UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

EXCO RESOURCES, INC.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

(Unaudited)

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

(Unaudited)

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

(Unaudited)

 

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “EXCO,” “EXCO Resources,” the “Company,” “we,” “our,”“our” and “us” are to EXCO Resources, Inc. and its consolidated subsidiaries.

We are an independent oil and natural gas company engaged in the exploration, exploitation, acquisition, development and production of onshore U.S. oil and natural gas properties with a focus on shale resource plays. Our principal operations are conducted in certain key U.S. oil and natural gas areas including Texas, Louisiana and the Appalachia region. The following is a brief discussion of our producing regions:

The accompanying Condensed Consolidated Balance Sheets as of March 31,September 30, 2018 and December 31, 2017, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended March 31,September 30, 2018 and 2017 are for EXCO and its consolidated subsidiaries. The unaudited Condensed Consolidated Financial Statements and related footnotes are presented in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain reclassifications have been made to prior period information to conform to current period presentation.

We have prepared the accompanying unaudited interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements and in the opinion of management, such financial statements reflect all adjustments necessary to fairly present the consolidated financial position of EXCO as of March 31,September 30, 2018 and its results of operations and cash flows for the periods presented. These unaudited interim financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes included in EXCO’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 15, 2018 (“2017 Form 10-K”).

In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures. The results of operations for the interim periods are not necessarily indicative of the results we expect for the full year.

For the duration of the Chapter 11 proceedings,Cases, our operations and our ability to develop and execute our business plan are subject to risks and uncertainties associated with Chapter 11 proceedings.Cases. As a result of these risks and uncertainties, our assets, liabilities, shareholders’ equity, officers and/or directors could be significantly different following the conclusion of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this quarterly report on Form 10-Q may not accurately reflect our operations, properties and capital plans following the conclusion of the Chapter 11 Cases. 

We haveThe Debtors filed schedules and statements with the Court setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may beare subject to further amendment or modification after filing.during the Chapter 11 Cases. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by theApril 15, 2018. The deadline for general claims, whichgovernmental units to file proofs of claim was set by the Court as April 15, 2018 (“Bar Date”).September 4, 2018. Differences between amounts scheduled by the Debtors and claims by creditors are being investigated and will be reconciled and resolved to within an immaterial amount in connection with the claims resolution process. In light of the expected number of creditors with filed or scheduled claims, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently asserted.

Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities to creditors and post-petition liabilities owed to creditors must be satisfied in full before the holders of our existing common shares are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery for creditors and shareholders, if any, will not be determined until confirmation and implementation of a plan of reorganization. The outcome of the Chapter 11 Cases remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors or shareholders may receive. We believe it is highly likely that our existing common shares will be canceled at the conclusion of our Chapter 11 Cases and the holders of our existing common shares will be entitled to a limited recovery, if any.

Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial orand administrative actions against the Company and the Filing SubsidiariesDebtors as well as efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from us or any of the Filing Subsidiaries,Debtors, or to create, perfect or enforce any lien against ourthe Debtors’ property, or any of the Filing Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.

As of the Petition Date, we had approximately $1.4 billion in principal amount of indebtedness, including approximately: (i) $126.4 million outstanding under our previous revolving credit agreement (“EXCO Resources Credit Agreement”), (ii) $317.0 million outstanding under our senior secured 1.5 lien notes due March 20, 2022 (“1.5 Lien Notes”), (iii) $708.9 million outstanding under our senior secured 1.75 lien term loans due October 26, 2020 (“1.75 Lien Term Loans”), (iv) $17.2 million outstanding under our senior secured second lien term loans due October 26, 2020 (“Second Lien Term Loans”), (v) $131.6 million outstanding under our senior unsecured notes due September 15, 2018 (“2018 Notes”), and (vi) $70.2 million outstanding under our senior unsecured notes due April 15, 2022 (“2022 Notes”). The commencement of the Chapter 11 Cases described above constituted an event of default that accelerated our obligations under the following debt instruments:

These debt instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. As a result of the Chapter 11 proceedings,Cases, the Court may limit post-petition interest on debt that may be under securedunder-secured or unsecured.

