax expense consisted of the following (in thousands):

	Twelve Months Ended		Nine Months Ended		Twelve Months Ended
	December 31,		December 31,		March 31,
	2006		2005		2005
Current:
U.S. Federal	$	1,260	$	372	$	—
State	54		39		—
Foreign	14,809		6,963		9,069
Total current	16,123		7,374		9,069
Deferred:
U.S. Federal	22,558		17,624		5,178
State	431		2,427		888
Foreign	3,165		3,628		2,078
Total deferred	26,154		23,679		8,144
Total income tax expense	$	42,277	$	31,053	$	17,213

A reconciliation of the provision for income taxes and the amount computed by applying the U.S. federal statutory income tax rate to income before taxes is as follows (in thousands):

	Twelve Months Ended			Nine Months Ended			Twelve Months Ended
	December 31,			December 31,			March 31,
	2006			2005			2005
Income tax expense at the U.S. federal statutory rate of 35%	$	45,477		$	30,248		$	17,790
State taxes	445			1,468			671
Foreign taxes (benefit)	(4,657		)	(984		)	(306		)
Non-deductible expenses (benefit) and other	1,012			321			(942		)
Total income tax expense	$	42,277		$	31,053		$	17,213

In 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, the Company recorded a deferred tax asset and related deferred tax benefit of $0.8 million.

In 2006, the U.S. 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

F-24

foreign corporations.  As a result, the Company recorded a reduction in its deferred tax liability and a related deferred tax benefit of $1.6 million.

In May and June 2006, reductions in the Alberta, Canada and Canadian federal income tax rates were enacted.  As a result, the Company recorded a reduction of its deferred tax liability and a deferred tax benefit of $1.6 million.

Deferred income tax balances are the direct effect of taxable temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered.  The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are (in thousands):

	As of December 31,
	2006			2005
Deferred tax assets:
Net operating loss carryforwards	$	106,421		$	134,688
AMT credits	1,619			411
Accrued reserves	6,662			7,447
Foreign tax credits	17,855			4,150
Other	16,497			12,357
Subtotal	149,054			159,053
Valuation allowances	(12,941		)	(890		)
Total deferred tax assets	136,113			158,163
Deferred tax liabilities:
Depreciation differences on properties and equipment	(290,456		)	(326,937		)
Basis difference in the Partnership	(20,673		)	—
Other	(22,807		)	(10,411		)
Total deferred tax liabilities	(333,936		)	(337,348		)
Net deferred tax liability	$	(197,823	)	$	(179,185	)

At December 31, 2006, the Company had U.S. federal net operating loss carryforwards of approximately $268.3 million that are available to offset future taxable income.  Annual utilization of the carryforwards could be limited by Section 382 of the Internal Revenue Code of 1986, as amended.  If not utilized, the carryforwards will begin to expire in 2020.  The Company also had available net operating loss carryforwards applicable to its non-U.S. subsidiaries of approximately $21.4 million, with certain of those carryforwards beginning to expire in 2007.  Foreign tax credits of $17.9 million and AMT credits of $1.6 million are available to the Company to offset future payments of U.S. federal income tax.  The foreign tax credits will expire in varying amounts beginning in 2015, whereas the AMT credits may be carried forward indefinitely under current U.S. law.

The Company records valuation allowances when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions.  The increase in valuation allowances recorded in 2006 relates to foreign tax credits and loss carryforwards of certain non-U.S. subsidiaries of $10.9 million and $1.1 million, respectively.

The Company has not provided U.S. or additional foreign taxes on the indefinitely (or permanently) reinvested cumulative earnings of approximately $189.1 million generated by its non-U.S. subsidiaries.  Such earnings are from ongoing operations which will be used to fund growth in the non-U.S. subsidiaries’ countries as well as future international expansion.  It is not practical to determine the additional amount of taxes that would be payable if such earnings were not indefinitely reinvested.

During 2006, the Company recognized a deferred tax liability for the taxable temporary difference related to the excess of the book value of its investment in the Partnership over its related tax basis in the Partnership.

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8. Stock-Based Compensation

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

	Twelve Months Ended			Nine Months Ended			Twelve Months Ended
	December 31,			December 31,			March 31,
	2006			2005			2005
Stock options, unit options and phantom units	$	4,593		$	—		$	—
Restricted stock	2,395			1,322			965
Unit appreciation rights	19			—			—
Employee stock purchase plan	434			—			—
Total stock-based compensation expense	7,441			1,322			965
Income tax benefit	(2,423		)	(475		)	(328		)
Total after-tax stock-based compensation expense	$	5,018		$	847		$	637

There was no stock-based compensation cost capitalized during the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005.

Stock options

The Incentive Stock Option Plan (the “ISO Plan”) authorizes the Company to grant stock options to its employees, consultants and directors.  The Company utilizes stock options under the ISO Plan in order to motivate and retain key employees.  In July 2004, an amendment to the ISO Plan was approved, increasing by 1,000,000 the number of shares of common stock available for grant under the ISO Plan from 5,012,421 shares to 6,012,421 shares to allow the continuation of this long-term incentive program.  Options generally vest over the following time period:

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

Under the ISO 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.

The weighted average fair values at date of grant for options granted during the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 were $18.22, $14.30 and $15.51, respectively, and were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

	Twelve Months Ended		Nine Months Ended		Twelve Months Ended
	December 31,		December 31,		March 31,
	2006		2005		2005
Expected life in years	6		5		6
Risk-free interest rate	4.72	%	4.06	%	4.16	%
Volatility	33.15	%	33.30	%	40.77	%
Dividend yield	0.00	%	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

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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 twelve months ended December 31, 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	(623,439	)	22.96
Cancelled	(19,839	)	31.90
Options outstanding, December 31, 2006	1,894,286		$	29.85	6.3	$	61,114
Options exercisable at December 31, 2006	1,385,234		$	26.13	5.5	$	49,843

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 twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 was $22.1 million, $4.6 million and $7.6 million, respectively.  The total grant date fair value of stock options that vested during the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 was $4.5 million, $3.3 million and $5.0 million, respectively.  As of December 31, 2006, $5.6 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over the weighted-average period of 1.8 years.

Cash received from stock option exercises during the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 was $14.3 million, $5.2 million and $8.4 million, respectively.  The actual tax benefit realized for the tax deductions for option exercises of the share-based payment arrangements for the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 totaled $7.8 million, $1.6 million and none, 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 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.

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The following table presents restricted stock activity for the twelve months ended December 31, 2006:

	Shares		Weighted Average Grant-Date Fair Value
Non-vested restricted stock, December 31, 2005	242,194		$	33.01
Granted	143,397		44.42
Vested	(39,250	)	26.18
Cancelled	(6,275	)	43.49
Non-vested restricted stock, December 31, 2006	339,362		$	38.38

The total grant date fair value of restricted stock that vested during the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005 was $1.1 million, $0.6 million and $0.7 million, respectively. As of December 31, 2006, $8.9 million of unrecognized compensation cost related to non-vested restricted stock is expected to be recognized over the weighted-average period of 3.6 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. In 2001, the Company’s stockholders approved the ESPP, under which 250,000 shares of the Company’s common stock could be purchased by employees.  In 2006, the Company’s stockholders approved an amendment to the ESPP, increasing the aggregate number of shares of the Company’s common stock reserve for issuance under the ESPP from 250,000 shares to 500,000 shares.  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 December 31, 2006, 290,051 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.

Unit Appreciation Rights

During December 2006, the Company issued 332,143 unit appreciation rights (“UARs”) to certain employees.  These UARs entitle the holder to receive a payment from the Company in cash equal to the excess of the fair market value of a common unit of the Partnership on the date of exercise over the exercise price.  These UARs vest on January 1, 2009 and expire on March 15, 2010.  As of December 31, 2006, all UARs were still outstanding.

As the holders of the UARs will receive a cash payment from the Company, these awards have been recorded as a liability and the Company is required to remeasure the fair value of these awards at each reporting date under the guidance of SFAS No. 123R.  At December 31, 2006, the fair value of each UAR was $2.31 and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

	December 31,
	2006
Expected life in years	2.61
Risk-free interest rate	4.79	%
Volatility	13.70	%
Dividend yield	5.22	%

The expected life represents the period of time the UARs 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 time of remeasurement for a period commensurate with the estimated expected life of the UARs.  Expected volatility is based on the historical volatility of comparable partnerships’ units over the most recent period commensurate with the expected life of the

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UAR and other factors.  The dividend yield is the expected dividend rate that will be paid out on the underlying units during the expected term of the options.   Under SFAS No. 123R, the Company is required to record compensation cost from unit-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 UAR activity for the twelve months ended December 31, 2006 (remaining life in years, intrinsic value in thousands):

	UARs	Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
UARs outstanding, December 31, 2005	—	$	—
Granted	332,143	25.94
UARs outstanding, December 31, 2006	332,143	$	25.94	3.21	$	299

As of December 31, 2006, no UARs were exercisable.

Intrinsic value is the difference between the market value of the Partnership’s common units and the exercise price of each UAR multiplied by the number of UARs outstanding.  As of December 31, 2006, $0.7 million of unrecognized compensation cost related to non-vested UARs is expected to be recognized over the weighted-average period of two years.

Partnership Long-Term Incentive Plans

The Partnership has a long-term incentive plan that was adopted by UCO GP, LLC, the general partner of the general partner of the Partnership, in October, 2006, for its employees, directors and affiliates who perform services for the Partnership.  The long-term incentive plan currently permits the grant of awards covering an aggregate of 625,000 common units, common unit options, restricted units and phantom units.  The long-term incentive plan is administered by the board of directors of UCO GP, LLC or a committee thereof (the “plan administrator”).

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

During the twelve months ended December 31, 2006, the Partnership granted 593,572 unit options and 5,607 phantom units.  The unit options vest on January 1, 2009 and have a contractual life of three years.  The phantom units will vest and settle on January 1, 2009.

The weighted average fair value at date of grant for unit options and phantom units granted during the twelve months ended December 31, 2006 was $1.66 and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

	Twelve Months Ended
	December 31,
	2006
Expected life in years	2.63
Risk-free interest rate	4.72	%
Volatility	14.47	%
Dividend yield	5.95	%

The expected life represents the period of time the unit 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

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grant for a period commensurate with the estimated expected life of the unit options.  Expected volatility is based on the historical volatility of comparable partnerships’ units over the most recent period commensurate with the expected life of the unit options and other factors.  The dividend yield is the expected dividend rate that will be paid out on the underlying units during the expected term of the options.  The phantom units were granted distribution equivalent rights and, as a result, a dividend yield was not used in the calculation of their fair value.  Under SFAS No. 123R, the Partnership is required to record compensation cost from unit-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 unit option and phantom unit activity for the twelve months ended December 31, 2006 (remaining life in years, intrinsic value in thousands):

	Unit Options and Phantom Units	Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Unit options and phantom units outstanding, December 31, 2005	—	$	—
Granted	599,179	23.74
Unit options and phantom units outstanding, December 31, 2006	599,179	$	23.74	3.01	$	1,858

As of December 31, 2006, no unit options or phantom units were exercisable.

Intrinsic value is the difference between the market value of the Partnership’s units and the exercise price of each unit option multiplied by the number of options outstanding.  As of December 31, 2006, $0.9 million of unrecognized compensation cost related to non-vested unit options and phantom units is expected to be recognized over the weighted-average period of two years.

Pro Forma Results

The following table summarizes results as if we 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):

	Nine Months Ended December 31, 2005			Twelve Months Ended March 31, 2005
Net income, as reported	$	55,369		$	33,610
Add: Stock-based compensation for restricted stock awards included in reported net income, net of tax	847			637
Deduct: Stock-based compensation determined under the fair value method, net of tax	(3,061		)	(3,204		)
Pro forma net income	$	53,155		$	31,043
Basic earnings per share:
As reported	$	1.74		$	1.07
Pro forma	$	1.67		$	0.99
Diluted earnings per share:
As reported	$	1.69		$	1.04
Pro forma	$	1.62		$	0.96

9. Employee Benefits Other Than Stock-Based Compensation

The Company has a defined contribution 401(k) plan that substantially all U.S.-based employees are eligible to participate in.  Prior to January 1, 2006, the Company made matching contributions under this plan in the form of Company stock equal to 50% of each participant’s contribution, with a maximum match of 3% of eligible pay.  Effective January 1, 2006, the matching formula for the 401(k) plan was amended to provide a match of 75% of the participant’s contribution, with a maximum match of 4.5% of eligible pay, for employees who have five or more years of service.  The match for employees with less than

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five years of service remains 50% of each participant’s contribution of up to 6%, with a maximum match of 3% of eligible pay.  For the twelve months ended December 31, 2006, nine months ended December 31, 2005 and twelve months ended March 31, 2005, the Company’s stock contributions to the plan of approximately 49,500 shares, 33,000 shares and 45,000 shares, respectively were valued at approximately $2.6 million, $1.2 million and $1.5 million, respectively.

The Employees’ Supplemental Savings Plan (“the ESSP”) provides executive officers and designated employees the opportunity to defer up to 25% of their eligible compensation that cannot be deferred under the existing 401(k) plan due to IRS limitations. Participants can also defer up to 100% of their bonuses. Prior to January 1, 2006 the Company matched 50% of the participant’s deferrals, with a maximum match of 3% of eligible pay. The vesting periods are generally the same as the 401(k) plan.  The Company’s matching contributions related to the ESSP have been in the form of common stock.  Effective January 1, 2006, the matching formula for the ESSP plan was amended to provide a match of 75% of the participant’s deferrals, with a maximum match of 4.5% of eligible pay, for employees who have five or more years of service.  The match for employees with less than five years of service remains 50% of each participant’s deferrals, with a maximum match of 3% of eligible pay.  Deferrals from bonuses are not eligible for the match.  The match limits of 3% and 4.5% are aggregate amounts and include both the 401(k) plan and the ESSP match amounts.

10. Stockholders’ Equity

In December 2005, Holdings entered into an underwriting agreement with Weatherford International Ltd. and J. P. Morgan Securities Inc., as sole underwriter, in connection with the offering of 6,750,000 shares of Holdings’ common stock by Weatherford.  Holdings did not sell any shares of common stock in connection with the offering and did not receive any of the proceeds from the sale of the shares by Weatherford.  In connection with the underwriting agreement, Holdings entered into a purchase agreement with J. P. Morgan Securities, pursuant to which it agreed to purchase 2,439,024 of the 6,750,000 shares of common stock acquired by them in the offering, at a price of $41.00 per share. The purchase price of approximately $100.0 million was funded from borrowings of approximately $80.0 million under the revolving credit facility with the balance of the funding provided from available cash.

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.  Under the terms of the merger agreement between the Company and Hanover Compressor Company (see Note 15), the Company may repurchase up to an additional $75 million of its common stock pursuant to the stock repurchase program prior to the consummation of the merger or the termination of the merger agreement.

During the twelve months ended December 31, 2006, the Company repurchased 569,499 shares of its common stock at an aggregate cost of $36.1 million.  Also, due to vesting of certain restricted shares during 2006, 13,636 shares were repurchased by the Company for $0.7 million as reimbursement for the related employee tax liability paid by the Company.

11. Accounting for Interest Rate Swap Agreements

In accordance with SFAS No. 133, all derivative instruments must be recognized on the balance sheet at fair value, and changes in such fair values are recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

In June 2004, the Company reduced the notional amount of interest rate swap agreements that convert variable interest payments under the ABS facility to fixed interest payments in connection with a debt repayment of $80.0 million. In accordance with SFAS No. 133, the Company recorded a gain of $3.2 million to earnings that had previously been recorded in accumulated other comprehensive income as a result of the reduction in the notional amount of such interest rate swap agreements. As of December 31, 2006 and 2005, the Company had interest rate swap agreements with a notional amount of $168.0 million and $180.0 million, respectively, related to $186.7 million and $200.0 million, respectively, outstanding under the ABS facility. The swaps outstanding at December 31, 2006 amortize ratably through 2019 and have a weighted average fixed rate of 4.94%. The

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swaps outstanding at December 31, 2005 would have terminated in February 2013 and had a weighted average fixed rate of 5.21%.  In accordance with SFAS No. 133, the Company’s balance sheet at December 31, 2006 and 2005 included a $1.1 million derivative asset and a $1.1 million derivative liability, respectively, related to the interest rate swap agreements.

In January 2005, the Company entered into interest rate swap agreements to convert variable interest payments related to $300 million of floating rate debt to fixed interest payments. These swaps amortize ratably from June 2007 through March 2010 and have a weighted average fixed rate of 4.02%, resulting in a net effective fixed interest rate on this $300 million of debt of 5.02% (4.02% plus the 1.00% margin applicable to our 2006 Credit Facility). In accordance with SFAS No. 133, the Company’s balance sheet at December 31, 2006 and 2005 included a $5.6 million and $5.9 million, respectively, 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 their floating rate debt.  In October 2006, this swap was transferred to the Partnership.  The effective date of the swap agreement was 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 December 31, 2006 includes a $1.5 million derivative liability related to this interest rate swap agreement.

These swaps, except for the swap agreement related to the $125.0 million of floating rate debt, 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.  For the swap agreement related to the $125 million of floating rate debt, the Company performs calculations to determine if the swap agreement is still effective and to calculate any ineffectiveness.  As of December 31, 2006, this swap was considered effective and for the twelve months ended December 31, 2006 there was no ineffectiveness.

As of December 31, 2006 and 2005, the Company had interest rate swap agreements to hedge $100.0 million of its $175.0 million 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 the six-month LIBOR rate. 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 December 31, 2006 and 2005, included a $3.5 million and $3.9 million, respectively, 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 the 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 twelve months ended December 31, 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.

12. 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 $13.8

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million at December 31, 2006.

13. Industry Segments and Geographic Information

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 to customers in the U.S.. The international contract compression segment provides natural gas compression to international customers, including 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 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 revenue, gross margin and identifiable assets by business segment (in thousands):

	Twelve Months Ended December 31,		Nine Months Ended December 31,		Twelve Months Ended March 31,
	2006		2005		2005
Revenue:
Domestic contract compression	$	398,189	$	248,414	$	296,239
International contract compression	142,448		94,831		102,167
Fabrication	215,825		143,710		213,994
Aftermarket services	191,245		126,692		150,670
Total	$	947,707	$	613,647	$	763,070
Gross Margin (1):
Domestic contract compression	$	254,318	$	160,256	$	186,865
International contract compression	106,052		71,075		78,448
Fabrication	29,361		14,191		15,285
Aftermarket services	38,920		25,813		29,656
Total	$	428,651	$	271,335	$	310,254

	As of December 31, 2006		As of December 31, 2005		As of March 31, 2005
Identifiable Assets:
Domestic contract compression	$	1,569,763	$	1,432,301	$	1,423,979
International contract compression	443,990		402,174		353,880
Fabrication	119,034		102,412		99,462
Aftermarket services	209,244		158,408		145,437
Total	$	2,342,031	$	2,095,295	$	2,022,758

(1)  Gross margin, a non-GAAP financial measure, is reconciled to net income below.

No one customer accounted for more than 10% of net sales for any of the periods presented.

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Geographic Area

The following table illustrates revenue, gross margin and identifiable assets by geographic locations (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.

	Twelve Months Ended December 31,		Nine Months Ended December 31,		Twelve Months Ended March 31,
	2006		2005		2005
Revenue:
United States	$	647,820	$	428,781	$	535,258
Canada	117,863		60,530		81,357
Argentina	70,435		59,328		45,950
Other international	111,589		65,008		100,505
Total	$	947,707	$	613,647	$	763,070
Gross Margin (1):
United States	$	295,285	$	187,935	$	218,410
Canada	30,439		18,898		19,754
Argentina	47,294		28,073		31,401
Other international	55,633		36,429		40,689
Total	$	428,651	$	271,335	$	310,254

	As of December 31, 2006		As of December 31, 2005		As of March 31, 2005
Identifiable Assets:
United States	$	1,813,593	$	1,632,946	$	1,619,113
Canada	165,772		157,612		140,928
Argentina	128,337		117,388		107,035
Other international	234,329		187,349		155,682
Total	$	2,342,031	$	2,095,295	$	2,022,758

(1)Gross margin, a non-GAAP financial measure, is reconciled to net income below.

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

	Twelve Months Ended December 31,			Nine Months Ended December 31,			Twelve Months Ended March 31,
	2006			2005			2005
Gross Margin	$	428,651		$	271,335		$	310,254
Depreciation and amortization	122,701			79,899			93,797
Selling, general and administrative	118,762			65,269			75,756
Interest expense, net	57,349			40,221			64,188
Debt extinguishment costs	1,125			—			26,543
Minority interest	1,354			—			—
Gain on termination of interest rate swap agreements	—			—			(3,197		)
Asset impairment expense	—			—			3,080
Foreign currency (gain) loss	(645		)	(692		)	389
Other (income) loss, net	(1,928		)	216			(1,125		)
Income tax expense	42,277			31,053			17,213
Net Income	$	87,656		$	55,369		$	33,610

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14. Selected Quarterly Financial Data (Unaudited)

Summarized quarterly financial data is as follows (earnings per share information is for Holdings only) (in thousands, except per share data):

	December 31		September 30		June 30		March 31
Twelve Months Ended December 31, 2006:
Revenue	$	252,991	$	246,932	$	218,716	$	229,068
Gross profit (1)	78,859		85,337		76,521		74,170
Net income	20,005		24,960		21,816		20,875
Earnings per common share—basic	$	0.67	$	0.83	$	0.73	$	0.70
Earnings per common share—diluted	$	0.64	$	0.80	$	0.70	$	0.68

	December 31		September 30		June 30
Nine Months Ended December 31, 2005:
Revenue	$	224,835	$	181,128	$	207,684
Gross profit (1)	72,754		61,953		61,981
Net income	19,554		17,679		18,136
Earnings per common share—basic	$	0.62	$	0.55	$	0.57
Earnings per common share—diluted	$	0.60	$	0.54	$	0.56

(1)Gross profit is defined as revenue less cost of sales and direct depreciation and amortization expense.

15. Subsequent Events (Unaudited)

In January 2007, the Company acquired B.T.I. Holdings Pte Ltd (“B.T.I.”) and its wholly-owned subsidiary B.T. Engineering Pte Ltd, a Singapore based fabricator of oil and gas, petrochemical, marine and offshore equipment, including pressure vessels, floating, production, storage and offloading process modules, terminal buoys, turrets, natural gas compression units and related equipment for $25 million in cash plus certain other working capital adjustments to be determined.  Total consideration will also include a contingent obligation of up to $20 million which is based on earnings of B.T.I. over the two years ended March 31, 2009.

In February 2007, the Company and Hanover Compressor Company (“Hanover”) entered into a merger agreement. Upon consummation of the transactions set forth in the merger agreement, each common share of Hanover will be converted into 0.325 shares of common stock of a newly created holding company, and each common share of Holdings will be converted into one share of the holding company.  Hanover will be treated as the acquirer for accounting purposes.

The merger agreement has been unanimously approved by both companies’ boards of directors. Completion of the merger is subject to a number of conditions, including the approval of the stockholders of both companies and customary regulatory approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Closing of the transaction is currently anticipated in the third quarter of 2007. The Company believes that its expectation as to timing for the closing of the merger is reasonable, however, no assurances can be given as to the timing of the satisfaction of all closing conditions or that all required approvals will be received.

The merger agreement requires the Company and Hanover to continue to operate their businesses in the ordinary course of business and to obtain the other party’s consent prior to engaging in certain specified activities, such as issuing or repurchasing securities, acquiring or disposing of businesses above specified thresholds, incurring new debt other than below specified thresholds and or for specified purposes, paying dividends or granting awards with respect to our common stock (other than under employee compensation arrangements).  These agreements are subject to specified exceptions, including those (1) permitting the Company to repurchase up to an additional $75 million of its common stock in accordance with its previously

F-35

announced open-market stock repurchase program, (2) permitting the Partnership to make cash distributions in accordance with its partnership agreement, (3) permitting the Company to make contributions of its domestic compression assets to the Partnership and (4) permitting the Company to redeem its 7 1/4% Senior Notes due 2010.

