A tale of transformation is revealed in the past four years of Annual Reports for Exterran Holdings.

Transcription

1 Annual Reports to Shareholders A tale of transformation is revealed in the past four years of Annual Reports for Exterran Holdings. The story begins with yet another disappointing year in 2011 and commitments to improve the company s performance, as Brad takes the reins as CEO in December The 2012 book reports on a year of steady progress and improving results, yet much work still to be done. The 2013 Annual Report reveals solid execution and a return to profitability for the first time in four years. It also celebrates two first-quarter 2014 events: a large acquisition and the initial declaration of a dividend to shareholders. Exterran's 2014 Annual Report declares the company "Growing. Strong." and covers the company's third straight year of solid performance improvement, including: - Achieving EBITDA, as adjusted, of $659 million 4 percent higher than the prior year and making up 23 percent of 2014 revenue, - Improving profitability in Exterran s contract operations and fabrication segments, delivering gross margin of 36 percent of revenue across our four segments, - Initiating a quarterly dividend of $0.15 per share of common stock in the first quarter of 2014, and - Announcing plans to further enhance the performance of our businesses and unlock value by separating Exterran into two independent companies: one comprising Exterran s international contract operations, international aftermarket services and global fabrication businesses and the other a pure-play U.S. compression services business. These actions are indicative not only of a remarkable performance turnaround under Brad's leadership, but also of the confidence now placed in Exterran by its employees, customers and investors.

2 The people of Exterran have one goal for Annual Report

3 Jorge Ledezma, Senior Structural Fitter, at North Houston Rosslyn Fabrication Facility

4 We will deliver significant and lasting performance improvement for Exterran

5 Exterran Holdings, Inc. is a global market leader in full-service natural gas compression and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Exterran serves customers across the energy spectrum from producers to transporters to processors to storage owners. Headquartered in Houston, Texas, Exterran and our more than 10,000 employees have operations in approximately 30 countries. Exterran Holdings owns an equity interest in Exterran Partners, L.P., a master limited partnership, which provides natural gas contract operations services to customers throughout the United States. For more information, visit Financial Highlights Years Ended December 31, (Dollars in thousands, except per share amounts) Revenues: North America contract operations $ 603,529 $ 608,065 $ 695,315 International contract operations 445, , ,995 Aftermarket services 409, , ,873 Fabrication 1,225,459 1,066,227 1,319,418 Total revenues 2,683,470 2,461,533 2,715,601 Gross margin (1) 738, , ,582 EBITDA, as adjusted (1) 398, , ,858 Loss attributable to Exterran stockholders (340,608) (101,825) (549,407) Loss per share attributable to Exterran stockholders diluted (5.44) (1.64) (8.95) Total assets 4,360,662 4,741,536 5,292,948 Total debt 1,773,039 1,897,147 2,260,936 Total Exterran stockholders equity 1,437,236 1,609,448 1,639,997 Fabrication backlog 665, , ,457 (1) Please see the discussion of Non-GAAP Financial Measures and a reconciliation of Gross Margin and EBITDA, as adjusted, to net loss beginning on page 39 of our 2011 Form 10-K.

6 A Message from the Chairman of the Board Clearly, the returns we delivered to our stockholders in 2011 were disappointing. We as a board took action to begin the process of improving those returns in the second half of 2011, and we are pleased with the progress Exterran is making. The comprehensive operational analysis we conducted yielded solid recommendations to position the company for improved profitability both in 2012 and over the long term. Exterran s dedicated employees took swift action on the first steps designed to drive improvement in the company s financial and operating performance. This work will continue in 2012 and will be combined with the refinement of long-term strategic plans to enhance Exterran s return on investment and potential for growth and lasting success. Gordon T. Hall Chairman of the Board These activities will be directed by Brad Childers, who was appointed president and chief executive officer in December. He most recently led Exterran s North American operations and previously was responsible for the company s international and corporate development divisions. Brad has in-depth knowledge of Exterran s markets and customers and is a decisive leader with an impressive record of execution capability. Exterran s operational and performance improvement expertise was further strengthened with the additions of Mark Sotir, as executive vice chairman, and Bill Austin, as executive vice president and chief financial officer. Mark has significant experience in managing complex, global, asset-intensive businesses like Exterran, while Bill is proficient in driving profit improvement and brings additional insight from his background in compression services and the energy services industry. We see this as a winning combination of industry knowledge, operational capability and sound fiscal expertise. The board has complete confidence that Exterran s entire leadership team will address the challenges ahead with urgency and commitment. There is much work still to be done, but the right steps are being taken and positive changes have already been set in motion. I and the rest of the board look forward to the progress Exterran will make in 2012, and we intend to deliver you, our stockholders, significant value during the year and beyond. Sincerely, Gordon T. Hall Chairman of the Board Exterran Holdings, Inc. March 1, 2012 Exterran Holdings 2011 Annual Report 3