On January 22, 2018, we closed a debtor-in-possession credit agreement (“DIP Credit Agreement”) with lenders including affiliates of Fairfax Financial Holdings Limited (“Fairfax”), Bluescape Resources Company LLC (“Bluescape”) and JPMorgan Chase Bank, N.A. (collectively the “DIP Lenders”). The DIP Credit Agreement includes a senior secured debtor-in-possession revolving credit facility in an aggregate principal amount of $125.0 million (“Revolver A Facility”) and a senior secured debtor-in-possession revolving credit facility in an aggregate principal amount of $125.0 million (“Revolver B Facility”, and together with the Revolver A Facility, the “DIP Facilities”). Proceeds from the DIP Facilities were used to repay all obligations outstanding under the EXCO Resources Credit Agreement and will provide additional liquidity to fund our operations during the Chapter 11 process.Cases. As of March 31,September 30, 2018, we had $156.4 million in outstanding indebtedness and $81.6 million of available borrowing capacity under the DIP Facilities. See further discussion of the DIP Credit Agreement in “Note 8. Debt”. On February 22, 2018, the Court approved our ability to make adequate protection payments for interest on the DIP Credit Agreement and the 1.5 Lien Notes.

The Court has entered a final order pursuant to Sections 362(a)(3) and 541 of the Bankruptcy Code enabling the Company and the Filing Subsidiaries to avoid limitations on the use of our income tax net operating loss carryforwards (“NOLs”) and certain other tax attributes by imposing certain notice procedures and transfer restrictions on the trading of our equity securities. In general, the order applies to any person that, directly or indirectly, beneficially owns (or would beneficially own as a result of a proposed transfer) at least 4.5% of our outstanding common shares (“Substantial Shareholder”), and requires that each Substantial Shareholder file with the Court and serve us with notice of such status. Under the order, prior to any proposed acquisition or disposition of equity securities that would result in an increase or decrease in the amount of our equity securities owned by a Substantial Shareholder, or that would result in a person or entity becoming a Substantial Shareholder, such person or entity is required to file with the Court and notify us of such acquisition or disposition. We have the right to seek an injunction from the Court to prevent certain acquisitions or sales of our common shares if the acquisition or sale would pose a material risk of adversely affecting our ability to utilize such tax attributes.

Subject to certain exceptions, under the Bankruptcy Code, the Company and the Filing SubsidiariesDebtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Court and fulfillment of certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a breach as of the Petition Date of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company and the Filing SubsidiariesDebtors of performing their future obligations under such executory contract or unexpired lease but may give rise to a general unsecured claim against us or the applicable Filing SubsidiariesDebtors for damages caused by such rejection. The assumption of an executory contract or unexpired lease generally requires the Company and the Filing SubsidiariesDebtors to cure existing monetary or other defaults under such executory contract or unexpired lease and provide adequate assurance of future performance.performance thereunder. Any description of the treatment of an executory contract or unexpired lease with the Company or any of the Filing Subsidiaries, including any description of the obligations under any such executory contract or unexpired lease, is qualified by and subject to any rights wethey have with respect to executory contracts and unexpired leases under the Bankruptcy Code.

During March 2018, the Court approved the rejection of the following executory contracts:

On March 1, 2018, the Company and the Filing SubsidiariesDebtors filed a motion to reject an agreement to deliver an aggregate minimum volume commitment of natural gas production in East Texas and North Louisiana to certain gathering systems owned by Azure Midstream Energy, LLC and TGG Pipeline, Ltd. (collectively, “Azure”) through November 30, 2018.  OnThe motion was abated on May, 8, 2018 and on May 16, 2018, EXCO Operating Company, LP and Raider Marketing, LP commenced an adversary proceeding (Adv. Proc. No. 18-03096) against Azure to establish that the motion was abated pendingminimum volume commitment agreement is severable from the filingbase gathering agreement between the parties.  The Debtors and the contract counterparties each filed various dispositive motions that were heard by the Court on August 9, 2018. The parties have engaged in settlement discussions related to this matter; however, there can be no assurance the parties will be able to reach an agreement. Any settlement reached between the parties would have to be approved by the Court. As of September 30, 2018, we have accrued $27.6 million related to the minimum volume commitment as “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet.

The accompanying Condensed Consolidated Balance Sheet as of March 31,September 30, 2018 includes amounts classified as liabilities subject to compromise, which represent liabilities that are anticipated to be allowed as claims in the Chapter 11 Cases. These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 proceedings,Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.