F-36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Universal Compression Holdings, Inc.
Houston, TX

We have audited the consolidated financial statements of Universal Compression Holdings, Inc. and subsidiaries (“Holdings”) and Universal Compression, Inc. and subsidiaries (“Universal”) (collectively “the Company”) as of December 31, 2006 and 2005, and for the twelve months ended December 31, 2006, the nine months ended December 31, 2005 and the twelve months ended March 31, 2005, management’s assessment of the effectiveness of Holdings’ internal control over financial reporting as of December 31, 2006, and the effectiveness of Holdings’ internal control over financial reporting as of December 31, 2006, and have issued our reports thereon dated March 1, 2007 (such report on the consolidated financial statements of the Company expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s change in its method of accounting for stock-based compensation); such consolidated financial statements and reports are included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of Holdings and Universal listed in Item 15.  These financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole for each of Holdings and Universal, present fairly, in all material respects, the information set forth therein.

/S/ DELOITTE & TOUCHE LLP

Houston, TX

March 1, 2007

E-1

UNIVERSAL COMPRESSION HOLDINGS, INC.
SCHEDULE I
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
(In thousands)

	December 31, 2006		December 31, 2005
ASSETS
Cash	$	898	$	—
Investment in subsidiary	1,028,585		931,492
Deferred income taxes	2,121		97
Total assets	$	1,031,604	$	931,589
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities	$	111	$	—
Note payable to subsidiary	78,063		100,277
Long-term debt	37,000		—
Common stock, $.01 par value, 200,000 and 200,000 shares authorized, 33,153 and 32,306 shares issued, 30,130 and 29,866 shares outstanding as of December 31, 2006 and December 31, 2005, respectively	330		323
Other stockholders’ equity	916,100		830,989
Total stockholders’ equity	916,430		831,312
Total liabilities and stockholders’ equity	$	1,031,604	$	931,589

UNIVERSAL COMPRESSION HOLDINGS, INC.
SCHEDULE I
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

	Twelve Months Ended December 31,			Nine Months Ended December 31,			Twelve Months Ended March 31,
	2006			2005			2005
Interest expense	$	(5,892	)	$	(277	)	$	—
Equity earnings in subsidiary, net of tax	91,467			55,549			33,610
Benefit from income taxes	2,081			97			—
Net income	$	87,656		$	55,369		$	33,610
Weighted average common and common equivalent shares outstanding:
Basic	29,911			31,773			31,392
Diluted	31,032			32,758			32,224
Earnings per share—Basic	$	2.93		$	1.74		$	1.07
Earnings per share—Diluted	$	2.82		$	1.69		$	1.04

See accompanying notes to condensed financial statements.

E-2

UNIVERSAL COMPRESSION HOLDINGS, INC.
SCHEDULE I
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)

	Twelve Months Ended December 31,			Nine Months Ended December 31,			Twelve Months Ended March 31,
	2006			2005			2005
Cash flows used in operating activities	$	(5,724	)	$	—		$	—
Cash flows from investing activities:
Investment in subsidiary	—			(5,995		)	(9,349		)
Net cash used in investing activities	—			(5,995		)	(9,349		)
Cash flows from financing activities:
Proceeds from common stock issuance	15,814			5,995			9,349
(Payments to) receipts from affiliate on note payable	(9,359		)	100,000			—
Proceeds from issuance of debt	37,000			—			—
Purchase of treasury stock	(36,833		)	(100,000		)	—
Net cash provided by financing activities	6,622			5,995			9,349
Net increase (decrease) in cash and cash equivalents	898			—			—
Cash and cash equivalents at beginning of period	—			—			—
Cash and cash equivalents at end of period	$	898		$	—		$	—

See accompanying notes to condensed financial statements.

E-3

UNIVERSAL COMPRESSION HOLDINGS, INC.
SCHEDULE I
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

These condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as restricted net assets of Universal Compression Holdings, Inc. (“Holdings”) subsidiary exceeds 25% of the consolidated net assets of Holdings.  Holdings is a holding company, which conducts its operations through its wholly-owned subsidiary, Universal Compression Inc. (“Universal”).

2. Debt

In January 2005, Holdings, Universal and their wholly-owned subsidiary, UC Canadian Partnership Holdings Company (collectively “the Borrowers”), closed a $650.0 million senior secured credit facility (the “2005 Credit Facility”) with a syndicate of lenders and financial institutions consisting of a $250.0 million, five-year revolving credit facility and a $400.0 million seven-year term loan.  In October 2006, all amounts outstanding under the 2005 Credit Facility were repaid using $330 million advanced under the 2006 Credit Facility, together with debt assumed by the Partnership in connection with its initial public offering and proceeds received from 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.  The 2005 Credit Facility was subsequently terminated.

The 2005 Credit Facility bore interest, if the borrowings were in U.S. dollars, at the Borrower’s option, of a base rate or LIBOR plus a margin or, if the borrowings were in Canadian dollars, at the Borrower’s option, of Canadian prime rate plus a variable amount depending on its leverage ratio or the CDOR rate plus a specified amount depending on the lender. The 2005 Credit Facility was secured by substantially all of the domestic assets of the Borrowers (except for the assets pledged to the ABS facility), as well as all the capital stock of the direct and indirect U.S. subsidiaries of Universal and 65% of the capital stock of Universal’s first tier foreign subsidiaries.

In September 2005, the Borrowers entered into an amendment to the 2005 Credit Facility (the “Amendment”). The Amendment, among other things, reduced the interest rate applicable to the Borrower’s seven-year term loan by 0.25%, resulting in a rate of LIBOR plus 1.50% and reduced the borrowing capacity under the revolving credit facility by $75.0 million to $175.0 million. In addition, under the terms of the Amendment, in October 2005, $75.0 million of the Universal’s outstanding revolving credit facility balance was funded to the seven-year term loan.

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 “2006 Credit Facility”).  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 and a mortgage of the Borrowers’ Houston, Texas real property. 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.  At December 31, 2006 the borrowers had selected three month LIBOR and the applicable margin was 1.0%.

At December 31, 2006, approximately $28.8 million of letters of credit were outstanding.

Under the 2006 Credit Facility, 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

E-4

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 leverage ratio (total debt of the Borrowers to earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses), an interest coverage ratio (earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses to total interest expense of the Borrowers) and a senior secured leverage ratio (total senior secured debt of the Borrowers to earnings before interest, taxes, depreciation, amortization and certain other non-cash expenses).   For the purposes of calculating the foregoing required ratios, the debt, interest expense and earnings of the Partnership are excluded and cash distributions actually received by the Borrowers from the Partnership are included as additional earnings.

Holdings’ borrowings under the 2006 Credit Facility as of December 31, 2006 was $37.0 million and matures in October 2011.

In December 2005, Holdings entered into a revolving loan agreement with Universal.  The balance of loans from Universal, including accrued interest was $78.1 million and $100.3 million, at December 31, 2006 and 2005, respectively.  The revolving loan agreement bears interest at LIBOR plus 1.25%.  Holdings may borrow up to a total of $115 million during the term of the agreement.  Holdings can prepay amounts outstanding under the revolving loan agreement at anytime without penalty.  Holdings’ borrowing under this agreement matures in December 2007.

3. 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.  Under the terms of the merger agreement between Holdings and Hanover Compressor Company (See Note 4), Holdings may repurchase up to an additional $75 million of its common stock pursuant to the stock repurchase program prior to the consummation of the merger or the termination of the merger agreement.

During the twelve months ended December 31, 2006, Holdings repurchased 569,499 shares of its common stock at an aggregate cost of $36.1 million.

4. Subsequent Events (Unaudited)

In February 2007, Holdings and Hanover Compressor Company (“Hanover”) entered into a merger agreement. Upon consummation of the transactions set forth in the merger agreement, each common share of Hanover will be converted into 0.325 shares of common stock of a newly created holding company, and each common share of Holdings will be converted into one share of the holding company. Hanover will be treated as the acquirer for accounting purposes.

The merger agreement has been unanimously approved by both companies’ boards of directors. Completion of the merger is subject to a number of conditions, including the approval of the stockholders of both companies and customary regulatory approvals, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Closing of the transaction is currently anticipated in the third quarter of 2007. Holdings believes that its expectation as to timing for the closing of the merger is reasonable, however, no assurances can be given as to the timing of the satisfaction of all closing conditions or that all required approvals will be received.

The merger agreement requires Holdings and Hanover to continue to operate their businesses in the ordinary course of business and to obtain the other party’s consent prior to engaging in certain specified activities, such as issuing or repurchasing securities, acquiring or disposing of businesses above specified thresholds, incurring new debt other than below specified thresholds or for specified purposes, paying dividends or granting awards with respect to our common stock (other than under employee compensation arrangements).  These agreements are subject to specified exceptions, including those (1)

E-5

permitting Holdings to repurchase up to an additional $75 million of its common stock in accordance with its previously announced open-market stock repurchase program, (2) permitting the Partnership to make cash distributions in accordance with its partnership agreement, (3) permitting Holdings to make contributions of Universal’s domestic compression assets to the Partnership and (4) permitting Universal to redeem its 7 1/4% Senior Notes due 2010.

E-6

UNIVERSAL COMPRESSION HOLDINGS, INC.
UNIVERSAL COMPRESSION, INC.
SCHEDULE II—
VALUATION AND QUALIFYING ACCOUNTS

Item	Balance at Beginning of Period		Charged to Costs and Expenses (1)		Collections/ Deductions (2)			Balance at Close of Period
	(In thousands)
December 31, 2006 Allowance for doubtful accounts	$	3,616	$	1,656	$	(586	)	$	4,686
December 31, 2005 Allowance for doubtful accounts	$	2,747	$	1,507	$	(638	)	$	3,616
March 31, 2005 Allowance for doubtful accounts	$	3,189	$	1,335	$	(1,777	)	$	2,747

(1)Amounts accrued for uncollectibility

(2)Uncollectible accounts written off, net of recoveries

Item	Balance at Beginning of Period		Charged to Costs and Expenses (1)		Inventory Write-offs (2)			Balance at Close of Period
	(In thousands)
December 31, 2006 Reserve for inventory obsolescence	$	10,896	$	1,770	$	(3,508	)	$	9,158
December 31, 2005 Reserve for inventory obsolescence	$	10,981	$	1,465	$	(1,550	)	$	10,896
March 31, 2005 Reserve for inventory obsolescence	$	12,041	$	1,897	$	(2,957	)	$	10,981

(1)Amounts accrued for inventory obsolescence

(2)Amounts written-off for inventory obsolescence

Item	Balance at Beginning of Period		Charged to Costs and Expenses (1)		Deductions (2)			Balance at Close of Period
	(In thousands)
December 31, 2006 Warranty accrual	$	3,614	$	2,214	$	(5,314	)	$	514
December 31, 2005 Warranty accrual	$	3,025	$	3,205	$	(2,616	)	$	3,614
March 31, 2005 Warranty accrual	$	1,493	$	3,353	$	(1,821	)	$	3,025

(1)Amounts accrued for warranty charges

(2)Warranty charges incurred

Item	Balance at Beginning of Period			Amounts recorded (1)			Amounts released (2)		Balance at Close of Period
	(In thousands)
December 31, 2006 Valuation allowances for deferred tax assets	$	(890	)	$	(12,941	)	$	890	$	(12,941	)
December 31, 2005 Valuation allowances for deferred tax assets	$	(1,634	)	$	—		$	744	$	(890	)
March 31, 2005 Valuation allowances for deferred tax assets	$	(1,779	)	$	—		$	145	$	(1,634	)

(1)Amounts recorded for foreign tax credits and loss carryforwards of non-U.S. subsidiaries

(2)Amounts released for expiring foreign tax credits

E-7

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2007.

Universal Compression Holdings, Inc.
By:	/s/ STEPHEN A. SNIDER
	Stephen A. Snider President and Chief Executive Officer

II-1

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen A. Snider, Ernie L. Danner, J. Michael Anderson and Donald C. Wayne, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities indicated on February 28, 2007.

Name	Title
/s/ STEPHEN A. SNIDER	President, Chief Executive Officer and Director
Stephen A. Snider	(Principal Executive Officer)
/s/ J. MICHAEL ANDERSON	Senior Vice President and Chief Financial Officer
J. Michael Anderson	(Principal Financial Officer)
/s/ KENNETH R. BICKETT	Vice President, Accounting and Corporate Controller
Kenneth R. Bickett	(Principal Accounting Officer)
/s/ ERNIE L. DANNER	Executive Vice President and Director
Ernie L. Danner
/s/ THOMAS C. CASE	Director
Thomas C. Case
/s/ JANET F. CLARK	Director
Janet F. Clark
/s/ URIEL E. DUTTON	Director
Uriel E. Dutton
/s/ LISA W. RODRIGUEZ	Director
Lisa W. Rodriguez
/s/ WILLIAM M. PRUELLAGE	Director
William M. Pruellage
/s/ J.W.G. HONEYBOURNE	Director
J.W.G. Honeybourne

II-2

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2007.

Universal Compression, Inc.
By:	/s/ STEPHEN A. SNIDER
	Stephen A. Snider President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange act of 1934, this report has been signed by the following persons in the capacities indicated on February 28, 2007.

Name	Title
/s/ STEPHEN A. SNIDER	President, Chief Executive Officer and Director
Stephen A. Snider	(Principal Executive Officer)
/s/ J. MICHAEL ANDERSON	Senior Vice President and Chief Financial Officer
J. Michael Anderson	(Principal Financial Officer)
/s/ KENNETH R. BICKETT	Vice President, Accounting and Corporate Controller
Kenneth R. Bickett	(Principal Accounting Officer)
/s/ ERNIE L. DANNER	Executive Vice President and Director
Ernie L. Danner

II-3

EX-10.19

Exhibit 10.19

EXECUTION VERSION

GUARANTY AGREEMENT

DATED AS OF
OCTOBER 20, 2006

MADE BY

UCI COMPRESSOR HOLDING, L.P.,
AS GUARANTOR

AND

UCI MLP LP LLC,
AS GUARANTOR

AND

EACH OF THE OTHER GUARANTORS (AS DEFINED HEREIN)

IN FAVOR OF

WACHOVIA BANK, NATIONAL ASSOCIATION,
AS ADMINISTRATIVE AGENT

TABLE OF CONTENTS

		Page
ARTICLE I Definitions		1
Section 1.01	Definitions	1
Section 1.02	Rules of Interpretation	3
ARTICLE II Guarantee		3
Section 2.01	Guarantee	3
Section 2.02	Right of Contribution	4
Section 2.03	No Subrogation	4
Section 2.04	Amendments, Etc. with respect to the Borrower Obligations	5
Section 2.05	Waivers	5
Section 2.06	Guaranty Absolute and Unconditional	5
Section 2.07	Reinstatement	7
Section 2.08	Payments	7
ARTICLE III Representations and Warranties		7
Section 3.01	Representations in Credit Agreement	7
Section 3.02	Benefit to the Guarantor	8
Section 3.03	Solvency	8
ARTICLE IV Covenants		8
Section 4.01	Covenants in Credit Agreement	8
ARTICLE V The Administrative Agent		8
Section 5.01	Authority of Administrative Agent	8
ARTICLE VI Subordination of Indebtedness		9
Section 6.01	Subordination of All Guarantor Claims	9
Section 6.02	Claims in Bankruptcy	9
Section 6.03	Payments Held in Trust	9
Section 6.04	Liens Subordinate	10
Section 6.05	Notation of Records	10
ARTICLE VII Miscellaneous		10
Section 7.01	Waiver	10
Section 7.02	Notices	10
Section 7.03	Amendments in Writing	10
Section 7.04	Successors and Assigns	10
Section 7.05	Survival; Revival; Reinstatement	11
Section 7.06	Counterparts; Integration; Effectiveness	11
Section 7.07	Severability	12
Section 7.08	Set-Off	12
Section 7.09	Governing Law; Submission to Jurisdiction	12
Section 7.10	Headings	13
Section 7.11	Acknowledgments	13
Section 7.12	Additional Guarantors	14
Section 7.13	Acceptance	14

i

ANNEXES:

IForm of Assumption Agreement

SCHEDULES:

1Notice Addresses of Guarantors

ii

This GUARANTY AGREEMENT is dated as of October 20, 2006 made by UCI COMPRESSOR HOLDING, L.P., a Delaware limited partnership (“UCI Compressor”) and UCI MLP LP, LLC, a Delaware limited liability company (“Limited Partner”) and each of the signatories hereto (each of the signatories hereto, together with UCI Compressor and the Limited Partner and the Subsidiary Guarantors that becomes a party hereto from time to time after the date hereof, the “Guarantors”), in favor of Wachovia Bank, National Association, as the administrative agent (in such capacity, together with its successors in such capacity, the “Administrative Agent”), for the banks and other financial institutions (the “Lenders”) from time to time parties to the Credit Agreement dated October 20, 2006 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Universal Compression, Inc., a corporation formed under the laws of the State of Texas (“UCI”); Universal Compression Holdings, Inc., a corporation formed under the laws of the State of Delaware (“Holdings”); Universal Compression Canada, Limited Partnership, a Nova Scotia limited partnership (“Universal Canada”); UC Canadian Partnership Holdings Company, a Nova Scotia unlimited liability company (“UC Canadian Holdings” and together with UCI, Holdings and Universal Canada, the “Borrowers”); the Lenders, the Administrative Agent, and the other Agents party thereto.

R E C I T A L S

A.The Borrowers have requested that the Lenders provide certain loans to and extensions of credit on behalf of the Borrowers.

B.The Lenders have agreed to make such loans and extensions of credit subject to the terms and conditions of the Credit Agreement.

C.It is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrowers under the Credit Agreement that the Guarantors shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Lenders.

D.NOW, THEREFORE, in consideration of the premises herein and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers thereunder, each Guarantor hereby agrees with the Administrative Agent, for the ratable benefit of the Lenders, as follows:

ARTICLE I
Definitions

Section 1.01Definitions.

(a)Unless otherwise defined herein, terms defined in the Credit Agreement and used herein have the meanings given to them in the Credit Agreement, and all uncapitalized terms which are defined in the UCC on the date hereof are used herein as so defined.

(b)The following terms have the following meanings:

“Agreement” means this Guaranty Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

“Bankruptcy Code” means Title 11, United States Code, as amended from time to time.

“Borrower Obligations” means the collective reference to the payment and performance when due of all indebtedness, liabilities, obligations and undertakings of the Borrowers (including, without limitation, all Indebtedness) of every kind or description arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Guaranteed Documents, including, without limitation, the unpaid principal of and interest on the Loans and the LC Exposure and all other obligations and liabilities of the Borrowers (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and LC Exposure and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrowers, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Guaranteed Creditors, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Guaranteed Documents, whether on account of principal, interest, premium, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all reasonable costs, fees and disbursements that are required to be paid by the Borrowers pursuant to the terms of any Guaranteed Documents).

“Collateral Agreement” means that certain Collateral Agreement, dated October 20, 2006 by Universal Compression, Inc., Universal Compression Holdings, Inc., UCI Compressor Holding, L.P. and UCI MLP LP LLC, collectively, as Grantors in favor of Wachovia Bank, National Association, as US Administrative Agent for the Lenders.

“Guaranteed Creditors” means the collective reference to the Administrative Agent, the Lenders and the Lenders and Affiliates of Lenders that are parties to Guaranteed Hedging Agreements.

“Guaranteed Documents” means the collective reference to the Credit Agreement, the other Loan Documents, each Guaranteed Hedging Agreement and any other document made, delivered or given in connection with any of the foregoing.

“Guaranteed Hedging Agreement” means any Hedging Agreement between any Borrower or any Restricted Subsidiary and any Lender or any Affiliate of any Lender while such Person (or, in the case of an Affiliate of a Lender, the Person affiliated therewith) is a Lender, including any Hedging Agreement between such Persons in existence prior to the date hereof, but excluding any Hedging Agreement now existing or hereafter arising in connection with the ABS Facility. For the avoidance of doubt, a Hedging Agreement ceases to be a Guaranteed Hedging Agreement if the Person that is the counterparty to any Borrower or any Restricted Subsidiary under a Hedging Agreement ceases to be a Lender under the Credit Agreement (or, in the case of an Affiliate of a Lender, the Person affiliated therewith ceases to be a Lender under the Credit Agreement).

2

“Guarantor Obligations” means with respect to any Guarantor, the collective reference to (a) the Borrower Obligations and (b) the payment and performance when due of all indebtedness, liabilities, obligations and undertakings of such Guarantor of every kind or description, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, arising out of or outstanding under, advanced or issued pursuant, or evidenced by, any Guaranteed Document to which such Guarantor is a party, in each case, whether on account of principal, interest, guarantee obligations, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all reasonable fees and disbursements that are required to be paid pursuant to the terms of any Guaranteed Document).

“Guarantors” means the collective reference to each Guarantor.

“Obligations” means:  (a) in the case of each Borrower, the Borrower Obligations and (b) in the case of each Guarantor, its Guarantor Obligations.

“Guarantor Claims” has the meaning assigned to such term in Section 6.01.

Section 1.02Rules of Interpretation. Section 1.04 of the Credit Agreement is hereby incorporated herein by reference and shall apply to this Agreement, mutatis mutandis.

ARTICLE II
Guarantee

Section 2.01Guarantee.

(a)Each of the Guarantors hereby jointly and severally, unconditionally and irrevocably, guarantees to the Guaranteed Creditors and each of their respective permitted successors, indorsees, transferees and assigns, the prompt and complete payment in cash and performance by the Borrowers when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations. This is a guarantee of payment and not collection and the liability of each Guarantor is primary and not secondary.

(b)Anything herein or in any other Guaranteed Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Guaranteed Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.02).

(c)Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this ARTICLE II or affecting the rights and remedies of any Guaranteed Creditor hereunder.

(d)Each Guarantor agrees that if the maturity of the Borrower Obligations is accelerated by bankruptcy or otherwise, such maturity shall also be deemed accelerated for the purpose of this guarantee without demand or notice to such Guarantor. The guarantee contained in this ARTICLE II shall remain in full force and effect until all the Borrower Obligations shall

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have been satisfied by payment in full in cash, no Letter of Credit shall be outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments are terminated, notwithstanding that from time to time during the term of the Credit Agreement, no Borrower Obligations may be outstanding.

(e)No payment made by any Guarantor, any other guarantor or any other Person or received or collected by any Guaranteed Creditor from any Guarantor, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations are paid in full in cash, no Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments are terminated.

Section 2.02Right of Contribution.  Each Guarantor hereby agrees that to the extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor’s right of contribution shall be subject to the terms and conditions of Section 2.03. The provisions of this Section 2.02 shall in no respect limit the obligations and liabilities of any Guarantor to the Guaranteed Creditors, and each Guarantor shall remain liable to the Guaranteed Creditors for the full amount guaranteed by such Guarantor hereunder.

Section 2.03No Subrogation.  Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by any Guaranteed Creditor, no Guarantor shall be entitled to be subrogated to any of the rights of any Guaranteed Creditor against any Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by any Guaranteed Creditor for the payment of the Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any indemnity, exoneration, participation, contribution or reimbursement from any Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Guaranteed Creditors on account of the Borrower Obligations are irrevocably and indefeasibly paid in full in cash, no Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been irrevocably and indefeasibly paid in full in cash, any Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) or any of the Aggregate Commitments are in effect, such amount shall be held by such Guarantor in trust for the Guaranteed Creditors, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against the Borrower

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Obligations, whether matured or unmatured, in accordance with Section 11.02(c) of the Credit Agreement.

