UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

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

FOR THE TRANSITION PERIOD FROM _____ TO _____.

Hanover Compressor Company

Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0625124 (I.R.S. Employer Identification No.)
12001 North Houston Rosslyn, Houston, Texas (Address of principal executive offices)		77086 (Zip Code)

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

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

Large accelerated þ                      Accelerated filer o                      Non-accelerated filer o

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

Number of shares of the Common Stock of the registrant outstanding as of July 25, 2007: 109,171,713 shares.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive Income			5
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			39
PART II. OTHER INFORMATION			39
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 6. Exhibits			39
SIGNATURES			41
Merger Severance Benefits Plan
Certification of the CEO Pursuant to Section 302
Certification of the CFO Pursuant to Section 302
Certification of the CEO Pursuant to Section 906
Certification of the CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HANOVER COMPRESSOR COMPANY

(in thousands of dollars, except for par value and share amounts)

		June 30,				December 31,
		2007				2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	53,784			$	73,286
Accounts receivable, net of allowance of $5,567 and $4,938, respectively			353,100				283,073
Inventory, net			317,028				308,093
Costs and estimated earnings in excess of billings on uncompleted contracts			129,246				109,732
Current deferred income taxes			23,323				20,129
Other current assets			93,473				86,350
Total current assets			969,954				880,663
Property, plant and equipment, net			1,887,905				1,863,452
Goodwill, net			181,043				181,098
Intangible and other assets			54,093				55,702
Investments in non-consolidated affiliates			99,449				89,974
Total assets		$	3,192,444			$	3,070,889
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt		$	5,522			$	4,433
Current maturities of long-term debt			192,000				455
Accounts payable, trade			122,982				136,908
Accrued liabilities			164,588				147,320
Advance billings			130,555				170,859
Billings on uncompleted contracts in excess of costs and estimated earnings			115,601				94,123
Total current liabilities			731,248				554,098
Long-term debt			1,140,957				1,365,043
Other liabilities			61,995				48,953
Deferred income taxes			86,390				76,522
Total liabilities			2,020,590				2,044,616
Commitments and contingencies (Note 6)
Minority interest			11,991				11,991
Common stockholders’ equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 109,587,563 and 103,825,732 shares issued, respectively			110				104
Additional paid-in capital			1,200,724				1,104,730
Accumulated other comprehensive income			14,820				12,983
Accumulated deficit			(51,821	)			(99,565	)
Treasury stock—469,652 and 449,763 common shares, at cost, respectively			(3,970	)			(3,970	)
Total common stockholders’ equity			1,159,863				1,014,282
Total liabilities and common stockholders’ equity		$	3,192,444			$	3,070,889

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

HANOVER COMPRESSOR COMPANY

(in thousands, except per share amounts)

(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Revenues and other income:
U.S. rentals		$	99,562			$	93,073			$	199,198			$	184,716
International rentals			69,645				67,520				136,936				130,026
Parts, service and used equipment			72,664				55,737				154,004				105,008
Compressor and accessory fabrication			139,508				70,128				218,216				124,819
Production and processing equipment fabrication			122,595				103,653				255,833				182,272
Equity in income of non-consolidated affiliates			6,279				5,230				11,962				11,078
Gain on sale of business and other income			5,465				10,330				12,797				40,549
			515,718				405,671				988,946				778,468
Expenses:
U.S. rentals			40,258				36,729				79,135				74,820
International rentals			27,675				23,691				50,980				45,023
Parts, service and used equipment			56,036				45,061				122,881				86,123
Compressor and accessory fabrication			106,016				58,482				169,261				105,175
Production and processing equipment fabrication			104,336				89,203				215,874				158,166
Selling, general and administrative			56,240				49,783				108,034				97,838
Merger expenses			3,065				—				3,389				—
Depreciation and amortization			52,772				43,077				103,668				85,045
Interest expense			26,775				29,287				53,640				60,927
Foreign currency translation			319				(2,236	)			11				(3,733	)
Debt extinguishment costs			—				—				—				5,902
Other			—				1,204				—				1,204
			473,492				374,281				906,873				716,490
Income from continuing operations before income taxes and minority interest			42,226				31,390				82,073				61,978
Provision for income taxes			16,162				9,546				30,607				17,993
Income from continuing operations before minority interest			26,064				21,844				51,466				43,985
Minority interest, net of taxes			—				(93	)			—				(93	)
Income from continuing operations			26,064				21,751				51,466				43,892
Loss from discontinued operations, net of tax			—				(63	)			—				(202	)
Gain from sales of discontinued operations, net of tax			—				16				—				63
Income before cumulative effect of accounting changes			26,064				21,704				51,466				43,753
Cumulative effect of accounting changes, net of tax			—				—				—				370
Net income		$	26,064			$	21,704			$	51,466			$	44,123
Basic income per common share:
Income from continuing operations		$	0.25			$	0.21			$	0.49			$	0.44
Loss from discontinued operations, net of tax			—				—				—				—
Cumulative effect of accounting changes, net of tax			—				—				—				—
Net income		$	0.25			$	0.21			$	0.49			$	0.44
Diluted income per common share:
Income from continuing operations		$	0.23			$	0.21			$	0.46			$	0.43
Loss from discontinued operations, net of tax			—				—				—				—
Cumulative effect of accounting changes, net of tax			—				—				—				—
Net income		$	0.23			$	0.21			$	0.46			$	0.43
Weighted average common and equivalent shares outstanding:
Basic			105,889				101,017				104,631				100,888
Diluted			118,054				112,052				117,828				111,740

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

HANOVER COMPRESSOR COMPANY

(in thousands of dollars)

(unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net income		$	26,064			$	21,704			$	51,466			$	44,123
Other comprehensive income:
Foreign currency translation adjustment			1,209				(4,283	)			1,837				(3,936	)
Comprehensive income		$	27,273			$	17,421			$	53,303			$	40,187

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

HANOVER COMPRESSOR COMPANY

(in thousands of dollars)

(unaudited)

