Table of Contents

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                       | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                                    |
| **For the  quarterly period ended September 30, 2008** |
| ** **                                                  | ** ** | ** **                                                                                                    |
| **OR**                                                      |
| ** **                                                  | ** ** | ** **                                                                                                    |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For thetransition period from           to           **

 

**CommissionFile Number 0-9204**

 

**EXCO RESOURCES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Texas**                                                    | ** ** | **74-1492779**                            |
|--------------------------------------------------------------|------------|-------------------------------------------|
| (State of incorporation)                                     |       | (I.R.S. Employer Identification No.) |
|                                                         |       |                                      |
| **12377 Merit Drive  Suite 1700, LB 82  Dallas, Texas** | ** ** | **75251**                                 |
| (Address of principal executive offices)                     |       | (Zip Code)                                |

 

**(214) 368-2084**

(Registrant’s telephone number, includingarea code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

YES x NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large  accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o(Do not check if a smaller reporting company) |   | Smaller reporting company o |
|---------------------------------|--------|--------------------------|--------|----------------------------------------------------------------------|--------|-----------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o NO x

 

The number of shares of common stock, parvalue $0.001 per share, outstanding as of November 3, 2008 was210,928,017.

 

 

** **

----

Table of Contents

 

**EXCORESOURCES, INC.**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                             |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                                   |
| Item 1.           | Financial Statements                                                                                                                   |
|              | Condensed Consolidated Balance Sheets at  September 30, 2008 and December 31, 2007                                           |
|              | Condensed Consolidated Statements of Operations for  the Three and Nine Months Ended September 30, 2008 and 2007             |
|              | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2008 and 2007                           |
|              | Condensed Consolidated Statements of Changes in  Shareholders’ Equity for the Nine Months Ended September 30, 2008 and  2007 |
|              | Notes to Condensed Consolidated Financial Statements                                                                                   |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                            |
| Item 4.           | Controls  and Procedures                                                                                                               |
|              |                                                                                                                                   |
| **PART II.** | **OTHER INFORMATION**                                                                                                                  |
|              |                                                                                                                                   |
| Item 1.           | Legal Proceedings                                                                                                                      |
| Item 1A.          | Risk Factors                                                                                                                           |
| Item 6.           | Exhibits                                                                                                                               |
|              | Signatures                                                                                                                             |
|              | Index to Exhibits                                                                                                                      |

 

----

Table of Contents

 

**PART I—FINANCIALINFORMATION**

 

***Item 1. Financial Statements***

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)**                                         | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                      | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                      |       |                   |       |                  |       |
| Current assets:                                                 |       |                   |       |                  |       |
| Cash and cash equivalents                                       |       | $                      | 95,135     |                  | $          | 55,510 |   |
| Accounts receivable:                                            |       |                   |       |                  |       |
| Oil and natural gas                                             |       | 181,011                |       | 146,297               |       |
| Joint interest                                                  |       | 12,349                 |       | 21,614                |       |
| Interest and other                                              |       | 4,576                  |       | 2,151                 |       |
| Derivative financial instruments                                |       | 60,259                 |       | 66,632                |       |
| Deferred income taxes                                           |       | —                 |       | 6,764                 |       |
| Inventory                                                       |       | 33,527                 |       | 3,686                 |       |
| Other                                                           |       | 13,214                 |       | 8,646                 |       |
| Total current assets                                            |       | 400,071                |       | 311,300               |       |
| Oil and natural gas properties (full cost accounting method):   |       |                   |       |                  |       |
| Unproved oil and natural gas properties                         |       | 541,892                |       | 334,803               |       |
| Proved developed and undeveloped oil and natural gas properties |       | 4,919,404              |       | 4,926,053             |       |
| Accumulated depletion                                           |       | (829,372               | )          | (500,493              | )          |
| Oil and natural gas properties, net                             |       | 4,631,924              |       | 4,760,363             |       |
| Gas gathering assets                                            |       | 470,720                |       | 340,706               |       |
| Accumulated depreciation and amortization                       |       | (28,034                | )          | (16,142               | )          |
| Gas gathering assets, net                                       |       | 442,686                |       | 324,564               |       |
| Office and field equipment, net                                 |       | 23,851                 |       | 20,844                |       |
| Advance on pending acquisition                                  |       | —                 |       | 39,500                |       |
| Derivative financial instruments                                |       | 28,324                 |       | 2,491                 |       |
| Deferred financing costs, net                                   |       | 17,458                 |       | 20,406                |       |
| Other assets                                                    |       | 880                    |       | 6,226                 |       |
| Goodwill                                                        |       | 470,077                |       | 470,077               |       |
| Total assets                                                    |       | $                      | 6,015,271  |                  | $          | 5,955,771 |   |

 

*Seeaccompanying notes.*

 

1

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands, except per share data)**                                                                                                                 | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Liabilities and shareholders’ equity**                                                                                                                                      |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                               |       |                   |       |                  |       |
| Accounts payable and accrued liabilities                                                                                                                                           |       | $                      | 162,510    |                  | $          | 106,305 |   |
| Accrued interest payable                                                                                                                                                           |       | 15,452                 |       | 21,835                |       |
| Revenues and royalties payable                                                                                                                                                     |       | 136,927                |       | 100,978               |       |
| Income taxes payable                                                                                                                                                               |       | 202                    |       | 87                    |       |
| Senior unsecured term credit agreement                                                                                                                                             |       | 300,000                |       | —                |       |
| Current portion of asset retirement obligations                                                                                                                                    |       | 1,787                  |       | 1,656                 |       |
| Derivative financial instruments                                                                                                                                                   |       | 51,064                 |       | 47,306                |       |
| Total current liabilities                                                                                                                                                          |       | 667,942                |       | 278,167               |       |
| Long-term debt                                                                                                                                                                     |       | 2,685,649              |       | 2,099,171             |       |
| Asset retirement obligations and other long-term liabilities                                                                                                                       |       | 109,149                |       | 89,810                |       |
| Deferred income taxes                                                                                                                                                              |       | —                 |       | 271,398               |       |
| Derivative financial instruments                                                                                                                                                   |       | 65,903                 |       | 109,205               |       |
| Commitments and contingencies                                                                                                                                                      |       | —                 |       | —                |       |
|                                                                                                                                                                               |       |                   |       |                  |       |
| 7.0% Cumulative Convertible Perpetual Preferred Stock, $0.001 par value,  39,008 shares outstanding at December 31, 2007, liquidation preference  of $391,218                 |       | —                 |       | 388,574               |       |
| Hybrid Preferred Stock, $0.001 par value, 160,992 shares outstanding  at December 31, 2007, liquidation preference of $1,614,616                                              |       | —                 |       | 1,603,704             |       |
| Shareholders’ equity:                                                                                                                                                         |       |                   |       |                  |       |
| Preferred stock, $0.001 par value; authorized shares - 10,000,000; issued  and outstanding shares - 200,000 presented above                                                        |       | —                 |       | —                |       |
| Common stock, $0.001 par value; authorized shares - 350,000,000; issued  and outstanding shares -210,926,742 at September 30, 2008 and 104,578,941  at December 31, 2007 |       | 211                    |       | 105                   |       |
| Additional paid-in capital                                                                                                                                                         |       | 3,063,504              |       | 1,043,645             |       |
| Retained earnings (deficit)                                                                                                                                                        |       | (577,087               | )          | 71,992                |       |
| Total shareholders’ equity                                                                                                                                                    |       | 2,486,628              |       | 1,115,742             |       |
| Total liabilities and shareholders’ equity                                                                                                                                    |       | $                      | 6,015,271  |                  | $          | 5,955,771 |   |

 

*See accompanying notes.*

 

2

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands, except per share and share data)** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues and other income:**                                                         |       |                             |       |                            |       |   |   |   |   |
| Oil and natural gas                                                                    |       | $                                | 402,384    |                            | $          | 228,316 |   | $ | 1,155,978 |   | $ | 610,227 |   |
| Midstream                                                                              |       | 27,004                           |       | 4,432                           |       | 61,852 |   | 14,189 |   |
| Gain (loss) on derivative financial instruments                                        |       | 900,313                          |       | 98,252                          |       | (103,534 | ) | 80,130 |   |
| Other income                                                                           |       | 1,820                            |       | 2,417                           |       | 5,496 |   | 7,579 |   |
| Total revenues and other income                                                        |       | 1,331,521                        |       | 333,417                         |       | 1,119,792 |   | 712,125 |   |
| **Costs and expenses:**                                                                |       |                             |       |                            |       |   |   |   |   |
| Oil and natural gas production                                                         |       | 62,979                           |       | 44,376                          |       | 177,518 |   | 121,349 |   |
| Midstream operating expenses                                                           |       | 28,820                           |       | 4,236                           |       | 59,671 |   | 11,339 |   |
| Gathering and transportation                                                           |       | 3,672                            |       | 3,387                           |       | 10,503 |   | 6,662 |   |
| Depreciation, depletion and amortization                                               |       | 126,207                          |       | 109,325                         |       | 346,705 |   | 265,797 |   |
| Write-down of oil and natural gas properties                                           |       | 1,193,105                        |       | —                          |       | 1,193,105 |   | — |   |
| Accretion of discount on asset retirement obligations                                  |       | 1,482                            |       | 1,324                           |       | 4,271 |   | 3,534 |   |
| General and administrative                                                             |       | 21,002                           |       | 17,010                          |       | 63,286 |   | 46,175 |   |
| Interest                                                                               |       | 44,874                           |       | 36,523                          |       | 101,167 |   | 146,775 |   |
| Total costs and expenses                                                               |       | 1,482,141                        |       | 216,181                         |       | 1,956,226 |   | 601,631 |   |
| Income (loss) before income taxes                                                      |       | (150,620                         | )          | 117,236                         |       | (836,434 | ) | 110,494 |   |
| Income tax expense (benefit)                                                           |       | (4,291                           | )          | 60,774                          |       | (264,352 | ) | 58,843 |   |
| Net income (loss)                                                                      |       | (146,329                         | )          | 56,462                          |       | (572,082 | ) | 51,651 |   |
| Preferred stock dividends                                                              |       | 6,997                            |       | 45,733                          |       | 76,997 |   | 97,968 |   |
| Net income (loss) available to common shareholders                                     |       | $                                | (153,326   | )                               | $          | 10,729 |   | $ | (649,079 | ) | $ | (46,317 | ) |
| Net income (loss) per common share:                                                    |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per common share - basic                                             |       | $                                | (0.80      | )                               | $          | 0.10 |   | $ | (4.84 | ) | $ | (0.44 | ) |
| Net income (loss) per common share - diluted                                           |       | $                                | (0.80      | )                               | $          | 0.10 |   | $ | (4.84 | ) | $ | (0.44 | ) |
| Weighted average shares:                                                               |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                  |       | 191,452                          |       | 104,415                         |       | 134,006 |   | 104,311 |   |
| Diluted                                                                                |       | 191,452                          |       | 106,683                         |       | 134,006 |   | 104,311 |   |

 

*Seeaccompanying notes.*

 