Section 2.04Amendments, Etc. with respect to the Borrower Obligations.  Each Guarantor shall remain obligated hereunder, and such Guarantor’s obligations hereunder shall not be released, discharged or otherwise affected, notwithstanding that, without any reservation of rights against any Guarantor and without notice to, demand upon or further assent by any Guarantor (which notice, demand and assent requirements are hereby expressly waived by such Guarantor), (a) any demand for payment of any of the Borrower Obligations made by any Guaranteed Creditor may be rescinded by such Guaranteed Creditor or otherwise and any of the Borrower Obligations continued; (b) the Borrower Obligations, the liability of any other Person upon or for any part thereof or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by, or any indulgence or forbearance in respect thereof granted by, any Guaranteed Creditor; (c) any Guaranteed Document may be amended, modified, supplemented or terminated, in whole or in part, as the Guaranteed Creditors may deem advisable from time to time; (d) any collateral security, guarantee or right of offset at any time held by any Guaranteed Creditor for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released; (e) any additional guarantors, makers or endorsers of the Borrowers’ Obligations may from time to time be obligated on the Borrowers’ Obligations or any additional security or collateral for the payment and performance of the Borrowers’ Obligations may from time to time secure the Borrowers’ Obligations; and (f) any other event shall occur which constitutes a defense or release of sureties generally. No Guaranteed Creditor shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this ARTICLE II or any Property subject thereto.

Section 2.05Waivers.  Each Guarantor hereby waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by any Guaranteed Creditor upon the guarantee contained in this ARTICLE II or acceptance of the guarantee contained in this ARTICLE II; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this ARTICLE II and no notice of creation of the Borrower Obligations or any extension of credit already or hereafter contracted by or extended to the Borrowers need be given to any Guarantor; and all dealings between any Borrower and any of the Guarantors, on the one hand, and the Guaranteed Creditors, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this ARTICLE II. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon any Borrower or any of the Guarantors with respect to the Borrower Obligations.

Section 2.06Guaranty Absolute and Unconditional.

(a)Each Guarantor understands and agrees that the guarantee contained in this ARTICLE II is, and shall be construed as, a continuing, completed, absolute and unconditional guarantee of payment, and each Guarantor hereby waives any defense of a surety or guarantor or any other obligor on any obligations arising in connection with or in respect of

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any of the following and hereby agrees that its obligations hereunder shall not be discharged or otherwise affected as a result of, any of the following:

(i)the invalidity or unenforceability of any Guaranteed Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by any Guaranteed Creditor;

(ii)any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Borrower or any other Person against any Guaranteed Creditor;

(iii)the insolvency, bankruptcy arrangement, reorganization, adjustment, composition, liquidation, disability, dissolution or lack of power of any Borrower or any other Guarantor or any other Person at any time liable for the payment of all or part of the Obligations, including any discharge of, or bar or stay against collecting, any Obligation (or any part of them or interest therein) in or as a result of such proceeding;

(iv)any sale, lease or transfer of any or all of the assets of any Borrower or any other Guarantor, or any changes in the shareholders of any Borrower or the Guarantor; provided that upon any such sale, lease or transfer, such assets shall be released in accordance with Section 8.12 of the Collateral Agreement.

(v)any change in the corporate existence (including its constitution, laws, rules, regulations or power), structure or ownership of any Guarantor;

(vi)the fact that any Collateral or Lien contemplated or intended to be given, created or granted as security for the repayment of the Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien, it being recognized and agreed by each of the Guarantors that it is not entering into this Agreement in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectability or value of any of the Collateral for the Obligations;

(vii)the absence of any attempt to collect the Obligations or any part of them from any Guarantor;

(viii)(A) any Guaranteed Creditor’s election, in any proceeding instituted under chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code; (B) any borrowing or grant of a Lien by the Borrowers, as debtor-in-possession, or extension of credit, under Section 364 of the Bankruptcy Code; (C) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of any Guaranteed Creditor’s claim (or claims) for repayment of the Obligations; (D) any use of cash collateral under Section 363 of the Bankruptcy Code; (E) any agreement or stipulation as to the provision of adequate protection in any bankruptcy proceeding; (F) the avoidance of any Lien in favor of the Guaranteed Creditors or any of them for any reason; or (G) failure by any Guaranteed Creditor to file or enforce a claim against any Borrower or any Borrower’s estate in any bankruptcy or insolvency case or proceeding; or

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(ix)any other circumstance or act whatsoever, including any action or omission of the type described in Section 2.04 (with or without notice to or knowledge of the Borrowers or such Guarantor), which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrowers for the Borrower Obligations, or of such Guarantor under the guarantee contained in this ARTICLE II, in bankruptcy or in any other instance.

(b)When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, any Guaranteed Creditor may, but shall be under no obligation to, join or make a similar demand on or otherwise pursue or exhaust such rights and remedies as it may have against any Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by any Guaranteed Creditor to make any such demand, to pursue such other rights or remedies or to collect any payments from any Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of any Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of any Guaranteed Creditor against any Guarantor. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

Section 2.07Reinstatement.  The guarantee contained in this ARTICLE II shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by any Guaranteed Creditor upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Borrower or any Guarantor or any substantial part of its Property, or otherwise, all as though such payments had not been made.

Section 2.08Payments.  Each Guarantor hereby guarantees that payments hereunder will be paid to the Administrative Agent, for the ratable benefit of the Guaranteed Creditors, without set-off, deduction or counterclaim in dollars, in immediately available funds, at its US Principal Office.

ARTICLE III
Representations and Warranties

To induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers thereunder and to induce the Lenders (and their Affiliates) to enter into Hedging Agreements with the Borrowers and their Restricted Subsidiaries, each Guarantor hereby represents and warrants to the Administrative Agent and each Lender that:

Section 3.01Representations in Credit Agreement.  In the case of each Guarantor, the representations and warranties set forth in Article VII of the Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party are true and correct

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in all material respects, provided that each reference in each such representation and warranty to each Borrower’s knowledge, as applicable, shall, for the purposes of this Section 3.01, be deemed to be a reference to such Guarantor’s knowledge.

Section 3.02Benefit to the Guarantor.  Each Borrower is a member of an affiliated group of companies that includes each Guarantor and each Borrower and the other Guarantors are engaged in related businesses. Each Guarantor is a Restricted Subsidiary of Holdings and its guaranty and surety obligations pursuant to this Agreement reasonably may be expected to benefit, directly or indirectly, it; and it has determined that this Agreement is necessary and convenient to the conduct, promotion and attainment of the business of such Guarantor and each Borrower.

Section 3.03Solvency.  Each Guarantor (a) is not insolvent as of the date hereof and will not be rendered insolvent as a result of this Agreement (after giving effect to Section 2.02), (b) is not engaged in business or a transaction, or about to engage in a business or a transaction, for which any Property remaining with it constitute unreasonably small capital, and (c) does not intend to incur, or believe it will incur, Debt that will be beyond its ability to pay as such Debt matures.

ARTICLE IV
Covenants

Each Guarantor covenants and agrees with the Administrative Agent and the Lenders that, from and after the date of this Agreement until the Borrower Obligations shall have been paid in full in cash, no Letter of Credit shall be outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments shall have terminated:

Section 4.01Covenants in Credit Agreement.  In the case of each Guarantor, such Guarantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its Restricted Subsidiaries.

ARTICLE V
The Administrative Agent

Section 5.01Authority of Administrative Agent.  Each Guarantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Guaranteed Creditors, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Guarantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Guaranteed Creditors with full and valid

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authority so to act or refrain from acting, and no Guarantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

ARTICLE VI
Subordination of Indebtedness

Section 6.01Subordination of All Guarantor Claims.  As used herein, the term “Guarantor Claims” shall mean all debts and obligations of the Borrowers or any other Guarantor to any other Guarantor, whether such debts and obligations now exist or are hereafter incurred or arise, or whether the obligation of the debtor thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or obligations be evidenced by note, contract, open account, or otherwise, and irrespective of the Person or Persons in whose favor such debts or obligations may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by. After and during the continuation of an Event of Default, no Guarantor shall receive or collect, directly or indirectly, from any obligor in respect thereof any amount upon the Guarantor Claims.

Section 6.02Claims in Bankruptcy.  In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceedings involving any Guarantor, the Administrative Agent on behalf of the Administrative Agent and the Guaranteed Creditors shall have the right to prove their claim in any proceeding, so as to establish their rights hereunder and receive directly from the receiver, trustee or other court custodian, dividends and payments which would otherwise be payable upon Guarantor Claims. Each Guarantor hereby assigns such dividends and payments to the Administrative Agent for the benefit of the Administrative Agent and the Guaranteed Creditors for application against the Borrower Obligations as provided under Section 11.02(b) of the Credit Agreement. Should any Agent or Guaranteed Creditor receive, for application upon the Obligations, any such dividend or payment which is otherwise payable to any Guarantor, and which, as between such Guarantors, shall constitute a credit upon the Guarantor Claims, then upon payment in full in cash of the Borrower Obligations, the expiration of all Letters of Credit (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and the termination of all of the Aggregate Commitments, the intended recipient shall become subrogated to the rights of the Administrative Agent and the Guaranteed Creditors to the extent that such payments to the Administrative Agent and the Lenders on the Guarantor Claims have contributed toward the liquidation of the Obligations, and such subrogation shall be with respect to that proportion of the Obligations which would have been unpaid if the Administrative Agent and the Guaranteed Creditors had not received dividends or payments upon the Guarantor Claims.

Section 6.03Payments Held in Trust.  In the event that notwithstanding Section 6.01 and Section 6.02, any Guarantor should receive any funds, payments, claims or distributions which is prohibited by such Sections, then it agrees: (a) to hold in trust for the Administrative Agent and the Guaranteed Creditors an amount equal to the amount of all funds, payments, claims or distributions so received, and (b) that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions except to pay them promptly to the Administrative Agent, for the benefit of the Guaranteed Creditors; and each Guarantor covenants promptly to pay the same to the Administrative Agent.

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Section 6.04Liens Subordinate.  Each Guarantor agrees that, until the Borrower Obligations are paid in full in cash, the expiration of all Letters of Credit (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and the termination of all of the Aggregate Commitments, any Liens securing payment of the Guarantor Claims shall be and remain inferior and subordinate to any Liens securing payment of the Obligations, regardless of whether such encumbrances in favor of such Guarantor, the Administrative Agent or any Guaranteed Creditor presently exist or are hereafter created or attach. Without the prior written consent of the Administrative Agent, no Guarantor, during the period in which any of the Borrower Obligations are outstanding or the Aggregate Commitments are in effect, shall (a) exercise or enforce any creditor’s right it may have against any debtor in respect of the Guarantor Claims, or (b) foreclose, repossess, sequester or otherwise take steps or institute any action or proceeding (judicial or otherwise, including without limitation the commencement of or joinder in any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any Lien held by it.

Section 6.05Notation of Records.  Upon the request of the Administrative Agent, all promissory notes and all accounts receivable ledgers or other evidence of the Guarantor Claims accepted by or held by any Guarantor shall contain a specific written notice thereon that the indebtedness evidenced thereby is subordinated under the terms of this Agreement.

ARTICLE VII
Miscellaneous

Section 7.01Waiver.  No failure on the part of the Administrative Agent or any Guaranteed Creditor to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, privilege or remedy or any abandonment or discontinuance of steps to enforce such right, power, privilege or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy under this Agreement or any other Loan Document preclude or  be construed as a waiver of any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. The remedies provided herein are cumulative and not exclusive of any remedies provided by law or equity.

Section 7.02Notices.  All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 13.02 of the Credit Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1.

Section 7.03Amendments in Writing.  None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 13.04 of the Credit Agreement.

Section 7.04Successors and Assigns.  The provisions of this Agreement shall be binding upon the Guarantors and their successors and assigns and shall inure to the benefit of the Administrative Agent and the Guaranteed Creditors and their respective successors and assigns; provided that except as set forth in Section 13.06 of the Credit Agreement, no Guarantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior

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written consent of the Administrative Agent and the Lenders, and any such purported assignment, transfer or delegation shall be null and void.

Section 7.05Survival; Revival; Reinstatement.

(a)All covenants, agreements, representations and warranties made by any Guarantor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document to which it is a party shall be considered to have been relied upon by the Administrative Agent, the other Agents, the Issuing Bank and the Lenders and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the other Agents, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under the Credit Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Aggregate Commitments have not expired or terminated.

(b)To the extent that any payments on the Guarantor Obligations are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Guarantor Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received and the Administrative Agent’s and the Guaranteed Creditors’ Liens, security interests, rights, powers and remedies under this Agreement and each other Loan Document shall continue in full force and effect. In such event, each Loan Document shall be automatically reinstated and the Borrowers shall take such action as may be reasonably requested by the Administrative Agent and the Guaranteed Creditors to effect such reinstatement.

Section 7.06Counterparts; Integration; Effectiveness.

(a)This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.

(b)THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THIS AGREEMENT AND THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

(c)This Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties

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hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto, the Lenders and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

Section 7.07Severability.  Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

Section 7.08Set-Off.  If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations (of whatsoever kind, including, without limitations obligations under Hedging Agreements) at any time owing by such Lender or Affiliate to or for the credit or the account of any Guarantor against any of and all the obligations of the Guarantor owed to such Lender now or hereafter existing under this Agreement or any other Loan Document, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 7.08 are in addition to other rights and remedies (including other rights of setoff) which such Lender or its Affiliates may have. Notwithstanding anything to the contrary contained in this Agreement, the Lenders hereby agree that they shall not set off any funds in any lock boxes whatsoever in connection with this Agreement, except for such lock boxes which may be established in connection with this Agreement.

Section 7.09Governing Law; Submission to Jurisdiction.

(a)THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

(b)ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE A PARTY FROM OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY COURT OTHERWISE HAVING JURISDICTION.

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(c)EACH GUARANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH GUARANTOR AT ITS ADDRESS SET FORTH ON SCHEDULE 1 HERETO OR AS UPDATED FROM TIME TO TIME, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.

(d)NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GUARANTOR IN ANY OTHER JURISDICTION.

(e)EACH PARTY HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY SECURITY INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (iii) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OF THE ADMINISTRATIVE AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (iv) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY INSTRUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 7.10.

Section 7.10Headings.  Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

Section 7.11Acknowledgments.  Each Guarantor hereby acknowledges that:

(a)it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

(b)neither the Administrative Agent nor any Guaranteed Creditor has any fiduciary relationship with or duty to any Guarantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Guarantors, on the one hand, and the Administrative Agent and Guaranteed Creditors, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

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(c)no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Guaranteed Creditors or among the Guarantors and the Guaranteed Creditors.

(d)Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged with notice and knowledge of the terms of this Agreement, the Security Instruments and the other Loan Documents; that it has in fact read this Agreement, the Security Instruments and the other Loan Documents and is fully informed and has full notice and knowledge of the terms, conditions and effects thereof; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the Security Instruments; and has received the advice of its attorney in entering into this Agreement and the Security Instruments; and that it recognizes that certain of the terms of this Agreement and the Security Instruments result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

Section 7.12Additional Guarantors.  Each Significant Domestic Subsidiary of Holdings that is required to become a party to this Agreement pursuant to Section 9.09 of the Credit Agreement shall become an Guarantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex I hereto and shall thereafter have the same rights, benefits and obligations as an Guarantor party hereto on the date hereof.

Section 7.13Acceptance.  Each Guarantor hereby expressly waives notice of acceptance of this Agreement, acceptance on the part of the Administrative Agent and the Guaranteed Creditors being conclusively presumed by their request for this Agreement and delivery of the same to the Administrative Agent.

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IN WITNESS WHEREOF, each of the undersigned has caused this Guaranty Agreement to be duly executed and delivered as of the date first above written.

BORROWERS:	UNIVERSAL COMPRESSION, INC.
	By:		/s/ J. Michael Anderson
	Name:		J. Michael Anderson
	Title:	Senior Vice President and
			Chief Financial Officer
	UNIVERSAL COMPRESSION
	HOLDINGS, INC.
	By:		/s/ J. Michael Anderson
	Name:		J. Michael Anderson
	Title:		Senior Vice President and
			Chief Financial Officer
GUARANTORS:	UCI MLP LP LLC
	By:		/s/ Pamela A. Jasinki
	Name:		Pamela A. Jasinski
	Title:		Manager
	UCI COMPRESSOR HOLDING, L.P.
	By:		/s/ J. Michael Anderson
	Name:		J. Michael Anderson
	Title:		Senior Vice President and
			Chief Financial Officer

Signature Page – Guaranty Agreement

Acknowledged and Agreed to as
of the date hereof by:
ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL
	ASSOCATION
	By:	/s/ Todd Schanzlin
	Name:	Todd Schanzlin
	Title:	Vice President

Signature Page – Guaranty Agreement

EX-10.20

Exhibit 10.20

EXECUTION VERSION

PLEDGE AND SECURITY AGREEMENT
(Assignment of Pledged Securities)

made by

UNIVERSAL COMPRESSION INTERNATIONAL INC.,

ENTERRA COMPRESSION INVESTMENT COMPANY,

UNIVERSAL COMPRESSION SERVICES, LLC,

UNIVERSAL COMPRESSION CANADIAN HOLDINGS, INC.,

UCI GP LP LLC, and

UCO GP, LLC,
as Pledgors

to

WACHOVIA BANK, NATIONAL ASSOCIATION,
as US Administrative Agent

Effective as of October 20, 2006

TABLE OF CONTENTS

	ARTICLE 1
	Security Interest
Section 1.01	Pledge	2
Section 1.02	Collateral	2
Section 1.03	No Subrogation	3
Section 1.04	Amendments, Etc. with respect to the Obligations	3
Section 1.05	Waivers	4
Section 1.06	Pledge Absolute and Unconditional	4
Section 1.07	Reinstatement	6
	ARTICLE 2
	Definitions
Section 2.01	Terms Defined Above	6
Section 2.02	Certain Definitions	6
Section 2.03	Credit Agreement Terms	8
Section 2.04	Section References	8
	ARTICLE 3
	Representations and Warranties
Section 3.01	Ownership of Collateral; Encumbrances	8
Section 3.02	No Required Consent	8
Section 3.03	Pledged Securities	8
Section 3.04	First Priority Security Interest	8
Section 3.05	Collateral	9
Section 3.06	Pledgor’s Location	9
Section 3.07	Benefit to the Pledgor	9
	ARTICLE 4
	Covenants and Agreements
Section 4.01	Covenants in Credit Agreement	9
Section 4.02	Maintenance of Perfected Security Interest; Further Documentation	9
Section 4.03	Changes in Locations, Name, Etc	10
Section 4.04	Pledged Securities	10
Section 4.05	Certain Liabilities	11
Section 4.06	Article 8 of the UCC	12
	ARTICLE 5
	Remedial Provisions
Section 5.01	UCC and Other Remedies	12
Section 5.02	Pledged Securities	13

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Section 5.03	Private Sales of Pledged Securities	15
Section 5.04	Non-Judicial Enforcement	15
	ARTICLE 6
	The Administrative Agent
Section 6.01	Administrative Agent’s Appointment as Attorney-in-Fact, Etc	15
Section 6.02	Duty of Administrative Agent	17
Section 6.03	Filing of Financing Statements	18
Section 6.04	Authority of Administrative Agent	18
	ARTICLE 7
	Miscellaneous
Section 7.01	Waiver	18
Section 7.02	Notices	18
Section 7.03	Amendments in Writing	18
Section 7.04	Successors and Assigns	18
Section 7.05	Survival; Revival; Reinstatement	19
Section 7.06	Counterparts; Effectiveness; Conflicts	19
Section 7.07	Severability	20
Section 7.08	Governing Law; Submission to Jurisdiction	20
Section 7.09	Headings	21
Section 7.10	Acknowledgments	21
Section 7.11	Additional Pledgors and Pledgors	22
Section 7.12	Releases	22
Section 7.13	Acceptance	23

ANNEXES:

IForm of Assumption Agreement

IIForm of Supplement

SCHEDULES:

1Notice Addresses of Pledgors

2Description of Pledged Securities

3Filings and Other Actions Required to Perfect Security Interests

4Location of Jurisdiction of Organization and Chief Executive Office

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PLEDGE AND SECURITY AGREEMENT

(Assignment of Pledged Securities)

This PLEDGE AND SECURITY AGREEMENT, dated as of October 20, 2006, is made by UNIVERSAL COMPRESSION INTERNATIONAL, INC., a Delaware corporation, ENTERRA COMPRESSION INVESTMENT COMPANY, a Delaware corporation, UNIVERSAL COMPRESSION SERVICES, LLC, a Delaware limited liability company, UNIVERSAL COMPRESSION CANADIAN HOLDINGS, INC., a Delaware corporation, UCI GP LP LLC, a Delaware limited liability company and UCO GP, LLC, a Delaware limited liability company with principal offices at 4444 Brittmoore Road, Houston, Texas 77041 (the “Pledgors”), in favor of WACHOVIA BANK, NATIONAL ASSOCIATION, with offices at 301 South College Street, Charlotte, North Carolina 28288, as Administrative Agent (in such capacity, the “US Administrative Agent”) for itself and the lenders and other financial institutions (the “Lenders”) from time to time party to the Senior Secured Credit Agreement dated of even date herewith (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Universal Compression, Inc., a Texas corporation (“UCI”), and Universal Compression Holdings, Inc., a Delaware corporation (“Holdings” and together with UCI, the “US Borrowers”), UC Canadian Partnership Holdings Company, a Nova Scotia unlimited liability company (“UC Canadian Holdings”), and Universal Compression Canada, Limited Partnership, a Nova Scotia limited partnership (“Universal Canada” and together with UC Canadian Partnership, the “Canadian Borrowers” and together with the US Borrowers, the “Borrowers”), the US Administrative Agent, Wachovia Capital Finance Corporation (Canada), as Canadian Administrative Agent, Deutsche Bank Trust Company Americas, as Syndication Agent, Wachovia Capital Markets, LLC and Deutsche Bank Securities Inc., as the Joint Lead Arrangers and Joint Lead Book Runners, and each of the other Agents and Lenders party thereto.

R E C I T A L S

A.The Borrowers have requested that the Lenders provide certain loans to and extensions of credit on behalf of the Borrowers.

B.The Lenders have agreed to make such loans and extensions of credit subject to the terms and conditions of the Credit Agreement.

C.It is a condition precedent and a continuing covenant to the obligation of the Lenders to make their loans and extensions of credit to the Borrowers under the Credit Agreement that the Pledgors shall have executed and delivered this Agreement to the US Administrative Agent for the ratable benefit of the Lenders.

D.NOW, THEREFORE, in consideration of the premises and to induce the US Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers thereunder, the parties hereto agree as follows:

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ARTICLE 1
Security Interest

Section 1.01Pledge.  Each Pledgor hereby pledges, assigns transfers and grants to the US Administrative Agent for the ratable benefit of the Secured Creditors a security interest in and right of set-off against all of the Pledgor’s rights, whether now owned or hereafter acquired, in and to the assets referred to in Section 1.02 (the “Collateral”) to secure the prompt payment and performance of the “Obligations” (as defined in Section 2.02) and the performance by such Pledgor of this Agreement.

Section 1.02Collateral.

(a)The Collateral consists of the “Pledged Securities” which means: (a) the certificated Capital Stock and the limited partnership interests and general partnership interests in UCO General Partner, LP all as described or referred to in Schedule 2 (as the same may be supplemented from time to time pursuant to a Supplement in substantially the form of Annex II); and (b) (i) the certificates or instruments, if any, representing such certificated Capital Stock and interests, (ii) all dividends (cash, certificated Capital Stock or otherwise), cash, instruments, rights to subscribe, purchase or sell and all other rights and Property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities and interests, (iii) all replacements, additions to and substitutions for any of the Property referred to in this definition, including, without limitation, claims against third parties, (iv) the proceeds, interest, profits and other income of or on any of the Property referred to in this definition, (v) all security entitlements in respect of any of the foregoing, if any and (vi) all books and records relating to any of the Property referred to in this definition.