		Six Months Ended
		June 30,
		2007				2006
Cash flows from operating activities:
Net income		$	51,466			$	44,123
Adjustments:
Depreciation and amortization			103,668				85,045
Loss from discontinued operations, net of tax			—				139
Cumulative effect of accounting changes, net of tax			—				(370	)
Minority interests			—				93
Bad debt expense			1,000				2,249
Gain on sale of property, plant and equipment			(3,263	)			(10,594	)
Equity in (income) loss of non-consolidated affiliates, net of dividends received			(6,379	)			255
Gain on remeasurement of intercompany balances			(192	)			(1,539	)
Net realized gain on trading securities			(10,313	)			(1,491	)
Zero coupon subordinated notes accreted interest paid by refinancing			—				(86,084	)
Gain on sale of business			—				(28,476	)
Stock compensation expense			6,190				4,117
Pay-in-kind interest on zero coupon subordinated notes			—				6,282
Sales of trading securities			23,593				9,641
Purchase of trading securities			(13,280	)			(8,150	)
Deferred income taxes			5,788				7,175
Changes in assets and liabilities:
Accounts receivable and notes			(67,375	)			(8,588	)
Inventory			(9,493	)			(37,156	)
Costs and estimated earnings versus billings on uncompleted contracts			1,402				14,681
Prepaid and other current assets			(6,175	)			(15,175	)
Accounts payable and other liabilities			7,176				9,678
Advance billings			(37,180	)			42,519
Other			(3,806	)			(3,639	)
Net cash provided by continuing operations			42,827				24,735
Net cash used in discontinued operations			—				(139	)
Net cash provided by operating activities			42,827				24,596
Cash flows from investing activities:
Capital expenditures			(142,197	)			(119,289	)
Proceeds from sale of property, plant and equipment			21,223				19,621
Cash invested in non-consolidated affiliates			(3,095	)			—
Proceeds from sale of business			—				52,125
Net cash used in continuing operations			(124,069	)			(47,543	)
Net cash provided by discontinued operations			—				—
Net cash used in investing activities			(124,069	)			(47,543	)
Cash flows from financing activities:
Borrowings on revolving credit facilities			198,400				110,500
Repayments on revolving credit facilities			(144,400	)			(88,500	)
Proceeds from issuance of senior notes			—				150,000
Payments for debt issue costs			—				(3,832	)
Repayment of zero coupon subordinated notes principal			—				(150,000	)
Proceeds from stock options exercised			5,813				3,834
Stock-based compensation excess tax benefit			1,576				—
Proceeds (repayments) of other debt, net			(615	)			7,526

		Six Months Ended
		June 30,
		2007				2006
Net cash provided by continuing operations			60,774				29,528
Net cash used in discontinued operations			—				—
Net cash provided by financing activities			60,774				29,528
Effect of exchange rate changes on cash and equivalents			966				623
Net increase (decrease) in cash and cash equivalents			(19,502	)			7,204
Cash and cash equivalents at beginning of period			73,286				48,233
Cash and cash equivalents at end of period		$	53,784			$	55,437
Supplemental disclosure of non-cash transactions:
Conversion of debt to common stock		$	84,392			$	—

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

HANOVER COMPRESSOR COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Hanover Compressor Company (“Hanover”, “we”, “us”, “our” or the “Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. It is the opinion of our management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position, results of operations, and cash flows of Hanover for the periods indicated. The financial statement information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006. These interim results are not necessarily indicative of results for a full year.

Proposed Merger

On February 5, 2007, we entered into an Agreement and Plan Merger with Universal Compression Holdings, Inc., a Delaware corporation (“Universal”), Exterran Holdings, Inc. (formerly known as Iliad Holdings, Inc.), a Delaware corporation and a wholly owned subsidiary of Universal (“Exterran”), and two wholly-owned subsidiaries of Exterran. If the transactions contemplated by the merger agreement are consummated, Hanover and Universal will become wholly owned subsidiaries of Exterran, and the stockholders of Hanover and Universal will become stockholders of Exterran. Although the proposed business combination is a merger of equals, we determined that Hanover will be the acquirer for accounting purposes.

Hanover and Universal have each made customary representations, warranties and covenants in the merger agreement, including, among others, covenants to conduct their businesses in the ordinary course between the execution of the merger agreement and the consummation of the mergers and covenants not to engage in certain kinds of transactions during that period. We have agreed with Universal to certain exceptions to the limitations contained in these covenants, including (1) permitting us to redeem our 7.25% Convertible Junior Subordinated Debentures due 2029 and (2) commencing on September 1, 2007, permitting us to repurchase in the open market up to $100 million aggregate principal amount of our outstanding 4.75% Convertible Senior Notes due 2008, subject to certain limitations. In addition, Hanover and Universal have made certain additional customary covenants to one another, including, among others, covenants, subject to certain exceptions, (A) not to solicit proposals relating to alternative business combination transactions, (B) not to enter into discussions concerning, or provide confidential information in connection with, alternative business combination transactions, (C) to cause stockholder meetings to be held to consider approval of the mergers and the other transactions contemplated by the merger agreement and (D) for our respective Boards of Directors to recommend adoption of the merger agreement by our respective stockholders.

Investors are cautioned that the representations, warranties and covenants included in the merger agreement were made by Hanover and Universal to each other. These representations, warranties and covenants were made as of specific dates and only for purposes of the merger agreement and are subject to important exceptions and limitations, including a contractual standard of materiality different from that generally relevant to investors, and are qualified by information in confidential disclosure schedules that the parties exchanged in connection with the execution of the agreement. In addition, the representations and warranties may have been included in the merger agreement for the purpose of allocating risk between us and Universal, rather than to establish matters as facts. The merger agreement is described in our Form 10-K for the year ended December 31, 2006, and an amendment to the merger agreement dated June 25, 2007 is described in our Form 8-K filed June 25, 2007. The merger agreement has been filed with the SEC only to provide investors with information regarding its terms and conditions, and, except for its status as a contractual document that establishes and governs the legal relationship among the parties thereto with respect to the mergers, not to provide any other factual information regarding us, Universal or our respective businesses or the actual conduct of our respective businesses during the pendency of the merger agreement. Investors are not third-party beneficiaries under the merger agreement and should not rely on the representations and warranties in the merger agreement as characterizations of the actual state of facts about us or Universal. Furthermore, investors should not rely on the covenants in the merger agreement as actual limitations on our business, because we may take certain actions that are either expressly permitted in the confidential disclosure letters to the merger agreement or as otherwise consented to by Universal, which consent may be given without prior notice to the public.