7 A Message from the President and Chief Executive Officer At Exterran, our goal for 2012 is clear: to make the changes that will drive significant improvement in our company s performance in 2012 and over the long term. In recent years, Exterran s margins and profitability have deteriorated. Although market conditions contributed to the decline, much of this underperformance was directly attributable to cost inefficiencies and overruns on our large projects. As the size of our businesses, revenue and backlog levels contracted, we did not sufficiently reduce our underlying cost structure. The value of Exterran shares fell accordingly. In 2011, revenue growth of 9 percent, to $2.7 billion, was met with an 11 percent decline in EBITDA, as adjusted, to $399 million. We ended the year with a net loss attributable to Exterran stockholders of $341 million. Debt at the Exterran Holdings level (excluding Exterran Partners) was reduced by $221 million in 2011, but remains at a level that is high compared to our earnings and cash flow. We are focused on improving these results. Capturing Opportunities for Improvement Brad Childers President and Chief Executive Officer The road to making the required changes to our business started in earnest during the third quarter of 2011, when we began an exhaustive review of our businesses to identify the root causes of our declining profitability. Armed with a clear understanding of our challenges, we began to make near-term changes necessary to improve our financial and operating results, and we have prioritized additional opportunities to continue to drive performance improvement in The most important of our goals is to improve our cash flow and profitability. We plan to do this by taking costs out of our operations, including SG&A, by increasing pricing where it makes sense to do so and by consolidating and simplifying our businesses to make Exterran more nimble and efficient. Over the past six months, we have taken preliminary steps toward increasing profitability. We reduced our workforce across all of our business segments; closed locations in India, Egypt and The Netherlands; and consolidated management activities through the reduction of one of our North America administrative regions. We began to reengineer our supply chain process to enable us to drive cost savings throughout the company, and we added project management skills in a restructuring of our integrated projects team to improve execution on large projects. In our North America aftermarket services and fabricated product lines, we centralized pricing to give us more control and speed in responding to changes in market conditions. Finally, we have increased our global business development and sales staffing levels to drive higher bookings. We believe these initial actions, plus others we plan to implement in 2012, will enhance our near-term performance and position our company for sustained success over the long term. Already we have seen encouraging results from our profit improvement initiatives, including improved business development and backlog, increased margins in North America due to cost controls and price increases, and an increase in operating horsepower in North America in the fourth quarter of Exterran Holdings 2011 Annual Report

8 We also remain fully committed to our strategy with Exterran Partners, the master limited partnership in which we own an equity interest. We completed the sale of compression and processing assets valued at $223 million to Exterran Partners in 2011, and in February 2012 we announced another asset sale that will bring the Partnership s contract operations fleet to approximately 2.1 million horsepower. Together, Exterran Holdings' and Exterran Partners' combined horsepower is greater than three times the size of our next largest contract compression competitor, allowing us opportunities to capitalize on our scale to the advantage of our customers and stockholders. Our Path Forward Our work to improve Exterran s overall operating performance and capital position is just beginning. During 2012, we will be focused on the following goals: Improving our margins throughout the course of the year, Growing our operating horsepower and Reducing our debt at the Exterran Holdings level. Finally, one of our key performance improvement opportunities is to continue to simplify our businesses, our processes and our infrastructure. In some cases, this may require that we stop activity that is impairing profitability. We are committed to improving the profits and earning power of our businesses over the long term. Although near-term challenges remain, I believe Exterran s long-term value proposition is solid and our path forward is clear. Successful industry deployment of enhanced drilling and completion techniques has increased the readily available supply of oil and natural gas and improved long-term growth opportunities in global energy markets. Exterran s unique and valued combination of capital, engineering, manufacturing and service expertise is well-positioned to support and benefit from this growth. Exterran s new management team is making the decisions to position the company to provide profitable growth for years to come and create long-term value for our stockholders. Our employees are dedicated to delivering significant and lasting performance improvement for Exterran. I am honored to have been selected to lead our organization through this critical period, and I thank you for your confidence and support. Respectfully, Brad Childers President and Chief Executive Officer Exterran Holdings, Inc. March 1, 2012 Exterran Holdings 2011 Annual Report 5