(b)It is expressly contemplated that additional Property may from time to time be pledged, assigned or granted to the US Administrative Agent as additional security for the Obligations, and the term “Collateral” as used herein shall be deemed for all purposes hereof to include all such additional Property, together with all other Property of the types described above related thereto; provided, however, that in no event shall the term “Collateral” include more than 65% of the issued and outstanding shares of Capital Stock of any Foreign Subsidiary.  All certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by the US Administrative Agent or a Person designated by the US Administrative Agent and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, and accompanied by any required transfer tax stamps to effect the pledge of the Pledged Securities to the US Administrative Agent.  Notwithstanding the preceding sentence, at the US Administrative Agent’s discretion, all Pledged Securities must be delivered or transferred in such manner as to permit the US Administrative Agent to be a “protected purchaser” to the extent of its security interest as provided in Section 8.303 of the UCC (if the US Administrative Agent otherwise qualifies as a protected purchaser). During the continuance of an Event of Default, the US Administrative Agent shall have the

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right, at any time in its discretion and without notice, to transfer to or to register in the name of the US Administrative Agent or any of its nominees any or all of the Pledged Securities, subject only to the revocable rights specified in Section 5.03.  In addition, during the continuance of an Event of Default, the US Administrative Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Securities for certificates or instruments of smaller or larger denominations.

Section 1.03No Subrogation.  Notwithstanding any payment made by any Pledgor hereunder or any set-off or application of funds of any Pledgor by any Secured Creditor, no Pledgor shall be entitled to be subrogated to any of the rights of any Secured Creditor against any Borrower or any other Pledgor or any collateral security or pledge or guarantee or right of offset held by any Secured Creditor for the payment of the Obligations, nor shall any Pledgor seek or be entitled to seek any indemnity, exoneration, participation, contribution or reimbursement from any Borrower or any other Pledgor in respect of payments made by such Pledgor hereunder, until all amounts owing to the Secured Creditors on account of the Obligations are irrevocably and indefeasibly paid in full in cash, no Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments are terminated.  If any amount shall be paid to any Pledgor on account of such subrogation rights at any time when all of the Obligations shall not have been irrevocably and indefeasibly paid in full in cash, any Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) or any of the Aggregate Commitments are in effect, such amount shall be held by such Pledgor in trust for the Secured Creditors, and shall, forthwith upon receipt by such Pledgor, be turned over to the US Administrative Agent in the exact form received by such Pledgor (duly indorsed by such Pledgor to the US Administrative Agent, if required), to be applied against the Obligations, whether matured or unmatured, in accordance with Section 11.02(c) of the Credit Agreement.

Section 1.04Amendments, Etc. with respect to the Obligations.  Each Pledgor shall remain obligated hereunder, and such Pledgor’s obligations hereunder shall not be released, discharged or otherwise affected, notwithstanding that, without any reservation of rights against any Pledgor and without notice to, demand upon or further assent by any Pledgor (which notice, demand and assent requirements are hereby expressly waived by such Pledgor), (a) any demand for payment of any of the Obligations made by any Secured Creditor may be rescinded by such Secured Creditor or otherwise and any of the Obligations continued; (b) the Obligations, the liability of any other Person upon or for any part thereof or any collateral security or pledge or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by, or any indulgence or forbearance in respect thereof granted by, any Secured Creditor; (c) any Secured Document may be amended, modified, supplemented or terminated, in whole or in part, as the Secured Creditors may deem advisable from time to time; (d) any collateral security, pledge, guarantee or right of offset at any time held by any Secured Creditor for the payment of the Obligations may be sold, exchanged, waived, surrendered or released; (e) any additional guarantors, makers or endorsers of the Obligations may from time to time be obligated on the Obligations or any additional security or collateral for the payment and

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performance of the Obligations may from time to time secure the Obligations; and (f) any other event shall occur which constitutes a defense or release of sureties generally.  No Secured Creditor shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for the pledge contained in this ARTICLE I or any Property subject thereto.

Section 1.05Waivers.  Each Pledgor hereby waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by any Secured Creditor upon the pledge contained in this ARTICLE I or acceptance of the pledge contained in this ARTICLE I; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the pledge contained in this ARTICLE I and no notice of creation of the Obligations or any extension of credit already or hereafter contracted by or extended to the Borrowers need be given to any Pledgor; and all dealings between any Borrower and any of the Pledgors, on the one hand, and the Secured Creditors, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the pledge contained in this ARTICLE I.  Each Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon any Borrower or any of the Pledgors with respect to the Obligations.

Section 1.06Pledge Absolute and Unconditional.

(a)Except as provided in Section 7.12, each Pledgor understands and agrees that the pledge contained in this ARTICLE I is, and shall be construed as, a continuing, completed, absolute and unconditional pledge, and each Pledgor hereby waives any defense of a surety or guarantor or Pledgor or any other obligor on any obligations arising in connection with or in respect of any of the following and hereby agrees that its obligations hereunder shall not be discharged or otherwise affected as a result of, any of the following:

(i)the invalidity or unenforceability of any Secured Document, any of the Obligations or any other collateral security therefor or pledge or guarantee or right of offset with respect thereto at any time or from time to time held by any Secured Creditor;

(ii)any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Borrower or any other Person against any Secured Creditor;

(iii)the insolvency, bankruptcy arrangement, reorganization, adjustment, composition, liquidation, disability, dissolution or lack of power of any Borrower or any other Pledgor or any other Person at any time liable for the payment of all or part of the Obligations, including any discharge of, or bar or stay against collecting, any Obligation (or any part of them or interest therein) in or as a result of such proceeding;

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(iv)any sale, lease or transfer of any or all of the assets of any Borrower or any other Pledgor, or any changes in the shareholders of any Borrower or the Pledgor;

(v)any change in the corporate existence (including its constitution, laws, rules, regulations or power), structure or ownership of any Pledgor;

(vi)the fact that any Collateral or Lien contemplated or intended to be given, created or granted as security for the repayment of the Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien, it being recognized and agreed by each of the Pledgors that it is not entering into this Agreement in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectability or value of any of the Collateral for the Obligations;

(vii)the absence of any attempt to collect the Obligations or any part of them from any Pledgor;

(viii)(A) any Secured Creditor’s election, in any proceeding instituted under chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code; (B) any borrowing or grant of a Lien by the Borrowers, as debtor-in-possession, or extension of credit, under Section 364 of the Bankruptcy Code; (C) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of any Secured Creditor’s claim (or claims) for repayment of the Obligations; (D) any use of cash collateral under Section 363 of the Bankruptcy Code; (E) any agreement or stipulation as to the provision of adequate protection in any bankruptcy proceeding; (F) the avoidance of any Lien in favor of the Secured Creditors or any of them for any reason; or (G) failure by any Secured Creditor to file or enforce a claim against any Borrower or any Borrower’s estate in any bankruptcy or insolvency case or proceeding; or

(ix)any other circumstance or act whatsoever, including any action or omission of the type described in Section 1.04 (with or without notice to or knowledge of the Borrowers or such Pledgor), which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrowers for the Obligations, or of such Pledgor under the pledge contained in this ARTICLE I, in bankruptcy or in any other instance.

(b)When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Pledgor, any Secured Creditor may, but shall be under no obligation to, join or make a similar demand on or otherwise pursue or exhaust such rights and remedies as it may have against any Borrower, any other Pledgor or any other Person or against any collateral security or pledge or guarantee for the Obligations or any right of offset with respect thereto, and any failure by any Secured Creditor to make any such demand, to pursue such other rights or remedies or to collect any payments from any

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Borrower, any other Pledgor or any other Person or to realize upon any such collateral security or pledge or guarantee or to exercise any such right of offset, or any release of any Borrower, any other Pledgor or any other Person or any such collateral security, guarantee or pledge or right of offset, shall not relieve any Pledgor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of any Secured Creditor against any Pledgor.  For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

Section 1.07Reinstatement.  The pledge contained in this ARTICLE I shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by any Secured Creditor upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any Pledgor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Borrower or any Pledgor or any substantial part of its Property, or otherwise, all as though such payments had not been made.

ARTICLE 2
Definitions

Section 2.01Terms Defined Above.  As used in this Agreement, the terms defined above shall have the meanings respectively assigned to them.

Section 2.02Certain Definitions.  As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires:

“Agreement” means this Pledge and Security Agreement, as the same may from time to time be amended, supplemented or otherwise modified.

“Event of Default” means any event specified in Section 6.01.

“Issuers” means the collective reference to each issuer of Pledged Securities.

“Obligations” means the collective reference to the payment and performance when due of all indebtedness, liabilities, obligations and undertakings of the Borrowers and their Restricted Subsidiaries (including, without limitation, all Indebtedness) of every kind or description arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Secured Documents, including, without limitation, the unpaid principal of and interest on the Aggregate Credit Exposure and all other obligations and liabilities of the Borrowers and their Restricted Subsidiaries (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and LC Exposure and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrowers, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Secured Creditors, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, arising out of

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or outstanding under, advanced or issued pursuant, or evidenced by, the Secured Documents, whether on account of principal, interest, premium, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all reasonable costs, fees and disbursements of counsel that are required to be paid by the Borrowers pursuant to the terms of the Credit Agreement).

“Pledged Securities” has the meaning assigned in Section 1.02(a).

“Proceeds” means all “proceeds” as such term is defined in Section 9.102(65) of the UCC and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions or payments with respect thereto.

“Secured Creditors” means the collective reference to the US Administrative Agent, the Issuing Banks, the Lenders and the Lenders and Affiliates of Lenders that are parties to Secured Hedging Agreements.

“Secured Documents” means the collective reference to the Credit Agreement, the other Loan Documents, each Secured Hedging Agreement and any other document made, delivered or given in connection with any of the foregoing.

“Secured Hedging Agreement” means any Hedging Agreement between any Borrower or its Restricted Subsidiary and any Lender or any Affiliate of any Lender while such Person (or, in the case of an Affiliate of a Lender, the Person affiliated therewith) is a Lender, including any Hedging Agreement between such Persons in existence prior to the date hereof, but excluding any Hedging Agreement now existing or hereafter arising in connection with the ABS Facility.  For the avoidance of doubt, a Hedging Agreement ceases to be a Secured Hedging Agreement if the Person that is the counterparty to a Borrower or its Restricted Subsidiary under a Hedging Agreement ceases to be a Lender under the Credit Agreement (or, in the case of an Affiliate of a Lender, the Person affiliated therewith ceases to be a Lender under the Credit Agreement).

“UCC” means the Uniform Commercial Code as from time to time in effect in the State of Texas; provided, however, that, in the event that, by reason of mandatory provisions of law, any of the attachment, perfection or priority of the Secured Creditors’ security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Texas, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, the effect thereof or priority and for purposes of definitions related to such provisions.

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Section 2.03Credit Agreement Terms.  Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

Section 2.04Section References.  Unless otherwise provided for herein, all references herein to Sections are to Sections of this Agreement.

ARTICLE 3
Representations and Warranties

To induce the US Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers thereunder and to induce the Lenders (and their Affiliates) to enter into Hedging Agreements with the Borrowers and their Subsidiaries, each Pledgor hereby represents and warrants to the US Administrative Agent and each Lender that:

Section 3.01Ownership of Collateral; Encumbrances.  Except as otherwise permitted by the Credit Agreement, the Pledgors are the record and beneficial owners of the Collateral free and clear of any Lien except for the security interest created by this Agreement, and the Pledgors have full right, power and authority to pledge, assign and grant a security interest in the Collateral to the US Administrative Agent.

Section 3.02No Required Consent.  No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the filing of financing statements) is required for (a) the due execution, delivery and performance by such Pledgor of this Agreement, (b) the grant by such Pledgor of the security interest granted by this Agreement or (c) the perfection of such security interest.

Section 3.03Pledged Securities.  The Pledged Securities required to be pledged hereunder and under the Credit Agreement by such Pledgor are listed on Schedule 2.  The shares and interests of Pledged Securities pledged by such Pledgor hereunder constitute all the issued and outstanding shares and interests of all classes of the Capital Stock of each Issuer owned by such Pledgor (or in the case of any Issuer that is a Foreign Subsidiary, 65% of all the issued and outstanding shares and interests of all classes of the Capital Stock of such Issuer (except as otherwise noted on Schedule 2)).  All the shares and interests of the Pledged Securities have been duly and validly issued and are fully paid and nonassessable, and such Pledgor is the record and beneficial owner of, and has good title to, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement, and has the power to transfer the Pledged Securities in which a Lien is granted by it hereunder, free and clear of any other Lien.

Section 3.04First Priority Security Interest.  The pledge of Pledged Securities pursuant to this Agreement and the filing of appropriate financing statements in the locations described on Schedule 3 create a valid and perfected first priority security interest in the Collateral, enforceable against such Pledgor and all third parties and securing payment of the Obligations.

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Section 3.05Collateral.  All statements to other information provided by such Pledgor to the US Administrative Agent describing or with respect to the Collateral is or (in the case of subsequently furnished information) will be when provided correct and complete in all material respects.

Section 3.06Pledgor’s Location.  On the date hereof, the correct legal name of such Pledgor, such Pledgor’s jurisdiction of organization and organizational number, and the location(s) of such Pledgor’s chief executive office or sole place of business are specified on Schedule 4.

Section 3.07Benefit to the Pledgor.  The Borrowers are members of an affiliated group of companies that includes each Pledgor.  Each Pledgor is a Subsidiary of a US Borrower, and its guaranty and surety obligations pursuant to this Agreement reasonably may be expected to benefit, directly or indirectly, the Borrowers, and it has determined that this Agreement is necessary and convenient to the conduct, promotion and attainment of the business of such Pledgor and the Borrowers.

ARTICLE 4
Covenants and Agreements

Each Pledgor covenants and agrees with the US Administrative Agent and the Lenders that, from and after the date of this Agreement until the Obligations under the Credit Agreement shall have been paid in full in cash, no Letters of Credit shall be outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments shall have terminated:

Section 4.01Covenants in Credit Agreement.  In the case of each Pledgor, such Pledgor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Pledgor or any of its Subsidiaries.

Section 4.02Maintenance of Perfected Security Interest; Further Documentation.  Except as set forth in the Credit Agreement, including, without limitation, any merger, consolidation, liquidation, sale, assignment, transfer or other disposition permitted by Sections 10.08 and 10.14 of the Credit Agreement, each Pledgor agrees that:

(a)it shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 3.04 and shall defend such security interest against the claims and demands of all Persons whomsoever;

(b)it will furnish to the US Administrative Agent and the Lenders from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the US Administrative Agent may reasonably request, all in reasonable detail; and

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(c)at any time and from time to time, upon the written request of the US Administrative Agent, and at the sole expense of such Pledgor, it will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the US Administrative Agent may reasonably deem necessary for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the delivery of certificated securities and the filing of any financing or continuation statements under the UCC (or other similar domestic laws) in effect in any jurisdiction with respect to the security interests created hereby.

Section 4.03Changes in Locations, Name, Etc.  Such Pledgor recognizes that financing statements pertaining to the Collateral have been or may be filed where such Pledgor is organized.  Without limitation of Section 9.03 of the Credit Agreement or any other covenant herein, such Pledgor will not cause or permit any change in its (a) corporate name, (b) its identity or corporate structure or in the jurisdiction in which it is incorporated or formed, (c) its jurisdiction of organization or its organizational identification number in such jurisdiction of organization or (d) its federal taxpayer identification number, unless, in each case, such Pledgor shall have first (i) notified the US Administrative Agent of such change prior to the effective date of such change, and (ii) taken all action reasonably requested by the US Administrative Agent for the purpose of maintaining the perfection and priority of the US Administrative Agent’s security interests under this Agreement.  In any notice furnished pursuant to this Section 4.03, such Pledgor will expressly state in a conspicuous manner that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of the US Administrative Agent’s security interest in the Collateral.

Section 4.04Pledged Securities.  In the case of each Pledgor, such Pledgor agrees that:

(a)if such Pledgor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Pledged Securities of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares or interests of the Pledged Securities, or otherwise in respect thereof, such Pledgor shall accept the same as the agent of the Secured Creditors, hold the same in trust for the Secured Creditors, segregated from other Property of such Pledgor, and deliver the same forthwith to the US Administrative Agent in the exact form received, duly indorsed by such Pledgor to the US Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Pledgor and with, if the US Administrative Agent so requests, signature guaranteed, to be held by the US Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations; provided, that the foregoing shall apply to 65% of such shares, interests or rights in the case of an Issuer that is a Foreign Subsidiary;

(b)without the prior written consent of the US Administrative Agent, such Pledgor will not (i) unless otherwise expressly permitted hereby or under the other Loan

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Documents, vote to enable, or take any other action to permit, any Issuer to issue any Capital Stock of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any Capital Stock of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction expressly permitted by the Credit Agreement), (iii) except as set forth in the Credit Agreement, create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Securities or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Pledgor or the US Administrative Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof;

(c)in the case of each Pledgor that is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Pledged Securities issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the US Administrative Agent promptly in writing of the occurrence of any of the events described in Section 4.04(a) with respect to the Pledged Securities issued by it and (iii) the terms of Section 5.02(a) and Section 5.03 shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 5.02(d) or Section 5.03 with respect to the Pledged Securities issued by it;

(d)such Pledgor shall furnish to the US Administrative Agent such stock powers and other instruments as may be reasonably required by the US Administrative Agent to assure the transferability of the Pledged Securities when and as often as may be reasonably requested by the US Administrative Agent; and

(e)the Pledged Securities will at all times constitute not less than 100% of the Capital Stock of the Issuer thereof owned by any Pledgor (or in the case of any Issuer that is a Foreign Subsidiary, not less than 65% of the Capital Stock of such Issuer (except as otherwise noted on Schedule 2)).  Such Pledgor will not permit any Issuer of any of the Pledged Securities to issue any new shares or interests of any class of Capital Stock of such Issuer unless such shares are pledged pursuant to this Agreement.

(f)Notwithstanding any contrary provisions contained in this Agreement, with respect to Issuers that are Foreign Subsidiaries, the Pledgors are required to pledge 65% of the Capital Stock of such Issuers (except as otherwise noted on Schedule 2) and to deliver the applicable certificates and stock powers duly executed in blank for such Capital Stock to the US Administrative Agent but shall not be required to take any additional actions to perfect the security interest of the Secured Creditors in such Pledged Securities.

Section 4.05Certain Liabilities.  Such Pledgor hereby assumes all liability for the Collateral, the security interest created hereunder and any use, possession, maintenance, management, enforcement or collection of any or all of the Collateral.

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Section 4.06Article 8 of the UCC.  To the extent that any Pledgor has opted into Article 8 of the UCC, such Pledgor may not opt out of Article 8 of the UCC without the prior written consent of the US Administrative Agent.

ARTICLE 5
Remedial Provisions

Section 5.01UCC and Other Remedies.

(a)Upon the occurrence and during the continuance of an Event of Default, the US Administrative Agent, on behalf of the Secured Creditors, may exercise, in addition to all other rights and remedies granted to them in this Agreement, the other Loan Documents and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the UCC or any other applicable law or otherwise available at law or equity.  Without limiting the generality of the foregoing, the US Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of any Secured Creditor or elsewhere upon such commercially reasonable terms and conditions as it may deem advisable and at such commercially reasonable prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk.  Any Secured Creditor shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Pledgor, which right or equity is hereby waived and released.  Any such sale or transfer by the US Administrative Agent either to itself or to any other Person shall, to the fullest extent permitted under applicable law, be absolutely free from any claim of right by any Pledgor, including any equity or right of redemption, stay or appraisal which any Pledgor has or may have under any rule of law, regulation or statute now existing or hereafter adopted (and such Pledgor hereby waives any rights it may have in respect thereof).  Upon any such sale or transfer, the US Administrative Agent shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred.  The US Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 5.01, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the US Administrative Agent and the Secured Creditors hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in accordance with the Credit Agreement, and only after such application and after the payment by the US Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9.615 of the UCC, need the US Administrative Agent account for the surplus, if any, to any Pledgor.  To the extent permitted by

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applicable law, each Pledgor waives all claims, damages and demands it may acquire against the US Administrative Agent or any Secured Creditor arising out of the exercise by them of any rights hereunder.  If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

(b)In the event that the US Administrative Agent elects not to sell the Collateral, the US Administrative Agent retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Obligations.  Each and every method of disposition of the Collateral described in this Agreement shall constitute disposition in a commercially reasonable manner.

(c)The US Administrative Agent may appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer of the Collateral.

Section 5.02Pledged Securities.

(a)Unless an Event of Default shall have occurred and be continuing and the US Administrative Agent shall have given notice to the relevant Pledgor of the US Administrative Agent’s intent to exercise its corresponding rights pursuant to Section 5.02, each Pledgor shall be permitted to receive all cash dividends paid in respect of the Pledged Securities paid in the normal course of business of the relevant Issuer, to the extent permitted in the Credit Agreement, and to exercise all voting, consent and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast, consent given or right exercised or other action taken by such Pledgor that would impair the Collateral or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document or, without the prior consent of the US Administrative Agent, enable or permit any Issuer of Pledged Securities to issue any Capital Stock or to issue any other securities convertible into or granting the right to purchase or exchange for any Capital Stock of any Issuer of Pledged Securities other than as permitted by the Credit Agreement.

(b)Upon the occurrence and during the continuance of an Event of Default, upon notice by the US Administrative Agent of its intent to exercise such rights to the relevant Pledgor or Pledgors, (i) the US Administrative Agent shall have the right to receive any and all cash dividends, payments, Property or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Obligations in accordance with the Credit Agreement, and (ii) any or all of the Pledged Securities shall be registered in the name of the US Administrative Agent or its nominee, and (iii) the US Administrative Agent or its nominee may exercise (A) all voting, consent, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders (or other equivalent body) of the relevant Issuer or Issuers or otherwise and (B) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in

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the organizational structure of any Issuer, or upon the exercise by any Pledgor or the US Administrative Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the US Administrative Agent may determine), all without liability except to account for Property actually received by it, but the US Administrative Agent shall have no duty to any Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

(c)In order to permit the US Administrative Agent to exercise the voting and other consensual rights that it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions that it may be entitled to receive hereunder, (i) each Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to the US Administrative Agent all such proxies, dividend payment orders and other instruments as the US Administrative Agent may from time to time reasonably request and (ii) without limiting the effect of clause (i) above, such Pledgor hereby grants to the US Administrative Agent an irrevocable proxy to vote all or any part of the Pledged Securities and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Securities would be entitled (including giving or withholding written consents of shareholders calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Securities on the record books of the Issuer thereof) by any other Person (including the Issuer of such Pledged Securities or any officer or agent thereof) upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full in cash of the Obligations under the Credit Agreement.

(d)Each Pledgor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Pledgor hereunder to (i) comply with any instruction received by it from the US Administrative Agent in writing that (A) states that an Event of Default has occurred and is continuing and (B) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Pledgor, and each Pledgor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Pledged Securities directly to the US Administrative Agent.

(e)Upon the occurrence and during the continuance of an Event of Default, if the Issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any Governmental Authority, then all rights of each Pledgor in respect thereof to exercise the voting and other consensual rights which such Pledgor would otherwise be entitled to exercise with respect to the Pledged Securities issued by such Issuer shall cease, and all such rights shall thereupon become vested in the US Administrative Agent who shall thereupon have the sole right to exercise such voting and other consensual rights, but the US Administrative Agent shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing.

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Section 5.03Private Sales of Pledged Securities.

(a)Each Pledgor recognizes that the US Administrative Agent may be unable to effect a public sale of any or all the Pledged Securities, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise or may determine that a public sale is impracticable or not commercially reasonable and, accordingly, may resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof.  Each Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner.  The US Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Securities for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.

(b)Each Pledgor agrees to use its best commercially reasonable efforts to do or cause to be done all such other acts as may reasonably be necessary to make such sale or sales of all or any portion of the Pledged Securities pursuant to this Section 5.03 valid and binding and in compliance with any and all other applicable Governmental Requirements.  Each Pledgor further agrees that a breach of any of the covenants contained in this Section 5.03 will cause irreparable injury to the Secured Creditors, that the Secured Creditors have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.03 shall be specifically enforceable against such Pledgor, and such Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred or is continuing under the Credit Agreement.

Section 5.04Non-Judicial Enforcement.  The US Administrative Agent may enforce its rights hereunder without prior judicial process or judicial hearing, and to the extent permitted by law, each Pledgor expressly waives any and all legal rights which might otherwise require the Administrative Agent to enforce its rights by judicial process.