Liabilities subject to compromise includesinclude amounts related to the rejection of various executory contracts.contracts and unexpired leases. Additional amounts may be included in liabilities subject to compromise in future periods if additional executory contracts or unexpired leases are rejected. Conversely, to the extent that executory contracts or unexpired leases are not rejected and are instead assumed, liabilities associated therewith would constitute post-petition liabilities which will be satisfied in full under a plan of reorganization. The nature of certain potential claims arising under the Debtors’ executory contracts and

unexpired leases has not been determined at this time, and therefore, such claims are not reasonably estimable at this time and may be material.

The following table summarizes the components of liabilities subject to compromise included on the Condensed Consolidated Balance Sheet as of March 31,September 30, 2018:

As of March 31,September 30, 2018, the principal and accrued interest associated with the DIP Credit Agreement and 1.5 Lien Notes were not classified as liabilities subject to compromise as a result of the adequate protection approved by the Court and our current estimates of the recoverability of claims related to these instruments.

We have discontinued recording interest on debt instruments classified as liabilities subject to compromise as of the Petition Date. The contractual interest on liabilities subject to compromise not reflected in the Condensed Consolidated Statement of Operations was approximately $21.9$75.6 million, representing interest expense from the Petition Date through March 31,September 30, 2018. The cash interest rate of 12.5% was utilized in the determination of contractual interest expense that would have been incurred under the 1.75 Lien Term Loans for the period subsequent to the Petition Date.

We consider significant accounting policies to be those related to our estimates of proved reserves, oil and natural gas properties, derivatives, business combinations, equity-based compensation, goodwill, revenue recognition, asset retirement obligations and income taxes. The policies include significant estimates made by management using information available at the time the estimates were made. However, these estimates could change materially if different information or assumptions were used. These policies and others are summarized in our 2017 Form 10-K. In addition, see further discussion of our application of ASC 852 as a result of the Chapter 11 Cases in “Note 1. Organization and basis of presentation”.

On January 26, 2018, we filed a motion in the Court to authorize the entry into a settlement agreement with a subsidiary of Shell to resolve arbitration regarding our right to participate in an area of mutual interest in the Appalachia region. The final order related to this settlement was approved on February 22, 2018 and we closed the settlement agreement on February 27, 2018. Under the terms of the Appalachia JV Settlement:

The settlement increased our acreage in the Appalachia region by approximately 177,700 net acres, and the production from the additional interests in producing wells acquired was 26 net Mmcfe per day during December 2017. In addition, EXCO now owns 100% of OPCO and Appalachia Midstream subsequent to the settlement. Prior to the settlement, we accounted for our 50% ownership interests in OPCO and Appalachia Midstream as equity method investments. The entities associated with the Appalachia JV Settlement, including EXCO Production Company (PA) II, LLC, EXCO Production Company (WV) II,

LLC, OPCO, and Appalachia Midstream, have not filed for relief under Chapter 11 of the Bankruptcy Code, and the operations of these entities are not expected to be affected by the Chapter 11 Cases.

The fair value of the assets and liabilities acquired as part of the Appalachia JV Settlement of $129.1$128.9 million resulted in a gain of $119.5$119.2 million after remeasurement of our previously held equity interest in OPCO and Appalachia Midstream.Midstream and adjustments to certain balances held by OPCO. As of the closing date, the carrying value of our equity investments in OPCO and Appalachia Midstream was $9.6 million.

We performed a valuation of the assets and liabilities acquired as of the closing date. A summary of the key inputs areis as follows:

The following is a reconciliation of our asset retirement obligations for the threenine months ended March 31,September 30, 2018:

Our asset retirement obligations are determined using discounted cash flow methodologies based on inputs and assumptions developed by management. We do not have any assets that are legally restricted for purposes of settling asset retirement obligations.

We use the full cost method of accounting, which involves capitalizing all acquisition, exploration, exploitation and development costs of oil and natural gas properties. Once we incur costs, they are recorded in the depletable pool of proved properties or in unproved properties (“collectively,(collectively, the “full cost pool”). We review our unproved oil and natural gas property costs on a quarterly basis to assess for impairment or the need to transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. The majority of our undeveloped properties are held-by-production, which reduces the risk of impairment as a result of lease expirations. There were no impairments of unproved properties during the three and nine months ended March 31,September 30, 2018 orand 2017.