9 2012 Annual Report On Our Way

10 Last year, the people of Exterran focused on driving significant and lasting performance improvement. Our promising results in 2012, including a return in the second half of the year to positive earnings per share from continuing operations, excluding charges, demonstrate that we are on our way. 18% Increase in EBITDA EBITDA, as adjusted, increased by 18% on 7% growth in revenues, supported by improved gross margins in all four of our business segments 2.4x Total Leverage Exterran Holdings covenant total leverage ratio declined from 4.3x to 2.4x by year end, as a result of reduced debt levels and increased EBITDA

11 38% Increase in profitability Better pricing and cost discipline led to a 38% increase in gross margin dollars and record revenues for aftermarket services 45% Increase in backlog Fabrication bookings were up globally and our backlog grew by 45%, which included record U.S. sales for production and processing and treating equipment 117K Increase in HP Contract operations increased working horsepower by 117,000, a second year of increases for North America and a return to growth for International

12 Exterran Holdings, Inc. is a global market leader in full service natural gas compression and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Exterran serves customers across the energy spectrum from producers to transporters to processors to storage owners. Headquartered in Houston, Texas, Exterran operates in approximately 30 countries. Exterran Holdings owns an equity interest in Exterran Partners, L.P., a master limited partnership and the leading provider of natural gas contract operations services to customers throughout the United States. For more information, visit Financial Highlights Years Ended December 31, (Dollars in thousands, except per share amounts) Revenues: North America contract operations $ 605,367 $ 588,034 $ 592,055 International contract operations 463, , ,144 Aftermarket services 385, , ,757 Fabrication 1,348,417 1,225,459 1,066,227 Total revenues 2,803,602 2,629,879 2,417,183 Gross margin (1) 834, , ,088 EBITDA, as adjusted (1) 464, , ,385 Net loss attributable to Exterran stockholders (39,486) (340,608) (101,825) Loss per share attributable to Exterran stockholders diluted (1.68) (5.28) (2.30) Total assets 4,254,847 4,360,662 4,741,536 Total debt 1,564,923 1,773,039 1,897,147 Total Exterran stockholders equity 1,478,613 1,437,236 1,609,448 Fabrication backlog 1,065, , ,671 (1) See the discussion of Non-GAAP Financial Measures beginning on page 40 of our accompanying 2012 Form 10-K for information on gross margin and EBITDA, as adjusted. 2 Exterran Holdings 2012 Annual Report

13 To Our Stakeholders At Exterran, we are committed to driving the significant performance improvement that will create long-term value for our stockholders and profitable growth for years to come. During 2012, we made steady progress toward those goals by delivering on our plans to increase the operating and capital Gordon T. Hall Chairman of the Board efficiency of our operations. As a result, both Exterran Holdings and Exterran Partners generated improved operating results on a year-overyear basis. Brad Childers President and Chief Executive Officer 2012 EXTERRAN HOLDINGS HIGHLIGHTS We achieved an 18 percent increase in EBITDA, as adjusted, on a 7 percent increase in revenue. 1 Each of our four business segments generated improved revenues and gross margin percentage on a year-over-year basis. 1 We returned to positive earnings per share from continuing operations, excluding charges, during the last two quarters of the year. We utilized our EBITDA growth and cash flow generation to lower our debt excluding Exterran Partners by $343 million, significantly reducing covenant leverage at the Exterran Holdings level from 4.3x at year-end 2011 to 2.4x at year-end We accomplished these results while continuing our focus on excellent customer service and providing a safe working environment for our employees. Our equipment run times exceeded our service targets across the globe, and our overall safety performance beat our TRIR target EXTERRAN PARTNERS HIGHLIGHTS Exterran Partners, the master limited partnership in which we own an equity interest, also benefited from the implementation of Exterran s initiatives to improve operating efficiency and reduce costs, while generating growth through both organic opportunities and further execution of our drop-down strategy. During 2012, the Partnership: Achieved a 31 percent increase in distributable cash flow, a 26 percent increase in revenue and a gross margin percentage increase to 53 percent in Exterran Holdings 2012 Annual Report