3

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                                                                              | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Operating Activities:**                                                                                            |       |                            |       |   |   |
| Net (loss) income                                                                                                    |       | $                               | (572,082   | ) | $ | 51,651 |   |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities:                            |       |                            |       |   |   |
| Loss (gain) on sale of other assets                                                                                  |       | 20                              |       | (653 | ) |
| Depreciation, depletion and amortization                                                                             |       | 346,705                         |       | 265,797 |   |
| Stock option compensation expense                                                                                    |       | 10,842                          |       | 6,728 |   |
| Accretion of discount on asset retirement obligations                                                                |       | 4,271                           |       | 3,534 |   |
| Write-down of oil and natural gas properties                                                                         |       | 1,193,105                       |       | — |   |
| Non-cash change in fair value of derivatives                                                                         |       | (59,004                         | )          | 4,821 |   |
| Cash settlements of assumed derivatives                                                                              |       | 96,504                          |       | 8,020 |   |
| Deferred income taxes                                                                                                |       | (264,657                        | )          | 64,918 |   |
| Amortization of deferred financing costs and premium on 7 1/4% senior  notes due 2011 and discount on long-term debt |       | 6,527                           |       | 10,800 |   |
| Effect of changes in:                                                                                                |       |                            |       |   |   |
| Accounts receivable                                                                                                  |       | (27,569                         | )          | (62,522 | ) |
| Other current assets                                                                                                 |       | 570                             |       | (2,547 | ) |
| Accounts payable and other current liabilities                                                                       |       | 76,785                          |       | 29,751 |   |
| Net cash provided by operating activities                                                                            |       | 812,017                         |       | 380,298 |   |
| **Investing Activities:**                                                                                            |       |                            |       |   |   |
| Additions to oil and natural gas properties, gathering systems and  equipment                                        |       | (741,654                        | )          | (319,122 | ) |
| Property and midstream acquisitions                                                                                  |       | (745,219                        | )          | (2,194,741 | ) |
| Advance on pending acquisition                                                                                       |       | —                          |       | 1,500 |   |
| Proceeds from disposition of property and equipment and other                                                        |       | 1,736                           |       | 483,811 |   |
| Net cash used in investing activities                                                                                |       | (1,485,137                      | )          | (2,028,552 | ) |
| **Financing Activities:**                                                                                            |       |                            |       |   |   |
| Borrowings under credit agreements                                                                                   |       | 1,065,185                       |       | 2,008,000 |   |
| Repayments under credit agreements                                                                                   |       | (476,200                        | )          | (2,113,532 | ) |
| Borrowings under senior unsecured credit term agreement                                                              |       | 300,000                         |       | — |   |
| Settlements of derivative financial instruments with a financing  element                                            |       | (96,504                         | )          | (8,020 | ) |
| Proceeds from issuance of common stock                                                                               |       | 14,465                          |       | 3,175 |   |
| Proceeds from issuance of preferred stock                                                                            |       | —                          |       | 2,000,000 |   |
| Payment of preferred stock dividends                                                                                 |       | (82,827                         | )          | (92,134 | ) |
| Payments for preferred stock issuance costs                                                                          |       | —                          |       | (7,501 | ) |
| Deferred financing costs                                                                                             |       | (11,374                         | )          | (17,759 | ) |
| Net cash provided by financing activities                                                                            |       | 712,745                         |       | 1,772,229 |   |
| Net increase in cash                                                                                                 |       | 39,625                          |       | 123,975 |   |
| Cash at beginning of period                                                                                          |       | 55,510                          |       | 22,822 |   |
| Cash at end of period                                                                                                |       | $                               | 95,135     |   | $ | 146,797 |   |
|                                                                                                                 |       |                            |       |   |   |
| Supplemental Cash Flow Information:                                                                                  |       |                            |       |   |   |
| Interest paid                                                                                                        |       | $                               | 109,017    |   | $ | 154,200 |   |
| Derivative financial instruments assumed in Vernon Acquisition                                                       |       | $                               | —     |   | $ | (60,015 | ) |
| Derivative financial instruments assumed in Southern Gas Acquisition                                                 |       | $                               | —     |   | $ | (42,204 | ) |
| Supplemental non-cash investing and financing activities:                                                            |       |                            |       |   |   |
| Capitalized stock compensation                                                                                       |       | $                               | 2,263      |   | $ | 1,332 |   |
| Capitalized interest                                                                                                 |       | $                               | 1,925      |   | $ | — |   |
| Issuance of common stock for director services                                                                       |       | $                               | 120        |   | $ | — |   |
| Value of shares received for sale of properties                                                                      |       | $                               | —     |   | $ | 4,575 |   |

 

*Seeaccompanying notes.*

 

4

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(Unaudited)**

** **
| ** **                         | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**           | ** ** | **Total**  | ** ** |
|------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                         | ** ** | **Common Stock** | ** ** | **paid-in** | ** ** | **earnings**   | ** ** | **shareholders’** | ** ** |
| **(in thousands)**            | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**    | ** ** | **(deficit)**          | ** ** | **equity** | ** ** |
| Balance at December 31, 2007  |       | 104,579               |       | $           | 105        |           | $          | 1,043,645              |       | $          | 71,992     |   | $ | 1,115,742 |   |
| Issuance of common stock           |       | 1,084                 |       | 1           |       | 14,584         |       | —                 |       | 14,585     |       |
| Preferred stock conversion         |       | 105,263               |       | 105         |       | 1,992,170      |       | —                 |       | 1,992,275  |       |
| Preferred stock dividends          |       | —                |       | —      |       | —         |       | (76,997                | )          | (76,997    | )          |
| Share-based compensation           |       | —                |       | —      |       | 13,105         |       | —                 |       | 13,105     |       |
| Net loss                           |       | —                |       | —      |       | —         |       | (572,082               | )          | (572,082   | )          |
| Balance at September 30, 2008 |       | 210,926               |       | $           | 211        |           | $          | 3,063,504              |       | $          | (577,087   | ) | $ | 2,486,628 |   |
|                               |       |                  |       |        |       |           |       |                   |       |       |       |
| Balance at December 31, 2006  |       | 104,162               |       | $           | 104        |           | $          | 1,024,442              |       | $          | 155,304    |   | $ | 1,179,850 |   |
| Issuance of common stock           |       | 298                   |       | —      |       | 3,175          |       | —                 |       | 3,175      |       |
| Preferred stock dividends          |       | —                |       | —      |       | —         |       | (97,968                | )          | (97,968    | )          |
| Share-based compensation           |       | —                |       | —      |       | 8,059          |       | —                 |       | 8,059      |       |
| Net income                         |       | —                |       | —      |       | —         |       | 51,651                 |       | 51,651     |       |
| Balance at September 30, 2007 |       | 104,460               |       | $           | 104        |           | $          | 1,035,676              |       | $          | 108,987    |   | $ | 1,144,767 |   |

 

*See accompanying notes.*

 

5

----

Table ofContents

 

**EXCO RESOURCES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**(Unaudited)**

 

**1.****            ****Organization and basis of presentation**

 

*Unless the context requires otherwise, references inthis quarterly report on Form 10-Q to “EXCO,” “EXCO Resources,” “Company,”“we,” “us,” and “our” are to EXCO Resources, Inc. and its consolidatedsubsidiaries.*

 

EXCOResources, Inc., a Texas corporation, is an independent oil and naturalgas company engaged in the acquisition, development and exploitation of onshoreNorth American oil and natural gas properties. Our principal operations arelocated in the East Texas/North Louisiana, Appalachia, Mid-Continent andPermian producing areas. Our assets in East Texas/North Louisiana are owned byour subsidiary, EXCO Operating Company, LP (formerly EXCO Partners OperatingPartnership, LP), and its subsidiaries and together they are collectivelyreferred to as EXCO Operating. Organizationally, EXCO Operating is an indirectwholly-owned subsidiary of EXCO Resources. EXCO Operating’s debt is notguaranteed by EXCO Resources and EXCO Operating does not guarantee EXCOResources’ debt.

 

Theaccompanying condensed consolidated balance sheets as of September 30,2008 and December 31, 2007, the results of operations for the three andnine months ended September 30, 2008 and 2007, the statements of cashflows for the nine months ended September 30, 2008 and 2007 and thechanges in shareholders’ equity for the nine months ended September 30,2008 and 2007, are for EXCO and its subsidiaries. All intercompany transactionshave been eliminated. Certain prior year amounts have been reclassified toconform to current year presentation.

 

Wehave prepared the accompanying unaudited interim financial statements pursuantto the rules and regulations of the Securities and Exchange Commission, orSEC, and in the opinion of management, such financial statements reflect alladjustments necessary to present fairly the consolidated financial position ofEXCO at September 30, 2008 and its results of operations and cash flowsfor the periods presented. We have omitted certain information and disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States pursuant to thoserules and regulations, although we believe that the disclosures we havemade are adequate to make the information presented not misleading. Theseunaudited interim financial statements should be read in conjunction with ouraudited financial statements and notes included in our Annual Report on Form 10-Kfor the year ended December 31, 2007. 

 

Inpreparing the accompanying financial statements, management has made certainestimates and assumptions that affect reported amounts in the financialstatements and disclosures. The results of operations for the interim periodsare not necessarily indicative of the results we expect for the full year.

 

**2.****            ****Significant****recent activities**

 

**Preferred Stock conversion**

 

OnJuly 18, 2008, we converted all outstanding shares of our 7.0% CumulativeConvertible Perpetual Preferred Stock and Hybrid Preferred Stock, or thePreferred Stock, into a total of approximately 105.2 million shares of ourcommon stock. The conversion of the Preferred Stock had the effect ofincreasing the book value of shareholders’ equity by approximately $2.0billion. We also paid all accrued dividends in cash totaling approximately $12.8million to the holders of the converted shares of Preferred Stock. After July 18,2008, dividends ceased to accrue on the Preferred Stock and all rights of theholders with respect to the Preferred Stock terminated, except for the right toreceive the whole shares of common stock issuable upon conversion, accrueddividends through July 18, 2008 and cash in lieu of any fractional shares.The conversion of all outstanding shares of Preferred Stock into common stockeliminated our obligation to pay quarterly cash dividends of $35.0 million,resulting in annual dividend savings of $140.0 million.

 

**Appalachian Acquisition**

 

OnFebruary 20, 2008, EXCO acquired shallow natural gas properties from EOGResources, Inc. located primarily in EXCO’s central Pennsylvania operatingarea, or the Appalachian Acquisition. The purchase price was$387.4 million and was financed with funds drawn under the EXCO Resourcescredit agreement. Our final purchase price allocation to the Appalachian Acquisition ispresented in the following table:

 

6

----

Table ofContents

 

| **(in thousands)**                         | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| **Purchase price calculation:**                 |       |       |       |
| Purchase price                                  |       | $          | 386,703    |   |
| Acquisition related expenses                    |       | 741        |       |
| Total purchase price                            |       | $          | 387,444    |   |
|                                            |       |       |       |
| **Allocation of purchase price:**               |       |       |       |
| Oil and natural gas properties - proved         |       | $          | 334,308    |   |
| Oil and natural gas properties - unproved       |       | 44,797     |       |
| Gas gathering, compression facilities and other |       | 19,876     |       |
| Other property and equipment                    |       | 2,517      |       |
| Asset retirement obligations                    |       | (12,647    | )          |
| Other liabilities assumed                       |       | (1,407     | )          |
| Total purchase price allocation                 |       | $          | 387,444    |   |

 

**Southern Gas Acquisition**

 

On March 31, 2008, we finalized the purchase price of our May 2007acquisition of properties located in the Mid-Continent region from AnadarkoPetroleum Corporation, or the Southern Gas Acquisition. Included in theSouthern Gas Acquisition were oil and natural gas properties which were sold toCrimson Exploration on May 8, 2007, or the Gulf Coast Sale. The finaladjusted purchase price allocation of $772.5 million is presented in thefollowing table:

 

| **(in thousands)**                                            | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|
| **Purchase price calculation:**                                    |       |       |       |
| Purchase price                                                     |       | $          | 770,498    |   |
| Acquisition related expenses                                       |       | 2,040      |       |
| Total purchase price                                               |       | $          | 772,538    |   |
|                                                               |       |       |       |
| **Allocation of purchase price:**                                  |       |       |       |
| Oil and natural gas properties - proved                            |       | $          | 586,407    |   |
| Oil and natural gas properties - unproved                          |       | 4,725      |       |
| Gulf Coast Sale, including the value of the Crimson stock          |       | 241,948    |       |
| Other, net                                                         |       | (5,771     | )          |
| Fair value (liability) of assumed derivative financial instruments |       | (42,204    | )          |
| Asset retirement obligations                                       |       | (12,567    | )          |
| Total purchase price allocation                                    |       | $          | 772,538    |   |

 

**Danville Acquisition**

 

On July 15, 2008, weacquired producing oil and natural gas properties, acreage and other assets inGregg, Rusk and Upshur counties of Texas, or the Danville Acquisition, forapproximately $249.5 million, net of preliminary closing adjustments. Fundingfor this acquisition was provided by a senior unsecured term loan, whichmatures on December 15, 2008. We expect to finalize the purchase priceallocation in the fourth quarter of 2008. The preliminary purchase priceallocation of $249.5 million is presented in the following table:

 

7

----

Table ofContents

 

| **(in thousands)**                         | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| **Purchase price calculation:**                 |       |       |       |
| Preliminary purchase price                      |       | $          | 249,368    |   |
| Acquisition related expenses                    |       | 178        |       |
| Total preliminary purchase price                |       | $          | 249,546    |   |
|                                            |       |       |       |
| **Allocation of purchase price:**               |       |       |       |
| Oil and natural gas properties - proved         |       | $          | 199,510    |   |
| Oil and natural gas properties - unproved       |       | 42,045     |       |
| Gas gathering, compression facilities and other |       | 10,974     |       |
| Other property and equipment                    |       | 660        |       |
| Asset retirement obligations                    |       | (1,123     | )          |
| Other liabilites assumed                        |       | (2,520     | )          |
| Total preliminary purchase price allocation     |       | $          | 249,546    |   |

 

**Pro forma results ofoperations**

 

The following tablereflects the unaudited pro forma results of operations as though the DanvilleAcquisition, Appalachian Acquisition, the conversion of our Preferred Stock andthe acquisitions and dispositions during 2007, including proved and unprovedoil and natural gas properties in North Louisiana, or the Vernon Acquisition,the Southern Gas Acquisition and the Gulf Coast Sale, had occurred on January 1,2007 (see our Annual Report on Form 10-K for the year ended December 31,2007 for a discussion of our 2007 acquisitions and sales).

 
| ** **                                                         | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues and other income                                          |       | $                                                        | 1,334,659  |                                                    | $          | 354,419 |   | $ | 1,158,472 |   | $ | 921,921 |   |
| Net income (loss) available to common shareholders                 |       | $                                                        | (142,986   | )                                                       | $          | 50,523 |   | $ | (543,467 | ) | $ | 94,005 |   |
| Basic earnings (loss) per share                                    |       | $                                                        | (0.68      | )                                                       | $          | 0.24 |   | $ | (2.58 | ) | $ | 0.45 |   |
| Diluted earnings (loss) per share                                  |       | $                                                        | (0.68      | )                                                       | $          | 0.24 |   | $ | (2.58 | ) | $ | 0.44 |   |

 

**3.****            ****Recent****accounting pronouncements**

 

In September 2006,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards, or SFAS, No. 157, “Fair ValueMeasurements,” or SFAS No. 157, which defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years forfinancial instruments. FASB Financial Staff Position No. FAS 157-2, “EffectiveDate of FASB Statement No. 157,” or FAS 157-2, deferred implementation forother non-financial assets and liabilities for one year. Examples ofnon-financial assets and liabilities are asset retirement obligations andnon-financial assets and liabilities initially measured at fair value in abusiness combination. We adopted SFAS No. 157 on January 1, 2008. See“Note 10.Derivative financial instruments and fair value measurements” for adiscussion of the impacts of the adoption of SFAS No. 157.