At the end of each quarterly period, companies that use the full cost method of accounting for their oil and natural gas properties must compute a limitation on capitalized costs (“ceiling test”). The ceiling test involves comparing the net book value of the full cost pool, after taxes, to the full cost ceiling limitation defined below. In the event the full cost ceiling limitation is less than the full cost pool, we are required to record an impairment of our oil and natural gas properties. The full cost ceiling limitation is computed as the sum of the present value of estimated future net revenues from our proved reserves by applying the average price as prescribed by the SEC, less estimated future expenditures (based on current costs) to develop and produce the proved reserves, discounted at 10%, plus the cost of properties not being amortized and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of income tax effects. During March 2018, the Court approved the rejection of certain executory contracts related to the sale, marketing and transportation of natural gas in the North Louisiana region. The rejection of these executory contracts has positively impacted the present value of our proved reserves. See further discussion of the rejection of executory contracts in “Note 1. Organization and basis of presentation”.

The ceiling test for each period was based on the following average spot prices, in each case adjusted for quality factors and regional differentials to derive estimated future net revenues. Prices presented in the table below are the trailing twelve-month simple average spot prices at the first of the month for natural gas at Henry Hub (“HH”) and West Texas Intermediate (“WTI”) crude oil at Cushing, Oklahoma. The fluctuations demonstrate the volatility in oil and natural gas prices between each of the periods and have a significant impact on our ceiling test limitation.

We did not recognize an impairment to our proved oil and natural gas properties for the three and nine months ended March 31,September 30, 2018 or for the three months ended March 31,and 2017. The possibility and amount of any future impairments is difficult to predict, and will depend, in part, upon future oil and natural gas prices to be utilized in the ceiling test, estimates of proved reserves, future capital expenditures and operating costs.

As of March 31,September 30, 2018, our proved undeveloped reserves were limited to certain wells expected to be completed during 2018. Our recognition of proved undeveloped reserves continues to be affected by the uncertainty regarding our availability of capital required to develop these reserves. A significant amount of our proved undeveloped reserves that were previously reclassified to unproved remain economic at current prices, and we may report proved undeveloped reserves in the future if we determine we have the financial capability to execute a development plan.

The evaluation of impairment of our oil and natural gas properties includes estimates of proved reserves. There are inherent uncertainties in estimating quantities of proved reserves including projecting the future rates of production and the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data, and engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revisions of such estimate. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered.

The following table presents the basic and diluted earnings (loss) per share computations, adjusted to give effect to our reverse share split on June 12, 2017, for the three and nine months ended March 31,September 30, 2018 and 2017:

Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during the period. In addition, warrants representing the right to purchase our common shares at an exercise price of $0.01 are included in our weighted average common shares outstanding and used in the computation of our basic net income (loss) per common share.

Diluted net income (loss) per common share for the three and nine months ended March 31,September 30, 2018 and 2017 is computed in the same manner as basic net income (loss) per share after assuming the issuance of common shares for all potentially dilutive common share equivalents, which include stock options, restricted share units, restricted share awards, warrants representing the right to purchase our common shares at an exercise price of $13.95, and for the three and nine months ended March 31,September 30, 2017, warrants issued to Energy Strategic Advisory Services LLC (“ESAS”), whether exercisable or not. The computation of diluted net income (loss) per share excluded 12,640,29510,792,583 and 3,232,22221,723,733 antidilutive common share equivalents for the three months ended March 31,September 30, 2018 and 2017, respectively, and 11,414,989 and 9,951,298 antidilutive common share equivalents for the nine months ended September 30, 2018 and 2017, respectively. The antidilutive common share equivalents for the three and nine months ended March 31,September 30, 2018 and 2017 primarily related to the warrants representing the right to purchase our common shares at an exercise price of $13.95. The antidilutive common share equivalents for the three months ended March 31, 2017 primarily related to warrants issued to ESAS.

Our derivative financial instruments are comprised of commodity derivatives and common share warrants.

The table below presents the effect of derivative financial instruments on our Condensed Consolidated Balance Sheets:

The table below presents the effect of derivative financial instruments on our Condensed Consolidated Statements of Operations.