14 Completed a drop down of compression and processing assets valued at $183 million. Invested $102 million in new units to capitalize on the organic demand for compression in the United States while further standardizing equipment and improving the fleet s competitiveness. With a leading market position, encouraging energy trends in the United States and ongoing activities to improve performance, we are optimistic about the long-term outlook for Exterran Partners. We believe the operating improvements we are making in our North American contract operations business will reduce and potentially eliminate the need for operating cost caps provided by Exterran Holdings in the future. Additionally, our goal is to continue to grow the Partnership through organic growth related to the strong U.S. market fundamentals and We are committed further acquistitions from Exterran Holdings and third parties. to driving growth while focusing on delivering the DRIVING MOMENTUM capital efficiency Exterran exited 2012 with good momentum. We plan to build on that and operational energy during the coming year both by capitalizing on the substantial improvements that growth opportunities we see in the markets for our products and will yield improved services and by maintaining our focus on improving the profitability performance not of our businesses to become more competitive. only for 2013, but for years to come. We expect the North America markets will continue to have strong demand for all of our products and services, driven by the growing need for infrastructure development in the liquids-rich and shale plays. In North American contract operations, we increased working horsepower by 70,000 in 2012, our second consecutive year of growth. In 2013, we plan to add approximately 170,000 horsepower of new fleet units in the United States to meet the increasing demand for compression services, including larger units for gathering applications as well as smaller units used in gas-lift applications. Our U.S. orders for production equipment and processing and treating products were at record levels in To serve that increasing demand, we are adding a production equipment fabrication facility in northeast Ohio and expanding the capacity of our existing production equipment and process treating fabrication facilities through increased workforce productivity and modest capital improvements. Outside North America, we expect improved demand for our products and services in 2013 in Latin America, the former Soviet states and the Middle East, signaling the front end of what we believe is a recovery in international markets. We expect to book new projects in 2013 that Exterran Holdings 2012 Annual Report 5

15 will continue to drive growth in our contract operations business. Activity levels in international fabricated products, traditionally a growth market for Exterran, steadily increased through 2012, a trend we expect to continue during Last year, our focus on better pricing and cost discipline in the aftermarket services business resulted in the segment s highest levels of revenue and profitability in company history. We believe this progress will continue to provide benefits in 2013 and hope to grow this segment of our business in both North America and internationally. FOCUS ON THE LONG RUN In 2013, we are implementing major process-driven initiatives to continue to improve the efficiency of both our field service and fabrication operations. These efforts build on the improvements we achieved in 2012 and focus on increasing the standardization of our work and improving our work processes. While we expect these efforts will deliver continuous improvement and results in 2013, they have the potential to make even more significant contributions to our performance in 2014 and beyond. We are confident that the global markets for our products and services will allow us to continue to grow in We are proud of the substantial progress we have made in improving Exterran s performance, but we are far from finished with this work. We are committed to driving growth while focusing on delivering the capital efficiency and operational improvements that will yield improved performance not only for 2013, but for years to come. Day by day, step by step, mile by mile, we are working to make Exterran a better company, a better partner, a better investment. We thank you for your continued support on this journey. Sincerely, Gordon T. Hall Chairman of the Board Exterran Holdings, Inc. Brad Childers President and Chief Executive Officer Exterran Holdings, Inc. March 1, 2013 (1) See the discussion of Non-GAAP Financial Measures beginning on page 40 of our accompanying 2012 Form 10-K for information on EBITDA, as adjusted, and gross margin. (2) See the discussion of Non-GAAP Financial Measures within Part II, Item 6 ( Selected Financial Data Non-GAAP Financial Measures ) of Exterran Partners, L.P. s 2012 Form 10-K for information on distributable cash flow and gross margin. 6 Exterran Holdings 2012 Annual Report

16 2013 Annual Report Ramping Up

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18 Exterran Holdings, Inc. is a global market leader in full service natural gas compression and a premier provider of operations, maintenance, service and equipment for oil and gas production, processing and transportation applications. Exterran serves customers across the energy spectrum from producers to transporters to processors to storage owners. Headquartered in Houston, Texas, Exterran has operations in approximately 30 countries. Exterran Holdings owns an equity interest, including all of the general partner interest, in Exterran Partners, L.P., the leading provider of natural gas contract operations services to customers throughout the United States. For more information, visit Financial Highlights Years Ended December 31, (Dollars in thousands, except per share amounts) Revenues: North America contract operations $ 627,844 $ 596,011 $ 570,780 International contract operations 476, , ,059 Aftermarket services 395, , ,327 Fabrication 1,660,944 1,348,417 1,225,459 Total revenues 3,160,404 2,794,246 2,612,625 Gross margin (1) 963, , ,414 EBITDA, as adjusted (1) 633, , ,089 Total assets 4,227,157 4,254,847 4,360,662 Total debt 1,502,155 1,564,923 1,773,039 Fabrication backlog 679,887 1,065, ,268 Net income (loss) attributable to Exterran stockholders 123,164 (39,486) (340,608) Income (loss) per share attributable to Exterran stockholders diluted 1.86 (0.62) (5.44) Debt Parent level (2) 744, ,423 1,227,539 Total Exterran stockholders equity 1,662,090 1,478,613 1,437,236 (1) See the discussion of Non-GAAP Financial Measures in Part II, Item 6, Selected Financial Data, of our accompanying 2013 Form 10-K for information on gross margin and EBITDA, as adjusted. (2) Total debt less Exterran Partners, L.P. debt Exterran Holdings 2013 Annual Report 1