The proposed merger will constitute a change of control under our 2001A and 2001B equipment lease notes. Taken together, there were an aggregate of $383.0 million of these equipment lease notes and $11.9 million in related minority interest obligations outstanding as of June 30, 2007. Within thirty days of a change of control, the equipment trusts (with funds supplied by us) must make an offer to the noteholders to purchase the notes at 101% of the outstanding principal amount of the notes and related minority interest obligations plus accrued interest to the purchase date unless the obligations of the equipment trusts have been earlier satisfied and discharged. We do not expect that the proposed merger will constitute a change of control under the provisions of any of our other debt obligations.

The completion of the proposed merger will result in the acceleration of vesting of certain long-term incentive awards held by employees, including executive officers. At June 30, 2007, there was approximately $17.5 million of unrecognized compensation expense related to long-term incentive awards of which the remaining unamortized amount will be subject to acceleration and expensed upon completion of the proposed merger. Additionally, if executives with change of control agreements are terminated or if the executive resigns for good reason, they will be entitled to change of control payments based on their contract agreement.

The merger agreement provides that, prior to the consummation of the merger, we may provide for cash retention bonuses to employees, including executive officers, not in excess of $10 million in the aggregate. Our Board of Directors adopted a retention bonus plan of up to $10 million which provides for awards to certain key employees if such individuals remain employed by Hanover or its successor through March 31, 2008, or are terminated without cause prior to such date. As of June 30, 2007, $8.9 million of retention awards have been granted under this plan. During the three and six months ended June 30, 2007, we expensed $2.1 million and $2.5 million, respectively, related to the retention bonus plan.

The merger agreement has been unanimously approved by both companies’ boards of directors and Exterran filed a joint proxy statement/prospectus on Form S-4 relating to the proposed merger and other annual meeting matters of each of Hanover and Universal with the Securities and Exchange Commission that was declared effective on July 10, 2007. During the second quarter, both companies received notice that the waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to their proposed merger has been terminated. Termination of the waiting period satisfies a condition to the closing of the merger. Both companies’ shareholders of record as of June 28, 2007 will be asked to vote on the proposed merger at their respective annual shareholders’ meetings on August 16, 2007. We remain optimistic that the merger will proceed and expect a closing within the third quarter of 2007.

Earnings Per Common Share

Basic income per common share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted income per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options to purchase common stock, restricted stock, convertible senior notes and convertible subordinated notes, unless their effect would be anti-dilutive.

The table below indicates the potential shares of common stock that were included in computing the dilutive potential shares of common stock used in diluted income per common share (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Weighted average common shares outstanding—used in basic income per common share			105,889				101,017				104,631				100,888
Net dilutive potential common stock issuable:
On exercise of options and vesting of restricted stock			1,721				1,452				1,615				1,269
On conversion of convertible senior notes due 2008			**				**				**				**
On conversion of convertible subordinated notes due 2029			861				**				1,999				**
On conversion of convertible senior notes due 2014			9,583				9,583				9,583				9,583
Weighted average common shares and dilutive potential common shares— used in diluted income per common share			118,054				112,052				117,828				111,740

Net income for the diluted earnings per share calculation for the three and six month periods ended June 30, 2007 is adjusted to add back interest expense and amortization financing costs totaling $1.2 million and $2.7 million, respectively, net of tax, relating to the Company’s convertible senior notes due 2014 and convertible subordinated notes due 2029. Net income for the diluted earnings per share calculation for the three and six month periods ended June 30, 2006 is adjusted to add back interest expense and amortization financing costs totaling $1.8 million and $3.6 million, respectively, net of tax, relating to the Company’s convertible senior notes due 2014.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net dilutive potential common shares issuable:
On exercise of options-exercise price greater than average market value at end of period			28				48				28				58
On conversion of convertible subordinated notes due 2029			—				4,825				—				4,825
On conversion of convertible senior notes due 2008			4,370				4,370				4,370				4,370
			4,398				9,243				4,398				9,253

Stock Options and Stock-based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized beginning in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value, and (b) compensation cost for any share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value.

On January 1, 2006, we recorded the cumulative effect of a change in accounting related to our adoption of SFAS 123(R) of $0.4 million (net of tax of $0) which relates to the requirement to estimate forfeitures on restricted stock awards.

Incentive Plans

Hanover has employee stock incentive plans that provide for the granting of restricted stock, stock-settled restricted units and options to purchase common shares. In May 2007, the Board of Directors approved grants of awards under the 2006 Stock Incentive Plan to certain employees, including our executive officers, as part of an incentive compensation program. The grants included, in the aggregate, approximately 0.6 million shares of restricted stock or stock-settled restricted stock units. The completion of the proposed merger will not result in the acceleration of vesting of grants made in May 2007. A description of long-term stock-based incentive awards and related activity within each is provided below. At June 30, 2007, approximately 4.3 million shares were available for grant in future periods under the 2006 Stock Incentive Plan.

Stock Options

Upon the adoption of SFAS 123(R), the remaining fair value of unvested options granted prior to the date of adoption are being amortized to expense ratably over the remaining vesting period. For options granted after the date of adoption, the fair value will be amortized to expense ratably over the vesting period. Options granted typically vest over a three to four-year period and are exercisable over a ten-year period. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

Restricted Stock Awards

For grants of restricted stock and stock-settled restricted units, we recognize compensation expense over the vesting period equal to the fair value of the restricted stock at the date of grant. The weighted-average fair value of restricted stock awards granted during the three and six months ended June 30, 2007 was $22.32 and $22.28, respectively.