 

In December 2007,the FASB issued SFAS No. 141(R), “BusinessCombinations,” or SFAS No. 141(R). SFAS No. 141(R) replacesSFAS No. 141. SFAS No. 141(R) broadens the scope of businesscombinations to include bargain purchases and combinations of relatedcompanies, provides guidance on measuring goodwill and requires acquisitioncosts to be separate from the value of assets and liabilities purchased. SFAS No. 141(R) iseffective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009. We arecurrently evaluating the effect of adopting SFAS No. 141(R) on ourfinancial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements,” or SFAS No. 160. SFAS No. 160 amendsAccounting Research Bulletin 51, or ARB 51. SFAS No. 160 requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements separate from the parent’s equity. The amountof net income attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement. It also amendscertain of ARB No. 51’s consolidation procedures for consistency with therequirements of SFAS No. 141(R). SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest. SFAS No. 160 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andas such, will be adopted by us on January 1, 2009. We are currentlyevaluating the effect of adopting SFAS No. 160 on our financialstatements.

 

8

----

Tableof Contents

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities,” or SFAS No. 161. SFAS No. 161requires enhanced disclosure about the fair value of derivative instruments andtheir gains or losses in tabular format and information aboutcredit-risk-related contingent features in derivative agreements, counterpartycredit risk, and the company’s strategies and objectives for using derivativeinstruments. SFAS No. 161 is effective for financial statements issued forfiscal years beginning after December 15, 2008, and as such, will beadopted by us on January 1, 2009.  We are currently evaluating the effect ofadopting SFAS No. 161 on our financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles,” or SFAS No. 162. SFAS No. 162identifies the sources of accounting principles and the framework for selectingthe principles to be used in the preparation of financial statements. The effectivedate of SFAS No. 162 is November 15, 2008.  We do not expect SFAS No. 162 to have animpact on our financial statements.

 

OnOctober 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3,or FSP 157-3. The purpose of FSP 157-3 is to clarify the application of SFAS No. 157in a market that that is not active and provides an example which illustrateskey considerations on determining fair value of a financial asset when a marketfor that financial asset is not active.

 

**4.****            ****Significant accounting policies**

 

We consider accountingpolicies related to our estimates of assets and liabilities acquired inacquisitions, estimates of proved reserves, accounting for derivatives,business combinations, share-based payments, accounting for oil and natural gasproperties, goodwill, asset retirement obligations and accounting for incometaxes as significant accounting policies. The policies include significantestimates made by management using information available at the time theestimates are made. However, these estimates could change materially ifdifferent information or assumptions were used. These policies are summarizedin our Annual Report on Form 10-K for the year ended December 31, 2007.

 

**5.****            ****Assetretirement obligations**

 

Thefollowing is a reconciliation of our asset retirement obligations for the ninemonths ended September 30, 2008:

 

| **(in thousands)**                                        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| Asset retirement obligation at January 1, 2008            |       | $          | 84,370     |   |
| Activity during the nine months ended September 30, 2008: |       |       |       |
| Liabilities incurred during the period                         |       | 3,319      |       |
| Liabilities settled during the period                          |       | (2,683     | )          |
| Additions to retirement obligations due to acquisitions        |       | 15,222     |       |
| Accretion of discount                                          |       | 4,271      |       |
| Asset retirement obligations as of September 30, 2008     |       | 104,499    |       |
| Less current portion                                           |       | 1,787      |       |
| Long-term portion                                              |       | $          | 102,712    |   |

 

We have no assets that are legally restricted forpurposes of settling asset retirement obligations.

 

**6.****            ****Inventory**

 

Inventory,which is included in current assets, includes tubular goods and other lease andwell equipment which we plan to utilize in our ongoing exploration anddevelopment activities and is carried at the lower of cost or market.

 

**7.****            ****Oil and natural gas properties**

 

We usethe full cost method of accounting, which involves capitalizing all acquisition,exploration, exploitation and development costs. Once weincur costs, they are recorded in the depletable pool of proved properties orunproved properties, or the full cost pool. Unproved property costs, whichtotaled $541.9 million and $334.8 million as of September 30, 2008 and December 31,2007, respectively, are not subject to depletion. We review our unproved oiland natural gas property costs on a quarterly basis, and we expect these coststo be evaluated in one to seven years and transferred

 

9

----

Table ofContents

 

tothe depletable portion of the full cost pool during that time. The full costpool is comprised of intangible drilling costs, lease and well equipment andexploration and development costs incurred plus acquired proved and unprovedleaseholds.

 

We calculate depletion using the unit-of-production method.Under this method, the sum of the proved properties and all estimated futuredevelopment costs are divided by the total quantities of proved reserves. Thisrate is applied to our total production for the period and the appropriateexpense is recorded. We capitalize the portion of general and administrativecosts, including share-based compensation that is attributable to ouracquisition, exploration, exploitation and development activities.

 

Sales,dispositions and other oil and natural gas property retirements are accountedfor as adjustments to the full cost pool, with no recognition of gain orloss unless the disposition would significantly alter both the relationshipbetween capitalized costs and proved reserves.

 

At the end of each quarterly period, theunamortized cost of oil and natural gas properties, net of related deferredincome taxes, is limited to the sum of the estimated future net revenues fromour oil and natural gas properties using current period-end prices discountedat 10%, adjusted for related income tax effects (ceiling test). When computingour ceiling test, we evaluate the limitation at the end of each reportingperiod date. In the event our capitalized costs exceed the ceiling limitationat the end of the reporting date, we subsequently evaluate the limitation forprice changes that occur after the balance sheet date to assess impairment aspermitted by Staff Accounting Bulletin Topic 12—Oil and Gas Producing Activities.Subsequent to September 30, 2008, prices for oil and natural gas havecontinued to decline. Accordingly, we may be subject to additional ceiling testwrite-downs if prices do not increase above their September 30, 2008 levels.At September 30, 2008, the carrying costs of our unamortized proved oiland natural gas properties, net of deferred taxes, exceeded the September 30,2008 present value of future net revenues. As a result, we recognized a pretaxnon-cash write-down of our oil and natural gas properties of approximately $1.2billion, or $723.3 million after tax, at September 30, 2008. Under fullcost accounting rules, any ceiling test write-downs of oil and natural gasproperties may not be reversed in subsequent periods. Since we do not designateour derivative financial instruments as hedges, we are not allowed to use theimpacts of the derivative financial instruments in our ceiling test computation.As a result, decreases in commodity prices which contribute to ceiling testwrite-downs may be offset by mark-to-market gains which are not reflected inour ceiling test results.

 

Thecalculation of the ceiling test is based upon estimates of provedreserves. There are numerous uncertainties inherent in estimating quantities ofproved reserves, in projecting the future rates of production and in the timingof development activities. The accuracy of any reserve estimate is a functionof the quality of available data and of engineering and geologicalinterpretation and judgment. Results of drilling, testing and productionsubsequent to the date of the estimate may justify revision of such estimate.Accordingly, reserve estimates are often different from the quantities of oiland natural gas that are ultimately recovered.

 

**8.****            ****Earnings (loss) per sha****re**

 

We account forearnings per share in accordance with SFAS No. 128, “Earnings per share,”or SFAS No. 128. SFAS No. 128 requires companies to present twocalculations of earnings per share; basic and diluted. Basic earnings (loss)per share for the three and nine months ended September 30, 2008 and 2007equals the net income (loss) available to common shareholders divided by theweighted average common shares outstanding during the period. Common sharesresulting from the conversion of our Preferred Stock on July 18, 2008 areincluded in the weighted average common shares for the three and nine monthsended September 30, 2008. Diluted earnings (loss) per common share for thethree and nine months ended September 30, 2008 and 2007 is computed in thesame manner as basic earnings per share after assuming issuance of common stockfor all potentially dilutive common stock equivalents, including our PreferredStock, whether exercisable or not. Since we incurred net losses for the threeand nine months ended September 30, 2008 and the nine months ended September 30,2007, we have excluded the potential common stock equivalents from the assumedconversion of stock options of 5,320,954, 4,833,503 and 2,541,801,respectively. Antidilutive options representing 785,125 shares for the threemonths ended September 30, 2007 were excluded from the computation ofdiluted earnings per share due to the options exercise price being lower thanthe weighted average stock price for the quarter. We have also excluded19,439,891, 76,336,899, 105,260,000, and 105,260,000 shares of common stockequivalents from the assumed conversion of the Preferred Stock from the computationof earnings per share for the three and nine months ended September 30,2008 and the three and nine months ended September 30, 2007, respectively,as they are antidilutive.

 

The following table presents the basic and diluted income (loss) pershare computations:

 

10

----

Table ofContents

 

| ** **                                                                     | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands, except per share amounts)**          | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Basic income (loss) per common share:                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss)                                                              |       | $                                                        | (146,329   | )                                                       | $          | 56,462 |   | $ | (572,082 | ) | $ | 51,651 |   |
| Preferred stock dividends                                                      |       | 6,997                                                    |       | 45,733                                                  |       | 76,997 |   | 97,968 |   |
| Net income (loss) available to common shareholders                             |       | $                                                        | (153,326   | )                                                       | $          | 10,729 |   | $ | (649,079 | ) | $ | (46,317 | ) |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Shares:                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares outstanding                           |       | 191,452                                                  |       | 104,415                                                 |       | 134,006 |   | 104,311 |   |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic income (loss) per common share:                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) available to common shareholders per common share            |       | $                                                        | (0.80      | )                                                       | $          | 0.10 |   | $ | (4.84 | ) | $ | (0.44 | ) |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted income (loss) per share:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) available to common shareholders                             |       | $                                                        | (153,326   | )                                                       | $          | 10,729 |   | $ | (649,079 | ) | $ | (46,317 | ) |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Shares:                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares outstanding                           |       | 191,452                                                  |       | 104,415                                                 |       | 134,006 |   | 104,311 |   |
| Dilutive effect of stock options                                               |       | —                                                   |       | 2,268                                                   |       | — |   | — |   |
| Weighted average common shares and common stock equivalent shares  outstanding |       | 191,452                                                  |       | 106,683                                                 |       | 134,006 |   | 104,311 |   |
|                                                                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted income (loss) per share:                                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss) available to common shareholders per common share            |       | $                                                        | (0.80      | )                                                       | $          | 0.10 |   | $ | (4.84 | ) | $ | (0.44 | ) |

 

**9.****            ****Stock options**

 

We account forstock options in accordance with SFAS No. 123(R), “Share-BasedCompensation,” or SFAS No. 123(R). As required by SFAS No. 123(R),the granting of options to our employees under our 2005 Long-Term IncentivePlan, or the 2005 Incentive Plan, are share-based payment transactions and areto be treated as compensation expense by us with a corresponding increase toadditional paid-in capital. Volatility is determined based on the combinationof the weighted average volatility of our common stock price and the dailyclosing prices from five comparable public companies during the period when wewere privately held. For the three and nine months ended September 30,2008, total share-based compensation was $5.1 million and $13.1 million,respectively, of which $4.1 million and $10.8 million, respectively, isincluded in general and administrative and lease operating expense and$1.0 million and $2.3 million, respectively, was capitalized as part ofproved developed and undeveloped oil and natural gas properties. For the threeand nine months ended September 30, 2007, total share-based compensationwas $2.7 million and $8.1 million, respectively, of which $2.3 million and $6.7million, respectively, is included in general and administrative and leaseoperating expense and $0.4 million and $1.4 million, respectively, wascapitalized as part of proved developed and undeveloped oil and natural gas properties.Total share-based compensation to be recognized on unvested awards as of September 30,2008 is $21.6 million over a weighted average period of 0.92 years.

