Organization And Basis Of Presentation

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “EXCO,” “EXCO Resources,” the “Company,” “we,” “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:

•East Texas and North Louisiana

The East Texas and North Louisiana regions are primarily comprised of our Haynesville and Bossier shale assets. We have a joint venture with a wholly owned subsidiary of Royal Dutch Shell, plc (“Shell”), covering an undivided 50% interest in the majority of our Haynesville and Bossier shale assets in East Texas and North Louisiana. The East Texas and North Louisiana regions also include certain assets outside of the joint venture in the Haynesville and Bossier shales. We serve as the operator for most of our properties in the East Texas and North Louisiana regions.

•South Texas

The South Texas region is primarily comprised of our Eagle Ford shale assets. We serve as the operator for most of our properties in the South Texas region.

•Appalachia

The Appalachia region is primarily comprised of our Marcellus shale assets. We had a joint venture with Shell covering our Marcellus shale and other assets in the Appalachian region (“Appalachia JV”). EXCO and Shell each owned an undivided 50% interest in the Appalachia JV and a 49.75% working interest in the Appalachia JV’s properties. The remaining 0.5% working interest is held by an entity that operates the Appalachia JV’s properties (“OPCO”), which was previously jointly owned by EXCO and Shell. On February 27, 2018, we closed 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 (“Appalachia JV Settlement”). As a result of the Appalachia JV Settlement, we acquired Shell’s interests in the Appalachia JV and OPCO. See further discussion of this transaction in “Note 3. Acquisitions, divestitures and other significant events”.

The accompanying Condensed Consolidated Balance Sheets as of 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 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 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.

Chapter 11 Cases and Going Concern Assessment

On January 15, 2018 (“Petition Date”), the Company and certain of its subsidiaries, including EXCO Services, Inc., EXCO Partners GP, LLC, EXCO GP Partners OLP, LP, EXCO Partners OLP GP, LLC, EXCO Operating Company, LP, EXCO Midcontinent MLP, LLC, EXCO Holding (PA), Inc., EXCO Production Company (PA), LLC, EXCO Resources (XA), LLC, EXCO Production Company (WV), LLC, EXCO Land Company, LLC, EXCO Holding MLP, Inc., Raider Marketing, LP and Raider Marketing GP, LLC (collectively, the “Filing Subsidiaries” and, together with the Company, the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Court”). The cases are being jointly administered under the caption In Re EXCO Resources, Inc., Case No. 18-30155 (MI) (“Chapter 11 Cases”). The Court granted all of the first day motions filed by the Debtors that were designed primarily to minimize the impact of the Chapter 11 Cases on their operations, customers and employees. The Debtors continue to operate their businesses as “debtors in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court. The Debtors expect to continue operations without interruption during the pendency of the Chapter 11 Cases.

For the duration of the Chapter 11 Cases, our operations and ability to develop and execute our business plan are subject to risks and uncertainties associated with Chapter 11 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.

The outcome of the Chapter 11 process is subject to a high degree of uncertainty and is dependent upon factors outside of our control, including actions of the Court and creditors. The significant risks and uncertainties related to our liquidity and the Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern. We define liquidity as cash and restricted cash plus the unused borrowing base under the debtor-in-possession credit agreement (“Liquidity”). These Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.

Chapter 11 filing impact on creditors and shareholders

The 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 are subject to further amendment or modification during the Chapter 11 Cases. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by April 15, 2018. The deadline for governmental units to file proofs of claim was 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 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 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.

Automatic stay

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

Impact on indebtedness

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:


•	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 in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. As a result of the Chapter 11 Cases, the Court may limit post-petition interest on debt that may be under-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 Cases. As of 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.

Restrictions on trading of our equity securities to protect our use of net operating losses

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.

Executory contracts

Subject to certain exceptions, under the Bankruptcy Code, the Debtors 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 Debtors of performing their future obligations under such executory contract or unexpired lease but may give rise to a general unsecured claim against the Debtors for damages caused by such rejection. The assumption of an executory contract or unexpired lease generally requires the Debtors to cure existing monetary or other defaults under such executory contract or unexpired lease and provide adequate assurance of future 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 they 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:


•	Firm transportation agreements with Acadian Gas Pipeline System, which required us to transport 325,000 Mmbtu per day on the Acadian Gas Pipeline System or pay reservation charges through October, 31, 2025;


•	Natural gas sales agreements with Enterprise Products Operating LLC (“Enterprise”), which required us to sell 75,000 Mmbtu per day of natural gas to Enterprise or incur certain costs through October 31, 2025;


•	Firm transportation agreements with Regency Intrastate Gas Systems LLC, which required us to either transport 237,500 Mmbtu per day of natural gas or pay reservation charges through January 31, 2020;


•	Marketing agreement with a subsidiary of Chesapeake Energy Corporation (“Chesapeake”), which required us to allow Chesapeake to purchase natural gas from certain wells in North Louisiana through 2021; and


•	Natural gas sales agreements with Shell, which required us to sell 100,000 Mmbtu per day of natural gas to Shell or incur certain costs through November 30, 2020.

On March 1, 2018, the Debtors 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. The 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 minimum volume commitment agreement is severable from the base 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.

On August 9, 2018, the Court approved the rejection of the office lease for our corporate headquarters in Dallas, Texas. We subsequently entered into a new lease for a reduced amount of square footage in the same office building with a term through December 31, 2022.