For restricted stock and stock-settled restricted stock units that vest based on performance, we record an estimate of the compensation expense to be expensed over the vesting period related to these grants. The compensation expense recognized in our statements of operations is adjusted for changes in our estimate of the number of performance stock that will vest. After the adoption of SFAS 123(R), performance stock awards are expensed based on the original grant date value of the awards. No performance stock awards were granted during the three and six month periods ended June 30, 2007.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the 2007 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

2. INVENTORY

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

		June 30,				December 31,
		2007				2006
Parts and supplies		$	135,602			$	135,632
Work in progress			163,020				162,096
Finished goods			18,406				10,365
		$	317,028			$	308,093

As of June 30, 2007 and December 31, 2006, we had inventory reserves of approximately $11.5 million and $11.9 million, respectively.

3. PROPERTY, PLANT AND EQUIPMENT

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

		June 30,				December 31,
		2007				2006
Compression equipment, facilities and other rental assets		$	2,671,420			$	2,587,377
Land and buildings			113,274				107,444
Transportation and shop equipment			94,575				89,673
Other			61,083				58,788
			2,940,352				2,843,282
Accumulated depreciation			(1,052,447	)			(979,830	)
		$	1,887,905			$	1,863,452

As of June 30, 2007, the compression assets owned by entities that lease equipment to us but, pursuant to our adoption of FIN 46, are included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $335.2 million, including improvements made to these assets after the sale leaseback transactions.

4. DEBT

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

		June 30,					December 31,
		2007				2006
Bank credit facility due November 2010		$	74,000			$	20,000
4.75% convertible senior notes due 2008*			192,000				192,000
4.75% convertible senior notes due 2014*			143,750				143,750
8.625% senior notes due 2010**			200,000				200,000
7.5% senior notes due 2013**			150,000				150,000
9.0% senior notes due 2014**			200,000				200,000
2001A equipment lease notes, interest at 8.5%, due September 2008			133,000				133,000
2001B equipment lease notes, interest at 8.75%, due September 2011			250,000				250,000
7.25% convertible junior subordinated notes due 2029*			—				84,803
Fair value adjustment — fixed to floating interest rate swaps			(10,015	)			(8,732	)
Other, interest at various rates, collateralized by equipment and other assets			222				677
			1,332,957				1,365,498
Less-current maturities			(192,000	)			(455	)
Long-term debt		$	1,140,957			$	1,365,043

As of June 30, 2007, we had $74.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under our bank credit facility bore interest at a weighted average rate of 6.7% and 6.9% at June 30, 2007 and December 31, 2006, respectively. As of June 30, 2007, we also had approximately $233.8 million in letters of credit outstanding under our bank credit facility. Our bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $450 million credit limit, plus, in addition to certain other indebtedness, an additional (1) $50 million in unsecured indebtedness, (2) $100 million of indebtedness of international subsidiaries and (3) $35 million of secured purchase money indebtedness. Additional borrowings of up to $142.2 million were available under that facility as of June 30, 2007.

On March 29, 2007, we entered into an amendment to our $450 million bank credit facility due 2010 in which the lenders waived the restrictions in the credit agreement to the consummation of the merger with Universal. The amendment also provides for an increase in the limit of the incremental term loan facility from $300 million to $425 million, and it allows us to request an increase of up to $100 million in the revolving bank credit facility. The incremental term loan facility and increase to the revolving bank credit facility has not been syndicated. The amendment further permits us to use up to $425 million of the proceeds from the incremental term loan and revolving credit facility for payment of the 2001A and 2001B compression equipment lease obligations.

Our 4.75% Convertible Senior Notes with an aggregate principle amount of $192 million are due March 15, 2008 and therefore are classified as current maturities of long-term debt on our condensed consolidated balance sheet as of June 30, 2007. We are currently evaluating our options regarding payment of these notes.

As of June 30, 2007, we were in compliance with all covenants and other requirements set forth in our bank credit facility, the indentures and agreements related to our compression equipment lease obligations and the indentures and agreements relating to our other long-term debt. A default under our bank credit facility or a default under certain of the various indentures and agreements would in some situations trigger cross-default provisions under our bank credit facility or the indentures and agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

While all of the agreements related to our long-term debt do not contain the same financial covenants, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010, our 7.5% Senior Notes due 2013 and our 9.0% Senior Notes due 2014 permit us at a minimum, (1) to incur indebtedness, at any time, of up to $400 million under our bank credit facility (which is $50 million less than the full capacity under

that facility), plus an additional $75 million in unsecured indebtedness, (2) to incur additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements governing such obligations), or our “coverage ratio,” is greater than 2.25 to 1.0, and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereof and (3) to incur certain purchase money and similar obligations. The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, our 8.625% Senior Notes due 2010, our 7.5% Senior Notes due 2013 and our 9.0% Senior Notes due 2014 define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of June 30, 2007, Hanover’s coverage ratio exceeded 2.25 to 1.0, and therefore as of such date it would allow us to incur a certain amount of additional indebtedness in addition to our bank credit facility and the additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness allowed by such bank credit facility.

7.5% Senior Notes due 2013

In March 2006, we completed a public offering of $150 million aggregate principal amount of 7.5% Senior Notes due 2013 (the “2013 Senior Notes”). We used the net proceeds from the offering of $146.6 million, together with borrowings under our bank credit facility, to redeem our 11% Zero Coupon Subordinated Notes due March 31, 2007. The offering and sale of the 2013 Senior Notes were made pursuant to an automatic shelf registration statement on Form S-3 filed with the Securities and Exchange Commission. We may redeem up to 35% of the 2013 Senior Notes using the proceeds of certain equity offerings completed before April 15, 2009 at a redemption price of 107.5% of the principal amount, plus accrued and unpaid interest to the redemption date. In addition, we may redeem some or all of the 2013 Senior Notes at any time on or after April 15, 2010 at certain redemption prices together with accrued interest, if any, to the date of redemption.