 

Duringthe nine months ended September 30, 2008, options to purchase 1,360,600shares were granted under the 2005 Incentive Plan at prices ranging from $15.15to $38.01 per share with fair values ranging from $5.39 to $14.27 per share.The options expire ten years following the date of grant. Pursuant to the 2005Incentive Plan, 25% of the options vest immediately with an additional 25% tovest on each of the next three anniversaries of the date of the grant. As of September 30,2008 and December 31, 2007, there were 5,927,675 and 7,022,375 sharesavailable to be granted under the 2005 Incentive Plan, respectively.

 

**10.****         ****Derivative financial instruments andfair value measurements**

 

We useoil and natural gas derivatives and financial risk management instruments tomanage our exposures to commodity price and interest rate fluctuations. We donot designate these instruments as hedging instruments for financial accountingpurposes, and, as a result, we recognize the change in the respectiveinstruments’ fair value currently in earnings, as gains or losses on oil andnatural gas derivatives and interest expense on interest rate swaps.

 

In September 2006,the FASB issued SFAS No. 157. SFAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with accountingprinciples generally accepted in the United States and provides for expandeddisclosure of information about fair value measurements. We adopted theprovisions of SFAS No. 157 on January 1, 2008 for our derivativefinancial instruments’ assets and liabilities.

 

SFAS No. 157 definesfair value as the exchange price that would be received for an asset or paid totransfer a liability (exit price) in the principal or most advantageous marketfor the asset or liability in an orderly transaction between market participants on themeasurement date. This fair value may be different than the settlement valuebased on 

 

11

----

Table ofContents

 

company-specificinputs, such as credit rating, futures markets and forward curves, and readilyavailable buyers or sellers for such assets or liabilities. Prior to January 1,2008, our derivative financial instruments were recorded at their expectedsettlement value.

 

SFAS No. 157 alsoestablishes a three-tier fair value hierarchy, which prioritizes the inputsused in measuring fair value. These tiers include:

 

*Level 1 –* Observable inputs, such as quoted marketprices in active markets, for substantially identical assets and liabilities.

 

*Level 2 –* Observable inputs other than quoted**prices within *Level 1* forsimilar assets and liabilities. These include quoted prices in markets that arenot active or other inputs that are observable or can be corroborated byobservable market data. If the asset or liability has a specified orcontractual term, the input must be observable for substantially the full termof the asset or liability.

 

*Level 3 –* Unobservable inputs that are supportedby little or no market activity, generally requiring development of fair valueassumptions by management.

 

As of September 30,2008, our oil and natural gas derivative financial instruments and interestrate swaps are required to be measured at their estimated fair value pursuantto SFAS No. 157. The following presents a summary of the estimated fairvalue of our derivative financial instruments at September 30, 2008:

 

| **(in thousands)**                              | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Oil and natural gas derivative financial instruments |       | $                | —     |             | $          | (33,539          | )          | $         | —     |   | $ | (33,539 | ) |
| Interest rate swaps                                  |       | —           |       | 5,155            |       | —           |       | 5,155     |       |
|                                                 |       | $                | —     |             | $          | (28,384          | )          | $         | —     |   | $ | (28,384 | ) |

 

**Oil and natural gas derivatives**

 

The following tablepresents our financial assets and liabilities for oil and natural gasderivative financial instruments measured at fair value subject to thedisclosure requirements of SFAS No. 157 as of September 30, 2008:

 

| ** **                                       | ** ** | ** **    | ** ** | **Weighted**            | ** ** | ** **                       | ** ** |
|--------------------------------------------------|------------|---------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **Volume**    | ** ** | **average strike** | ** ** | **Fair value at**      | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu/Bbl** | ** ** | **price**               | ** ** | **September 30, 2008** | ** ** |
| **Natural Gas:**                                 |       |          |       |                    |       |                             |       |
| Swaps (NYMEX):                                   |       |          |       |                    |       |                             |       |
| Remainder of 2008                                |       | 26,910        |       | $                       | 8.39       |                             | $          | 22,458 |   |
| 2009                                             |       | 100,530       |       | 8.18                    |       | 5,968                            |       |
| 2010                                             |       | 44,397        |       | 8.10                    |       | (17,452                          | )          |
| 2011                                             |       | 9,125         |       | 7.97                    |       | (3,504                           | )          |
| 2012                                             |       | 1,830         |       | 4.51                    |       | (5,088                           | )          |
| 2013                                             |       | 1,825         |       | 4.51                    |       | (4,701                           | )          |
| **Total Natural Gas**                            |       | 184,617       |       |                    |       | (2,319                           | )          |
|                                             |       |          |       |                    |       |                             |       |
| **Oil:**                                         |       |          |       |                    |       |                             |       |
| Swaps (NYMEX):                                   |       |          |       |                    |       |                             |       |
| Remainder of 2008                                |       | 450           |       | 78.60                   |       | (9,065                           | )          |
| 2009                                             |       | 1,580         |       | 80.64                   |       | (30,940                          | )          |
| 2010                                             |       | 1,568         |       | 104.64                  |       | 967                              |       |
| 2011                                             |       | 1,095         |       | 112.99                  |       | 7,539                            |       |
| 2012                                             |       | 92            |       | 109.30                  |       | 279                              |       |
| **Total Oil**                                    |       | 4,785         |       |                    |       | (31,220                          | )          |
| **Total Oil and Natural Gas**                    |       |          |       |                    |       | $                                | (33,539    | ) |
|                                                  |            |               |            |                         |            |                                  |            |  |  |

 

12

----

Table ofContents

 

In measuring fair valueof financial assets and liabilities pursuant to SFAS No. 157, we utilizequoted NYMEX futures for period prices applicable to our derivatives and otherrelevant information generated by market transactions. Our derivative financialinstruments and their related fair value tier have been classified as Level 2.The significant observable inputs for our oil and natural gas derivatives arebased principally on NYMEX strip prices, London Inter Bank Offered Rate, orLIBOR, and credit risk assessment which affects the discount rate to beutilized to compute fair value. To adjust for credit risk, we use a factorbased on management’s estimated credit rating of the applicable institution.This factor is applied to each transaction, based on whether it is an asset or liability.For a liability, we use our credit rating factor, which was 627 basis points,or bps, at September 30, 2008. For an asset, we use the credit ratingfactor for the significant institutional counterparties, which ranged fromapproximately 60 bps to 625 bps at September 30, 2008.

 

At September 30,2008, the average forward NYMEX oil prices per Bbl for the remainder of 2008and for 2009 were $100.49 and $102.46, respectively, and the average forwardNYMEX natural gas price per Mmbtu for the remainder of 2008 and for 2009 was$7.57 and $8.15, respectively.

 

**Interestrate swaps**

 

In January 2008, we entered into interest rateswaps to mitigate our exposure to fluctuations in interest rates on$700.0 million in principal through February 14, 2010 at LIBO ratesranging from 2.45% to 2.8%. During the three and nine months ended September 30,2008, we recognized $2.0 million as an increase to interest expense on ourinterest rate swaps and $6.1 million as a reduction to interest expense on ourinterest rate swaps, respectively. The impact of SFAS No. 157 was notmaterial to our interest rate swaps. As of September 30, 2008, the fairvalue of our interest rate swaps was an asset of $5.2 million.

 

**11.****         ****Current and long-term debt**

 

Our total debt issummarized as follows:

 

| ** **                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)**                              | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Current debt:                                        | ** ** | ** **             | ** ** | ** **            | ** ** |
| Senior unsecured term credit agreement               |       | $                      | 300,000    |                  | $          | — |   |
| Long-term debt:                                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| EXCO credit agreement.                               |       | 1,014,000              |       | 560,500               |       |
| EXCO Operating credit agreement.                     |       | 1,218,485              |       | 1,083,000             |       |
| 7 1/4% senior notes due 2011                         |       | 444,720                |       | 444,720               |       |
| Unamortized premium on 7 1/4 % senior notes due 2011 |       | 8,444                  |       | 10,951                |       |
| Total long-term debt                                 |       | $                      | 2,685,649  |                  | $          | 2,099,171 |   |
| Total debt                                           |       | $                      | 2,985,649  |                  | $          | 2,099,171 |   |

 

**Creditagreements**

 

*Senior Unsecured Term CreditAgreement*

 

On July 15,2008, EXCO Operating entered into a senior unsecured term credit agreement, orthe Term Credit Agreement, and drew $300.0 million, resulting in net proceedsof $289.4 million after transaction fees and administrative expenses. Proceedsfrom the Term Credit Agreement were used to fund the Danville Acquisition fromprivate sellers for approximately $224.5 million, net of a $25.0 milliondeposit paid early in the second quarter of 2008 and preliminary closingadjustments, provide working capital to EXCO Operating and reduce debt on theEXCO Operating credit agreement.

 

The Term CreditAgreement balance of $300.0****millionwas borrowed in a single draw on July 15, 2008. Thereafter through October 15,2008, EXCO Operating could have requested additional term loans of up to $200.0million in the aggregate, but the lenders had no obligation to provide therequested additional funding. EXCO Operating did not request any additionalborrowings under the Term Credit Agreement. The Term Credit Agreement is dueand payable on December 15, 2008 and is guaranteed by all existing andfuture direct or indirect subsidiaries of EXCO Operating, including anyguarantor of the EXCO Operating credit agreement.

 

Financialcovenants governing the Term Credit Agreement include a minimum current ratioof 1.00 to 1.00, a maximum leverage ratio of 3.50 to 1.00 and a minimuminterest coverage ratio of 2.50 to 1.00. At the borrower’s election, term loansunder the Term Credit Agreement may bear interest at a rate per annum equal to:(a) the Alternate Base Rate, or ABR (defined as the higher of (i) therate of interest publicly announced by JPMorgan as its prime rate in effect atits principal office in New York City and (ii) the federal funds effectiverate from time to time plus 0.50%), plus 4.75% or

 

13

----

Tableof Contents

 

(b) the LIBO Rate(defined as the greater of (i) the rate at which Eurodollar deposits inthe London interbank market for one, two or three months, as selected by theborrower, are quoted on the Telerate screen and (ii) 3.50%) as adjustedfor actual statutory reserve requirements for Eurocurrency liabilities, plus6.0%. In the case of term loans bearing interest based upon ABR, interest ispayable quarterly in arrears. In the case of term loans bearing interest basedupon the LIBO rate, interest is payable on the last day of each relevantinterest period and, in the case of any interest period longer than threemonths, on each successive date three months after the first day of suchinterest period. The Term Credit Agreement contains representations,warranties, covenants, events of default and indemnities that are customary foragreements of this type and are substantially the same as the terms included inthe EXCO Operating credit agreement.

 

At September 30,2008, the interest rate on the Term Credit Agreement was 9.5% using the 3.50% LIBOrate floor. At September 30, 2008 we had $300.0 million of outstandingindebtedness under the Term Credit Agreement.

 

*EXCO Resources credit agreement*

 

On February 20,2008, we entered into the first amendment to our Second Amended and RestatedCredit Agreement, or, as amended to date, the EXCO Resources Credit Agreement.The primary change to the EXCO Resources Credit Agreement included anincrease in the borrowing base from $0.9 billion to approximately $1.2 billion,principally to reflect the assets acquired in the Appalachian Acquisition. On July 14,2008, we entered into the second amendment to the EXCO Resources Credit Agreement.This amendment, which was effective June 30, 2008, permitted the paymentof cash dividends in connection with the exercise of any right to convert ourpreferred stock into common stock without compliance with certain limitationson restricted payments. In addition, the leverage ratio covenant, as defined inthe agreement, was changed to provide that EXCO will not permit such ratio (i) asof the end of any fiscal quarter ending on or after June 30, 2008 and onor before December 31, 2008 to be greater than 4.00 to 1.00, (ii) asof the end of the fiscal quarter ending on March 31, 2009 to be greaterthan 3.75 to 1.00 and (iii) as the end of any fiscal quarter ending on orafter June 30, 2009 to be greater than 3.50 to 1.00. Prior to theamendment, the leverage ratio was not permitted to be greater than 3.50 to1.00. The other financial covenants and all other terms, including maturitydate and borrowing base, contained within the EXCO Resources Credit Agreementremained unchanged.