ARTICLE 6
The Administrative Agent

Section 6.01Administrative Agent’s Appointment as Attorney-in-Fact, Etc.

(a)Anything in this Section 6.01(a) to the contrary notwithstanding, the US Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 6.01(a) unless an Event of Default shall have occurred and be continuing.  Each Pledgor hereby irrevocably constitutes and appoints the US Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Pledgor

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and in the name of such Pledgor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all reasonably appropriate action and to execute any and all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Pledgor hereby gives the US Administrative Agent the power and right, on behalf of such Pledgor, without notice to or assent by such Pledgor, to do any or all of the following:

(i)unless being disputed under Section 9.03(a) of the Credit Agreement, pay or discharge Taxes and Liens levied or placed on or threatened against the Collateral;

(ii)execute, in connection with any sale provided for in Section 5.01 or Section 5.03, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and

(iii)(A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the US Administrative Agent or as the US Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) in the name of such Pledgor or its own name, or otherwise, take possession of and indorse and collect any check, draft, note, acceptance or other instrument for the payment of moneys due with respect to any Collateral and commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (D) defend any suit, action or proceeding brought against such Pledgor with respect to any Collateral; (E) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the US Administrative Agent may deem appropriate; and (F) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the US Administrative Agent were the absolute owner thereof for all purposes, and do, at the US Administrative Agent’s option and such Pledgor’s expense, at any time, or from time to time, all acts and things which the US Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the US Administrative Agent’s and the Secured Creditors’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Pledgor might do.

(b)If any Pledgor fails to perform or comply with any of its agreements contained herein within the applicable grace periods, the US Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

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(c)The reasonable expenses of the US Administrative Agent incurred in connection with actions undertaken as provided in this Section 6.01, together with interest thereon at a rate per annum equal to the Post-Default Rate, but in no event to exceed the Highest Lawful Rate, from the date of payment by the US Administrative Agent to the date reimbursed by the relevant Pledgor, shall be payable by such Pledgor to the US Administrative Agent on demand.

(d)All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

Section 6.02Duty of Administrative Agent.  The US Administrative Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9.207 of the UCC or otherwise, shall be to deal with it in the same manner as the US Administrative Agent deals with similar Property for its own account and shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral.  To the fullest extent permitted under applicable law, neither the US Administrative Agent, any Secured Creditor nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof.  The powers conferred on the US Administrative Agent and the Secured Creditors hereunder are solely to protect the US Administrative Agent’s and the Secured Creditors’ interests in the Collateral and shall not impose any duty upon the US Administrative Agent or any Secured Creditor to exercise any such powers.  The US Administrative Agent and the Secured Creditors shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.  To the fullest extent permitted by applicable law, the US Administrative Agent shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Obligations, or to take any steps necessary to preserve any rights against any Pledgor or other Person or ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not it has or is deemed to have knowledge of such matters.  Each Pledgor, to the extent permitted by applicable law, waives any right of marshaling in respect of any and all Collateral, and waives any right to require the US Administrative Agent or any Secured Creditor to proceed against any Pledgor or other Person, exhaust any Collateral or enforce any other remedy which the US Administrative Agent or any Secured Creditor now has or may hereafter have against each Pledgor, any Pledgor or other Person.

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Section 6.03Filing of Financing Statements.  Pursuant to the UCC and any other applicable law, each Pledgor authorizes the US Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral in such form and in such offices as the US Administrative Agent reasonably determines appropriate to perfect the security interests of the US Administrative Agent under this Agreement.  A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.

Section 6.04Authority of Administrative Agent.  Each Pledgor acknowledges that the rights and responsibilities of the US Administrative Agent under this Agreement with respect to any action taken by the US Administrative Agent or the exercise or non-exercise by the US Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the US Administrative Agent and the Secured Creditors, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the US Administrative Agent and the Pledgors, the US Administrative Agent shall be conclusively presumed to be acting as agent for the Secured Creditors with full and valid authority so to act or refrain from acting, and no Pledgor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

ARTICLE 7
Miscellaneous

Section 7.01Waiver.  No failure on the part of the US Administrative Agent or any Secured Creditor to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, privilege or remedy or any abandonment or discontinuance of steps to enforce such right, power, privilege or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy under this Agreement or any other Loan Document preclude or be construed as a waiver of any other or further exercise thereof or the exercise of any other right, power, privilege or remedy.  The remedies provided herein are cumulative and not exclusive of any remedies provided by law or equity.

Section 7.02Notices.  All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 13.02 of the Credit Agreement; provided that any such notice, request or demand to or upon any Pledgor shall be addressed to such Pledgor at its notice address set forth on Schedule 1.

Section 7.03Amendments in Writing.  None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 13.04 of the Credit Agreement.

Section 7.04Successors and Assigns.  The provisions of this Agreement shall be binding upon the Pledgors and their successors and permitted assigns and shall inure to the

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benefit of the US Administrative Agent and the Secured Creditors and their respective successors and permitted assigns; provided that no Pledgor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the US Administrative Agent and the Lenders unless otherwise permitted by the terms of the Credit Agreement or this Agreement, and any such purported assignment, transfer or delegation shall be null and void.

Section 7.05Survival; Revival; Reinstatement.

(a)All covenants, agreements, representations and warranties made by any Pledgor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document to which it is a party shall be considered to have been relied upon by the US Administrative Agent, the other Agents, the Issuing Bank and the Lenders and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the US Administrative Agent, the other Agents, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under the Credit Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Aggregate Commitments have not expired or terminated.

(b)To the extent that any payments on the Obligations or proceeds of any Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received and the US Administrative Agent’s and the Secured Creditors’ Liens, security interests, rights, powers and remedies under this Agreement and each other Loan Document shall continue in full force and effect.  In such event, each Loan Document shall be automatically reinstated and the Pledgors shall take such action as may be reasonably requested by the US Administrative Agent and the Secured Creditors to effect such reinstatement.

Section 7.06Counterparts; Effectiveness; Conflicts.

(a)This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.

(b)This Agreement shall become effective when it shall have been executed by the US Administrative Agent and when the US Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto, the Lenders and their respective successors and assigns.  Delivery of an executed counterpart of a

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signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

(c)In the event of a conflict between the provisions hereof and the provisions of the Credit Agreement, the provisions of the Credit Agreement shall control.

Section 7.07Severability.  Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

Section 7.08Governing Law; Submission to Jurisdiction.

(a)THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

(b)ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.  THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE A PARTY FROM OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY COURT OTHERWISE HAVING JURISDICTION.

(c)EACH PLEDGOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PLEDGOR AT ITS ADDRESS SET FORTH ON SCHEDULE 1 HERETO OR AS UPDATED FROM TIME TO TIME, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.

(d)NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE US ADMINISTRATIVE AGENT OR ANY LENDER OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE PLEDGORS IN ANY OTHER JURISDICTION.

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(e)EACH PARTY HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY SECURITY INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (iii) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OF THE US ADMINISTRATIVE AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (iv) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY INSTRUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 7.08.

Section 7.09Headings.  Article and Section headings used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

Section 7.10Acknowledgments.  Each Pledgor hereby acknowledges that:

(a)it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

(b)neither the US Administrative Agent nor any Secured Creditor has any fiduciary relationship with or duty to any Pledgor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Pledgors, on the one hand, and the US Administrative Agent and Secured Creditors, on the other hand, in connection herewith or therewith is solely that of debtor and creditor;

(c)no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Secured Creditors or among the Pledgors and the Secured Creditors; and

(d)Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged with notice and knowledge of the terms of this Agreement, the Security Instruments and the other Loan Documents; that it has in fact read this Agreement, the Security Instruments and the other Loan Documents and is fully informed and has full notice and knowledge of the terms, conditions and effects thereof; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the Security Instruments; and has received the advice of its attorney in entering into this Agreement and the Security Instruments; and that it recognizes that certain of the terms of this Agreement and the

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Security Instruments result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability.  EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

Section 7.11Additional Pledgors and Pledgors.  Each Subsidiary of a US Borrower that is required to become a party to this Agreement pursuant to Section 9.09(a) of the Credit Agreement shall become a Pledgor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex I hereto and shall thereafter have the same rights, benefits and obligations as a Pledgor party hereto on the date hereof.  Each Pledgor that is required to pledge certificated Capital Stock of its Subsidiaries shall execute and deliver a Supplement in the form of Annex II hereto, if such certificated Capital Stock were not previously pledged.

Section 7.12Releases.

(a)Full Release.  The grant of a security interest hereunder and all of rights, powers and remedies in connection herewith shall remain in full force and effect until the US Administrative Agent has (i) retransferred and delivered all Collateral in its possession to the Pledgors, and (ii) executed a written release or termination statement and reassigned to the Pledgors without recourse or warranty any remaining Collateral and all rights conveyed hereby.  Pursuant to the satisfaction of the conditions set forth in Section 9.09(b) of the Credit Agreement or upon the complete payment of the Obligations under the Credit Agreement (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and the compliance by the Pledgors with all covenants and agreements hereof, the US Administrative Agent, at the written request and expense of the Borrowers, will promptly release, reassign and transfer the Collateral to the Pledgors and declare this Agreement to be of no further force or effect.

(b)Partial Release.  Notwithstanding anything contained herein to the contrary, the Pledgors are authorized to release any Collateral that is sold, leased, assigned, exchanged, conveyed, transferred or otherwise disposed of in compliance with Sections 10.08, 10.11 and 10.14 of the Credit Agreement at which point the liens and security interests shall terminate with respect to such Collateral and this Agreement shall have no further force or effect with respect to such released Collateral; provided that so long as the lien in favor of the US Administrative Agent continues in the proceeds of such sale, lease, assignment, exchange, conveyance, transfer or other disposal of such Collateral, or to the extent such Collateral is sold, leased, assigned, exchanged, conveyed, transferred or otherwise disposed of to any Borrower or any Subsidiary Guarantor, such lien continues in such Collateral.

(c)Retention in Satisfaction.  Except as may be expressly applicable pursuant to Section 9.620 of the UCC, no action taken or omission to act by the US Administrative Agent

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or the Secured Creditors hereunder, including, without limitation, any exercise of voting or consensual rights or any other action taken or inaction, shall be deemed to constitute a retention of the Collateral in satisfaction of the Obligations or otherwise to be in full satisfaction of the Obligations, and the Obligations shall remain in full force and effect, until the US Administrative Agent and the Secured Creditors shall have applied payments (including, without limitation, collections from Collateral) towards the Obligations in the full amount then outstanding or until such subsequent time as is provided in Section 7.12(a).

Section 7.13Acceptance.  Each Pledgor hereby expressly waives notice of acceptance of this Agreement, acceptance on the part of the US Administrative Agent and the Secured Creditors being conclusively presumed by their request for this Agreement and delivery of the same to the US Administrative Agent.

[Signatures begin on next page]

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PLEDGORS:	UNIVERAL COMPRESSION INTERNATIONAL, INC.
	By:	/s/ J. Michael Anderson
	Name:					J. Michael Anderson
	Title:		Senior Vice President and Chief Financial Officer
	UNIVERSAL COMPRESSION CANADIAN
	HOLDINGS, INC.
	By:			/s/ J. Michael Anderson
	Name:				J. Michael Anderson
	Title:				Senior Vice President and Chief Financial Officer
	ENTERRA COMPRESSION INVESTMENT COMPANY
	By:		/s/ J. Michael Anderson
	Name:					J. Michael Anderson
	Title:					Senior Vice President and Chief Financial Officer
	UNIVERSAL COMPRESSION SERVICES, LLC
	By:		/s/ J. Michael Anderson
	Name:					J. Michael Anderson
	Title:					Senior Vice President and Chief Financial Officer
	UCI GP LP LLC
	By:		/s/ Pamela A. Jasinki
	Name:					Pamela A. Jasinski
	Title:					Manager
	UCO GP, LLC
	By:		/s/ J. Michael Anderson
	Name:					J. Michael Anderson
	Title:					Senior Vice President and Chief Financial Officer

Signature Page – Pledge and Security Agreement

US ADMINISTRATIVE AGENT:	WACHOVIA BANK, NATIONAL ASSOCIATION,
	as US Administrative Agent
	By:	/s/ Todd Schanzlin
	Name:	Todd Schanzlin
	Title:	Vice President

Signature Page – Pledge and Security Agreement

EX-10.21

Exhibit 10.21

EXECUTION VERSION

COLLATERAL AGREEMENT

DATED AS OF
OCTOBER 20, 2006

MADE BY

UNIVERSAL COMPRESSION, INC.;

UNIVERSAL COMPRESSION HOLDINGS, INC.;

UCI COMPRESSOR HOLDING, L.P.;

AND

UCI MLP LP LLC

IN FAVOR OF

WACHOVIA BANK, NATIONAL ASSOCIATION,
AS US ADMINISTRATIVE AGENT

TABLE OF CONTENTS

		Page
ARTICLE I Definitions		1
Section 1.01	Definitions	1
Section 1.02	Other Definitional Provisions	4
ARTICLE II Grant of Security Interest		4
Section 2.01	Grant of Security Interest	4
Section 2.02	Transfer of Pledged Securities	5
Section 2.03	No Subrogation	5
Section 2.04	Amendments, Etc. with respect to the Obligations	6
Section 2.05	Waivers	6
Section 2.06	Pledge Absolute and Unconditional	7
Section 2.07	Reinstatement	8
ARTICLE III Representations and Warranties		9
Section 3.01	Title; No Other Liens	9
Section 3.02	Perfected First Priority Liens	9
Section 3.03	Grantor Information	9
Section 3.04	Pledged Securities	9
Section 3.05	Instruments and Chattel Paper	10
Section 3.06	Truth of Information; Accounts	10
Section 3.07	Governmental Obligors	10
ARTICLE IV Covenants		10
Section 4.01	Maintenance of Perfected Security Interest; Further Documentation	10
Section 4.02	Changes in Locations, Name, Etc	11
Section 4.03	Pledged Securities	11
Section 4.04	Instruments and Tangible Chattel Paper	12
Section 4.05	Article 8 of the UCC	12
ARTICLE V Remedial Provisions		13
Section 5.01	UCC and Other Remedies	13
Section 5.02	Collections on Accounts, Etc	14
Section 5.03	Proceeds	14
Section 5.04	Pledged Securities	15
Section 5.05	Private Sales of Pledged Securities	17
Section 5.06	Deficiency	17
Section 5.07	Non-Judicial Enforcement	17
ARTICLE VI The US Administrative Agent		17
Section 6.01	US Administrative Agent’s Appointment as Attorney-in-Fact, Etc	17
Section 6.02	Duty of US Administrative Agent	19
Section 6.03	Filing of Financing Statements	19
Section 6.04	Authority of US Administrative Agent	20
ARTICLE VII Subordination of Indebtedness		20
Section 7.01	Subordination of All Grantor Claims	20
Section 7.02	Claims in Bankruptcy	20
Section 7.03	Payments Held in Trust	21
Section 7.04	Liens Subordinate	21

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Section 7.05	Notation of Records	21
ARTICLE VIII Miscellaneous		21
Section 8.01	Waiver	21
Section 8.02	Notices	22
Section 8.03	Amendments in Writing	22
Section 8.04	Successors and Assigns	22
Section 8.05	Survival; Revival; Reinstatement	22
Section 8.06	Counterparts; Integration; Effectiveness; Conflicts	23
Section 8.07	Severability	23
Section 8.08	Governing Law; Submission to Jurisdiction	23
Section 8.09	Headings	24
Section 8.10	Acknowledgments	24
Section 8.11	Additional Capital Stock	25
Section 8.12	Releases	25
Section 8.13	Acceptance	26

ANNEXES:

IForm of Supplement

SCHEDULES:

1Notice Addresses of Grantors

2Description of Pledged Securities

3Filings and Other Actions Required to Perfect Security Interests

4Location of Jurisdiction of Organization and Chief Executive Office

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This COLLATERAL AGREEMENT, dated as of October 20, 2006, is made by UNIVERSAL COMPRESSION, INC., a Texas corporation (“UCI”), UNIVERSAL COMPRESSION HOLDINGS, INC., a Delaware corporation (“Holdings”, and together with UCI, the “US Borrowers”), UCI COMPRESSOR HOLDING, L.P., a Delaware limited partnership (“UCI Compressor”) and UCI MLP LP LLC, a Delaware limited liability company (collectively with the US Borrowers and UCI Compressor, the “Grantors”), in favor of WACHOVIA BANK, NATIONAL ASSOCIATION, as administrative agent (in such capacity, together with its successors in such capacity, the “US Administrative Agent”), for the lenders and other financial institutions (the “Lenders”) from time to time party to the Senior Secured Credit Agreement dated of even date herewith (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among UCI, Holdings, Universal Compression Canada, Limited Partnership, a Nova Scotia limited partnership (“Universal Canada”) and UC Canadian Partnership Holdings Company, a Nova Scotia unlimited liability company (“UC Canadian Holdings”, and together with Universal Canada, the “Canadian Borrowers”, and together with the US Borrowers, the “Borrowers”), the US Administrative Agent, Wachovia Capital Finance Corporation (Canada), as Canadian Administrative Agent, Deutsche Bank Trust Company Americas, as Syndication Agent, Wachovia Capital Markets, LLC and Deutsche Bank Securities Inc., as the Joint Lead Arrangers and Joint Lead Book Runners, and each of the other Agents and Lenders party thereto.

R E C I T A L S

A.The Borrowers have requested that the Lenders provide certain loans to and extensions of credit on behalf of the Borrowers.

B.The Lenders have agreed to make such loans and extensions of credit subject to the terms and conditions of the Credit Agreement.

C.It is a condition precedent and a continuing covenant to the obligation of the Lenders to make their loans and extensions of credit to the Borrowers under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the US Administrative Agent for the ratable benefit of the Lenders.

D.NOW, THEREFORE, in consideration of the premises herein and to induce the US Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers thereunder, each Grantor hereby agrees with the US Administrative Agent, for the ratable benefit of the Lenders, as follows:

ARTICLE I
Definitions

Section 1.01Definitions.

(a)As used in this Agreement, each term defined above shall have the meaning indicated above.  Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms which are defined in the UCC on the date hereof are used herein as so

defined:  Accounts, Chattel Paper, Documents, Equipment, General Intangibles, Instruments, Inventory, Payment Intangibles and Tangible Chattel Paper.

(b)The following terms have the following meanings:

“Account Debtor” means any Person (other than any Grantor) obligated on an Account, Chattel Paper, or General Intangible.

“Agreement” means this Collateral Agreement, as the same may from time to time be amended, supplemented or otherwise modified.

“Borrower Obligations” means the collective reference to the payment and performance when due of all indebtedness, liabilities, obligations and undertakings of the Borrowers and their Restricted Subsidiaries (including, without limitation, all Indebtedness) of every kind or description arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Secured Documents, including, without limitation, the unpaid principal of and interest on the Aggregate Credit Exposure and all other obligations and liabilities of the Borrowers and their Restricted Subsidiaries (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and LC Exposure and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrowers, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Secured Creditors, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, arising out of or outstanding under, advanced or issued pursuant, or evidenced by, the Secured Documents, whether on account of principal, interest, premium, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all reasonable costs, fees and disbursements that are required to be paid by the Borrowers pursuant to the terms of the Credit Agreement).

“Borrowers” has the meaning assigned to such term in the preamble hereto.

“Canadian Borrowers” has the meaning assigned to such term in the preamble hereto.

“Collateral” has the meaning assigned such term in Section 2.01.

“Credit Agreement” has the meaning assigned to such term in the preamble hereto.

“Grantor” has the meaning assigned to such term in the preamble hereto.

“Grantor Claims” has the meaning assigned to such term in Section 7.01.

“Holdings” has the meaning assigned to such term in the preamble hereto.

“Issuers” means the collective reference to each issuer of Pledged Securities.

“Lenders” has the meaning assigned to such term in the preamble hereto.

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“Pledged Securities” means: (a) the certificated Capital Stock described or referred to in Schedule 2 (as the same may be supplemented from time to time pursuant to a Supplement in substantially the form of Annex I); and (b) (i) the certificates or instruments, if any, representing such certificated Capital Stock, (ii) all dividends (cash, certificated Capital Stock or otherwise), cash, instruments, rights to subscribe, purchase or sell and all other rights and Property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such securities and interests, (iii) all replacements, additions to and substitutions for any of the Property referred to in this definition, including, without limitation, claims against third parties, (iv) the proceeds, interest, profits and other income of or on any of the Property referred to in this definition, (v) all security entitlements in respect of any of the foregoing, if any and (vi) all books and records relating to any of the Property referred to in this definition.

“Proceeds” means all “proceeds” as such term is defined in Section 9.102(65) of the UCC and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions or payments with respect thereto.

“Secured Creditors” means the collective reference to the US Administrative Agent, the Issuing Banks, the Lenders and the Lenders and Affiliates of Lenders that are parties to Secured Hedging Agreements.

“Secured Documents” means the collective reference to the Credit Agreement, the other Loan Documents, each Secured Hedging Agreement and any other documents made, delivered or given in connection with any of the foregoing.

“Secured Hedging Agreement” means any Hedging Agreement between any Borrower or its Restricted Subsidiary and any Lender or any Affiliate of any Lender while such Person (or, in the case of an Affiliate of a Lender, the Person affiliated therewith) is a Lender, including any Hedging Agreement between such Persons in existence prior to the date hereof, but excluding any Hedging Agreement now existing or hereafter arising in connection with the ABS Facility.  For the avoidance of doubt, a Hedging Agreement ceases to be a Secured Hedging Agreement if the Person that is the counterparty to the Borrower or its Restricted Subsidiary under a Hedging Agreement ceases to be a Lender under the Credit Agreement (or, in the case of an Affiliate of a Lender, the Person affiliated therewith ceases to be a Lender under the Credit Agreement).

“Securities Act” means the Securities Act of 1933, as amended.

“UC Canadian Holdings” has the meaning assigned to such term in the preamble hereto.

“UCC” means the Uniform Commercial Code as from time to time in effect in the State of Texas; provided, however, that, in the event that, by reason of mandatory provisions of law, any of the attachment, perfection or priority of the Secured Creditors’ security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Texas, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, the effect thereof or priority and for purposes of definitions related to such provisions.

“UCI Compressor” has the meaning assigned to such term in the preamble hereto.

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“Universal Canada” has the meaning assigned to such term in the preamble hereto.

“US Administrative Agent” has the meaning assigned to such term in the preamble hereto.

“US Borrowers” has the meaning assigned to such term in the preamble hereto.

Section 1.02Other Definitional Provisions.

(a)The words “hereof,” “herein,” “hereto” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified.

(b)The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

(c)Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, refer to such Grantor’s Collateral or the relevant part thereof.

ARTICLE II
Grant of Security Interest

Section 2.01Grant of Security Interest.  Each Grantor hereby pledges, assigns and transfers to the US Administrative Agent, and hereby grants to the US Administrative Agent, for the ratable benefit of the Secured Creditors, a security interest in all of the following Property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the “Collateral”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations:

(1)all Accounts;

(2)all Chattel Paper;

(3)all Documents;

(4)all Equipment;

(5)all General Intangibles;

(6)all Instruments;

(7)all Inventory;

(8)all Pledged Securities;

(9)all books and records pertaining to the Collateral; and

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(10)to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing.

Each reference to Collateral or to any relevant type or item of Property constituting Collateral shall be deemed to exclude (i) tangible Property that is not located in the continental United States (including its possessions), (ii) motor vehicles, forklifts and trailers, (iii) voting equity interests in any Foreign Subsidiary required to prevent the Collateral from including more than 65% of all voting equity interests in such Foreign Subsidiary, (iv) any general intangibles or other rights arising under any contract, instrument, license or other document if (but only to the extent that) the grant of a security interest therein would constitute a material violation of a valid and enforceable restriction in favor of a third party, unless and until all required consents shall have been obtained, (v) Property owned by or assigned to the ABS Subsidiaries and the Capital Stock of such ABS Subsidiaries; provided that, upon the transfer of such Property to a Grantor, such Property shall become Collateral, (vi) any Property subject to a Lien permitted by Section 10.02(b), (c), (e) or (g) of the Credit Agreement, so long as such Lien is in effect, and (vii) any Property owned by a member of the UCLP Group.