19 SOLID EXECUTION, SIGNIFICANT GROWTH To Our Stakeholders We are proud to report Exterran Holdings outperformed our plans and market expectations in Exterran delivered solid execution and significant growth in revenue; gross margins; EBITDA, as adjusted; earnings per share and free cash flow. This success is a result of the work we have done since launching our Mark R. Sotir Executive Chairman of the Board performance improvement initiatives in 2011 aimed at simplifying our business, improving our processes and modernizing our compression fleet. Building on this success, we believe Exterran is well positioned to grow and deliver long-term value for its stakeholders Exterran Holdings Highlights We captured our highest EBITDA, as adjusted, of the past four years, with growth of 38 percent over For the first time since 2009, we recorded positive diluted earnings per share $1.05 from continuing operations attributable to Exterran stockholders, excluding items. For the second consecutive year, each of our four business segments grew revenues on a yearover-year basis, and each generated consistent or improved profitability, as measured by gross margin percentages. We reduced debt, excluding debt at Exterran Partners, by more than $140 million. Exterran s new mobile hardware and state of the art PerformX TM Mobile software for field service is enhancing our operational efficiency, labor management and records accuracy. Brad Childers President and Chief Executive Officer

20 Exterran Partners Exterran Partners also generated solid results, delivering a 30 percent increase in distributable cash flow in Exterran Partners generated a 20 percent increase in revenue and a 32 percent increase in EBITDA, as further adjusted, year-over-year. Exterran Partners invested $118 million in new units to standardize the fleet, enhance its competitive position and increase overall cash generation capacity. Exterran Partners completed an acquisition from us of compression assets valued at $174 million, increasing its contract operations fleet to approximately 2.4 million horsepower. In 2014, we will continue to bolster Exterran Partners leading market position in the United States as a provider of natural gas contract operations services through continued implementation of performance improvement initiatives. We also believe Exterran Partners is well positioned to grow through continued fleet investment, dropdown transactions, organic growth and third-party acquisitions.

21 Positioned for growth We believe our performance improvement work has positioned Exterran well to capitalize on favorable industry trends associated with the development of energy infrastructure in the United States and international markets. Looking ahead, we can now focus on pursuing growth opportunities to maximize the value of our businesses in 2014 and beyond. To meet increased demands in our North America contract operations business, we invested significant capital in our compression fleet, adding approximately 160,000 horsepower in new units, including 61,000 horsepower dedicated to gas lift operations. Although North America working horsepower levels declined year-over-year, working horsepower increased by 44,000 in the fourth quarter of In 2014, we expect to continue to see growth in our contract operations in the Eagle Ford, Marcellus and Niobrara shales and in the Mississippi Lime and Permian Basin, though we also expect modestly declining horsepower in dry gas conventional plays. In Latin America, which is largely a long-term contract operations market, we believe we have the product and services portfolio, industry contacts, geographic scale and overall reputation to successfully compete for the large opportunities we see in the market. In 2013, we signed sizeable contract renewals in Argentina, Brazil and Mexico, as well as large new contracts in Brazil and Mexico, that we believe provide for stability and future growth in We have seen the trends that started in this market in 2013 continue into 2014, giving us further confidence in our ability to capitalize on our market position in Latin America.