The 2013 Senior Notes are our general unsecured senior obligations and rank equally in right of payment with all of our other senior debt. The 2013 Senior Notes are effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the 2013 Senior Notes. The 2013 Senior Notes are guaranteed on a senior subordinated basis by HCLP. The 2013 Senior Notes rank equally in right of payment with our 8.625% Senior Notes due 2010 and 9.0% Senior Notes due 2014 and the guarantee of the 2013 Senior Notes by HCLP ranks equally in right of payment with the guarantee of the 8.625% Senior Notes due 2010 and 9.0% Senior Notes due 2014 by HCLP. The indenture under which the 2013 Senior Notes were issued contains various financial covenants which limit, among other things, our ability to incur additional indebtedness or sell assets.

7.25% Convertible Junior Subordinated Notes due 2029

Beginning December 2006 through May 2007, we announced a series of irrevocable calls for redemption of portions of our 7.25% Convertible Junior Subordinated Notes due 2029 (“Jr. TIDES Notes”). The Jr. TIDES Notes were owned by the Hanover Compressor Capital Trust (the “Trust”), a subsidiary of ours. The Trust was required to use 4.8 million Hanover common shares to redeem its 7.25% Convertible Preferred Securities (“TIDES Preferred Securities”). All of the $86.3 million of Jr. TIDES Notes have now been called.

5. ACCOUNTING FOR DERIVATIVES

We use derivative financial instruments from time to time to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt and leasing obligations. Our primary objective is to reduce our overall cost of borrowing by managing the fixed and floating interest rate mix of our debt portfolio. We do not use derivative financial instruments for trading or other speculative purposes. Cash flow from hedges are classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

In March 2004, we entered into two interest rate swaps, which we designated as fair value hedges, to hedge the risk of changes in fair value of our 8.625% Senior Notes due 2010 resulting from changes in interest rates. These interest rate swaps, under which we receive fixed payments and make floating payments, result in the conversion of the hedged obligation into floating rate debt. The following table summarizes, by individual hedge instrument, these interest rate swaps as of June 30, 2007 (dollars in thousands):

												Fair Value of
				Fixed Rate to be				Notional				Swap at
Floating Rate to be Paid		Maturity Date		Received				Amount				June 30, 2007
Six Month LIBOR +4.72%		December 15, 2010			8.625	%		$	100,000			$	(5,125	)
Six Month LIBOR +4.64%		December 15, 2010			8.625	%		$	100,000			$	(4,890	)

As of June 30, 2007, a total of approximately $2.7 million in accrued liabilities, $7.3 million in long-term liabilities and a $10.0 million reduction of long-term debt was recorded with respect to the fair value adjustment related to these two swaps. We estimate the effective floating rate, which is determined in arrears pursuant to the terms of the swap, to be paid at the time of settlement. As of June 30, 2007, we estimated that the effective rate for the six-month period ending in December 2007 would be approximately 10.0%.

The counterparties to our interest rate swap agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us.

6. COMMITMENTS AND CONTINGENCIES

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

						Maximum Potential
						Undiscounted
						Payments as of
		Term				June 30, 2007
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium (1)			2009			$	1,328
El Furrial (1)			2013				26,017
Other:
Performance guarantees through letters of credit (2)			2007-2010				246,715
Standby letters of credit			2007-2008				14,498
Commercial letters of credit			2007				3,725
Bid bonds and performance bonds (2)			2007-2012				112,496
						$	404,779

As part of our acquisition of Production Operators Corporation (“POC”) in 2001, Hanover may be required to make a contingent payment to Schlumberger based on the realization of certain tax benefits by Hanover through 2016. To date we have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.

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

We are involved in a project called the Cawthorne Channel Project in Nigeria, a project in which Global Gas and Refining Ltd., a Nigerian entity (“Global”) has contracted with an affiliate of Royal Dutch Shell plc (“Shell”) to process gas from some of Shell’s Nigerian oil and gas fields. Pursuant to a contract between us and Global, we rent and operate barge-mounted gas compression and gas

processing facilities stationed in a Nigerian coastal waterway. We completed the building of the required barge-mounted facilities and our portion of the project was declared commercial by Global in November 2005. The contract runs for a ten-year period which commenced when the project was declared commercial, subject to a purchase option, by Global, that is exercisable for the remainder of the term of the contract. Under the terms of a series of contracts between Global and Hanover, Shell, and several other counterparties, respectively, Global is primarily responsible for the overall project.

During 2006, the area in Nigeria where the Cawthorne Channel Project is located experienced unrest and violence and gas delivery from Shell to the Cawthorne Channel Project was stopped from June 2006 to June 2007. As a result, the Cawthorne Channel Project did not operate from early June 2006 to June 2007. In July 2007, we received some gas from Shell and we have begun processing the gas received.

During the six months ended June 30, 2007, we did not recognize any revenues related to the Cawthorne Channel Project and we received approximately $1.3 million in payments. Even though we believe we are entitled to rents from Global and have accordingly invoiced Global for rents, collectibility is not reasonably assured due to uncertainty regarding when the Cawthorne Channel Project’s operations will be fully operational and Global’s dependence on gas production by the Cawthorne Channel Project to pay its rents to us. Therefore, we billed but did not recognize revenue of approximately $8.4 million related to the Cawthorne Channel Project during the six months ended June 30, 2007. When the Cawthorne Channel Project is on-line, we will determine whether or not and how much revenue to recognize for the period it is on-line. Based on current long-term expectations of future run-time, we believe we will recover all of our receivables and our full investment in the Cawthorne Channel Project over the term of the contract.

However, if Shell does not provide gas to the project or if Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the Cawthorne Channel Project, we would be required to find an alternative use for the barge facility which could potentially result in an impairment and write-down of our investment and receivables related to this project and could have a material impact on our consolidated financial position or results of operation. Additionally, due to the environment in Nigeria, Global’s capitalization level, inexperience with projects of a similar nature and lack of a successful track record with respect to this project and other factors, there is no assurance that Global can satisfy its obligations under its various contracts, including its contract with us.

This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks, including risks arising from the recent increase in violence and local unrest, could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. At June 30, 2007, we had net assets of approximately $68 million related to projects in Nigeria, a majority of which is related to our capital investment and advances/accounts receivable for the Cawthorne Channel Project.