Section 2.02Transfer of Pledged Securities.  All certificates or instruments representing or evidencing the Pledged Securities shall be delivered to and held pursuant hereto by the US Administrative Agent or a Person designated by the US Administrative Agent and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, and accompanied by any required transfer tax stamps to effect the pledge of the Pledged Securities to the US Administrative Agent.  Notwithstanding the preceding sentence, at the US Administrative Agent’s discretion, all Pledged Securities must be delivered or transferred in such manner as to permit the US Administrative Agent to be a “protected purchaser” to the extent of its security interest as provided in Section 8.303 of the UCC (if the US Administrative Agent otherwise qualifies as a protected purchaser). During the continuance of an Event of Default, the US Administrative Agent shall have the right, at any time in its discretion and without notice, to transfer to or to register in the name of the US Administrative Agent or any of its nominees any or all of the Pledged Securities, subject only to the revocable rights specified in Section 5.05.  In addition, during the continuance of an Event of Default, the US Administrative Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Securities for certificates or instruments of smaller or larger denominations.

Section 2.03No Subrogation.  Notwithstanding any payment made by any Grantor hereunder or any set-off or application of funds of any Grantor by any Secured Creditor, no Grantor shall be entitled to be subrogated to any of the rights of any Secured Creditor against any Borrower or any other Grantor or any collateral security or pledge or guarantee or right of offset held by any Secured Creditor for the payment of the Borrower Obligations, nor shall any Grantor seek or be entitled to seek any indemnity, exoneration, participation, contribution or reimbursement from any Borrower or any other Grantor in respect of payments made by such Grantor hereunder, until all amounts owing to the Secured Creditors on account of the Borrower Obligations are irrevocably and indefeasibly paid in full in cash, no Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments are terminated.  If

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any amount shall be paid to any Grantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been irrevocably and indefeasibly paid in full in cash, any Letter of Credit is outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) or any of the Aggregate Commitments are in effect, such amount shall be held by such Grantor in trust for the Secured Creditors, and shall, forthwith upon receipt by such Grantor, be turned over to the US Administrative Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the US Administrative Agent, if required), to be applied against the Borrower Obligations, whether matured or unmatured, in accordance with Section 11.02(c) of the Credit Agreement.

Section 2.04Amendments, Etc. with respect to the Obligations.  Each Grantor shall remain obligated hereunder, and such Grantor’s obligations hereunder shall not be released, discharged or otherwise affected, notwithstanding that, without any reservation of rights against any Grantor and without notice to, demand upon or further assent by any Grantor (which notice, demand and assent requirements are hereby expressly waived by such Grantor), (a) any demand for payment of any of the Borrower Obligations made by any Secured Creditor may be rescinded by such Secured Creditor or otherwise and any of the Borrower Obligations continued; (b) the Borrower Obligations, the liability of any other Person upon or for any part thereof or any collateral security or pledge or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by, or any indulgence or forbearance in respect thereof granted by, any Secured Creditor; (c) any Secured Document may be amended, modified, supplemented or terminated, in whole or in part, as the Secured Creditors may deem advisable from time to time; (d) any collateral security, pledge, guarantee or right of offset at any time held by any Secured Creditor for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released; (e) any additional guarantors, makers or endorsers of the Borrower Obligations may from time to time be obligated on the Borrower Obligations or any additional security or collateral for the payment and performance of the Borrower Obligations may from time to time secure the Borrower Obligations; and (f) any other event shall occur which constitutes a defense or release of sureties generally.  No Secured Creditor shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the pledge and security grants contained in this ARTICLE II or any Property subject thereto.

Section 2.05Waivers.  Each Grantor hereby waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by any Secured Creditor upon the pledge and security grants contained in this ARTICLE II or acceptance of the pledge and security grants contained in this ARTICLE II; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the pledge and security grants contained in this ARTICLE II and no notice of creation of the Borrower Obligations or any extension of credit already or hereafter contracted by or extended to the Borrowers need be given to any Grantor; and all dealings between any Borrower and any of the Grantors, on the one hand, and the Secured Creditors, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the pledge and security grants contained in this ARTICLE II.  Each Grantor waives diligence, presentment,

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protest, demand for payment and notice of default or nonpayment to or upon any Borrower or any of the Grantors with respect to the Borrower Obligations.

Section 2.06Pledge Absolute and Unconditional.

(a)Except as provided in Section 8.12, each Grantor understands and agrees that the pledge and security grants contained in this ARTICLE II is, and shall be construed as, a continuing, completed, absolute and unconditional pledge and security grant, and each Grantor hereby waives any defense of a surety or guarantor or Grantor or any other obligor on any obligations arising in connection with or in respect of any of the following and hereby agrees that its obligations hereunder shall not be discharged or otherwise affected as a result of, any of the following:

(i)the invalidity or unenforceability of any Secured Document, any of the Borrower Obligations or any other collateral security therefor or pledge or guarantee or right of offset with respect thereto at any time or from time to time held by any Secured Creditor;

(ii)any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Borrower or any other Person against any Secured Creditor;

(iii)the insolvency, bankruptcy arrangement, reorganization, adjustment, composition, liquidation, disability, dissolution or lack of power of any Borrower or any other Grantor or any other Person at any time liable for the payment of all or part of the Borrower Obligations, including any discharge of, or bar or stay against collecting, any Borrower Obligation (or any part of them or interest therein) in or as a result of such proceeding;

(iv)any sale, lease, assignment, exchange, conveyance or transfer of any or all of the assets of any Borrower or any other Grantor, or any changes in the shareholders of any Borrower or the Grantor;

(v)any change in the corporate existence (including its constitution, laws, rules, regulations or power), structure or ownership of any Grantor;

(vi)the fact that any Collateral or Lien contemplated or intended to be given, created or granted as security for the repayment of the Borrower Obligations shall not be properly perfected or created, or shall prove to be unenforceable or subordinate to any other Lien, it being recognized and agreed by each of the Grantors that it is not entering into this Agreement in reliance on, or in contemplation of the benefits of, the validity, enforceability, collectibility or value of any of the Collateral for the Borrower Obligations;

(vii)the absence of any attempt to collect the Borrower Obligations or any part of them from any Grantor;

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(viii)(A) any Secured Creditor’s election, in any proceeding instituted under chapter 11 of the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code; (B) any borrowing or grant of a Lien by the Borrowers, as debtor-in-possession, or extension of credit, under Section 364 of the Bankruptcy Code; (C) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of any Secured Creditor’s claim (or claims) for repayment of the Borrower Obligations; (D) any use of cash collateral under Section 363 of the Bankruptcy Code; (E) any agreement or stipulation as to the provision of adequate protection in any bankruptcy proceeding; (F) the avoidance of any Lien in favor of the Secured Creditors or any of them for any reason; or (G) failure by any Secured Creditor to file or enforce a claim against any Borrower or any Borrower’s estate in any bankruptcy or insolvency case or proceeding; or

(ix)any other circumstance or act whatsoever, including any action or omission of the type described in Section 2.04 (with or without notice to or knowledge of the Borrowers or such Grantor), which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrowers for the Borrower Obligations, or of such Grantor under the pledge and security grants contained in this ARTICLE II, in bankruptcy or in any other instance.

(b)When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Grantor, any Secured Creditor may, but shall be under no obligation to, join or make a similar demand on or otherwise pursue or exhaust such rights and remedies as it may have against any Borrower, any other Grantor or any other Person or against any collateral security or pledge or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by any Secured Creditor to make any such demand, to pursue such other rights or remedies or to collect any payments from any Borrower, any other Grantor or any other Person or to realize upon any such collateral security or pledge or guarantee or to exercise any such right of offset, or any release of any Borrower, any other Grantor or any other Person or any such collateral security, guarantee or pledge or right of offset, shall not relieve any Grantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of any Secured Creditor against any Grantor.  For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

Section 2.07Reinstatement.  The pledge and security grants contained in this ARTICLE II shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by any Secured Creditor upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any Grantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Borrower or any Grantor or any substantial part of its Property, or otherwise, all as though such payments had not been made.

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ARTICLE III
Representations and Warranties

To induce the US Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers thereunder and to induce the Lenders (and their Affiliates) to enter into Hedging Agreements with the Borrowers and their Restricted Subsidiaries, each Grantor hereby represents and warrants to the US Administrative Agent and each Lender that:

Section 3.01Title; No Other Liens.  Except for Permitted Liens and the security interest granted to the US Administrative Agent for the ratable benefit of the Secured Creditors pursuant to this Agreement, such Grantor is the record and beneficial owner of its respective items of the Collateral free and clear of any and all Liens and has the power to transfer each item of the Collateral in which a Lien is granted by it hereunder, free and clear of any Lien.  Except with respect to Liens permitted by Section 10.02(b), (c), (e) or (g) of the Credit Agreement, no financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the US Administrative Agent, for the ratable benefit of the Secured Creditors, pursuant to this Agreement or the Security Instruments or as are filed to secure Liens permitted by Section 10.02 of the Credit Agreement.

Section 3.02Perfected First Priority Liens.  The security interests granted pursuant to this Agreement (a) upon the completion of the filings and the other actions specified on Schedule 3 constitute valid perfected security interests in all of the Collateral in favor of the US Administrative Agent, for the ratable benefit of the Secured Creditors, as collateral security for the Borrower Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and any Persons purporting to purchase any Collateral from such Grantor and (b) are prior to all other Liens on the Collateral in existence on the date hereof, except, in each case, for Liens expressly permitted by the Credit Agreement.

Section 3.03Grantor Information.  On the date hereof, the correct legal name of such Grantor, such Grantor’s jurisdiction of organization and organizational number, and the location(s) of such Grantor’s chief executive office or sole place of business are specified on Schedule 4.

Section 3.04Pledged Securities.  The Pledged Securities required to be pledged hereunder and under the Credit Agreement by such Grantor are listed in Schedule 2.  The shares of Pledged Securities pledged by such Grantor hereunder except for LP Units and Subordinated Units, constitute all the issued and outstanding shares of all classes of the Capital Stock of each Issuer owned by such Grantor that is a Domestic Subsidiary and 65% of all the issued and outstanding shares of all classes of the Capital Stock of each Issuer (except as otherwise noted on Schedule 2) that is a Foreign Subsidiary.  All the shares of the Pledged Securities have been duly and validly issued and are fully paid and nonassessable, and such Grantor is the record and beneficial owner of, and has good title to, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement, and has the power to transfer the Pledged Securities in which a Lien is granted by it hereunder, free and clear of any other Lien.

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Section 3.05Instruments and Chattel Paper.  Such Grantor has delivered to the US Administrative Agent all Collateral constituting any Instrument or Chattel Paper in excess of $1,000,000 that is required to be delivered under Section 4.04.  No Collateral constituting Chattel Paper or Instruments contains any statement therein to the effect that such Collateral has been assigned to an identified party other than the US Administrative Agent, and the grant of a security interest in such Collateral in favor of the US Administrative Agent hereunder does not violate the rights of any other Person as a secured party.

Section 3.06Truth of Information; Accounts.  All information with respect to the Collateral set forth in any schedule or certificate at any time heretofore or hereafter furnished by such Grantor to the US Administrative Agent is and will be true and correct in all material respects as of the date furnished.  The place where each Grantor keeps its records concerning the Accounts, Chattel Paper and Payment Intangibles is 4444 Brittmoore Road, Houston, Texas 77041.

Section 3.07Governmental Obligors.  None of the Account Debtors on a material portion of such Grantor’s Accounts, Chattel Paper or Payment Intangibles is a Governmental Authority.

ARTICLE IV
Covenants

Each Grantor covenants and agrees with the US Administrative Agent and the Lenders that, from and after the date of this Agreement until the Borrower Obligations under the Credit Agreement shall have been paid in full in cash, no Letter of Credit shall be outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and all of the Aggregate Commitments shall have terminated:

Section 4.01Maintenance of Perfected Security Interest; Further Documentation.  Except as set forth in the Credit Agreement, including, without limitation, any merger, consolidation, liquidation, sale, assignment, transfer or other disposition permitted by Section 10.08 or 10.14 of the Credit Agreement, each Grantor agrees that:

(a)it shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 3.02 and shall defend such security interest against the claims and demands of all Persons whomsoever;

(b)it will furnish to the US Administrative Agent and the Lenders from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the US Administrative Agent may reasonably request, all in reasonable detail; and

(c)at any time and from time to time, upon the written request of the US Administrative Agent, and at the sole expense of such Grantor, it will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the US Administrative Agent may reasonably deem necessary for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the delivery of certificated securities  and the filing of any

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financing or continuation statements under the UCC (or other similar domestic laws) in effect in any jurisdiction with respect to the security interests created hereby.

Section 4.02Changes in Locations, Name, Etc.  Such Grantor recognizes that financing statements pertaining to the Collateral have been or may be filed where such Grantor is organized.  Without limitation of Section 9.03 of the Credit Agreement or any other covenant herein, such Grantor will not cause or permit any change in its (a) corporate name, (b) its identity or corporate structure or in the jurisdiction in which it is incorporated or formed, (c) its jurisdiction of organization or its organizational identification number in such jurisdiction of organization or (d) its federal taxpayer identification number, unless, in each case, such Grantor shall have first (i) notified the US Administrative Agent of such change prior to the effective date of such change, and (ii) taken all action reasonably requested by the US Administrative Agent for the purpose of maintaining the perfection and priority of the US Administrative Agent’s security interests under this Agreement.  In any notice furnished pursuant to this Section 4.02, such Grantor will expressly state in a conspicuous manner that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purposes of continuing perfection of the US Administrative Agent’s security interest in the Collateral.

Section 4.03Pledged Securities.  In the case of each Grantor, such Grantor agrees that:

(a)if such Grantor shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Pledged Securities of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Securities, or otherwise in respect thereof, such Grantor shall accept the same as the agent of the Secured Creditors, hold the same in trust for the Secured Creditors, segregated from other Property of such Grantor, and deliver the same forthwith to the US Administrative Agent in the exact form received, duly indorsed by such Grantor to the US Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the US Administrative Agent so requests, signature guaranteed, to be held by the US Administrative Agent, subject to the terms hereof, as additional collateral security for the Borrower Obligations; provided, that the foregoing shall apply to 65% of such shares or rights in the case of an Issuer that is a Foreign Subsidiary;

(b)without the prior written consent of the US Administrative Agent, such Grantor will not (i) unless otherwise expressly permitted hereby or under the other Loan Documents, vote to enable, or take any other action to permit, any Issuer (other than UCLP) to issue any Capital Stock of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any Capital Stock of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction expressly permitted by the Credit Agreement), (iii) except as set forth in the Credit Agreement, create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the

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Pledged Securities or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Grantor or the US Administrative Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof;

(c)in the case of each Grantor that is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Pledged Securities issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the US Administrative Agent promptly in writing of the occurrence of any of the events described in Section 4.03(a) with respect to the Pledged Securities issued by it and (iii) the terms of Section 5.04(a) and Section 5.05 shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 5.04(d) or Section 5.05 with respect to the Pledged Securities issued by it;

(d)such Grantor shall furnish to the US Administrative Agent such stock powers and other instruments as may be reasonably required by the US Administrative Agent to assure the transferability of the Pledged Securities when and as often as may be reasonably requested by the US Administrative Agent; and

(e)the Pledged Securities (except for LP Units and Subordinated Units) will at all times constitute not less than 100% of the Capital Stock of the Issuer thereof owned by any Grantor (or in the case of any Issuer that is a Foreign Subsidiary, not less than 65% of the Capital Stock of such Issuer (except as otherwise noted on Schedule 2)).  Such Grantor will not permit any Issuer of any of the Pledged Securities (other than UCLP) to issue any new shares of any class of Capital Stock of such Issuer unless such shares are pledged pursuant to this Agreement.

(f)Notwithstanding any contrary provision contained in this Agreement, with respect to Issuers that are Foreign Subsidiaries, the Grantors are required to pledge 65% of the Capital Stock of such Issuers (except as otherwise noted on Schedule 2) and to deliver the applicable stock certificates and stock powers duly executed in blank for such Capital Stock to the US Administrative Agent but shall not be required to take any additional actions to perfect the security interest of the Secured Creditors in such Pledged Securities.

Section 4.04Instruments and Tangible Chattel Paper.  If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Tangible Chattel Paper having a value in excess of $1,000,000, such Instrument or Tangible Chattel Paper shall be immediately delivered to the US Administrative Agent, duly endorsed in a manner satisfactory to the US Administrative Agent, to be held as Collateral pursuant to this Agreement.

Section 4.05Article 8 of the UCC.  To the extent that any Grantor has opted into Article 8 of the UCC, such Grantor may not opt out of Article 8 of the UCC without the prior written consent of the US Administrative Agent.

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ARTICLE V
Remedial Provisions

Section 5.01UCC and Other Remedies.

(a)Upon the occurrence and during the continuance of an Event of Default, the US Administrative Agent, on behalf of the Secured Creditors, may exercise, in addition to all other rights and remedies granted to them in this Agreement, the other Loan Documents and in any other instrument or agreement securing, evidencing or relating to the Borrower Obligations, all rights and remedies of a secured party under the UCC or any other applicable law or otherwise available at law or equity.  Without limiting the generality of the foregoing, the US Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of any Secured Creditor or elsewhere upon such commercially reasonable terms and conditions as it may deem advisable and at such commercially reasonable prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk.  Any Secured Creditor shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released.  If applicable to any particular item of Collateral, each Grantor further agrees, at the US Administrative Agent’s request following an acceleration of the Indebtedness under Section 11.02(a) of the Credit Agreement, to assemble the Collateral and make it available to the US Administrative Agent at places which the US Administrative Agent shall reasonably select, whether at such Grantor’s premises or elsewhere, unless prohibited by agreements with unaffiliated third parties.  Any such sale or transfer by the US Administrative Agent either to itself or to any other Person shall, to the fullest extent permitted under applicable law, be absolutely free from any claim of right by Grantor, including any equity or right of redemption, stay or appraisal which Grantor has or may have under any rule of law, regulation or statute now existing or hereafter adopted (and such Grantor hereby waives any rights it may have in respect thereof).  Upon any such sale or transfer, the US Administrative Agent shall have the right to deliver, assign and transfer to the purchaser or transferee thereof the Collateral so sold or transferred.  The US Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 5.01, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the US Administrative Agent and the Secured Creditors hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Borrower Obligations, in accordance with the Credit Agreement, and only after such application and after the payment by the US Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9.615 of the UCC, need the US Administrative Agent account for the surplus, if any, to any Grantor.  To the extent permitted by applicable law, each Grantor waives all

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claims, damages and demands it may acquire against the US Administrative Agent or any Secured Creditor arising out of the exercise by them of any rights hereunder.  If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

(b)In the event that the US Administrative Agent elects not to sell the Collateral, the US Administrative Agent retains its rights to dispose of or utilize the Collateral or any part or parts thereof in any manner authorized or permitted by law or in equity, and to apply the proceeds of the same towards payment of the Borrower Obligations.  Each and every method of disposition of the Collateral described in this Agreement shall constitute disposition in a commercially reasonable manner.

(c)The US Administrative Agent may appoint any Person as agent to perform any act or acts necessary or incident to any sale or transfer of the Collateral.

Section 5.02Collections on Accounts, Etc.  The US Administrative Agent hereby authorizes each Grantor to collect upon the Collateral that is represented by Accounts, Instruments, Chattel Paper and Payment Intangibles subject to the US Administrative Agent’s direction and control, and the US Administrative Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of Default.  Upon the request of the US Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify the Account Debtors that the applicable Accounts, Chattel Paper and Payment Intangibles have been assigned to the US Administrative Agent for the ratable benefit of the Secured Creditors and that payments in respect thereof shall be made directly to the US Administrative Agent.  The US Administrative Agent may in its own name or in the name of others communicate with the Account Debtors to verify with them to its satisfaction the existence, amount and terms of any such Accounts, Chattel Paper or Payment Intangibles.  Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of its Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto.  Neither the US Administrative Agent nor any Lender shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the US Administrative Agent or any Lender of any payment relating thereto, nor shall the US Administrative Agent or any Lender be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Account (or any agreement giving rise thereto) to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

Section 5.03Proceeds.  If required by the US Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Collateral composed of Accounts, Instruments, Chattel Paper and Payment Intangibles, when collected or received by each Grantor, and any other cash or non-cash Proceeds received by each Grantor upon the sale or other disposition of any Collateral, shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed

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by such Grantor to the US Administrative Agent if required, in a special collateral account maintained by the US Administrative Agent, subject to withdrawal by the US Administrative Agent for the ratable benefit of the Secured Parties only, as hereinafter provided, and, until so turned over, shall be held by such Grantor in trust for the US Administrative Agent for the ratable benefit of the Secured Creditors, segregated from other funds of any such Grantor.  Each deposit of any such Proceeds shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.  All Proceeds (including, without limitation, Proceeds constituting collections of Accounts, Chattel Paper, Instruments) while held by the US Administrative Agent (or by any Grantor in trust for the US Administrative Agent for the ratable benefit of the Secured Creditors) shall continue to be collateral security for all of the Borrower Obligations and shall not constitute payment thereof until applied as hereinafter provided.  At such intervals as may be agreed upon by each Grantor and the US Administrative Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the US Administrative Agent’s election, the US Administrative Agent shall apply all or any part of the funds on deposit in said special collateral account on account of the Borrower Obligations in such order as the US Administrative Agent may elect, and any part of such funds which the US Administrative Agent elects not so to apply and deems not required as collateral security for the Borrower Obligations shall be paid over from time to time by the US Administrative Agent to each Grantor or to whomsoever may be lawfully entitled to receive the same.

Section 5.04Pledged Securities.

(a)Unless an Event of Default shall have occurred and be continuing and the US Administrative Agent shall have given notice to the relevant Grantor of the US Administrative Agent’s intent to exercise its corresponding rights pursuant to Section 5.04(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Securities paid in the normal course of business of the relevant Issuer, to the extent permitted in the Credit Agreement, and to exercise all voting, consent and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast, consent given or right exercised or other action taken by such Grantor that would impair the Collateral or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document or, without the prior consent of the US Administrative Agent, enable or permit any Issuer of Pledged Securities other than UCLP to issue any Capital Stock or to issue any other securities convertible into or granting the right to purchase or exchange for any Capital Stock of any Issuer of Pledged Securities other than as permitted by the Credit Agreement.

(b)Upon the occurrence and during the continuance of an Event of Default, upon notice by the US Administrative Agent of its intent to exercise such rights to the relevant Grantor or Grantors, (i) the US Administrative Agent shall have the right to receive any and all cash dividends, payments, Property or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Borrower Obligations in accordance with the Credit Agreement, and (ii) any or all of the Pledged Securities shall be registered in the name of the US Administrative Agent or its nominee, and (iii) the US Administrative Agent or its nominee may exercise (A) all voting, consent, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders (or other equivalent body) of the relevant Issuer or Issuers or otherwise and (B) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner

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thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the organizational structure of any Issuer, or upon the exercise by any Grantor or the US Administrative Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the US Administrative Agent may determine), all without liability except to account for Property actually received by it, but the US Administrative Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

(c)In order to permit the US Administrative Agent to exercise the voting and other consensual rights that it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions that it may be entitled to receive hereunder, (i) each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the US Administrative Agent all such proxies, dividend payment orders and other instruments as the US Administrative Agent may from time to time reasonably request and (ii) without limiting the effect of clause (i) above, such Grantor hereby grants to the US Administrative Agent an irrevocable proxy to vote all or any part of the Pledged Securities and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Securities would be entitled (including giving or withholding written consents of shareholders calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Securities on the record books of the Issuer thereof) by any other Person (including the Issuer of such Pledged Securities or any officer or agent thereof) upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full in cash of the Borrower Obligations under the Credit Agreement.