22 In the Eastern Hemisphere, we saw an improving opportunity set in 2013 that looks to further strengthen in The business met success in a new market during 2013, winning contracts in Iraq for a gas production facility and our first contract compression project in the country. In addition, Exterran completed the expansion and extension of an oil production facility operation in Indonesia, extended contracts for the operation of natural gas processing plants in Oman, and landed a $120 million tank farm booking in Abu Dhabi within our Belleli Energy business. Going forward, the outlook for new projects remains robust, and we believe we are well positioned to win attractive projects in the region in 2014, particularly in the Middle East, Russia and Asia Pacific. In our fabrication business, we commenced operations at our new production equipment fabrication facility in northeast Ohio, serving the Marcellus and Utica shale plays. We generated a significant increase in revenue and gross margin dollars in 2013 due to improvements in our fabrication processes, allowing for better results from the substantial bookings we generated in the second half of That increased activity at the end of 2012 was followed by a slowdown in order flow during the first half of 2013, however, as customers worked to install previously ordered equipment. Therefore, our bookings declined in 2013 as compared to record 2012 levels, particularly in our processing and treating and installation product lines. In the second half of 2013, bookings picked up and we recorded increased bookings on a sequential basis in the third and fourth quarters. For the second consecutive year, our aftermarket services business generated record levels of revenue and gross margin. Aftermarket services revenue grew by 3 percent over 2012, with a gross margin percentage of 22 percent. Our sustained focus on capturing attractive business, closely managing our cost structure and utilization, and developing new product offerings should provide us opportunities to continue to grow this business in Ramping up for the future Our results have come from the actions we have taken based on a clear focus: concentrate on our core operations and simplify our processes and businesses to improve efficiency and reduce cost. As a result of these actions, some of which are listed below, we have enhanced our financial results, strengthened our capital position and positioned Exterran to benefit from industry growth trends for years to come. Going forward, we will continue to focus on generating profitable growth and capturing value for our stakeholders. In addition to adding new units to meet market demand and modernize our fleet of compressors, Launched in the fourth quarter of 2013, Exterran s new C-Series 3516 Gas Compression Packages are pre-engineered and assembled with high-quality components and a wide range of options providing customers with exceptional configuration flexibility and high performance coupled with rapid delivery and startup. 5

23 we are continuing to streamline and standardize our service processes across contract operations and aftermarket services. We are deploying new mobile hardware and software in our field operation to improve our operational efficiency. And we are implementing state of the art record-keeping and compliance systems in response to recently enacted environmental regulations. In fabrication, we are achieving significant improvements in operational efficiency and profitability by implementing lean manufacturing processes, reducing material costs through strategic sourcing and better managing material flows and job scheduling. With these investments and improvements, we believe we are very well positioned to capture significant growth opportunities in our businesses. Moreover, we will look to expand our operating footprint by acquisition where we see a good fit. On Feb. 28, 2014, Exterran Partners announced an agreement to acquire 334 compression units from MidCon Compression, L.L.C., a subsidiary of Chesapeake Energy Corporation. The assets currently are being used to provide compression services to Access MLP Operating, L.L.C., a subsidiary of Access Midstream Partners LP. Additionally, Exterran Partners and Access have entered into a seven-year contract operations services contract, to be effective as of the closing, under which Exterran Partners will provide contract compression services to Access in regions including the Permian, Eagle Ford, Barnett, Anadarko, Mississippi Lime, Granite Wash, Woodford, Haynesville and Niobrara Basins. When closed, this transaction will increase Exterran s North America fleet working horsepower by approximately 440,000 horsepower to 3.3 million horsepower, for an increase of 15 percent. Our actions are not only focused on growing; we constantly look to simplify Exterran s portfolio of offerings and operating structure so we can deploy more time and resources to those areas we believe are our most profitable. In 2013, we did just that. We restructured our North America and Eastern Hemisphere businesses, simplifying their organization structures by separating service and operations from sales and marketing in each. Additionally, we sold our Canadian contract operations and aftermarket services businesses and our U.K. fabrication business, and we discontinued our U.S. contract water treatment business. These changes are providing a more efficient cost structure and improving how we take our products and services to market. As a result of these tremendous efforts, the Exterran of 2014 has a better portfolio, higher margin businesses and a stronger emphasis on improved profitability. This position has been furthered by our continued focus on generating cash and reducing our debt load, which allowed us to return money to our shareholders by declaring our first dividend in the first quarter of Paying a dividend is a major step for us, as it shows the amount of progress we have made in stabilizing Exterran and the confidence we have in our business and our financial position. Exterran has an unparalleled reputation in our industry for performance, technical expertise and commitment to service. To that, we are building our standing as an excellent long-term value for our shareholders. We thank you for your continued support and confidence in Exterran. Sincerely, Mark R. Sotir Executive Chairman of the Board Exterran Holdings, Inc. Brad Childers President and Chief Executive Officer Exterran Holdings, Inc. March 3, Exterran Holdings 2013 Annual Report