We have historically entered into commodity derivative financial instruments to manage our exposure to commodity price fluctuations, protect our returns on investments and achieve a more predictable cash flow from operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits we would realize if commodity prices increase. Settlements in the normal course of maturities of our derivative financial instrument contracts result in cash receipts from, or cash disbursements to, our derivative contract counterparties. Changes in the fair value of our derivative financial instrument contracts, which include both cash settlements and non-cash changes in fair value, are included in earnings with a corresponding increase or decrease in the Condensed Consolidated Balance Sheets fair value amounts.

At December 31, 2017, we had outstanding swap contracts covering 3,650 Bbtu of natural gas at a weighted average strike price of $3.15 per Mmbtu. In January 2018, the counterparty to our remaining open swap contracts early terminated the outstanding contracts effective January 31, 2018.  We received proceeds of $0.5 million for the settlement of these contracts in February 2018. As of March 31,September 30, 2018, we did not have any outstanding commodity derivative financial instruments.

In connection with the issuance of the 1.5 Lien Notes, on March 15, 2017, we issued warrants to the investors of the 1.5 Lien Notes representing the right to purchase an aggregate of up to 21,505,383 common shares (assuming a cash exercise) at an exercise price of $13.95 per share (“Financing Warrants”), and warrants representing the right to purchase an aggregate of up to 431,433 common shares (assuming a cash exercise) at an exercise price of$0.01of $0.01 per share (“Commitment Fee Warrants”). In addition, certain exchanging holders of the Second Lien Term Loans received warrants representing the right to purchase an aggregate of up to 1,325,546 common shares (assuming a cash exercise) at an exercise price of $0.01 per share (“Amendment Fee Warrants”, and with the Commitment Fee Warrants and Financing Warrants, collectively referred to as the “2017 Warrants”).

On January 16, 2018, affiliates of Fairfax, which had previously been identified as a related party, surrendered all of their rights to the Commitment Fee, Amendment Fee and Financing Warrants. Their rights under the 2017 Warrants entitled them to purchase in aggregate up to 10,824,376 common shares at $13.95 per share and 1,725,576 common shares at $0.01 per share.

We record the 2017 Warrants as non-current liabilities at fair value, with the increase or decrease in fair value being recognized in earnings. The 2017 Warrants will be measured at fair value on a recurring basis until the date of exercise or the date of expiration. As a result of the change in the fair value of the 2017 Warrants, we recorded a loss of $0.3 million and a gain $18.3 million during the three months ended September 30, 2018 and 2017, respectively, and gains of $0.2$1.4 million and $6.0$146.6 million during the nine months ended September 30, 2018 and 2017, respectively, on the revaluation of the warrants, during the three months ended March 31, 2018 and 2017, respectively, in “Gain (loss) on derivative financial instruments - common share warrants” on the Condensed Consolidated Statements of Operations. The gains were primarily due to a decrease in EXCO’sour share price and the cancellation of warrants by affiliates of Fairfax.

The carrying value of our total debt is summarized as follows:

As of December 31, 2017, we classified all of our outstanding indebtedness as a current liability as a result of agreements entered into in anticipation of events of default under certain debt agreements, as well as any outstanding debt with cross-default provisions, and an event of default under the Second Lien Term Loans. The commencement of the Chapter 11 Cases constituted an event of default that accelerated our obligations under the EXCO Resources Credit Agreement, 1.5 Lien Notes, 1.75 Lien Term Loans, 2018 Notes and 2022 Notes. These debt instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ rights of enforcement with respect to the debt instruments are subject to the applicable provisions of the Bankruptcy Code.

As of the Petition Date, we adjusted the carrying value of our indebtedness to the estimated amount that will be allowed as claims in the Chapter 11 Cases. These amounts represent our current estimate and may materially differ from actual future settlement amounts paid. This resulted in expenses of $24.4 million for the acceleration of (i) deferred financing costs, (ii) debt discounts, and (iii) deferred reductions in carrying value associated with debt instruments previously accounted for as a troubled debt restructuring pursuant to ASC 470-60, which was classified as “Reorganization items, net” in our Condensed Consolidated Statement of Operations for the threenine months ended March 31,September 30, 2018. As discussed below, the proceeds from the DIP Facilities were used to repay all obligations under the EXCO Resources Credit Agreement and the EXCO Resources Credit Agreement was terminated. The financing costs of $5.4$6.1 million that were directly attributable to the DIP Credit Agreement were expensed as “Reorganization items, net” in our Condensed Consolidated Statement of Operations for the threenine months ended March 31,September 30, 2018.