(d)Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to (i) comply with any instruction received by it from the US Administrative Agent in writing that (A) states that an Event of Default has occurred and is continuing and (B) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Pledged Securities directly to the US Administrative Agent.

(e)Upon the occurrence and during the continuance of an Event of Default, if the Issuer of any Pledged Securities is the subject of bankruptcy, insolvency, receivership, custodianship or other proceedings under the supervision of any Governmental Authority, then all rights of the Grantor in respect thereof to exercise the voting and other consensual rights which such Grantor would otherwise be entitled to exercise with respect to the Pledged Securities issued by such Issuer shall cease, and all such rights shall thereupon become vested in the US Administrative Agent who shall thereupon have the sole right to exercise such voting and other consensual rights, but the US Administrative Agent shall have no duty to exercise any such voting or other consensual rights and shall not be responsible for any failure to do so or delay in so doing.

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Section 5.05Private Sales of Pledged Securities.

(a)Each Grantor recognizes that the US Administrative Agent may be unable to effect a public sale of any or all the Pledged Securities, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise or may determine that a public sale is impracticable or not commercially reasonable and, accordingly, may resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof.  Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner.  The US Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Securities for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.

(b)Each Grantor agrees to use its best commercially reasonable efforts to do or cause to be done all such other acts as may reasonably be necessary to make such sale or sales of all or any portion of the Pledged Securities pursuant to this Section 5.05 valid and binding and in compliance with any and all other applicable Governmental Requirements.  Each Grantor further agrees that a breach of any of the covenants contained in this Section 5.05 will cause irreparable injury to the Secured Creditors, that the Secured Creditors have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.05 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred or is continuing under the Credit Agreement.

Section 5.06Deficiency.  Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its obligations and the fees and disbursements of any attorneys employed by the US Administrative Agent or any Secured Creditor to collect such deficiency.

Section 5.07Non-Judicial Enforcement.  The US Administrative Agent may enforce its rights hereunder without prior judicial process or judicial hearing, and to the extent permitted by law, each Grantor expressly waives any and all legal rights which might otherwise require the US Administrative Agent to enforce its rights by judicial process.

ARTICLE VI
The US Administrative Agent

Section 6.01US Administrative Agent’s Appointment as Attorney-in-Fact, Etc.

(a)Anything in this Section 6.01(a) to the contrary notwithstanding, the US Administrative Agent agrees that it will not exercise any rights under the power of attorney

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provided for in this Section 6.01(a) unless an Event of Default shall have occurred and be continuing.  Each Grantor hereby irrevocably constitutes and appoints the US Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all reasonably appropriate action and to execute any and all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the US Administrative Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following:

(i)unless being disputed under Section 9.03(a) of the Credit Agreement, pay or discharge Taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement or any other Loan Document and pay all or any part of the premiums therefor and the costs thereof;

(ii)execute, in connection with any sale provided for in Section 5.01 or Section 5.05, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and

(iii)(A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the US Administrative Agent or as the US Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any check, draft, note, acceptance or other instrument for the payment of moneys due with respect to any Collateral and commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (D) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (E) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the US Administrative Agent may deem appropriate; and (F) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the US Administrative Agent were the absolute owner thereof for all purposes, and do, at the US Administrative Agent’s option and such Grantor’s expense, at any time, or from time to time, all acts and things which the US Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the US Administrative Agent’s and the Secured Creditors’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.

(b)If any Grantor fails to perform or comply with any of its agreements contained herein within the applicable grace periods, the US Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

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(c)The reasonable expenses of the US Administrative Agent incurred in connection with actions undertaken as provided in this Section 6.01, together with interest thereon at a rate per annum equal to the Post-Default Rate, but in no event to exceed the Highest Lawful Rate, from the date of payment by the US Administrative Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the US Administrative Agent on demand.

(d)All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

Section 6.02Duty of US Administrative Agent.  The US Administrative Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9.207 of the UCC or otherwise, shall be to deal with it in the same manner as the US Administrative Agent deals with similar Property for its own account and shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which comparable secured parties accord comparable collateral.  To the fullest extent permitted under applicable law, neither the US Administrative Agent, any Secured Creditor nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof.  The powers conferred on the US Administrative Agent and the Secured Creditors hereunder are solely to protect the US Administrative Agent’s and the Secured Creditors’ interests in the Collateral and shall not impose any duty upon the US Administrative Agent or any Secured Creditor to exercise any such powers.  The US Administrative Agent and the Secured Creditors shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.  To the fullest extent permitted by applicable law, the US Administrative Agent shall be under no duty whatsoever to make or give any presentment, notice of dishonor, protest, demand for performance, notice of non-performance, notice of intent to accelerate, notice of acceleration, or other notice or demand in connection with any Collateral or the Borrower Obligations, or to take any steps necessary to preserve any rights against any Grantor or other Person or ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not it has or is deemed to have knowledge of such matters.  Each Grantor, to the extent permitted by applicable law, waives any right of marshaling in respect of any and all Collateral, and waives any right to require the US Administrative Agent or any Secured Creditor to proceed against any Grantor or other Person, exhaust any Collateral or enforce any other remedy which the US Administrative Agent or any Secured Creditor now has or may hereafter have against each Grantor, any Grantor or other Person.

Section 6.03Filing of Financing Statements.  Pursuant to the UCC and any other applicable law, each Grantor authorizes the US Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral

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in such form and in such offices as the US Administrative Agent reasonably determines appropriate to perfect the security interests of the US Administrative Agent under this Agreement.  A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.

Section 6.04Authority of US Administrative Agent.  Each Grantor acknowledges that the rights and responsibilities of the US Administrative Agent under this Agreement with respect to any action taken by the US Administrative Agent or the exercise or non-exercise by the US Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the US Administrative Agent and the Secured Creditors, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the US Administrative Agent and the Grantors, the US Administrative Agent shall be conclusively presumed to be acting as agent for the Secured Creditors with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

ARTICLE VII
Subordination of Indebtedness

Section 7.01Subordination of All Grantor Claims.  As used herein, the term “Grantor Claims” shall mean all debts and obligations of the Borrowers or any other Grantor to any other Grantor, whether such debts and obligations now exist or are hereafter incurred or arise, or whether the obligation of the debtor thereon be direct, contingent, primary, secondary, several, joint and several, or otherwise, and irrespective of whether such debts or obligations be evidenced by note, contract, open account, or otherwise, and irrespective of the Person or Persons in whose favor such debts or obligations may, at their inception, have been, or may hereafter be created, or the manner in which they have been or may hereafter be acquired by.  Except for payments permitted by the Credit Agreement, after and during the continuation of an Event of Default, no Grantor shall receive or collect, directly or indirectly, from any obligor in respect thereof any amount upon the Grantor Claims.

Section 7.02Claims in Bankruptcy.  In the event of receivership, bankruptcy, reorganization, arrangement, debtor’s relief, or other insolvency proceedings involving any Grantor, the US Administrative Agent on behalf of the US Administrative Agent and the Secured Creditors shall have the right to prove their claim in any proceeding, so as to establish their rights hereunder and receive directly from the receiver, trustee or other court custodian, dividends and payments which would otherwise be payable upon Grantor Claims.  Each Grantor hereby assigns such dividends and payments to the US Administrative Agent for the benefit of the US Administrative Agent and the Secured Creditors for application against the Borrower Obligations as provided under the Credit Agreement.  Should any Agent or Secured Creditor receive, for application upon the Borrower Obligations, any such dividend or payment which is otherwise payable to any Grantor, and which, as between such Grantors, shall constitute a credit upon the Grantor Claims, then upon payment in full in cash of the Borrower Obligations, the expiration of all Letters of Credit outstanding under the Credit Agreement (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and the

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termination of all of the Aggregate Commitments, the intended recipient shall become subrogated to the rights of the US Administrative Agent and the Secured Creditors to the extent that such payments to the US Administrative Agent and the Lenders on the Grantor Claims have contributed toward the liquidation of the Borrower Obligations, and such subrogation shall be with respect to that proportion of the Borrower Obligations which would have been unpaid if the US Administrative Agent and the Secured Creditors had not received dividends or payments upon the Grantor Claims.

Section 7.03Payments Held in Trust.  In the event that notwithstanding Section 7.01 and Section 7.02, any Grantor should receive any funds, payments, claims or distributions which is prohibited by such Sections, then it agrees: (a) to hold in trust for the US Administrative Agent and the Secured Creditors an amount equal to the amount of all funds, payments, claims or distributions so received, and (b) that it shall have absolutely no dominion over the amount of such funds, payments, claims or distributions except to pay them promptly to the US Administrative Agent, for the benefit of the Secured Creditors; and each Grantor covenants promptly to pay the same to the US Administrative Agent.

Section 7.04Liens Subordinate.  Each Grantor agrees that, until the Borrower Obligations are paid in full in cash, no Letter of Credit shall be outstanding (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and the termination of all of the Aggregate Commitments, any Liens securing payment of the Grantor Claims shall be and remain inferior and subordinate to any Liens securing payment of the Borrower Obligations, regardless of whether such encumbrances in favor of such Grantor, the US Administrative Agent or any Secured Creditor presently exist or are hereafter created or attach.  Without the prior written consent of the US Administrative Agent, no Grantor, during the period in which any of the Borrower Obligations are outstanding or the Aggregate Commitments are in effect, shall (a) exercise or enforce any creditor’s right it may have against any debtor in respect of the Grantor Claims, or (b) foreclose, repossess, sequester or otherwise take steps or institute any action or proceeding (judicial or otherwise, including without limitation the commencement of or joinder in any liquidation, bankruptcy, rearrangement, debtor’s relief or insolvency proceeding) to enforce any Lien held by it.

Section 7.05Notation of Records.  Upon the request of the US Administrative Agent, all promissory notes and all accounts receivable ledgers or other evidence of the Grantor Claims accepted by or held by any Grantor shall contain a specific written notice thereon that the indebtedness evidenced thereby is subordinated under the terms of this Agreement.

ARTICLE VIII
Miscellaneous

Section 8.01Waiver.  No failure on the part of the US Administrative Agent or any Secured Creditor to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, privilege or remedy or any abandonment or discontinuance of steps to enforce such right, power, privilege or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, privilege or remedy under this Agreement or any other Loan Document preclude or be construed as a waiver of any other or further exercise thereof or the exercise of any other right, power, privilege

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or remedy.  The remedies provided herein are cumulative and not exclusive of any remedies provided by law or equity

Section 8.02Notices.  All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 13.02 of the Credit Agreement; provided that any such notice, request or demand to or upon any Grantor shall be addressed to such Grantor at its notice address set forth on Schedule 1.

Section 8.03Amendments in Writing.  None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 13.04 of the Credit Agreement.

Section 8.04Successors and Assigns.  The provisions of this Agreement shall be binding upon the Grantors and their successors and permitted assigns and shall inure to the benefit of the US Administrative Agent and the Secured Creditors and their respective successors and permitted assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the US Administrative Agent and the Lenders unless otherwise permitted by the terms of the Credit Agreement or this Agreement, and any such purported assignment, transfer or delegation shall be null and void.

Section 8.05Survival; Revival; Reinstatement.

(a)All covenants, agreements, representations and warranties made by any Grantor herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document to which it is a party shall be considered to have been relied upon by the US Administrative Agent, the other Agents, the Issuing Bank and the Lenders and shall survive the execution and delivery of this Agreement and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the US Administrative Agent, the other Agents, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under the Credit Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Aggregate Commitments have not expired or terminated.

(b)To the extent that any payments on the Borrower Obligations or proceeds of any Collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Borrower Obligations so satisfied shall be revived and continue as if such payment or proceeds had not been received and the US Administrative Agent’s and the Secured Creditors’ Liens, security interests, rights, powers and remedies under this Agreement and each other Loan Document shall continue in full force and effect.  In such event, each Loan Document shall be automatically reinstated and the Grantors shall take such action as may be reasonably requested by the US Administrative Agent and the Secured Creditors to effect such reinstatement.

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Section 8.06Counterparts; Integration; Effectiveness; Conflicts.

(a)This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.

(b)THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF.  THIS AGREEMENT AND THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

(c)This Agreement shall become effective when it shall have been executed by the US Administrative Agent and when the US Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto, the Lenders and their respective successors and assigns.  Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

(d)In the event of a conflict between the provisions hereof and the provisions of the Credit Agreement, the provisions of the Credit Agreement shall control.

Section 8.07Severability.  Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

Section 8.08Governing Law; Submission to Jurisdiction.

(a)THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

(b)ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH

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RESPECTIVE JURISDICTIONS.  THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE A PARTY FROM OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY COURT OTHERWISE HAVING JURISDICTION.

(c)EACH GRANTOR IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH GRANTOR AT ITS ADDRESS SET FORTH ON SCHEDULE 1 HERETO OR AS UPDATED FROM TIME TO TIME, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.

(d)NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE GRANTORS IN ANY OTHER JURISDICTION.

(e)EACH PARTY HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY SECURITY INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (iii) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OF THE ADMINISTRATIVE AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (iv) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY INSTRUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 8.08.

Section 8.09Headings.  Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

Section 8.10Acknowledgments.  Each Grantor hereby acknowledges that:

(a)it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

(b)neither the US Administrative Agent nor any Secured Creditor has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on

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the one hand, and the US Administrative Agent and Secured Creditors, on the other hand, in connection herewith or therewith is solely that of debtor and creditor;

(c)no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Secured Creditors or among the Grantors and the Secured Creditors; and

(d)Each of the parties hereto specifically agrees that it has a duty to read this Agreement, the Security Instruments and the other Loan Documents and agrees that it is charged with notice and knowledge of the terms of this Agreement, the Security Instruments and the other Loan Documents; that it has in fact read this Agreement, the Security Instruments and the other Loan Documents and is fully informed and has full notice and knowledge of the terms, conditions and effects thereof; that it has been represented by independent legal counsel of its choice throughout the negotiations preceding its execution of this Agreement and the Security Instruments; and has received the advice of its attorney in entering into this Agreement and the Security Instruments; and that it recognizes that certain of the terms of this Agreement and the Security Instruments result in one party assuming the liability inherent in some aspects of the transaction and relieving the other party of its responsibility for such liability.  EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

Section 8.11Additional Capital Stock.  Each Grantor that is required to pledge certificated Capital Stock of its Subsidiaries shall execute and deliver a Supplement in the form of Annex I hereto, if such certificated Capital Stock was not previously pledged.

Section 8.12Releases.

(a)Full Release.  The grant of a security interest hereunder and all of rights, powers and remedies in connection herewith shall remain in full force and effect until the US Administrative Agent has (i) retransferred and delivered all Collateral in its possession to the Grantors, and (ii) executed a written release or termination statement and reassigned to the Grantors without recourse or warranty any remaining Collateral and all rights conveyed hereby.  Pursuant to the satisfaction of the conditions set forth in Section 9.09(b) of the Credit Agreement or upon the complete payment of the Borrower Obligations under the Credit Agreement (except for Letters of Credit secured by cash collateral as permitted in Section 2.01(b)(iii) of the Credit Agreement) and the compliance by the Grantors with all covenants and agreements hereof and the termination of the Aggregate Commitments, the US Administrative Agent, at the written request and expense of the Borrowers, will promptly release, reassign and transfer the Collateral to the Grantors and declare this Agreement to be of no further force or effect.

(b)Partial Release.  Notwithstanding anything contained herein to the contrary, the Grantors are authorized to release any Collateral that is sold, leased, assigned, exchanged, conveyed, transferred or otherwise disposed of in compliance with Sections 10.08, 10.11 and 10.14 of the Credit Agreement at which point the liens and security interests shall

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terminate with respect to such Collateral and this Agreement shall have no further force or effect with respect to such released Collateral; provided that so long as the lien in favor of the US Administrative Agent continues in the proceeds of such sale, lease, assignment, exchange, conveyance, transfer or other disposal of such Collateral, or to the extent such Collateral is sold, leased, assigned, exchanged, conveyed, transferred or otherwise disposed of to any Borrower or any Subsidiary Guarantor, such lien continues in such Collateral.

(c)Retention in Satisfaction.  Except as may be expressly applicable pursuant to Section 9.620 of the UCC, no action taken or omission to act by the US Administrative Agent or the Secured Creditors hereunder, including, without limitation, any exercise of voting or consensual rights or any other action taken or inaction, shall be deemed to constitute a retention of the Collateral in satisfaction of the Borrower Obligations or otherwise to be in full satisfaction of the Borrower Obligations, and the Borrower Obligations shall remain in full force and effect, until the US Administrative Agent and the Secured Creditors shall have applied payments (including, without limitation, collections from Collateral) towards the Borrower Obligations in the full amount then outstanding or until such subsequent time as is provided in Section 8.12(a).

Section 8.13Acceptance.  Each Grantor hereby expressly waives notice of acceptance of this Agreement, acceptance on the part of the US Administrative Agent and the Secured Creditors being conclusively presumed by their request for this Agreement and delivery of the same to the US Administrative Agent.

[SIGNATURE PAGES TO FOLLOW]

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IN WITNESS WHEREOF, each of the undersigned has caused this Collateral Agreement to be duly executed and delivered as of the date first above written.

GRANTORS:	UNIVERSAL COMPRESSION, INC.
	By:	/s/ J. Michael Anderson
	Name:	J. Michael Anderson
	Title:	Senior Vice President and
		Chief Financial Officer
	UNIVERSAL COMPRESSION HOLDINGS,
	INC.
	By:	/s/ J. Michael Anderson
	Name:	J. Michael Anderson
	Title:	Senior Vice President and
		Chief Financial Officer
	UCI COMPRESSOR HOLDING, L.P.
	By:	UCI LEASING HOLDING GP LLC,
		its general partner
	By:	/s/ J. Michael Anderson
	Name:	J. Michael Anderson
	Title:	Senior Vice President and
		Chief Financial Officer
	UCI MLP LP LLC
	By:	/s/ Pamela Jasinki
	Name:	Pamela A. Jasinski
	Title:	Manager

Signature Page – Collateral Agreement

Acknowledged and Agreed to as
of the date hereof by:
ADMINISTRATIVE AGENT:		WACHOVIA BANK, NATIONAL
		ASSOCIATION
	By:		/s/ Todd Schanzlin
	Name:		Todd Schanzlin
	Title:		Vice President

Acknowledgment Page – Collateral Agreement

EX-10.39

Exhibit 10.39

AMENDMENT NO. TWO
TO THE
UNIVERSAL COMPRESSION HOLDINGS, INC.
EMPLOYEE STOCK PURCHASE PLAN

ARTICLE I
PURPOSE

1.01    Purpose.    The Universal Compression Holdings, Inc. Employee Stock Purchase Plan (the “Plan”), was adopted by the Board of Directors to encourage employees of Universal Compression Holdings, Inc. (“Universal”) to remain in its employ and participate in its growth by providing a method whereby employees of Universal and its eligible Subsidiary Corporations (collectively, with Universal, the “Company”) will have an opportunity to acquire a proprietary interest in the Company’s long-term performance and success through the purchase of shares of the Common Stock at a price that may be less than the fair market value of the stock on the date of purchase from funds accumulated through payroll deductions. It is the intention of the Company to have the Plan qualify as an “employee stock purchase plan” under section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). The provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. The Plan as originally adopted reflected that Two Hundred Fifty Thousand (250,000) shares of Common Stock were available for purchase pursuant to the Plan. The Company now amends and restates the Plan effective as of April 19, 2006, to reflect that an additional Two Hundred Fifty Thousand (250,000) shares of Common Stock will be available for purchase pursuant to the Plan.

ARTICLE II
DEFINITIONS

2.01 “Board” means the Board of Directors of Universal.

2.02 “Common Stock” means the Common Stock, $0.01 par value, of Universal.

2.03 “Committee” means the committee appointed by the Board pursuant to Article X to administer the Plan. If the Board does not appoint a Committee, or if a Committee otherwise fails to exist at any time during the term hereof, the Board shall perform the functions of the Committee.

2.04 “Eligible Pay” means regular straight-time earnings, including commissions, but excluding payments for overtime, shift premium, bonuses and other incentive and special payments.

2.05 “Employee” means any person who is customarily employed, within the meaning of Code section 3401, by the Company (i) more than 20 hours per week or (ii) at least five months in any calendar year. The Committee shall determine when an Employee’s period of employment terminates and when such period of employment is deemed to be continued during an approved leave of absence.

2.06 “Offering” means any offering as described in Section 4.02 hereof permitting Participants to purchase Common Stock under the Plan.

2.07 “Offering Commencement Date” means the date on which an Offering will commence, as described in Section 4.02.

2.08 “Offering Period” means the period between the Offering Commencement Date and the Offering Termination Date, as described in Section 4.02.

2.09 “Offering Termination Date” means the last day of an Offering Period, as described in Section 4.02.

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2.10 “Participant” means an Employee who exercises an option to purchase Common Stock under the Plan by authorizing payroll deductions under Section 5.02.

2.11 “Plan” means the Universal Compression Holdings, Inc. Employee Stock Purchase Plan, as set forth herein and as it may be amended from time to time.

2.12 “Subsidiary Corporation” means (i) any “subsidiary corporation” of Universal as that term is defined in section 424(f) of the Code, (ii) any other entity that is taxed as a corporation under Code Section 7701(a)(3) and is a member of the “affiliated group” as defined in Code Section 1504(a) of which Universal is the common parent, and (iii) any other entity as may be permitted from time to time by the Code or the Internal Revenue Service to be an employer of employees participating in the Plan; provided, however, that any such Subsidiary Corporation must be designated as a participating employer in the Plan by the Board.

ARTICLE III
ELIGIBILITY AND PARTICIPATION

3.01    Initial Eligibility.    Except as provided in Section 3.02, any Employee who shall have completed ninety (90) days’ employment and shall be employed by the Company on the date his participation in the Plan is to become effective shall be eligible to participate in Offerings under the Plan which commence on or after such ninety-day period has concluded.

3.02    Restrictions on Participation.    Notwithstanding any provisions of the Plan to the contrary, no Employee shall be granted an option to purchase Common Stock under the Plan:

(a)   if, immediately after the grant, such Employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company (for purposes of this subparagraph, the rules of section 424(d) of the Code shall apply in determining stock ownership of any Employee) and any option granted to an Employee which results in his stock ownership (as determined under section 423(b)(3) of the Code) equaling or exceeding such 5% limitation shall be entirely void as if it had never been granted; or

(b)   which permits his rights to purchase stock under all employee stock purchase plans of the Company to accrue at a rate which exceeds $25,000 in fair market value of the stock (determined at the time such option is granted) for each calendar year in which such option is outstanding. For purposes of this subparagraph (b), (i) an option accrues when the option first becomes exercisable during any calendar year; (ii) an option accrues at a rate provided in the applicable Offering, but in no case may such rate for any Employee exceed $25,000 of the fair market value of stock determined at the time the option is granted for any one calendar year; (iii) an option that has accrued under any one Offering may not be carried over by a Participant to any other Offering; and (iv) only rights to purchase stock that have been granted under an employee stock purchase plan that complies with section 423 of the Code shall be taken into account.

3.03    Commencement of Participation.    An eligible Employee may become a Participant by completing an authorization for a payroll deduction in accordance with Section 5.02 on the form provided by the Company and filing it with the Company’s finance department on or before the date set therefore by the Committee, which date shall be prior to the Offering.

ARTICLE IV
OFFERINGS

4.01    Shares Offered.    The total number of shares of Common Stock available under the Plan is Five Hundred Thousand (500,000) shares. If any Offering shall expire without the rights under such Offering having been exercised in full, such unpurchased shares covered thereby shall be added to the shares otherwise available for future Offerings.