 

The borrowing baseis redetermined semi-annually with EXCO and the lenders having the right tointerim unscheduled redeterminations in certain circumstances, such as assetacquisitions or sales. Scheduled redeterminations are on or about April 1and October 1 of each year. The interest rate ranges from LIBOR plus 100bps to LIBOR plus 175 bps depending upon borrowing base usage. The facilityalso includes an ABR pricing alternative ranging from ABR plus 0 bps to ABRplus 75 bps depending upon borrowing base usage. Borrowings under the EXCOResources Credit Agreement are collateralized by a first lien mortgageproviding a security interest in our oil and natural gas properties. EXCO hasalso agreed to have in place derivative financial instruments covering no morethan 80% of its forecasted production from total proved reserves (as defined)for each of the first two years of the forthcoming five year period and 70% foreach of the third through fifth years of the forthcoming five year period. EXCOis required to have in place mortgages covering 80% of the engineered value ofits Borrowing Base Properties (as defined). The foregoing description is notcomplete and is qualified in its entirety by the EXCO Resources CreditAgreement. As of September 30, 2008, EXCO was in compliance with thefinancial covenants contained in the EXCO Resources Credit Agreement whichrequire that we:

 

·      maintain a consolidated current ratio (asdefined) of at least 1.0 to 1.0 as of the end of any fiscal quarter ending onor after September 30, 2007;

 

·      not permit our ratio of consolidatedfunded indebtedness (as defined) to consolidated EBITDAX (as defined) to begreater than (i) 4.0 to 1.0 at the end of any fiscal quarter ending on orafter September 30, 2008 and on or before December 31, 2008, (ii) 3.75to 1.0 at the end of the fiscal quarter ending on March 31, 2009 and (iii) 3.5to 1.0 beginning with the quarter ending June 30, 2009 and each quarterthereafter; and

 

·      maintain a consolidated EBITDAX toconsolidated interest expense (as defined) ratio of at least 2.5 to 1.0 at theend of any fiscal quarter ending on or after September 30, 2007.

 

At September 30,2008 and December 31, 2007, the six month LIBO rates were 4.3% and 4.6%,respectively, which resulted in interest rates of approximately 5.8% and 5.8%, respectively.At September 30, 2008 and December 31, 2007, we had $1.0 billion and$560.5 million, respectively, of outstanding indebtedness under the EXCO ResourcesCredit Agreement. The next scheduled borrowing base redetermination date is April 1,2009.

 

*EXCO Operating Credit Agreement*

 

TheEXCO Operating Credit Agreement has a borrowing base of $1.3 billion. Theborrowing base is scheduled to be

 

14

----

Tableof Contents

 

redetermined on asemi-annual basis, with EXCO Operating and the lenders having the right tointerim unscheduled redeterminations in certain circumstances. Scheduledredeterminations will be made on or about April 1 and October 1 ofeach year. The EXCO Operating Credit Agreement is secured by a first prioritylien on the assets of EXCO Operating, including 100% of the equity of EXCOOperating’s subsidiaries, and is guaranteed by all existing and futuresubsidiaries of EXCO Operating. EXCO Operating has agreed to have in placederivative financial instruments covering no more than 80% of the “forecastedproduction from total proved reserves” (as defined) for 2008 and 70% of theforecasted production from total proved reserves for 2009 through 2011. On July 14,2008, EXCO Operating entered into a second amendment to the EXCO OperatingCredit Agreement to (i) allow EXCO Operating to incur up to $500.0 millionof indebtedness under the Term Credit Agreement and (ii) exclude drawingsunder the Term Credit Agreement from the consolidated current ratio, as definedin the EXCO Operating Credit Agreement through December 31, 2008. The foregoingdescription is not complete and is qualified in its entirety by the EXCOOperating Credit Agreement. As of September 30, 2008, EXCO Operating wasin compliance with the financial covenants contained in the EXCO OperatingCredit Agreement, which require that EXCO Operating:

 

·      maintain a consolidated current ratio (asdefined) of at least 1.0 to 1.0 at the end of any fiscal quarter, beginningwith the quarter ended September 30, 2007;

 

·      not permit our ratio of consolidatedindebtedness to consolidated EBITDAX (as defined) to be greater than 3.5 to 1.0at the end of each fiscal quarter, beginning with the quarter ended September 30,2007; and

 

·      not permit our interest coverage ratio(as defined) to be less than 2.5 to 1.0 at the end of each fiscal quarter,beginning with the quarter ended September 30, 2007.

 

TheEXCO Operating Credit Agreement contains representations, warranties,covenants, events of default and indemnities customary for agreements of thistype. The EXCO Operating Credit Agreement matures March 30, 2012. Interestunder the EXCO Operating Credit Agreement ranges from LIBOR plus 100 bps to 175bps. The facility also includes an ABR pricing alternative ranging from ABRplus 0 bps to ABR plus 75 bps.

 

At September 30,2008 and December 31, 2007, the six month LIBO rates were 4.3% and 4.6%,respectively, which resulted in interest rates of approximately 6.1% and 6.1%, respectively.At September 30, 2008 and December 31, 2007, we had $1.2 billion and$1.1 billion, respectively, of outstanding indebtedness under the EXCOOperating Credit Agreement. The next scheduled borrowing base redeterminationdate is April 1, 2009.

 

*7 1/4%senior notes due January 15, 2011*

 

As of September 30,2008 and December 31, 2007, $444.7 million and $444.7 million, respectively,in principal were outstanding on our 7 1/4% senior notes due January 15,2011, or Senior Notes. The unamortized premium on the Senior Notes at September 30,2008 and December 31, 2007 was $8.4 million and $11.0 million,respectively. The estimated fair value of the Senior Notes, based on quotedmarket prices for the Senior Notes, was $435.8 million on September 30,2008.

 

**12.****         ****Income Taxes**

 

Eachquarter we evaluate our estimated annual effective income tax rate based oncurrent and forecasted business results and enacted tax laws. We apply this taxrate to our ordinary income or loss to calculate our estimated tax liability orbenefit. For the nine months ended September 30, 2008 our cumulativefinancial operating losses increased due to the third quarter ceiling testwrite-down of the carrying value of our oil and natural gas properties. As aresult of the cumulative financial operating losses, measured in accordancewith GAAP, we have provided a valuation allowance of approximately $63.3 millionto reduce our net deferred tax asset balance at September 30, 2008 to zero.The valuation allowance does not impact future utilization of the underlyingtax attributes.

 

**13.****         ****Operating segments**

 

Wefollow SFAS No. 131, “Disclosures About Segments of an Enterprise andRelated Information,” or SFAS No. 131. Identification of operating segments isbased principally upon differences in the types and distribution channel of products.In prior periods, we only had operations in one industry segment, that being theoil and natural gas exploration and production industry. Beginning in thesecond quarter of 2008, we made a strategic shift in the focus on andallocation of resources to our midstream division. The decision to designateour midstream division as a separate business segment was due primarily torecent pipeline acquisitions and increased third party throughput resultingfrom capital projects specifically designed to grow this segment of our business.Our reportable segments now consist of exploration and production and

 

15

----

Tableof Contents

 

midstream. Ourexploration and production operational segment and midstream segment aremanaged separately because of the nature of their products and services. Theexploration and production segment is responsible for acquisition, developmentand production of oil and natural gas. The midstream segment is responsible forpurchasing, gathering, transporting, processing and treating natural gas. Weevaluate the performance of our operating segments based on segment profits,which includes segment revenues, excluding the gain (loss) on derivativefinancial instruments, from external and internal customers and segment costsand expenses.

 

Summarized financial information concerning ourreportable segments is shown in the following table:

 

| ** **                                          | ** ** | **Exploration and** | ** ** | ** **    | ** ** | **Intercompany** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|---------------|------------|------------------|------------|------------------|------------|
| **(in thousands)**                             | ** ** | **production**           | ** ** | **Midstream** | ** ** | **eliminations** | ** ** | **total**        | ** ** |
| For the three months ended September 30, 2008: |       |                     |       |          |       |             |       |             |       |
| Total revenues                                      |       | $                        | 404,204    |          | $          | 49,258           |       | $                | (22,254    | ) | $ | 431,208 |   |
| Intersegment revenues                               |       | —                   |       | (22,254       | )          | 22,254           |       | —           |       |
| Third party revenues                                |       | $                        | 404,204    |          | $          | 27,004           |       | $                | —     |   | $ | 431,208 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| Segment profit                                      |       | $                        | 337,553    |          | $          | 7,848            |       | $                | (9,664     | ) | $ | 335,737 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| For the three months ended September 30, 2007: |       |                     |       |          |       |             |       |             |       |
| Total revenues                                      |       | $                        | 230,733    |          | $          | 12,274           |       | $                | (7,842     | ) | $ | 235,165 |   |
| Intersegment revenues                               |       | —                   |       | (7,842        | )          | 7,842            |       | —           |       |
| Third party revenues                                |       | $                        | 230,733    |          | $          | 4,432            |       | $                | —     |   | $ | 235,165 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| Segment profit                                      |       | $                        | 182,970    |          | $          | 6,634            |       | $                | (6,438     | ) | $ | 183,166 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| For the nine months ended September 30, 2008:  |       |                     |       |          |       |             |       |             |       |
| Total revenues                                      |       | $                        | 1,161,474  |          | $          | 105,915          |       | $                | (44,063    | ) | $ | 1,223,326 |   |
| Intersegment revenues                               |       | —                   |       | (44,063       | )          | 44,063           |       | —           |       |
| Third party revenues                                |       | $                        | 1,161,474  |          | $          | 61,852           |       | $                | —     |   | $ | 1,223,326 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| Segment profit                                      |       | $                        | 973,453    |          | $          | 26,915           |       | $                | (24,734    | ) | $ | 975,634 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| For the nine months ended September 30, 2007:  |       |                     |       |          |       |             |       |             |       |
| Total revenues                                      |       | $                        | 617,806    |          | $          | 33,603           |       | $                | (19,414    | ) | $ | 631,995 |   |
| Intersegment revenues                               |       | —                   |       | (19,414       | )          | 19,414           |       | —           |       |
| Third party revenues                                |       | $                        | 617,806    |          | $          | 14,189           |       | $                | —     |   | $ | 631,995 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| Segment profit                                      |       | $                        | 489,795    |          | $          | 17,615           |       | $                | (14,765    | ) | $ | 492,645 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| As of September 30, 2008:                      |       |                     |       |          |       |             |       |             |       |
| Total assets                                        |       | $                        | 5,594,388  |          | $          | 420,883          |       | $                | —     |   | $ | 6,015,271 |   |
|                                                |       |                     |       |          |       |             |       |             |       |
| As of December 31, 2007:                       |       |                     |       |          |       |             |       |             |       |
| Total assets                                        |       | $                        | 5,640,034  |          | $          | 315,737          |       | $                | —     |   | $ | 5,955,771 |   |

 

The followingtable reconciles the segment profits reported above to income (loss) beforeincome taxes:

 

| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Segment profits                                       |       | $                                | 335,737    |                            | $          | 183,166 |   | $ | 975,634 |   | $ | 492,645 |   |
| Gain (loss) on derivative financial instruments       |       | 900,313                          |       | 98,252                          |       | (103,534 | ) | 80,130 |   |
| Depreciation, depletion and amortization              |       | (126,207                         | )          | (109,325                        | )          | (346,705 | ) | (265,797 | ) |
| Write-down of oil and natural gas properties          |       | (1,193,105                       | )          | —                          |       | (1,193,105 | ) | — |   |
| Accretion of discount on asset retirement obligations |       | (1,482                           | )          | (1,324                          | )          | (4,271 | ) | (3,534 | ) |
| General and administrative                            |       | (21,002                          | )          | (17,010                         | )          | (63,286 | ) | (46,175 | ) |
| Interest                                              |       | (44,874                          | )          | (36,523                         | )          | (101,167 | ) | (146,775 | ) |
| Income (loss) before income taxes                     |       | $                                | (150,620   | )                               | $          | 117,236 |   | $ | (836,434 | ) | $ | 110,494 |   |

 

**14.****         ****Subsequent events**

 

On October 20, 2008, the respective group ofbanks reaffirmed the borrowing base of $1.2 billion and $1.3 billion under theEXCO Resources Credit Agreement and the EXCO Operating Credit Agreements,respectively.

 

16

----

Table of Contents

 

**15.****         ****Condensed****consolidating****financial statements**

 

Set forth below arecondensed consolidating financial statements of EXCO, the guarantorsubsidiaries and the non-guarantor subsidiaries. The Senior Notes are jointlyand severally guaranteed by some of our subsidiaries (referred to asGuarantor Subsidiaries). Each of theGuarantor Subsidiaries is wholly-owned subsidiaries of EXCO Resources, orResources, and the guarantees are unconditional as it relates to the assets ofthe Guarantor Subsidiaries. In 2007, certain subsidiaries, previously GuarantorSubsidiaries, were merged into and with Resources.

 

In connection with the 2007mergers discussed above, the condensed consolidating balance sheet as of December 31,2007 and the condensed consolidating statements of operations for the three andnine months ended September 30, 2007 and condensed consolidatingstatements of cash flows for the nine months ended September 30, 2007 havebeen restated to reflect the Guarantor Subsidiaries as if they had been part ofResources for all periods presented. In addition, we have adjusted the 2007consolidating financial information to reflect our designation of a midstreambusiness segment in the second quarter of 2008 and certain prior year amountshave been reclassified to conform to the current year presentation. All of theentities comprising our midstream segment are subsidiaries of EXCO Operating,which is a non-guarantor subsidiary. The columns designated as “Non-guarantorsubsidiaries” in the accompanying condensed consolidating financial statementsrepresent EXCO Operating and its subsidiaries. There are no other non-guarantorsubsidiaries.