24 Growing. Strong Annual Report

25 Exterran Holdings, Inc. is a global market leader in full service natural gas compression and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Exterran serves customers across the energy spectrum from producers to transporters to processors to storage owners. Headquartered in Houston, Texas, Exterran has operations in approximately 30 countries. Exterran Holdings owns an interest, including all of the general partner interest, in Exterran Partners, L.P., the leading provider of natural gas contract compression services to customers throughout the United States. For more information, visit FINANCIAL HIGHLIGHTS Years Ended December 31, (Dollars in thousands, except per share amounts) Revenues: North America contract operations $ 729,103 $ 627,844 $ 596,011 International contract operations 493, , ,957 Aftermarket services 392, , ,861 Fabrication 1,284,008 1,660,944 1,348,417 Total revenues 2,899,738 3,160,404 2,794,246 Gross margin (1) 1,031, , ,408 EBITDA, as adjusted (1) 658, , ,661 Total assets 4,857,147 4,227,157 4,254,847 Total debt 2,026,902 1,502,155 1,564,923 Fabrication backlog 953, ,887 1,065,714 Net income (loss) attributable to Exterran stockholders 98, ,164 (39,486) Net income (loss) per share attributable to Exterran common stockholders diluted (0.62) Debt Parent level (2) 726, , ,423 Total Exterran stockholders equity 1,797,260 1,662,090 1,478,613 Dividends declared and paid per common share 0.60 (1) See the discussion of Non-GAAP Financial Measures in Part II, Item 6, Selected Financial Data, of our accompanying 2014 Form 10-K for information on gross margin and EBITDA, as adjusted. (2) Total debt less Exterran Partners, L.P. debt. Exterran Holdings 2014 Annual Report 1

26 TO OUR STAKEHOLDERS We are proud of Exterran s performance in Not only did we deliver our highest annual EBITDA, as adjusted, in the past five years, we also returned money to our shareholders through the initiation of a regular dividend and set our company up for future success by announcing and beginning preparations for the separation of our company into two more focused companies. Specifically, in 2014 we: Achieved EBITDA, as adjusted, of $659 million 4 percent higher than the prior year and making up 23 percent of 2014 revenue, Improved profitability in Exterran s contract operations and fabrication segments, delivering gross margin of 36 percent of revenue across our four segments, Initiated a quarterly dividend of $0.15 per share of common stock in the first quarter of 2014, and Announced plans to further enhance the performance of our businesses and unlock value by separating Exterran into two independent companies: one comprising Exterran s international contract operations, international aftermarket services and global fabrication businesses and the other a pure-play U.S. compression services business. Performance and Growth In 2014, Exterran delivered its third straight year of solid performance improvement across our business segments and geographies. In our North America contract operations business, we grew operating horsepower by 816,000, or 28 percent, in This growth came from approximately 262,000 horsepower of organic growth and approximately 554,000 horsepower of growth through acquisitions made by Mark R. Sotir Executive Chairman of the Board Brad Childers President and Chief Executive Officer

27 Exterran Partners. Through these acquisitions and fleet investments, we continued to modernize and standardize our North America fleet during Partnered with the continued implementation of our performance improvement initiatives and a modest improvement in pricing, these steps generated increases in both revenue and profitability in 2014, resulting in an increase in gross margin dollars of 20 percent on a 16 percent increase in revenue. Our international contract operations business also had a solid year in Our 2014 results benefited from the startup of a project in Brazil, full-year contribution from projects in Trinidad and Iraq that commenced in 2013, increased revenue in Mexico and increased activity at a production facility in Indonesia. Gross margin dollars were up by 11 percent on a 4 percent revenue increase. In addition to delivering good results during the year, we also booked significant new projects during 2014 that will positively impact our financial results in 2015 and beyond. Among those bookings were large, long-term compression projects in Exterran s fabrication backlog was $953 million at December 31, 2014, Brazil and Bolivia. Due to these bookings, for compression, production, and process and treating equipment, like this at year-end, the business s backlog of 186-foot-long demethanizer tower built in 2014 at our Broken Arrow, Okla., facility. new projects stood at $69 million and included 67,000 horsepower in compression. In our aftermarket service business, revenue for the fourth quarter was higher than expected due to increased activity across our geographies, although revenue declined over 2013 levels as reduced activity in the United States offset increases in international. In 2014, process improvements and a favorable product mix helped drive increased profitability in our fabrication business. Fabrication gross margin was 18 percent in 2014, up from 15 percent in With the high levels of activity experienced in 2014, fabrication bookings were $1.6 billion in 2014, compared to $1.3 billion in 2013, leading to our fabrication backlog being a healthy $953 million at December 31, 2014, compared to $680 million at December 31, Exterran Partners Exterran Partners also generated solid results in 2014, delivering a 25 percent increase in revenue year-over-year and a 17 percent increase in EBITDA, as further adjusted. As part of this increase, Exterran Partners completed two significant acquisitions, valued at a total of $483 million, and invested an additional $233 million in new compressor units during the year. As a Exterran Holdings 2014 Annual Report 3