On February 22, 2018, the Court approved our ability to make adequate protection payments for interest on the DIP Credit Agreement and the 1.5 Lien Notes. We accrued interest on 1.75 Lien Term Loans, Second Lien Term Loans, 2018 Notes and 2022 Notes through the Petition Date with no interest accrued subsequent to the filings. The 1.75 Lien Term Loans, Second Lien Term Loans, 2018 Notes and 2022 Notes have been reclassified as “Liabilities subject to compromise” on the Condensed Consolidated Balance Sheet as of March 31,September 30, 2018. As of March 31,September 30, 2018, the carrying value for each of our debt instruments approximates the principal amount. As of March 31,September 30, 2018, the principal and accrued interest associated with the DIP Credit Agreement and 1.5 Lien Notes were not classified as liabilities subject to compromise as a result of the adequate protection approved by the Court and our current estimate of the recoverability of claims related to these debt instruments.

On January 18, 2018, the Court entered into an interim order that authorized us to enter into the DIP Credit Agreement. On January 22, 2018, we closed the DIP Credit Agreement, which includes the Revolver A Facility in an aggregate principal amount of $125.0 million and the Revolver B Facility in an aggregate principal amount of $125.0 million with the DIP Lenders. Hamblin Watsa Investment Counsel Ltd. is the administrative agent (“DIP Agent”) for the DIP Credit Agreement. The proceeds of the DIP Facilities may be used in accordance with the DIP Credit Agreement to (i) repay obligations outstanding under the EXCO Resources Credit Agreement, (ii) pay for operating expenses incurred during the Chapter 11 Cases subject to a budget provided to the DIP Lenders under the DIP Credit Agreement, (iii) pay for certain transaction costs, fees and expenses,

On February 22, 2018, the Court entered into a final order authorizing entry into the DIP Credit Agreement on a final basis. The entry into the final order resulted in the termination of the EXCO Resources Credit Agreement. As of March 31,September 30, 2018, we had $156.4 million in outstanding indebtedness and $12.0 million of letters of credit outstanding under the DIP Facilities. Our available borrowing capacity under the DIP Facilities was $81.6 million as of March 31,September 30, 2018.

All amounts outstanding under the DIP Facilities bear interest at an adjusted LIBOR plus 4.00% per annum. During the continuance of an event of default under the DIP Facilities, the outstanding amounts bear interest at an additional 2.00% per annum above the interest rate otherwise applicable.

The DIP Facilities will mature on the earliest of (a) 12 months from the initial borrowings on January 22, 2018, (b) the effective date of a plan of reorganization in the Chapter 11 Cases, or (c) the date of termination of all revolving commitments and/or the acceleration of the obligations under the DIP Facilities following an event of default. We have theThe DIP Credit Agreement provided us with an option subject to certain conditions, to extend the maturity of the DIP Facilities to the date that is 18 months from the initial borrowing date.date if certain conditions are met. These conditions included a requirement to file a plan of reorganization with the Court no later than July 1, 2018. We did not file a plan of reorganization with the Court prior to July 1, 2018; therefore, an extension of the DIP Facilities beyond the original maturity date would require a waiver or consent from the DIP Lenders. Borrowings under the DIP Credit Agreement are subject to an initial borrowing base of $250.0 million. BeginningThe initial borrowing base redetermination will occur on or about January 1, 2019,2019. Thereafter, the borrowing base will be subject to adjustment semi-annually, on April 1 and October 1 of each year based upon the value of our oil and gas reserves. The DIP Lenders have considerable discretion in setting our borrowing base as part of the redetermination process. However, we may elect to redetermine the borrowing base to an amount equal to two-thirds of the net present value, discounted at nine percent, of our proved developed reserves.

The DIP Lenders and the DIP Agent, subject to the Carve-Out (as defined below), at all times: (i) are entitled to joint and several super-priority administrative expense claim status in the Chapter 11 Cases; (ii) have a first priority lien on substantially all of our assets; (iii) have a junior lien on any of our assets subject to a valid, perfected and non-avoidable lien as of the Petition Date, other than such liens securing the obligations under the 1.5 Lien Notes, 1.75 Lien Term Loans and Second Lien Term Loans, and (iv) have a first priority pledge of 100% of the stock and other equity interests in each of our direct and indirect subsidiaries. Our obligations to the DIP Lenders and the liens and super-priority claims are subject in each case to a carve out (“Carve-Out”) that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.