 

The following financial information presentsconsolidating financial statements, which include:

 

·      Resources;

 

·      the guarantor subsidiaries on a combined basis;

 

·      the non-guarantor subsidiaries;

 

·      elimination entries necessary to consolidate Resources, the guarantorsubsidiaries and the non-guarantor subsidiaries; and

 

·      EXCO on a consolidated basis.

 

Investments in subsidiariesare accounted for using the equity method of accounting. The financialinformation for the guarantor and non-guarantor subsidiaries is presented on acombined basis. The elimination entries primarily eliminate investments in subsidiariesand intercompany balances and transactions.

 

17

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING BALANCESHEET**

**(Unaudited)**

 

**September 30, 2008**

 
| **(in thousands)**                                          | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                       |       |          |       |                        |       |                              |       |             |       |             |       |
| Current assets:                                                  |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                        |       | $             | 19,430     |                        | $          | 4,959                             |       | $                | 70,746     |             | $          | — |   | $ | 95,135 |   |
| Other current assets                                             |       | 81,993        |       | 42,586                      |       | 180,357                           |       | —           |       | 304,936          |       |
| Total current assets                                             |       | 101,423       |       | 47,545                      |       | 251,103                           |       | —           |       | 400,071          |       |
| Oil and natural gas properties (full cost  accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil and natural gas properties                          |       | 101,906       |       | 142,389                     |       | 297,597                           |       | —           |       | 541,892          |       |
| Proved developed and undeveloped oil and  natural gas properties |       | 1,172,068     |       | 968,075                     |       | 2,779,261                         |       | —           |       | 4,919,404        |       |
| Allowance for depreciation, depletion and  amortization          |       | (202,126      | )          | (129,915                    | )          | (497,331                          | )          | —           |       | (829,372         | )          |
| Oil and natural gas properties, net                              |       | 1,071,848     |       | 980,549                     |       | 2,579,527                         |       | —           |       | 4,631,924        |       |
| Gas gathering, office and field equipment,  net                  |       | 8,826         |       | 54,045                      |       | 403,666                           |       | —           |       | 466,537          |       |
| Deferred financing costs                                         |       | 20,366        |       | —                      |       | 7,958                             |       | —           |       | 28,324           |       |
| Derivative financial instruments                                 |       | 6,907         |       | —                      |       | 10,551                            |       | —           |       | 17,458           |       |
| Goodwill                                                         |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments in and advances to affiliates                        |       | 1,918,893     |       | —                      |       | —                            |       | (1,918,893       | )          | —           |       |
| Other assets, net                                                |       | —        |       | 680                         |       | 200                               |       | —           |       | 880              |       |
| Total assets                                                     |       | $             | 3,239,063  |                        | $          | 1,247,288                         |       | $                | 3,447,813  |             | $          | (1,918,893 | ) | $ | 6,015,271 |   |
|                                                             |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and stockholders’ equity**                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Current liabilities                                              |       | $             | 119,716    |                        | $          | 64,628                            |       | $                | 483,598    |             | $          | — |   | $ | 667,942 |   |
| Long-term debt                                                   |       | 1,467,164     |       | —                      |       | 1,218,485                         |       | —           |       | 2,685,649        |       |
| Deferred income taxes                                            |       | (43,267       | )          | 43,267                      |       | —                            |       | —           |       | —           |       |
| Other liabilities                                                |       | 59,772        |       | 73,649                      |       | 41,631                            |       | —           |       | 175,052          |       |
| Payable to parent                                                |       | (850,950      | )          | 924,413                     |       | (73,463                           | )          | —           |       | —           |       |
| Commitments and contingencies                                    |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Preferred stock                                                  |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Stockholders’ equity                                        |       | 2,486,628     |       | 141,331                     |       | 1,777,562                         |       | (1,918,893       | )          | 2,486,628        |       |
| Total liabilities and stockholders’ equity                  |       | $             | 3,239,063  |                        | $          | 1,247,288                         |       | $                | 3,447,813  |             | $          | (1,918,893 | ) | $ | 6,015,271 |   |
|                                                                  |            |               |            |                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

18

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATINGBALANCE SHEET**

 

**December 31, 2007**

 
| **(in thousands)**                                          | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                       |       |          |       |                        |       |                              |       |             |       |             |       |
| Current assets:                                                  |       |          |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                        |       | $             | 23,069     |                        | $          | 7,250                             |       | $                | 25,191     |             | $          | — |   | $ | 55,510 |   |
| Other current assets                                             |       | 76,261        |       | 31,601                      |       | 147,928                           |       | —           |       | 255,790          |       |
| Total current assets                                             |       | 99,330        |       | 38,851                      |       | 173,119                           |       | —           |       | 311,300          |       |
| Oil and natural gas properties (full cost  accounting method):   |       |          |       |                        |       |                              |       |             |       |             |       |
| Unproved oil and natural gas properties                          |       | 92,680        |       | 17,142                      |       | 224,981                           |       | —           |       | 334,803          |       |
| Proved developed and undeveloped oil and  natural gas properties |       | 1,192,337     |       | 899,745                     |       | 2,833,971                         |       | —           |       | 4,926,053        |       |
| Allowance for depreciation, depletion and  amortization          |       | (112,548      | )          | (84,288                     | )          | (303,657                          | )          | —           |       | (500,493         | )          |
| Oil and natural gas properties, net                              |       | 1,172,469     |       | 832,599                     |       | 2,755,295                         |       | —           |       | 4,760,363        |       |
| Gas gathering, office and field equipment,  net                  |       | 7,449         |       | 32,665                      |       | 305,294                           |       | —           |       | 345,408          |       |
| Advance on pending acquisition                                   |       | 39,500        |       | —                      |       | —                            |       | —           |       | 39,500           |       |
| Deferred financing costs                                         |       | 7,619         |       | —                      |       | 12,787                            |       |             |       | 20,406           |       |
| Derivative financial instruments                                 |       | 851           |       | —                      |       | 1,640                             |       | —           |       | 2,491            |       |
| Goodwill                                                         |       | 110,800       |       | 164,469                     |       | 194,808                           |       | —           |       | 470,077          |       |
| Investments in and advances to affiliates                        |       | 2,525,487     |       | —                      |       | —                            |       | (2,525,487       | )          | —           |       |
| Other assets, net                                                |       | —        |       | 668                         |       | 5,558                             |       | —           |       | 6,226            |       |
| Total assets                                                     |       | $             | 3,963,505  |                        | $          | 1,069,252                         |       | $                | 3,448,501  |             | $          | (2,525,487 | ) | $ | 5,955,771 |   |
|                                                             |       |          |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and shareholders’ equity**                    |       |          |       |                        |       |                              |       |             |       |             |       |
| Current liabilities                                              |       | $             | 118,522    |                        | $          | 35,959                            |       | $                | 123,686    |             | $          | — |   | $ | 278,167 |   |
| Long-term debt                                                   |       | 1,016,171     |       | —                      |       | 1,083,000                         |       | —           |       | 2,099,171        |       |
| Deferred income taxes                                            |       | 105,531       |       | 165,867                     |       | —                            |       | —           |       | 271,398          |       |
| Other liabilities                                                |       | 77,189        |       | 67,197                      |       | 54,629                            |       | —           |       | 199,015          |       |
| Payable to parent                                                |       | (461,928      | )          | 468,607                     |       | (6,679                            | )          | —           |       | —           |       |
| Commitments and contingencies                                    |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Preferred stock                                                  |       | 1,992,278     |       | —                      |       | —                            |       | —           |       | 1,992,278        |       |
| Shareholders’ equity                                        |       | 1,115,742     |       | 331,622                     |       | 2,193,865                         |       | (2,525,487       | )          | 1,115,742        |       |
| Total liabilities and shareholders’ equity                  |       | $             | 3,963,505  |                        | $          | 1,069,252                         |       | $                | 3,448,501  |             | $          | (2,525,487 | ) | $ | 5,955,771 |   |

 

19

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the three months ended September 30,2008**

** **
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                         |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                    |       | $             | 116,326    |             | $          | 58,473           |       | $                | 227,585    |             | $          | — |   | $ | 402,384 |   |
| Midstream                                              |       | —        |       | —           |       | 27,004           |       | —           |       | 27,004           |       |
| Gain on derivative financial instruments               |       | 385,132       |       | 50,456           |       | 464,725          |       | —           |       | 900,313          |       |
| Other income (loss)                                    |       | 7,157         |       | (6,217           | )          | 880              |       | —           |       | 1,820            |       |
| Equity in earnings of subsidiaries                     |       | (255,828      | )          | —           |       | —           |       | 255,828          |       | —           |       |
| Total revenues and other income                        |       | 252,787       |       | 102,712          |       | 720,194          |       | 255,828          |       | 1,331,521        |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                                |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                         |       | 19,625        |       | 9,473            |       | 33,881           |       | —           |       | 62,979           |       |
| Midstream operating expenses                           |       | —        |       | —           |       | 28,820           |       |             |       | 28,820           |       |
| Gathering and transportation                           |       | 56            |       | 832              |       | 2,784            |       | —           |       | 3,672            |       |
| Depreciation, depletion and amortization               |       | 39,919        |       | 16,856           |       | 69,432           |       | —           |       | 126,207          |       |
| Writedown of oil and natural gas properties            |       | 198,440       |       | 359,350          |       | 635,315          |       | —           |       | 1,193,105        |       |
| Accretion of discount on asset retirement  obligations |       | 417           |       | 723              |       | 342              |       | —           |       | 1,482            |       |
| General and administrative                             |       | 11,688        |       | 4,814            |       | 4,500            |       | —           |       | 21,002           |       |
| Interest                                               |       | 19,530        |       | —           |       | 25,344           |       | —           |       | 44,874           |       |
| Total costs and expenses                               |       | 289,675       |       | 392,048          |       | 800,418          |       | —           |       | 1,482,141        |       |
| Income (loss) before income taxes                      |       | (36,888       | )          | (289,336         | )          | (80,224          | )          | 255,828          |       | (150,620         | )          |
| Income tax expense (benefit)                           |       | 109,441       |       | (113,732         | )          | —           |       | —           |       | (4,291           | )          |
| Net income (loss)                                      |       | (146,329      | )          | (175,604         | )          | (80,224          | )          | 255,828          |       | (146,329         | )          |
| Preferred stock dividends                              |       | 6,997         |       | —           |       | —           |       | —           |       | 6,997            |       |
| Net income (loss) available to common  shareholders    |       | $             | (153,326   | )                | $          | (175,604         | )          | $                | (80,224    | )                | $          | 255,828 |   | $ | (153,326 | ) |

 

20

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the nine months ended September 30,2008**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                         |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                    |       | $             | 336,290    |             | $          | 167,819          |       | $                | 651,869    |             | $          | — |   | $ | 1,155,978 |   |
| Midstream                                              |       | —        |       | —           |       | 61,852           |       | —           |       | 61,852           |       |
| Loss on derivative financial instruments               |       | (28,618       | )          | (9,478           | )          | (65,438          | )          | —           |       | (103,534         | )          |
| Other income (loss)                                    |       | 22,294        |       | (18,865          | )          | 2,067            |       | —           |       | 5,496            |       |
| Equity in earnings of subsidiaries                     |       | (606,593      | )          | —           |       | —           |       | 606,593          |       | —           |       |
| Total revenues and other income                        |       | (276,627      | )          | 139,476          |       | 650,350          |       | 606,593          |       | 1,119,792        |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                                |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                         |       | 57,734        |       | 26,653           |       | 93,131           |       | —           |       | 177,518          |       |
| Midstream operating expenses                           |       | —        |       | —           |       | 59,671           |       |             |       | 59,671           |       |
| Gathering and transportation                           |       | 173           |       | 2,246            |       | 8,084            |       | —           |       | 10,503           |       |
| Depreciation, depletion and amortization               |       | 91,456        |       | 48,966           |       | 206,283          |       | —           |       | 346,705          |       |
| Writedown of oil and natural gas properties            |       | 198,440       |       | 359,350          |       | 635,315          |       | —           |       | 1,193,105        |       |
| Accretion of discount on asset retirement  obligations |       | 1,232         |       | 2,014            |       | 1,025            |       | —           |       | 4,271            |       |
| General and administrative                             |       | 36,543        |       | 13,243           |       | 13,500           |       | —           |       | 63,286           |       |
| Interest                                               |       | 51,525        |       | —           |       | 49,642           |       | —           |       | 101,167          |       |
| Total costs and expenses                               |       | 437,103       |       | 452,472          |       | 1,066,651        |       | —           |       | 1,956,226        |       |
| Income (loss) before income taxes                      |       | (713,730      | )          | (312,996         | )          | (416,301         | )          | 606,593          |       | (836,434         | )          |
| Income tax benefit                                     |       | (141,648      | )          | (122,704         | )          | —           |       | —           |       | (264,352         | )          |
| Net income (loss)                                      |       | (572,082      | )          | (190,292         | )          | (416,301         | )          | 606,593          |       | (572,082         | )          |
| Preferred stock dividends                              |       | 76,997        |       | —           |       | —           |       | —           |       | 76,997           |       |
| Net income (loss) available to common  shareholders    |       | $             | (649,079   | )                | $          | (190,292         | )          | $                | (416,301   | )                | $          | 606,593 |   | $ | (649,079 | ) |