4.02    Offerings.    The Company may make periodic Offerings to eligible employees to purchase

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Common Stock under the Plan, the duration of which may be for a period of three months up to one year; provided, however, that the initial Offering Commencement Date may be for a period of less than three months, as determined by the Committee. Offering Periods commencing after the initial Offering Period will commence on January 1, April 1, July 1 or October 1. With respect to each Offering, the Committee, at its discretion, may specify the maximum number of shares of Common Stock that may be purchased under the Offering or such other limitations that it may deem appropriate. The number of shares of Common Stock that may be purchased under each successive Offering shall be all or a portion of the balance of the Five Hundred Thousand (500,000) shares authorized but not purchased previously under the terms of this Plan.

As used in the Plan, “Offering Commencement Date” means the January 1, April 1, July 1 or October 1, as the case may be, on which the particular Offering begins. “Offering Termination Date” means the March 31, June 30, September 30 or December 31, as the case may be, on which the particular Offering terminates, and “Offering Period” means the period from the Offering Commencement Date to the Offering Termination Date.

ARTICLE V
PAYROLL DEDUCTIONS

5.01    Offering Rights.    With respect to each Offering, each Employee shall be offered the opportunity to elect to have deducted from each paycheck issued during the Offering Period an amount as determined by the Participant which shall be withheld by the Company for the purchase on behalf of such electing Employee of the number of whole shares of Common Stock that can be purchased with the amount deducted for such purpose, but in no event may the number of whole shares which may be purchased by any Participant exceed the number of whole shares available during the Offering Period or exceed the individual Participant allotment, if any, for the Offering Period described in Section 6.03 hereof. Fractional shares may not be purchased; any funds that are insufficient to purchase whole shares shall remain in each affected Participant’s Plan account until the following Offering Period, at which time such funds shall be (i) combined with the Participant’s payroll deduction for the following Offering Period and used to purchase whole shares for each affected Participant who remains eligible to participate in such Offering Period, or (ii) returned to each affected Participant who is not eligible to participate in the following Offering Period.

5.02    Payroll Deductions.    Each Employee shall become a Participant pursuant to the terms of an Offering by filing a written election to participate in that Offering in the form of a payroll deduction authorization prior to the Offering Commencement Date on the form provided by the Company for that purpose. A Participant may elect to have his authorization continue for future Offerings until revoked or modified in writing. A Participant may elect to have deductions made from his pay in one of two ways. At the time a Participant files his authorization for payroll deduction, he shall elect to have deductions made from his pay on each payday during the time he is a Participant in an Offering at the rate of any specified whole percentage from 1% up to and including 10% of his Eligible Pay in effect at the Offering Commencement Date or the Participant shall elect to have a specific dollar amount deducted from his pay on each payday during the time he is a Participant pursuant to rules that may be proscribed from time to time by the Committee; provided, however, that each payroll deduction shall be in an amount not less than $20 per payroll period and shall be subject to the restrictions contained in Section 3.02. In the case of a part-time hourly Employee, such Employee’s Eligible Pay during an Offering shall be determined by multiplying such Employee’s hourly rate of pay in effect on the Offering Commencement Date by the number of regularly scheduled hours of work for such Employee during such Offering. Payroll deductions shall commence with the first regular payroll period coinciding with or ending on the Offering Commencement Date, or at such other time as may be specified in such Offering and shall end on the earlier of the last regular payroll period coinciding with or ending before the Offering Termination Date or, if earlier, upon the termination of the Participant’s employment with the Company.

5.03    Method of Payment; Participant’s Account.    The Company will maintain or cause to have maintained a Plan account on its books in the names of each Participant. All payroll deductions made for a Participant shall be credited to his account under the Plan. Purchases of shares of Common Stock by any

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Participant pursuant to an Offering shall be made with funds accumulated in the Participant’s account through payroll deductions from the Participant’s Eligible Pay during the Offering Period. A Participant may not make any separate cash payment into such account except when on leave of absence and then only as provided in Section 5.05. The Company shall not credit a Participant’s Plan account with interest on any payroll deduction.

5.04    Changes in Payroll Deductions.    A Participant may discontinue his participation in the Plan as provided in Article VII, but no other change can be made during an Offering and, specifically, a Participant may not alter the amount of his payroll deductions for that Offering.

5.05    Leave of Absence.    If a Participant goes on a leave of absence, such Participant shall have the right to elect (i) to withdraw the balance in his Plan account pursuant to Article VII, (ii) to discontinue contributions to the Plan but remain a Participant in the Plan, or (iii) to remain a Participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the Participant during such leave of absence and undertaking to make cash payments to the Plan at the end of each payroll period to the extent that amounts payable by the Company to such Participant are insufficient to meet such Participant’s authorized Plan deductions.

ARTICLE VI
TERMS AND CONDITIONS OF OFFERINGS AND OPTIONS

6.01    Terms and Conditions.    Except as provided in Section 3.02(b), all Participants shall have the same rights and privileges, as specified below in this Article VI.

6.02    Number of Option Shares.    On each Offering Commencement Date, a Participant shall be deemed to have been granted an option to purchase shares of Common Stock of the Company equal to the percentage of the Employee’s Eligible Pay that he has elected to have withheld through payroll deductions multiplied by the Employee’s Eligible Pay during the Offering Period, or the specified portion elected, divided by the purchase price per share determined under Section 6.04, subject to the allotments, if any, for the Offering Period described in Section 6.03.

6.03    Allotment of Shares.    If the total number of shares of Common Stock to be purchased by Participants through payroll deduction under any Offering exceeds the shares available for purchase under the Offering, the Committee may make allotments of shares among the Participants on any basis consistent with the terms of the Plan, and Offerings for shares, if any, in excess of the shares so allotted shall be deemed to have lapsed. Any funds remaining in a Participant’s account after an Offering as a result of this Section 6.03 shall be carried over into the next Offering, or shall be returned to the Participant as soon as practicable if another Offering will not occur or if the Employee does not elect to participate in the next Offering.

6.04    Purchase Price.    The purchase price per share at which Common Stock may be purchased under each Offering shall be a percentage established by the Committee prior to the Offering Commencement Date which is from 85% to 100% of the lesser of the fair market value of a share of Common Stock as determined as of (i) the Offering Commencement Date or (ii) the Offering Termination Date. In determining the purchase price, the fair market value per share of Common Stock shall be the closing price reported, if any, on the New York Stock Exchange or successor exchange or market system for the date on which such value is being determined; provided, however, that if the closing sales price is not reported on such date, then the closing price on the most recently preceding date on which such price was reported shall be used. If no trading market on the New York Stock Exchange exists, the Board of Directors or the Committee shall determine the fair market value for this purpose.

6.05    Nontransferability of Options.    An option shall not be transferable by the Employee or Participant to whom it has been granted otherwise than by will or the laws of descent and distribution and shall be exercisable, during the Participant’s lifetime, only by the Participant. Further, in the discretion of the Board, the terms of any Offering may prohibit transfer under any circumstances and provide for cancellation of the unexercised portion of any option upon the death of a Participant.

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6.06    Purchases.    As of the Offering Termination Date, or such other date as required by administrative operational requirements, purchases of shares of Common Stock by any Participant pursuant to an Offering shall be made with funds accumulated in the Participant’s account through payroll deductions from the Participant’s pay or as otherwise permitted by the Board, under rules of uniform application over the time period specified in such Offering.

6.07    Other Provisions.    Each Offering shall contain such other provisions as the Committee shall deem advisable, including restrictions on resale of Common Stock purchased through an Offering, provided that no such provisions may in any way conflict, or be inconsistent with the terms of the Plan as amended from time to time.

6.08    Requirements of Law.    The issuance of any Common Stock hereunder is conditioned upon registration or exemption of the Common Stock to be issued under applicable federal and state securities laws and its listing on any applicable stock exchange. In no event shall any Common Stock be issued hereunder prior to the effective date of any such registration, exemption or listing application. In addition, unless and until the Plan is approved by a proper vote of the stockholders of Universal, the purchase price per share under Section 6.04 shall be at least 100% of the fair market value determined thereunder.

6.09    Issuance of Common Stock.    The shares of Common Stock purchased by each Participant with respect to each Offering shall be considered to be issued and outstanding to his credit as of the close of business on the Offering Termination Date or other purchase date for the Offering as described in Section 6.06. Certificates for shares of Common Stock shall be issued in accordance with Section 7.02 only in the name of the Participant unless the Participant, or in the event of death, the Participant’s designee, elects otherwise by written notice to the Company and the Company gives prior written consent to such election.

6.10    Account Balances.    No interest shall accrue at any time for any amount credited to the account of a Participant. After the close of each Offering, a report shall be sent to each Participant stating the entries made to his account, the number of shares of Common Stock purchased, and the applicable purchase price of such shares.

ARTICLE VII
WITHDRAWALS FROM PARTICIPANT ACCOUNTS

7.01    Withdrawal From Offering.    Except for any officer of the Company who is subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended (an “Insider”), any Participant may cease participation in an Offering at any time prior to the Offering Termination Date and withdraw all cash amounts in his account by providing at least fifteen (15) days’ prior written notice to the Company’s human resource department revoking his payroll deduction authorization. Such withdrawals shall serve to cancel the Participant’s option, and the Participant shall thereupon cease his participation in such Offering. Partial cash withdrawals shall not be permitted. Any cash withdrawal request shall be made in such form and under such conditions as may be specified from time to time by the Committee. Insiders may not make cash withdrawals for so long as they remain Insiders.

7.02    Issuance of Certificates.    As soon as practicable after each Offering Period, each Participant will receive a stock certificate representing all of the shares of Common Stock (in a whole number of shares) held in his account. Subject to Section 6.07, a Participant shall not be permitted to pledge, transfer, or sell shares of Common Stock held in his account until they are issued in certificate form.

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7.03    Termination of Employment.    Upon termination of a Participant’s employment with the Company for any reason, whether voluntary or involuntary, his participation in the Plan shall immediately terminate. As soon thereafter as is practicable, the Participant, or the Participant’s beneficiary in the event of the Participant’s death, shall receive (i) cash in an amount equal to the balance in his account as of the date of his termination of employment, without interest; (ii) a stock certificate for all whole shares of Common Stock not yet delivered out of the account; and (iii) cash equivalent to any fractional shares of Common Stock in the account.

ARTICLE VIII
RECAPITALIZATION OR REORGANIZATION
AND COMMON STOCK DIVIDENDS

8.01    Merger, Consolidation, or Reorganization.    In the event of a dissolution or liquidation of the Company, or any merger, consolidation, or share exchange pursuant to which the holders of Common Stock would receive cash, securities or property from another person or entity, the Board, at its election, may cause each outstanding option to terminate; provided, however, that each Participant shall in such event, subject to such rules and limitations of uniform application as the Board may prescribe, be entitled to the rights of terminating Participants provided in Article VII.

8.02    Capital Adjustments.    The aggregate number of shares of Common Stock that may be purchased by the exercise of outstanding options and the purchase price per share covered by each such outstanding option and the number of shares of Common Stock held in a Participant’s account shall be proportionately adjusted for any increase or decrease in the number of issued shares resulting from a subdivision or consolidation of Common Stock or other capital adjustment or the payment of a Common Stock dividend or other increase or decrease in such shares of Common Stock effected without the receipt of consideration by the Company.

8.03    Company’s Discretion.    The grant of an option under the Plan shall not affect in any way the Company’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part of its business or assets.

ARTICLE IX
AMENDMENT OR TERMINATION OF THE PLAN

9.01    Amendment or Termination.    The Board in its sole and absolute discretion may suspend or terminate the Plan, reconstitute the Plan in whole or in part, or amend or revise the Plan in any respect whatsoever except that (i) no amendment shall cause any option to fail to qualify as an option under section 423 of the Code; (ii) without approval of the stockholders, no amendment shall increase the number shares of Common Stock that may be sold under the Plan or make any change in the Employees or class of Employees eligible to participate in the Plan; and (iii) without the approval of a Participant, no change shall be made in the terms of any outstanding option adverse to the interest of the Participant. The Plan shall terminate on the date that all shares of Common Stock authorized for sale under the Plan have been purchased, except as otherwise extended by authorizing additional shares under the Plan.

ARTICLE X
ADMINISTRATION

10.01    Appointment of Committee.    If the Board appoints a Committee to administer the Plan, the Committee shall consist of at least two directors of Universal. The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee.

10.02    Authority of Committee.    Subject to the express provisions of the Plan, the Committee shall have full power and authority in its discretion to interpret and construe any and all provisions of the Plan, to adopt rules and regulations for administering the Plan, and to make all other determinations deemed

6

necessary or advisable for administering the Plan. The Committee’s determination on the foregoing matters shall be final, conclusive and binding on all persons. The Committee may delegate some or all of its administrative powers and responsibilities to such other persons from time to time as it deems appropriate.

ARTICLE XI
MISCELLANEOUS

11.01    Nontransferability.    Except by the laws of descent and distribution, no benefit provided hereunder shall be subject to alienation, assignment, or transfer by a Participant (or by any person entitled to such benefit pursuant to the terms of this Plan), nor shall it be subject to attachment or other legal process of whatever nature, and any attempted alienation, assignment, attachment, or transfer shall be void and of no effect whatsoever and, upon any such attempt, the benefit shall terminate and be of no force or effect. During a Participant’s lifetime, options granted to the Participant shall be exercisable only by the Participant. Shares of Common Stock shall be delivered only to the Participant or death beneficiary entitled to receive the same or to the Participant’s authorized legal representative.

11.02    No Employment Right.    Neither this Plan nor any action taken hereunder shall be construed as giving any right to any individual to be retained as an officer or Employee of the Company.

11.03    Tax Withholding.    The Company shall have the right to deduct from all payments hereunder any federal, state, local, or employment taxes that it deems are required by law to be withheld with respect to such payments.

11.04    Government and Other Regulations.    The obligation of the Company to deliver shares of Common Stock or make cash payments hereunder shall be subject to all applicable laws, rules, and regulations and to such approvals by any government agencies or regulatory authority as may be deemed necessary or appropriate by the Committee. If shares of Common Stock deliverable hereunder may in certain circumstances be exempt from registration under the Securities Act of 1933, as amended, the Company may restrict its transfer in such manner as it deems advisable to ensure such exempt status. The Plan is intended to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Any provision inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. The Plan shall be subject to any provision necessary to assure compliance with federal and state securities laws.

11.05    Indemnification.    Each person who is or at any time serves as a member of the Board and/or the Committee shall be indemnified and held harmless by Universal against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit, or proceeding to which such person may be a party or in which such person may be involved by reason of any action or failure to act under this Plan; and (ii) any and all amounts paid by such person in satisfaction of judgment in any such action, suit, or proceeding relating to this Plan except to the extent that any such loss, cost, liability or expense arises from the gross negligence or willful misconduct of such person. Each person covered by this indemnification shall give Universal an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend the same on such person’s own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the charter or bylaws of Universal, as a matter of law, or otherwise, or any power that Universal may have to indemnify such person or hold such person harmless.

11.06    Reliance on Reports.    Each member of the Board and the Committee shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and upon any other information furnished in connection with this Plan. In no event shall any person who is or shall have been a member of the Board and/or the Committee be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information, or for any action taken, including the furnishing of information, or failure to act, if in good faith.

11.07    Governing Law.    All matters relating to this Plan shall be governed by the laws of the State

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of Texas, without regard to the principles of conflict of laws thereof, except to the extent preempted by the laws of the United States.

11.08    Relationship to Other Benefits.    No payment under this Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, or group insurance plan of the Company.

11.09    Expenses.    The expenses of implementing and administering this Plan shall be borne by the Company.

11.10    Titles and Headings.    The titles and headings of the Articles and Sections in this Plan are for convenience of reference only, and in the event of any conflict, the text of this Plan, rather than such titles or headings, shall control.

11.11    Application of Funds.    All funds received by the Company under the Plan shall constitute general funds of the Company.

11.12    Nonexclusivity of Plan.    Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of Universal for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases.

Effective as of April 19, 2006.

UNIVERSAL COMPRESSION HOLDINGS, INC.
By:	/s/ J. Michael Anderson
Name:	J. Michael Anderson
Title:	Senior Vice President and Chief Financial Officer

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EX-10.44

Exhibit 10.44

UNIVERSAL COMPRESSION HOLDINGS, INC.
SUMMARY OF COMPENSATION FOR
DIRECTORS AND EXECUTIVE OFFICERS

Director Compensation

Directors who are employees receive no separate compensation for Board service. As of the filing of the Company’s annual report on Form 10-K for the year ended December 31, 2006, non-employee directors receive the following for their service on the Board:

·An annual retainer of $30,000 for serving on the Board.

·An annual fee for serving as Chair of a Committee. These fees are as follows: $10,000 for the Audit Committee Chair; $5,000 for the Compensation Committee Chair; and $5,000 for Nominating and Corporate Governance Committee Chair.

·Fees for meeting attendance of between $500 and $1,000 per Board or Committee meeting attended, except in the case of a Committee Chair, who will receive $1,500 per Committee meeting attended.

·Reimbursement for reasonable out-of-pocket expenses.

Non-employee directors also receive stock option awards under the Universal Compression Holdings, Inc.’s Incentive Stock Option Plan with a target value equal to $125,000 (with an assumed option valuation rate as a percentage of face value) rounded to the nearest 100 options.

Named Executive Officers

The named executive officers (as such term is defined under the rules and regulations of the Securities and Exchange Commission) of the Company serve at the discretion of the Board of Directors. From time to time, the Compensation Committee of the Board of Directors reviews and determines the salaries that are paid to the Company’s executive officers. The following are the annualized base salaries for the named executive officers effective as of the filing of the Company’s annual report on Form 10-K for the year ended December 31, 2006:

Name	Base Salary
Stephen A. Snider, Chairman, President and Chief Executive Officer	$	550,000
Ernie L. Danner, Executive Vice President and Chief Operating Officer	$	355,000
J. Michael Anderson, Sr. Vice President and Chief Financial Officer	$	310,000
D. Bradley Childers, Sr. Vice President	$	300,000
Kirk E. Townsend, Sr. Vice President	$	315,000

Named executive officers are also eligible to participate in an Officer’s Incentive Plan, which provides such executive officers with the potential to earn a cash bonus expressed as a percentage of salary. The Officer’s Incentive Plan for the transition period beginning April 1, 2006 and ending December 31, 2006 was approved by the Compensation Committee of the Board of Directors on May 1, 2005.  The nine-month measurement period was a result of the Board of Directors’ decision, in December 2005, to change the Company’s fiscal year end from March 31 to December 31.

The named executive officers are also eligible to participate in the following:

·Universal Compression Holdings, Inc.’s Incentive Stock Option Plan;

·Universal Compression Holdings, Inc.’s Restricted Stock Plan;

·Universal Compression, Inc.’s Employees’ Supplemental Savings Plan;

·Universal Compression Holdings, Inc.’s Employee Stock Purchase Plan;

·the Company’s broad-based benefit programs available to its salaried employees, including 401(k), health, disability and life insurance programs.

EX-21.1

Exhibit 21.1

Subsidiaries of Universal Compression Holdings, Inc.

Beijing Universal Compression Technical Services Company Ltd.	China
Compression Services de Mexico, S.A. de C.V.	Mexico
Compressor Systems International, Inc.	Delaware
Energy Dynamics de Venezuela, C.A.	Venezuela
Enterra Compression Investment Company	Delaware
Excel Energy Services Limited	Nigeria
Oceanic Compression Services Pty Ltd	Australia
Probalance Engenharia Ltda.	Brazil
PT Universal Compression Indonesia	Indonesia
Quimex S.A.	Switzerland
UC Canadian Partnership Holdings Company	Nova Scotia, Canada
UC Canadian Partnership Minority Holdings Company	Nova Scotia, Canada
UC Operating Partnership, L.P.	Delaware
UCI Compressor Holding, L.P.	Delaware
UCI GP LP LLC	Delaware
UCI Leasing Holding GP LLC	Delaware
UCI Leasing Holding LP LLC	Delaware
UCI MLP LP LLC	Delaware
UCLP Leasing GP LLC	Delaware
UCLP Leasing, L.P.	Delaware
UCLP OLP GP LLC	Delaware
UCO Compression 2005 LLC	Delaware
UCO Compression Holding, L.L.C.	Delaware
UCO General Partner, LP	Delaware
UCO GP, LLC	Delaware
Universal Compression (Australia) Pty Ltd	Australia
Universal Compression (Thailand), Ltd.	Thailand
Universal Compression Argentina S.A.	Argentina
Universal Compression B.V.	The Netherlands
Universal Compression Bolivia Ltda.	Bolivia
Universal Compression Canada, Limited Partnership	Nova Scotia, Canada
Universal Compression Canadian Holdings, Inc.	Delaware
Universal Compression de Mexico, S.A. de C.V.	Mexico
Universal Compression de Venezuela Unicom, C.A.	Venezuela
Universal Compression del Peru S.R.L.	Peru
Universal Compression Finance Company Ltd.	Barbados
Universal Compression International Holdings, S.L.U.	Spain
Universal Compression International Ltd.	Cayman Islands
Universal Compression International, Inc.	Delaware
Universal Compression Ltda.	Brazil
Universal Compression of Colombia Ltd.	Cayman Islands
Universal Compression Partners, L.P.	Delaware
Universal Compression Services de Venezuela, C.A.	Venezuela
Universal Compression Services, LLC	Delaware
Universal Compression Singapore Pte. Ltd.	Singapore
Universal Compression Trade Holdings ULC	Alberta, Canada
Universal Compression, Inc.	Texas
Uniwhale de Colombia E.U.	Colombia
Uniwhale Ltd.	Cayman Islands

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-114145 and 333-121937 on Form S-3 and Registration Statement Nos. 333-37648, 333-55260, 333-67784, 333-69504, 333-99473 and 333-120108 on Form 3-8 of our reports dated March 1, 2007, relating to the financial statements and financial statement schedules of Universal Compression Holdings, Inc. (“Holdings”) (such report expresses an unqualified opinion and includes an explanatory paragraph relating to Holdings change in its method of accounting for stock-based compensation) and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Universal Compression Holdings, Inc. for the year ended December 31, 2006.

/s/ DELOITTE & TOUCHE LLP

Houston, Texas

March 1, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Stephen A. Snider, certify that:

1.I have reviewed this report on Form 10-K of Universal Compression Holdings, Inc. (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 28, 2007	/s/ Stephen A. Snider
		Name:	Stephen A. Snider
		Title:	Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION

I, J. Michael Anderson, certify that:

1.I have reviewed this report on Form 10-K of Universal Compression Holdings, Inc. (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 28, 2007	/s/ J. Michael Anderson
		Name:	J. Michael Anderson
		Title:	Chief Financial Officer

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EX-31.3

Exhibit 31.3

CERTIFICATION

I, Stephen A. Snider, certify that:

1.I have reviewed this report on Form 10-K of Universal Compression, Inc. (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)[RESERVED]

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 28, 2007	/s/ Stephen A. Snider
		Name:	Stephen A. Snider
		Title:	Chief Executive Officer

1

EX-31.4

Exhibit 31.4

CERTIFICATION

I, J. Michael Anderson, certify that:

1.I have reviewed this report on Form 10-K of Universal Compression, Inc. (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)[RESERVED]

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 28, 2007	/s/ J. Michael Anderson
		Name:	J. Michael Anderson
		Title:	Chief Financial Officer

1

EX-32.1

Exhibit 32.1

UNIVERSAL COMPRESSION HOLDINGS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of Universal Compression Holdings, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 (the “Report”), I, Stephen A. Snider, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ STEPHEN A. SNIDER

Stephen A. Snider

Chief Executive Officer

February 28, 2007

In connection with the Report of Universal Compression Holdings, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 (the “Report”), I, J. Michael Anderson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. MICHAEL ANDERSON

J. Michael Anderson

Chief Financial Officer

February 28, 2007

1

EX-32.2

Exhibit 32.2

UNIVERSAL COMPRESSION, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of Universal Compression, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 (the “Report”), I, Stephen A. Snider, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ STEPHEN A. SNIDER

Stephen A. Snider

Chief Executive Officer

February 28, 2007

In connection with the Report of Universal Compression, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 (the “Report”), I, J. Michael Anderson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ J. MICHAEL ANDERSON

J. Michael Anderson

Chief Financial Officer

February 28, 2007

1