In the ordinary course of business we are involved in various other pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

7. RELATED-PARTY TRANSACTIONS

Ted Collins, Jr., a Director of the Company, owns 100% of Azalea Partners, which owns approximately 15% of Energy Transfer Group, LLC (“ETG”). In the first quarter of 2006, we entered into an agreement to be ETG’s exclusive manufacturer of Dual Drive compressors and to provide marketing services for ETG. During the six months ended June 30, 2007 and 2006, we recorded revenue of approximately $4.1 million and $21.7 million, respectively, related to equipment lease and sales to ETG. As of June 30, 2007 and December 31, 2006, we had receivable balances due from ETG of $2.3 million and $4.5 million, respectively. In addition, Hanover and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership, each party is responsible for its obligations as a co-owner. In addition, Hanover is the designated manager of the facility. As manager, Hanover received revenues related to the facility and distributed to ETG its net share of the operating cash flow of $0.6 million and $0.5 million for the six months ended June 30, 2007 and 2006, respectively.

Jon Brumley, a Director of the Company, is the Chairman of the Board of Encore Acquisition Company (“Encore”). During the six months ended June 30, 2007 and 2006, Hanover recorded revenue from sales to Encore of approximately $1.0 million and

$0.2 million, respectively. As of June 30, 2007 and December 31, 2006 we had receivables from Encore of approximately $0.3 million and $0.2 million, respectively.

8. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, 2003, the FASB issued Staff Position 150-3 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $11.9 million in sale leaseback obligations that, as of June 30, 2007, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

These minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of June 30, 2007, the yield rates on the outstanding equity certificates ranged from 13.3% to 13.7%. Equity certificate holders may receive a return of capital payment upon termination of the lease or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At June 30, 2007, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of FASB No. 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material impact on our consolidated results of operations, cash flows or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation is effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes 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. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Differences between the amounts recognized in balance sheet prior to adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings (accumulated deficit). The adoption of FIN 48 on January 1, 2007 resulted in a reduction to stockholders’ equity of $3.7 million.

On the date of our adoption of FIN 48, we had $12.7 million of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. Our policy is to classify interest and penalties in our provision for income taxes in our Consolidated Statements of Operations. We did not change our policy on the classification of interest and penalties in conjunction with our adoption of FIN 48. We had $1.1 million of accrued interest and $2.7 million of accrued penalties as of the date of our adoption of this Interpretation. Tax years beginning in 1999 are still subject to examination by major tax jurisdictions.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a single definition of fair value, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value to measure assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the provisions of SFAS 157.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). SFAS 159 provided entities the one-time election to measure financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis under a fair value option. SFAS 159 is effective for financial statements as of the beginning of the first fiscal year that begins after November 15, 2007. Its provision may be applied to an earlier period only if the following conditions are met: (1) the decision to adopt is made after the issuance of FAS 159 but within 120 days after the first day of the fiscal year of adoption, and no financial statements, including footnotes, for any interim period of the adoption year have yet been issued and (2) the requirement of FAS 157 are adopted concurrently with or prior to the adoption of SFAS 159. We are currently evaluating the provisions of SFAS 159.

9. REPORTABLE SEGMENTS

We manage our business segments primarily based upon the type of product or service provided. We have six principal industry segments: U.S. Rentals; International Rentals; Parts, Service and Used Equipment; Compressor and Accessory Fabrication; Production and Processing Fabrication — Belleli; and Production and Processing Fabrication — Surface Equipment. The U.S. and International Rentals segments primarily provide natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on Hanover-owned assets. The Parts, Service and Used Equipment segment provides a full range of services to support the surface production needs of customers from installation and normal maintenance and services to full operation of a customer’s owned assets and surface equipment as well as sales of used equipment. The Compressor and Accessory Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet standard or unique customer specifications. The Production and Processing Fabrication — Surface Equipment segment designs, fabricates and sells equipment used in the production, treating and processing of crude oil and natural gas. Production and Processing Fabrication — Belleli provides engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms.

We evaluate the performance of our segments based on segment gross profit. Segment gross profit for each segment includes direct revenues and operating expenses. Costs excluded from segment gross profit include selling, general and administrative, merger expenses, depreciation and amortization, interest, foreign currency translation, other expenses and income taxes. Revenues include sales to external customers. We do not include intersegment sales when we evaluate the performance of our segments. Our chief executive officer does not review asset information by segment.

The following tables present sales and other financial information by industry segment for the three months ended June 30, 2007 and 2006.

																		Production and
										Parts,				Compressor				Processing
										service and				and				Surface								Reportable
		U.S.				International				used				accessory				equipment								Segments
		rentals				rentals				equipment				fabrication				fabrication				Belleli				Total
		(in thousands)
June 30, 2007:
Revenue from external customers		$	99,562			$	69,645			$	72,664			$	139,508			$	41,617			$	80,978			$	503,974
Gross profit			59,304				41,970				16,628				33,492				11,978				6,281				169,653
June 30, 2006:
Revenue from external customers		$	93,073			$	67,520			$	55,737			$	70,128			$	47,079			$	56,574			$	390,111
Gross profit			56,344				43,829				10,676				11,646				8,532				5,918				136,945

		Three Months Ended
		June 30,
		2007				2006
		(in thousands)
Total revenue for reportable segments		$	503,974			$	390,111
Gain on sale of business and other income *			11,744				15,560
Total consolidated revenues and other income		$	515,718			$	405,671

The following tables present sales and other financial information by industry segment for the six months ended June 30, 2007 and 2006.