 

21

----

Tableof Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the three months ended September 30,2007**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                         |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                    |       | $             | 59,102     |             | $          | 27,974           |       | $                | 141,240    |             | $          | — |   | $ | 228,316 |   |
| Midstream                                              |       | —        |       | —           |       | 4,432            |       | —           |       | 4,432            |       |
| Gain on derivative financial instruments               |       | 16,528        |       | 9,620            |       | 72,104           |       | —           |       | 98,252           |       |
| Other income (loss)                                    |       | 9,180         |       | (7,104           | )          | 341              |       | —           |       | 2,417            |       |
| Equity in earnings of subsidiaries                     |       | 81,349        |       | —           |       | —           |       | (81,349          | )          | —           |       |
| Total revenues and other income                        |       | 166,159       |       | 30,490           |       | 218,117          |       | (81,349          | )          | 333,417          |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                                |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                         |       | 12,924        |       | 5,839            |       | 25,613           |       | —           |       | 44,376           |       |
| Midstream operating expenses                           |       | —        |       | —           |       | 4,236            |       | —           |       | 4,236            |       |
| Gathering and transportation                           |       | 158           |       | 435              |       | 2,794            |       | —           |       | 3,387            |       |
| Depreciation, depletion and amortization               |       | 19,504        |       | 10,768           |       | 79,053           |       | —           |       | 109,325          |       |
| Accretion of discount on asset retirement  obligations |       | 439           |       | 486              |       | 399              |       | —           |       | 1,324            |       |
| General and administrative                             |       | 10,442        |       | 2,068            |       | 4,500            |       | —           |       | 17,010           |       |
| Interest                                               |       | 16,293        |       | —           |       | 20,230           |       | —           |       | 36,523           |       |
| Total costs and expenses                               |       | 59,760        |       | 19,596           |       | 136,825          |       | —           |       | 216,181          |       |
| Income (loss) before income taxes                      |       | 106,399       |       | 10,894           |       | 81,292           |       | (81,349          | )          | 117,236          |       |
| Income tax expense                                     |       | 49,937        |       | 10,837           |       | —           |       | —           |       | 60,774           |       |
| Net income (loss)                                      |       | 56,462        |       | 57               |       | 81,292           |       | (81,349          | )          | 56,462           |       |
| Preferred stock dividends                              |       | 45,733        |       | —           |       | —           |       | —           |       | 45,733           |       |
| Net income (loss) available to common shareholders     |       | $             | 10,729     |             | $          | 57               |       | $                | 81,292     |             | $          | (81,349 | ) | $ | 10,729 |   |

 

22

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**(Unaudited)**

 

**For the nine months ended September 30,2007**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Guarantor**    | ** ** | **guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| **(in thousands)**                                | ** ** | **Resources** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues and other income:**                         |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas                                    |       | $             | 146,066    |             | $          | 90,030           |       | $                | 374,131    |             | $          | — |   | $ | 610,227 |   |
| Midstream                                              |       | —        |       | —           |       | 14,189           |       | —           |       | 14,189           |       |
| Gain (loss) on derivative financial  instruments       |       | 17,736        |       | (4,886           | )          | 67,280           |       | —           |       | 80,130           |       |
| Other income (loss)                                    |       | 27,394        |       | (21,743          | )          | 1,928            |       | —           |       | 7,579            |       |
| Equity in earnings of subsidiaries                     |       | 61,721        |       | —           |       | —           |       | (61,721          | )          | —           |       |
| Total revenues and other income                        |       | 252,917       |       | 63,401           |       | 457,528          |       | (61,721          | )          | 712,125          |       |
|                                                   |       |          |       |             |       |             |       |             |       |             |       |
| **Costs and expenses:**                                |       |          |       |             |       |             |       |             |       |             |       |
| Oil and natural gas production                         |       | 32,352        |       | 17,265           |       | 71,732           |       | —           |       | 121,349          |       |
| Midstream operating expenses                           |       | —        |       | —           |       | 11,339           |       | —           |       | 11,339           |       |
| Gathering and transportation                           |       | 461           |       | 1,007            |       | 5,194            |       | —           |       | 6,662            |       |
| Depreciation, depletion and amortization               |       | 45,585        |       | 31,139           |       | 189,073          |       | —           |       | 265,797          |       |
| Accretion of discount on asset retirement  obligations |       | 1,075         |       | 1,439            |       | 1,020            |       | —           |       | 3,534            |       |
| General and administrative                             |       | 25,607        |       | 7,400            |       | 13,168           |       | —           |       | 46,175           |       |
| Interest                                               |       | 45,843        |       | —           |       | 100,932          |       | —           |       | 146,775          |       |
| Total costs and expenses                               |       | 150,923       |       | 58,250           |       | 392,458          |       | —           |       | 601,631          |       |
| Income (loss) before income taxes                      |       | 101,994       |       | 5,151            |       | 65,070           |       | (61,721          | )          | 110,494          |       |
| Income tax expense                                     |       | 50,343        |       | 8,500            |       | —           |       | —           |       | 58,843           |       |
| Net income (loss)                                      |       | 51,651        |       | (3,349           | )          | 65,070           |       | (61,721          | )          | 51,651           |       |
| Preferred stock dividends                              |       | 97,968        |       | —           |       | —           |       | —           |       | 97,968           |       |
| Net loss available to common shareholders              |       | $             | (46,317    | )                | $          | (3,349           | )          | $                | 65,070     |             | $          | (61,721 | ) | $ | (46,317 | ) |

 

23

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

**(Unaudited)**

 

**For the nine months ended September 30,2008**

 
| **(in thousands)**                                                       | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating Activities:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by operating activities                                     |       | $             | 219,779    |                        | $          | 89,856                            |       | $                | 502,382    |             | $          | — |   | $ | 812,017 |   |
| **Investing Activities:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to oil and natural gas  properties, gathering systems and equipment |       | (160,259      | )          | (156,431                    | )          | (424,964                          | )          | —           |       | (741,654         | )          |
| Property and midstream acquisitions                                           |       | (400,660      | )          | (437                        | )          | (344,122                          | )          | —           |       | (745,219         | )          |
| Proceeds from dispositions of property and  equipment                         |       | 1,288         |       | 282                         |       | 166                               |       |             |       | 1,736            |       |
| Advance on pending acquisition                                                |       | —        |       | —                      |       | —                            |       | —           |       | —           |       |
| Advances/investments with affiliates                                          |       | 3,179         |       | 64,439                      |       | (67,618                           | )          | —           |       | —           |       |
| Net cash used in investing activities                                         |       | (556,452      | )          | (92,147                     | )          | (836,538                          | )          | —           |       | (1,485,137       | )          |
| **Financing Activities:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Borrowings under credit agreements                                            |       | 750,000       |       | —                      |       | 315,185                           |       | —           |       | 1,065,185        |       |
| Repayments under credit agreements                                            |       | (296,500      | )          | —                      |       | (179,700                          | )          | —           |       | (476,200         | )          |
| Borrowings under senior unsecured credit  term agreement                      |       | —        |       | —                      |       | 300,000                           |       | —           |       | 300,000          |       |
| Settlements of derivative financial instruments  with a financing element     |       | (51,399       | )          | —                      |       | (45,105                           | )          | —           |       | (96,504          | )          |
| Proceeds from issuance of common stock                                        |       | 14,465        |       | —                      |       | —                            |       | —           |       | 14,465           |       |
| Payment of preferred stock dividends                                          |       | (82,827       | )          | —                      |       | —                            |       | —           |       | (82,827          | )          |
| Deferred financing costs and other                                            |       | (707          | )          | —                      |       | (10,667                           | )          | —           |       | (11,374          | )          |
| Net cash provided by financing activities                                     |       | 333,032       |       | —                      |       | 379,713                           |       | —           |       | 712,745          |       |
| Net (decrease) increase in cash                                               |       | (3,641        | )          | (2,291                      | )          | 45,557                            |       | —           |       | 39,625           |       |
| Cash at beginning of the period                                               |       | 23,069        |       | 7,250                       |       | 25,191                            |       | —           |       | 55,510           |       |
| Cash at end of period                                                         |       | $             | 19,428     |                        | $          | 4,959                             |       | $                | 70,748     |             | $          | — |   | $ | 95,135 |   |
|                                                                               |            |               |            |                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |

 

24

----

Table of Contents

 

**EXCO RESOURCES, INC.**

 

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

**(Unaudited)**

 

**For the nine months ended September 30,2007**

 
| **(in thousands)**                                                       | ** ** | **Resources** | ** ** | **Guarantor  subsidiaries** | ** ** | **Non-  guarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Operating Activities:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by operating activities                                     |       | $             | 66,699     |                        | $          | 52,806                            |       | $                | 260,793    |             | $          | — |   | $ | 380,298 |   |
| **Investing Activities:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Additions to oil and natural gas  properties, gathering systems and equipment |       | (809,804      | )          | (36,295                     | )          | (1,667,764                        | )          | —           |       | (2,513,863       | )          |
| Proceeds from dispositions of property and  equipment                         |       | 481,744       |       | 34                          |       | 2,033                             |       | —           |       | 483,811          |       |
| Advance on pending sale                                                       |       | 1,500         |       | —                      |       |                              |       | —           |       | 1,500            |       |
| Advances/investments with affiliates                                          |       | (1,665,863    | )          | (11,549                     | )          | 1,677,412                         |       | —           |       | —           |       |
| Net cash provided by (used in) investing  activities                          |       | (1,992,423    | )          | (47,810                     | )          | 11,681                            |       | —           |       | (2,028,552       | )          |
| **Financing Activities:**                                                     |       |          |       |                        |       |                              |       |             |       |             |       |
| Borrowings under credit agreements                                            |       | 838,000       |       | —                      |       | 1,170,000                         |       | —           |       | 2,008,000        |       |
| Repayments under credit agreements                                            |       | (693,000      | )          | —                      |       | (1,420,532                        | )          | —           |       | (2,113,532       | )          |
| Settlement of derivative financial  instrument with a financing element       |       | (5,383        | )          | —                      |       | (2,637                            | )          | —           |       | (8,020           | )          |
| Proceeds from issuance of common stock                                        |       | 3,175         |       | —                      |       | —                            |       | —           |       | 3,175            |       |
| Proceeds from issuance of preferred stock                                     |       | 2,000,000     |       | —                      |       | —                            |       | —           |       | 2,000,000        |       |
| Payments for preferred stock issuance costs                                   |       | (7,501        | )          | —                      |       | —                            |       | —           |       | (7,501           | )          |
| Payment of preferred stock dividends                                          |       | (92,134       | )          | —                      |       | —                            |       | —           |       | (92,134          | )          |
| Deferred financing costs and other                                            |       | (7,850        | )          | —                      |       | (9,909                            | )          | —           |       | (17,759          | )          |
| Net cash provided by (used in) financing  activities                          |       | 2,035,307     |       | —                      |       | (263,078                          | )          | —           |       | 1,772,229        |       |
| Net increase in cash                                                          |       | 109,583       |       | 4,996                       |       | 9,396                             |       | —           |       | 123,975          |       |
| Cash at the beginning of the period                                           |       | 6,522         |       | 6,233                       |       | 10,067                            |       | —           |       | 22,822           |       |
| Cash at end of period                                                         |       | $             | 116,105    |                        | $          | 11,229                            |       | $                | 19,463     |             | $          | — |   | $ | 146,797 |   |

 

25

----

Table of Contents

 

***Item2.******   Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

**Forward-looking statements**

 

This quarterly reportcontains forward-looking statements, as defined in Section 27A of theSecurities Act of 1933, as amended, or the Securities Act, and Section 21Eof the Securities Exchange Act of 1934, as amended, or the Exchange Act. Theseforward-looking statements relate to, among other things, the following:

 

·      our future financial and operating performance and results;

 

·      our business strategy;

 

·      market prices;

 

·      our future derivative financial instrument activities; and

 

·      our plans and forecasts.

 

We have based theseforward-looking statements on our current assumptions, expectations andprojections about future events.