28 result of this combination of organic and acquisition growth, Exterran Partners increased operating horsepower by 776,000, or 34 percent year-over-year, to slightly more than 3 million horsepower. For the fourth quarter, Exterran Partners increased its quarterly distribution to $ cents per limited partner unit, or $2.23 on an annualized basis, up 4.7 percent compared to the same period a year ago. As part of the omnibus agreement between the two companies, Exterran Holdings has historically reimbursed Exterran Partners for operating and SG&A expenses in excess of specified levels. Exterran Partners improved 2014 performance, however, eliminated the need for such payments at the end of The Year Ahead We remain optimistic about the long-term outlook for oil and gas production-oriented businesses in both the United States and international markets, supported by the expectation of increasing oil and natural gas production levels in coming years. However, recent significant declines in global oil prices, U.S. natural gas prices and drilling activity in North America, as well as capital budget reductions announced by oil and gas producers, are expected to reduce overall oil and gas industry activity and investment levels in 2015 compared to At Exterran, we believe the steps we have taken in recent years to strengthen our businesses have improved our ability to weather the market conditions in Despite the commodity price drops, rig count declines and lowered capital spending budgets from oil and gas producers, we expect that oil and natural gas production in the United States will grow in 2015 from 2014 levels, albeit at reduced rates. We believe our large installed base of 3.7 million operating horsepower in our North America contract operations business, which is deployed to produce and transport natural gas and to facilitate the production of oil through gas lift applications, will be less impacted by commodity price volatility and lower producer capital expenditures compared to oil and gas service companies that are more directly tied to drilling and completion activity. However, we do expect to see lower bookings in this business in We also could see an increase in stop activity as customers focus on production costs. As a result, we have reduced our expected 2015 growth capital expenditures in this business by about one third over prior-year levels. Our international contract operations business is also driven largely by natural gas production, and we expect international natural gas production to remain stable or grow in With a strong backlog of committed projects underpinned by long-term contracts, we expect increased growth in capital expenditures in this business in 2015, the majority of which are reimbursable from our customers on the startup of these projects. 4 Exterran Holdings 2014 Annual Report

29 In 2014, Exterran Partners acquired two attractive fleets of high-quality compression units with horsepower totaling approximately 554,000 and operating largely in liquids-rich plays and shale basins.

30 Our fabrication business is the business most responsive to short-term changes in industry activity in our portfolio. Given the outlook for industry capital budgets being reduced, we expect a lower level of bookings and some project delays in our fabrication business this year. However, with a solid level of bookings in 2014, we entered 2015 with a robust backlog of projects to execute, providing us with good revenue visibility into the first half of Throughout 2015, we will continue to diligently monitor activity levels and stay close to our customers. We will remain focused on free cash flow and have plans in place to aggressively manage our costs in order to stay aligned with activity levels. With our enhanced operating and financial positions, we believe that we are well-positioned to both navigate commodity price cycles and to take advantage of long-term secular growth opportunities. In addition, we believe our plan to separate our international services and global fabrication businesses into a new publicly traded company will result in two businesses that will be better positioned to capture more profit and growth, as well as generate more value for our investors. The separation is designed to enable these businesses, as well as the company s remaining U.S. services businesses, to have clear strategic focus and enhanced flexibility to pursue their own strategic priorities. Current market conditions do not alter our conviction that this is the best strategy to create long-term value. Our separation plans remain on track, and we expect the transaction to close in the second half of Through our efforts and the dedication of our skilled employees over the last three years, Exterran is stronger and positioned for continued growth. Since 2011, we have simplified our company and reduced costs, improved the profitability and competitive position of our businesses, and focused on maximizing the value of our businesses for our stockholders. We thank you for your continued support and confidence in our company and our strategy. Sincerely, Mark R. Sotir Executive Chairman of the Board Exterran Holdings, Inc. Brad Childers President and Chief Executive Officer Exterran Holdings, Inc. March 3, Exterran Holdings 2014 Annual Report