Plan of Reorganization

On October 1, 2018, the Debtors filed a Settlement Joint Chapter 11 Plan of Reorganization (the “Plan”) and related Disclosure Statement with the Court. As is customary in bankruptcy proceedings, the Debtors subsequently filed amendments to the Plan and related Disclosure Statement with the Court. The Plan does not currently contemplate the divestiture of any of the Company’s assets. The restructuring transactions contemplated by the Plan include the following key elements:


•	Holders of the DIP Credit Agreement will receive payment in full in cash with proceeds from a new revolving credit facility (“Exit Facility”);


•	Holders of the 1.5 Lien Notes will receive payment in full in cash (without payment of any premium or “make-whole”) with the proceeds from a new second lien debt instrument;


•	Holders of the 1.75 Lien Term Loans will receive 82 percent of the equity in the reorganized Company and 82 percent of the interests in a claims trust that will hold certain litigation claims (“Claims Trust”);

•

Holders of the Second Lien Term Loans, 2018 Notes, 2022 Notes and allowed general unsecured claims (other than “Convenience Claims” as defined below or those creditors that elect to be treated as holding Convenience Claims, and claims against Raider Marketing, LP or Raider Marketing GP, LLC) will receive, collectively, (i) 18 percent of the equity in the reorganized Company, (ii) $15.4 million in cash, and (iii) 18 percent of the interests in the Claims Trust;


•	Holders of allowed claims greater than $0 but less than or equal to $405,000 (“Convenience Claims”), along with any holder of an allowed general unsecured claim who elects to be treated as a holder of an allowed Convenience Claim, will receive a pro rata share of $5.0 million in cash;


•	Holders of claims against Raider Marketing, LP or Raider Marketing GP, LLC shall not receive a distribution and claims will be deemed canceled, discharged, released and extinguished;


•	Holders of existing equity interests in EXCO shall not receive a distribution and the equity interests will be deemed cancelled, discharged, released and extinguished; and


•	The carriers of directors’ and officers’ liability insurance coverage related to the Debtors agreed to pay $13.4 million (“D&O Proceeds”) in exchange for full and final settlement of potential claims and causes of action against current and former directors and officers.

The Debtors shall fund distributions under the Plan with: (i) cash on hand; (ii) the Exit Facility; (iii) a new second lien debt instrument; (iv) the equity in the reorganized Company; and, (v) the D&O Proceeds.

We currently believe the Plan would allow us to preserve our tax attributes upon emergence if we are eligible for an exception in Section 382(l)(5) of the Internal Revenue Code. See further discussion of Section 382 of the Internal Revenue Code and the impact of the Plan on our tax attributes in “Note 10. Income taxes”.

On November 5, 2018, the Court authorized us to solicit acceptances of the Plan and approved the Disclosure Statement and other related solicitation materials and procedures necessary to approve the Plan. We are currently in the process of soliciting votes with respect to the Plan. The Plan is subject to acceptance by certain holders of claims against the Debtors and to confirmation by the Court. The Plan will be accepted by a class of claims entitled to vote if at least one-half in number and two-thirds in dollar amount of claims actually voting in the class have voted to accept the Plan. Under certain circumstances set forth in the Bankruptcy Code, the Court may confirm the Plan even if it has not been accepted by all impaired classes of claims and equity interests if the Debtors demonstrate, among other things, that (i) no class junior to the rejecting class is receiving or retaining property under the plan and (ii) no class of claims or interests senior to the rejecting class is being paid more than in full. A hearing to consider confirmation of the Plan is scheduled to be held on December 10, 2018 in the Court (“Confirmation Hearing”). If the Plan is ultimately confirmed by the Court, the Debtors will emerge from bankruptcy pursuant to the terms of the Plan.

Accounting during bankruptcy

We have applied Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations (“ASC 852”), in the preparation of these Condensed Consolidated Financial Statements. For periods subsequent to the Chapter 11 filings, ASC 852 requires the financial statements to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that have been approved for rejection by the Court, and adjustments to the carrying value of certain indebtedness are recorded as “Reorganization items, net” on the Condensed Consolidated Statement of Operations. In addition, pre-petition obligations that may be impacted by the Chapter 11 process have been classified on the Condensed Consolidated Balance Sheet as of September 30, 2018 as “Liabilities subject to compromise.”

Liabilities subject to compromise

The accompanying Condensed Consolidated Balance Sheet as of 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 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 include amounts related to the rejection of various executory 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 September 30, 2018:



(in thousands)	September 30, 2018
Current maturities of long-term debt	$	927,917
Accrued interest payable	34,281
Accounts payable, accrued expenses and other liabilities	110,656
Liabilities related to rejected executory contracts	418,771
Liabilities subject to compromise	$	1,491,625

As of 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.

Reorganization items, net

We have incurred significant expenses associated with the Chapter 11 process, primarily (i) the acceleration of deferred financing costs, debt discounts and deferred reductions in carrying value associated with debt instruments previously accounted for as a troubled debt restructuring pursuant to ASC 470-60, Troubled Debt Restructuring by Debtors, (ii) adjustments for estimated allowable claims related to executory contracts approved for rejection by the Court, and (iii) legal and professional fees incurred subsequent to the Petition Date related to the restructuring process. These costs, which are being expensed as incurred, significantly impact our results of operations. The following table summarizes the components included in “Reorganization items, net” in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2018:



(in thousands)	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Legal and professional fees	$	15,184	$	44,766
Deferred financing costs, debt discounts and deferred reductions in carrying value	—		30,509
Rejection of executory contracts	2,985		312,182
Reorganization items, net	$	18,169	$	387,457

Interest expense

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 $75.6 million, representing interest expense from the Petition Date through 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.

EXCO RESOURCES INC 10-Q