The DIP Credit Agreement contains certain financial covenants, including, but not limited to:

As of March 31,September 30, 2018, we were in compliance with all of the covenants under the DIP Credit Agreement. The DIP Credit Agreement contains events of default, including: (i) conversion of the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code and (ii) appointment of a trustee, examiner or receiver in the Chapter 11 Cases. The DIP Facilities contained

an event of default if we failed to pursue a Court hearing no later than July 1, 2018 to consider the sale of all or substantially all of our assets; however, the final order entered by the Court deemed this requirement to be no longer in force and effect.

We categorize the inputs used in measuring fair value into a three-tier fair value hierarchy. These tiers include:

During the threenine months ended March 31,September 30, 2018 and 2017 there were no changes in the fair value level classifications.

The following table presents a summary of the estimated fair value of our derivative financial instruments as of March 31,September 30, 2018 and December 31, 2017.

We have historically evaluated commodity derivative assets and liabilities in accordance with master netting agreements with the derivative counterparties, but report them on a gross basis in our Condensed Consolidated Balance Sheets. Net commodity derivative asset values are determined primarily by quoted NYMEX futures prices, notional volumes and utilization of the counterparties’ credit-adjusted risk-free rate curves and net commodity derivative liabilities are determined by utilization of our credit-adjusted risk-free rate curve. The credit-adjusted risk-free rates of our counterparties are based on an independent market-quoted credit default swap rate curve for the counterparties’ debt plus the LIBOR curve as of the end of the reporting period. Our credit-adjusted risk-free rate is based on the blended rate of independent market-quoted credit default swap rate curves for companies that have the same credit rating as us plus the LIBOR curve as of the end of the reporting period. The fair value of our commodity derivative financial instruments may be different from the settlement value based on company-specific inputs, such as credit ratings, futures markets and forward curves, and readily available buyers or sellers.

The liability attributable to our common share warrants as of the issuance date and the end of each reporting period is measured using the Black-Scholes model based on inputs including our share price, volatility, expected remaining life and the risk-free rate of return. The implied rates of volatility were determined based on historical prices of our common shares over a period consistent with the expected remaining life. Common share warrants are measured at fair value on a recurring basis until the date of exercise or the date of expiration.

See further details on our derivative financial instruments in “Note 7. Derivative financial instruments”.

Our financial instruments include cash and cash equivalents, accounts receivable and payable and accrued liabilities.  The carrying amount of these instruments approximates fair value because of their short-term nature.

The estimated fair values of our senior notes and term loans are presented below. The estimated fair values of the 2018 Notes and 2022 Notes have been calculated based on quoted prices in active markets. The estimated fair valuevalues of the 1.5 Lien Notes wasand Second Lien Term Loans were calculated based on a model internally prepared by management that lacks significant observable inputs and was classified as Level 3. The 1.75 Lien Term Loans and the Second Lien Term Loans havehas been calculated based on quoted prices obtained from third-party pricing sources that lack significant observable inputs and are classified as Level 3. The 2017 Warrants are considered freestanding financial instruments and are not considered in the determination of the fair value of the 1.5 Lien Notes and 1.75 Lien Term Loans. See “Note 8. Debt” for the carrying value and the principal balance of each debt instrument included in the table below.

We evaluate our estimated annual effective income tax rate based on current and forecasted business results and enacted tax laws on a quarterly basis and apply this tax rate to our ordinary income or loss to calculate our estimated tax liability or benefit. Our annual effective tax rate is highly sensitive to estimates of ordinary income or loss primarily due to significant permanent differences related to the non-taxable gains or losses on the 2017 Warrants and non-deductible interest on our 1.5 Lien Notes and 1.75 Lien Term Loans.