																		Production and
										Parts,				Compressor				Processing
										service and				and				Surface								Reportable
		U.S.				International				used				accessory				equipment								Segments
		rentals				rentals				equipment				fabrication				fabrication				Belleli				Total
		(in thousands)
June 30, 2007:
Revenue from external customers		$	199,198			$	136,936			$	154,004			$	218,216				$77,221				$178,612			$	964,187
Gross profit			120,063				85,956				31,123				48,955				21,282				18,677				326,056
June 30, 2006:
Revenue from external customers		$	184,716			$	130,026			$	105,008			$	124,819				$84,589				$97,683			$	726,841
Gross profit			109,896				85,003				18,885				19,644				14,416				9,690				257,534

		Six Months Ended
		June 30,
		2007				2006
		(in thousands)
Total revenue for reportable segments		$	964,187			$	726,841
Gain on sale of business and other income *			24,759				51,627
Total consolidated revenues and other income		$	988,946			$	778,468

10. DISPOSITIONS

In February 2006, we sold our U.S. amine treating rental assets to Crosstex Energy Services L.P. (“Crosstex”) for approximately $51.5 million and recorded a pre-tax gain of $28.4 million that is included in gain on sale of business and other income in our consolidated statement of operations. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Our U.S. amine treating rental assets had revenues of approximately $7.6 million in 2005. Because Hanover leased back from Crosstex one of the facilities sold in this transaction, approximately $3.3 million of additional gain was deferred into future periods. We also entered into a three-year strategic alliance with Crosstex.

During the first quarter of 2006, Hanover’s Board of Directors approved management’s plan to dispose of the assets used in our fabrication facility in Canada, which was part of our Production and Processing Fabrication-Surface Equipment segment. These assets
were sold in May 2006 as part of management’s plan to improve overall operating efficiency in this line of business. The Canadian assets were sold for approximately $10.1 million and we recorded a pre-tax gain of approximately $8.0 million as a result of the transaction in gain on sale of business and other income in our consolidated statement of operations. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144.

11. SUBSEQUENT EVENT

Hanover announced in July 2007 that it commenced cash tender offers and consent solicitations for $550 million of its 8.625% Senior Notes due 2010, 7.5% Senior Notes due 2013, and 9.0% Senior Notes due 2014 (collectively, the “Notes”) on the terms and subject to the conditions set forth in the Company’s Offer to Purchase and Consent Solicitation Statement dated July 19, 2007. The tender offers will expire on August 17, 2007, unless extended or earlier terminated by Hanover. Hanover reserves the right to terminate, withdraw or amend the tender offers and consent solicitations at any time subject to applicable law. The tender offers are part of the refinancing plan of Hanover and Universal being implemented in anticipation of the closing of the proposed merger, which is currently expected to occur in the third quarter of 2007, if the conditions to the closing set forth in the Agreement and Plan of Merger have been satisfied. Hanover will incur early extinguishment charges that will be dependent upon the underlying treasury yield for each security in effect on the date of payment. Based on the treasury yields in effect at June 30, 2007, the charge assuming all Notes are tendered and consent solicitations received would have been approximately $43.3 million.

As part of the refinancing plan, Exterran Holdings, Inc., which will be the publicly traded holding company following the completion of the merger, has engaged Wachovia Capital Markets, LLC and J. P. Morgan Securities Inc. to arrange and syndicate a senior secured credit facility, consisting of a revolving credit facility and a term loan, and has engaged Wachovia to provide a new asset-backed securitization facility to Exterran. The primary purpose of these new facilities will be to fund the redemption or repurchase of substantially all of Hanover’s and Universal’s outstanding debt other than the Hanover’s convertible debt securities and the credit facility of Universal’s publicly traded subsidiary, Universal Compression Partners, L.P. The new facilities will replace Hanover’s and Universal’s existing bank lines and Universal’s existing asset-backed securitization facility. The closing of the new facilities is subject to, among other things, the receipt of sufficient commitments from participating lenders and the execution of mutually satisfactory documentation. At June 30, 2007, Hanover has deferred financing costs related to indebtedness that is expected to be refinanced of approximately $14.8 million which, upon consummation of the refinancing, the unamortized portion would be written off.

12. GUARANTOR SUBSIDIARY

Hanover’s obligations under its 8.625% Senior Notes due 2010, 7.5% Senior Notes due 2013 and 9% Senior Notes due 2014 are jointly and severally, fully and unconditionally guaranteed by HCLP. As a result of these guarantee arrangements, Hanover is required to present the following condensed consolidating financial information pursuant to Rule 3-10 of Regulation S-X. These schedules are presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for Hanover’s share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.

Condensed Consolidating Balance Sheet
June 30, 2007
(unaudited)

						Guarantor				Other
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidation
		(In thousands)
ASSETS
Total current assets		$	—			$	498,010			$	479,558			$	(7,614	)		$	969,954
Property, plant and equipment, net			—				1,041,348				846,557				—				1,887,905
Investments in non-consolidated affiliates			—				—				99,449				—				99,449
Investments in affiliates			1,285,444				231,930				1,285,444				(2,802,818	)			—
Intercompany receivables			780,373				438,734				701,872				(1,920,979	)			—
Other assets			54,259				222,475				12,038				(53,636	)			235,136
Total Long-term Assets			2,120,076				1,934,487				2,945,360				(4,777,433	)			2,222,490
Total Assets		$	2,120,076			$	2,432,497			$	3,424,918			$	(4,785,047	)		$	3,192,444
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities		$	202,478			$	286,479			$	250,109			$	(7,818	)		$	731,248
Long-term debt			757,735				74,222				383,000				(74,000	)			1,140,957
Intercompany payables			—				667,055				1,179,924				(1,846,979	)			—
Other long-term liabilities			—				119,297				82,520				(53,432	)			148,385
Total liabilities			960,213				1,147,053				1,895,553				(1,982,229	)			2,020,590
Minority interest			—				—				11,991				—				11,991
Stockholders’ equity			1,159,863				1,285,444				1,517,374				(2,802,818	)			1,159,863
Total Liabilities and Stockholders’ Equity		$	2,120,076			$	2,432,497			$	3,424,918			$	(4,785,047	)		$	3,192,444
Condensed Consolidating Balance Sheet December 31, 2006
						Guarantor				Other
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidation
		(In thousands)
ASSETS
Total current assets		$	—			$	443,759			$	444,561			$	(7,657	)		$	880,663
Property, plant and equipment, net			—				1,027,123				836,329				—				1,863,452
Investments in non-consolidated affiliates			—				—				89,974				—				89,974
Investments in affiliates			1,227,369				216,536				1,227,369				(2,671,274	)			—
Intercompany receivables			725,804				378,344				698,891				(1,803,039	)			—
Other assets			53,649				220,921				12,038				(49,808	)			236,800
Total Long-term Assets			2,006,822				1,842,924				2,864,601				(4,524,121	)			2,190,226
Total Assets		$	2,006,822			$	2,286,683			$	3,309,162			$	(4,531,778	)		$	3,070,889
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities		$	10,719			$	270,413			$	280,769			$	(7,803	)		$	554,098
Long-term debt			981,821				20,222				383,000				(20,000	)			1,365,043
Intercompany payables			—				666,250				1,116,789				(1,783,039	)			—
Other long-term liabilities			—				102,429				72,708				(49,662	)			125,475
Total liabilities			992,540				1,059,314				1,853,266				(1,860,504	)			2,044,616
Minority interest			—				—				11,991				—				11,991
Stockholders’ equity			1,014,282				1,227,369				1,443,905				(2,671,274	)			1,014,282
Total Liabilities and Stockholders’ Equity		$	2,006,822			$	2,286,683			$	3,309,162			$	(4,531,778	)		$	3,070,889

Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2007
(unaudited)

						Guarantor				Other
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidation
		(In thousands)
Revenues		$	—			$	327,408			$	176,566			$	—			$	503,974
Equity in income of non-consolidating affiliates			—				—				6,279				—				6,279
Gain on sale of business and other income			—				(425	)			5,890				—				5,465
Revenues and other income			—				326,983				188,735				—				515,718
Costs and expenses			233				265,836				177,264				—				443,333
Other (income) expense:
Interest expense, net			16,413				1,580				8,782				—				26,775
Intercompany charges, net			(14,224	)			25,828				(11,604	)			—				—
Equity in (income) loss of affiliates			(25,717	)			(6,570	)			(25,717	)			58,004				—
Other, net			—				4,400				(1,016	)			—				3,384
Income from continuing operations before income taxes			23,295				35,909				41,026				(58,004	)			42,226
Provision for (benefit from) income taxes			(2,769	)			10,192				8,739				—				16,162
Net income		$	26,064			$	25,717			$	32,287			$	(58,004	)		$	26,064
Condensed Consolidating Statement of Operations Three Months Ended June 30, 2006 (unaudited)
						Guarantor				Other
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidation
		(In thousands)
Revenues		$	—			$	256,718			$	133,393			$	—			$	390,111
Equity in income of non-consolidating affiliates			—				—				5,230				—				5,230
Gain on sale of business and other income			—				895				9,435				—				10,330
Revenues and other income			—				257,613				148,058				—				405,671
Costs and expenses			233				217,570				128,223				—				346,026
Other (income) expense:
Interest expense, net			18,111				2,383				8,793				—				29,287
Intercompany charges, net			(14,227	)			22,698				(8,471	)			—				—
Equity in (income) loss of affiliates			(29,237	)			(15,974	)			(29,237	)			74,448				—
Other, net			—				317				(1,349	)			—				(1,032	)
Income from continuing operations before income taxes and minority interest			25,120				30,619				50,099				(74,448	)			31,390
Provision for (benefit from) income taxes			3,416				1,398				4,732				—				9,546
Income from continuing operations before minority interest			21,704				29,221				45,367				(74,448	)			21,844
Minority interest			—				—				(93	)			—				(93	)
Income from continuing operations			21,704				29,221				45,274				(74,448	)			21,751
Income (loss) from discontinued operations			—				16				(63	)			—				(47	)
Net income		$	21,704			$	29,237			$	45,211			$	(74,448	)		$	21,704

Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2007
(unaudited)

						Guarantor				Other
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidation
		(In thousands)
Revenues		$	—			$	602,838			$	361,349			$	—			$	964,187
Equity in income of non-consolidating affiliates			—				—				11,962				—				11,962
Gain on sale of business and other income			—				(657	)			13,454				—				12,797
Revenues and other income			—				602,181				386,765				—				988,946
Costs and expenses			466				493,135				356,232				—				849,833
Other (income) expense:
Interest expense, net			33,231				2,835				17,574				—				53,640
Intercompany charges, net			(28,204	)			52,464				(24,260	)			—				—
Equity in (income) loss of affiliates			(53,130	)			(25,634	)			(53,130	)			131,894				—
Other, net			—				4,546				(1,146	)			—				3,400
Income from continuing operations before income taxes			47,637				74,835				91,495				(131,894	)			82,073
Provision for (benefit from) income taxes			(3,829	)			21,705				12,731				—				30,607
Net income		$	51,466			$	53,130			$	78,764			$	(131,894	)		$	51,466
Condensed Consolidating Statement of Operations Six Months Ended June 30, 2006 (unaudited)
						Guarantor				Other
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidation
		(In thousands)
Revenues		$	—			$	483,908			$	242,933			$	—			$	726,841
Equity in income of non-consolidating affiliates			—				—				11,078				—				11,078
Gain on sale of business and other income			—				30,146				10,403				—				40,549
Revenues and other income			—				514,054				264,414				—				778,468
Costs and expenses			466				417,560				234,164				—				652,190
Other (income) expense:
Interest expense, net			39,573				3,793				17,561				—				60,927
Debt extinguishment costs			—				5,902				—				—				5,902
Intercompany charges, net			(31,806	)			47,178				(15,372	)			—				—
Equity in (income) loss of affiliates			(51,564	)			(16,774	)			(51,564	)			119,902				—
Other, net			—				(349	)			(2,180	)			—				(2,529	)
Income from continuing operations before income taxes and minority interest			43,331				56,744				81,805				(119,902	)			61,978
Provision for (benefit from) income taxes			(792	)			5,553				13,232				—				17,993
Income from continuing operations before minority interest			44,123				51,191				68,573				(119,902	)			43,985
Minority interest			—				—				(93	)			—				(93	)
Income from continuing operations			44,123				51,191				68,480				(119,902	)			43,892
Income (loss) from discontinued operations			—				3				(142	)			—				(139	)
Cumulative effect of accounting change			—				370				—				—				370
Net income		$	44,123			$	51,564			$	68,338			$	(119,902	)		$	44,123