We have accumulated financial net deferred tax assets primarily due to losses arising from impairments to the carrying value of our oil and natural gas properties that are subject to valuation allowances. Our valuation allowances increased $43.3$37.4 million for the threenine months ended March 31,September 30, 2018. As a result of cumulative financial operating losses, we have recognized net valuation allowances of approximately $886.8$880.9 million that have fully offset our net deferred tax assets as of March 31,September 30, 2018. The valuation allowances will continue to be recognized until the realization of future deferred tax

benefits are more likely than not to become utilized. The valuation allowances do not impact future utilization of the underlying tax attributes.

The utilization of our net operating loss carryforwards (“NOLs”)NOLs to offset taxable income in future periods may be limited if we undergo an ownership change pursuant to the criteria in Section 382 of the Internal Revenue Code. Generally, an ownership change occurs for Section 382 purposes when the percentage of stock held by one or more five-percent shareholders increases by more than 50 percentage points over the lowest stock ownership held by such shareholders on any testing date within a three-year period. See further discussion of restrictions imposed by the Court on the trading of our equity securities to protect our use of NOLs in “Note 1. Organization and basis of presentation”. The Internal Revenue Code permits the exclusion of cancellation of debt income from taxable income if the discharge occurs during a Chapter 11 case. If this occurs, the amount of cancellation of debt income would reduce a company’s tax attributes unless it is offset by NOLs. The NOLs that are available to offset cancellation of debt income in a Chapter 11 case are not limited by Section 382 of the Internal Revenue Code. As of March 31,September 30, 2018, we had estimated NOLs of $2.1$2.3 billion.

On December 22, 2017, the United States enacted the Tax Act which, among other things, lowered the U.S. Federal tax rate from 35% to 21%, repealed the corporate alternative minimum tax, and provided for a refund of previously accrued

As of December 31, 2017, we recognized a deferred tax liability of $4.5 million for tax-deductible goodwill. The deferred tax liability related to goodwill was considered to have an indefinite life based on the nature of the underlying asset and could not be offset under GAAP with a deferred tax asset with a definite life, such as NOLs. As a result of the Tax Act, deferred tax assets resulting from NOLs generated in taxable years subsequent to December 31, 2017 are considered to have an indefinite life. Therefore, we recognized an income tax benefit of $4.5 million during the threenine months ended March 31,September 30, 2018 because we expect to be able to utilize deferred tax assets related to NOLs to offset the deferred tax liability related to goodwill.

As of March 31,September 30, 2018, the majority of EXCO’s subsidiaries were guarantors under the DIP Credit Agreement, the indenture governing the 1.5 Lien Notes, the credit agreements governing the 1.75 Lien Term Loans and Second Lien Term Loans and the indentures governing the 2018 Notes and 2022 Notes. All of our unrestricted subsidiaries under the 1.5 Lien Notes, 1.75 Lien Term Loans and the indentures governing the 2018 Notes and 2022 Notes are considered non-guarantor subsidiaries.

Set forth below are condensed consolidating financial statements of EXCO, the guarantor subsidiaries and the non-guarantor subsidiaries. The DIP Credit Agreement, 1.5 Lien Notes, 1.75 Lien Term Loans, Second Lien Term Loans, 2018 Notes and 2022 Notes, which were issued by EXCO Resources, Inc., are jointly and severally guaranteed by substantially all of our subsidiaries (referred to as Guarantor Subsidiaries). For purposes of this footnote, EXCO Resources, Inc. is referred to as Resources to distinguish it from the Guarantor Subsidiaries. Each of the Guarantor Subsidiaries is a 100% owned subsidiary of Resources and the guarantees are unconditional as they relate to the assets of the Guarantor Subsidiaries. Resources and the Guarantor Subsidiaries solely consist of entities that are Debtors in the Chapter 11 Cases, including each of the Filing Subsidiaries. The non-guarantor subsidiaries solely consist of entities that are not included in the Chapter 11 Cases, including OPCO, Appalachia Midstream, EXCO Production Company (PA) II, LLC, EXCO Production Company (WV) II, LLC and certain other entities (referred to as Non-Guarantor Subsidiaries).

The following financial information presents consolidating financial statements, which include:

Investments in subsidiaries are accounted for using the equity method of accounting for the disclosures within this footnote. The financial information for the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is presented on a combined basis. The elimination entries primarily eliminate investments in subsidiaries and intercompany balances and transactions.

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATING BALANCE SHEET

(Unaudited)

As of March 31,September 30, 2018

EXCO RESOURCES, INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATING BALANCE SHEET