 

We use the words “may,” “expect,”“anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” andother similar words to identify forward-looking statements. You should readstatements that contain these words carefully because they discuss futureexpectations, contain projections of results of operations or of our financialcondition and/or state other “forward-looking” information. We do not undertakeany obligation to update or revise publicly any forward-looking statements,except as required by law. These statements also involve risks anduncertainties that could cause our actual results or financial condition tomaterially differ from our expectations in this quarterly report, including,but not limited to:

 

·      fluctuations in prices of oil and natural gas;

 

·      imports of foreign oil and natural gas,including liquefied natural gas;

 

·      future capital requirements and availabilityof financing;

 

·      continued disruption of credit and capitalmarkets and the ability of financial institutions to honor their commitments,such as the events which occurred during the third quarter of 2008 andthereafter, for an extended period of time;

 

·      estimates of reserves and economicassumptions used in connection with our acquisitions;

 

·      geological concentration of our reserves;

 

·      risks associated with drilling and operatingwells;

 

·      exploratory risks, including our Marcellusand Huron shale plays in Appalachia and the Haynesville/Bossier shale play inEast Texas/North Louisiana;

 

·      risks associated with the operation ofnatural gas pipelines and gathering systems;

 

·      discovery, acquisition, development andreplacement of oil and natural gas reserves;

 

·      cash flow and liquidity;

 

·      timing and amount of future production of oiland natural gas;

 

·      availability of drilling and productionequipment;

 

26

----

Table of Contents

 

·      marketing of oil and natural gas;

 

·      developments in oil-producing and naturalgas-producing countries;

 

·      title to our properties;

 

·      litigation;

 

·      competition;

 

·      general economic conditions, including costsassociated with drilling and operations of our properties;

 

·      governmental regulations;

 

·      receipt and collectability of amounts owed tous by purchasers of our production and counterparties to our derivativefinancial instruments;

 

·      deciding whether or not to enter intoderivative financial instruments;

 

·      events similar to those of September 11,2001;

 

·      actions of third party co-owners of interestsin properties in which we also own an interest;

 

·      fluctuations in interest rates; and

 

·      our ability to effectively integratecompanies and properties that we acquire.

 

We believe that it isimportant to communicate our expectations of future performance to ourinvestors. However, events may occur in the future that we are unable toaccurately predict, or over which we have no control. You are cautioned not toplace undue reliance on a forward-looking statement. When considering ourforward-looking statements, keep in mind the risk factors and other cautionarystatements in this quarterly report, and the risk factors included in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

During the third quarter of2008, and thereafter, substantial volatility occurred in global credit,securities and oil and natural gas markets. The federal government, theSecurities and Exchange Commission, or SEC, and the Financial Accounting StandardsBoard, or FASB, have implemented measures to attempt to reduce this volatilityand provide liquidity to financial institutions. Our exposure to thesedisruptions and the duration of this global economic crisis could have amaterial impact on our results of operations and capital resources andliquidity.

 

Our revenues, operatingresults, financial condition and ability to borrow funds or obtain additionalcapital depend substantially on prevailing prices for oil and natural gas, theavailability of capital from our revolving credit facilities and liquidity fromcapital markets. Declines in oil or natural gas prices may have a materialadverse affect on our financial condition, liquidity, ability to obtainfinancing and operating results. Lower oil or natural gas prices also mayreduce the amount of oil or natural gas that we can produce economically. Adecline in oil or natural gas prices could have a material adverse effect onthe estimated value and estimated quantities of our oil and natural gas reserves,our ability to fund our operations and our financial condition, cash flow,results of operations and access to capital. Historically, oil and natural gasprices and markets have been volatile, with prices fluctuating widely, and theyare likely to continue to be volatile.

 

**Overview**

 

We are an independent oiland natural gas company engaged in the acquisition, development andexploitation of onshore North American oil and natural gas properties. Weexpect to continue to grow by leveraging our management team’s experience,exploiting our multi-year inventory of development drilling locations andexploitation projects, and selectively pursuing acquisitions that meet ourstrategic and financial objectives. We employ the use of debt and equity alongwith a comprehensive derivative financial instrument program to support ouracquisition strategy. This approach enhances our ability to execute ourbusiness plan over the entire commodity price cycle, protect our return oninvestments, and manage our capital structure.

 

27

----

Table of Contents

 

Historically, oil and natural gas prices have beenvolatile. Significant factors that will impact near-term commodity pricesinclude political developments in Iraq, Iran and other oil producing countries,the extent to which members of the OPEC and other oil exporting nations areable to manage oil supply through export quotas and variations in key NorthAmerican natural gas and refined products supply and demand indicators,including the slowing of the worldwide economy and unpredictable weatherconditions. A substantial portion of our estimated production is currentlycovered by derivative financial instruments through 2009, and we have adopted acommodity price risk management program under which we intend to enter intoadditional derivative financial instruments that will cover substantialpercentages of our estimated production to mitigate the impact of pricevolatility on our oil and natural gas reserves.

 

The increases in commodity prices in recent yearshas resulted in increased drilling activity and demand for drilling, oilcountry tubular goods and operating services and equipment in our operatingareas. In addition, the costs of leasing acreage in our East Texas/NorthLouisiana and Appalachia operating areas have increased significantly duringthe past year. Competition for this acreage was intense through the first halfof 2008, which resulted in increased demands from land owners for higherroyalties or other forms of compensation. The volatility in oil and natural gasprices, particularly in the third quarter of 2008 and thereafter, may have animpact on such costs if these economic conditions continue.

 

We estimate 2008 capital expenditures to be approximately$941.0 million which includes $837.0 million for leasing, drilling, developmentand exploitation expenditures, $51.0 million in midstream operations and $53.0million in corporate and other. The exploration and production segment’soperations capital expenditure budget reflects significant acreage acquisitionsand drilling in the Haynesville/Bossier shales in East Texas and NorthLouisiana and the Marcellus and Huron shales in Appalachia. As of September 30,2008, our significant leasehold acquisition program is effectively complete. Wedo not budget for acquisitions as these transactions are opportunistic in nature.In response to recent economic conditions, we reallocated some capitaloriginally planned for drilling conventional wells to focus on our shale plays.We expect our fourth quarter capital expenditures to be in the $200.0 millionrange, a decrease of approximately $100.0 million from the third quarter. Thesereductions reflect reduced leasing expenditures and lower drilling expenditures.We anticipate presenting to our Board of Directors a 2009 capital budgetprogram that will be fully funded within our 2009 expected cash flow. Theexpected activity level in 2009 will differ from 2008 with an emphasis onhorizontal shale development, a reduced conventional drilling program, minimalleasing and continued midstream development in East Texas/North Louisiana and Appalachia.We also expect to focus our conventional technical teams on exploitationprojects to minimize the base decline of our properties.

 

Like all oil and natural gas production companies,we face the challenge of natural production declines. Oil and natural gasproduction from a given well naturally decreases over time. We attempt toovercome this natural decline by drilling to develop and identify additionalreserves and by acquisitions. Our future growth will depend upon our ability tocontinue to add oil and natural gas reserves in excess of production at areasonable cost. We will maintain our focus on the costs of adding reserves throughdrilling and acquisitions as well as the costs necessary to produce suchreserves.

 

On February 20,2008, we acquired oil and natural gas properties including approximately 2,500producing wells, 2,000 shallow undrilled locations and 16 Mmcfe/d of netproduction in the Appalachian Acquisition. The purchase price, afterpreliminary closing adjustments, was $387.4 million and was financed withthe EXCO Resources credit agreement.

 

On March 11, 2008, we acquired agathering system in East Texas, or the New Waskom Acquisition, forapproximately $55.6 million, net of preliminary purchase price adjustments.

 

On July 15, 2008, we acquired producing oil and natural gasproperties, acreage and other assets in Gregg, Rusk and Upshur counties ofTexas, or the Danville Acquisition, for approximately $249.5 million, net ofpreliminary closing adjustments. Funding for this acquisition was provided by asenior unsecured term loan, which matures on December 15, 2008. We expectto finalize the purchase price allocation in the fourth quarter of 2008.

 

We face the challenge of financing futureacquisitions. In connection with our 2007 and 2008 acquisitions, we amended ourcredit agreements in February 2008 to increase our borrowing capacity toan aggregate of approximately $2.5 billion. On July 14, 2008, we revisedcertain covenant provisions and amended our credit agreements to allow for upto $500.0 million of senior unsecured term loans. The credit agreement of ourwholly-owned unrestricted subsidiary, EXCO Operating Company, LP, or EXCOOperating (formerly EXCO Partners Operating Partnership, LP), which holds allof our assets located in East Texas/North Louisiana, or the EXCO OperatingCredit Agreement, as amended on July 14, 2008, provides for an aggregateborrowing base of $1.3 billion, of which approximately $1.2 billion and$1.2 billion was drawn as of September 30, 2008 and November 3, 2008,respectively. The EXCO Resources credit agreement, as amended on July 14,2008, but effective on June 30, 2008 has a borrowing base of approximately$1.2 billion, of which approximately $1.0 billion and $1.0 billion was drawn asof September 30, 2008 and November 3, 2008, respectively. The seniorunsecured term loan 

 

28

----

Table of Contents

 

entered into on July 15, 2008 has $300.0million outstanding as of both September 30, 2008 and November 3,2008. With these credit agreements and the unsecured loan, we believe ourunused borrowing capacity as of November 3, 2008 of approximately $238.0million will be sufficient to meet our commitments. Funding for futureacquisitions may require additional sources of financing, which may not beavailable.

 

As of November 3,2008, we were negotiating with our lenders to refinance, renew and extend theTerm Credit Agreement, which is subject to approval of the banking group of theEXCO Operating Credit Agreement. If the refinancing, renewal and extension isnot successful, we believe that our available borrowings under our existingcredit facilities and operating cash flows will be sufficient to pay the TermCredit Agreement. However, future compliance with certain debt covenants underour existing credit agreements may not be met if we are required to draw onthose facilities. The ultimate outcome of these negotiations could furtherimpact our ability to fund our capital and development programs.

 

**Criticalaccounting policies**

 

We consideraccounting policies related to our estimates of assets and liabilities acquiredin acquisitions, proved reserves, accounting for derivatives, businesscombinations, share-based payments, accounting for oil and natural gasproperties, goodwill, asset retirement obligations and accounting for incometaxes as critical accounting policies. The policies include significantestimates made by management using information available at the time theestimates are made. However, these estimates could change materially ifdifferent information or assumptions were used. These policies are summarizedin Management’s Discussion and Analysis of Financial Condition and Results ofOperations in our Annual Report on Form 10-K for the year ended December 31,2007.

 

We adopted FASB Statementof Financial Accounting Standards, or SFAS, No. 157, “Fair ValueMeasurements,” or SFAS No. 157 on January 1, 2008.SFAS No. 157defines fair value, establishes a framework for measuring fair value andprovides for expanded disclosure of information about fair value measurements.Beginning with the first quarter of 2008, we revised our computations of thefair value of our derivative financial instruments related to oil and naturalgas sales to reflect the requirements outlined in SFAS No. 157.

 

**Recentaccounting pronouncements**

 

In September 2006,FASB issued SFAS, No. 157 which defines fair value, establishes aframework for measuring fair value in GAAP and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years forfinancial instruments. FASB Financial Staff Position No. FAS 157-2, “EffectiveDate of FASB Statement No. 157,” or FAS 157-2, deferred implementation forother non-financial assets and liabilities for one year. Examples ofnon-financial assets and liabilities are asset retirement obligations andnon-financial assets and liabilities initially measured at fair value in abusiness combination. We adopted SFAS No. 157 on January 1, 2008.

 

In December 2007,the FASB issued SFAS No. 141(R), “BusinessCombinations,” or SFAS No. 141(R). SFAS No. 141(R) replacesSFAS No. 141. SFAS No. 141(R) broadens the scope of businesscombinations to include bargain purchases and combinations of relatedcompanies, provides guidance on measuring goodwill and requires acquisitioncosts to be separate from the value of assets and liabilities purchased. SFAS No. 141(R) iseffective for financial statements issued for fiscal years beginning after December 15,2008, and as such, will be adopted by us on January 1, 2009. We arecurrently evaluating the effect of adopting SFAS No. 141(R) on ourfinancial statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements,” or SFAS No. 160. SFAS No. 160 amendsAccounting Research Bulletin 51, or ARB 51. SFAS No. 160 requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements separate from the parent’s equity. The amountof net income attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement. It also amendscertain of ARB No. 51’s consolidation procedures for consistency with therequirements of SFAS No. 141(R).SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest. SFAS No. 160 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andas such, will be adopted by us on January 1, 2009. We are currentlyevaluating the effect of adopting SFAS No. 160 on our financialstatements.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities,” or SFAS No. 161. SFAS No. 161requires enhanced disclosure about the fair value of derivative instruments andtheir gains or losses in tabular format and information aboutcredit-risk-related contingent features in derivative agreements, counterpartycredit risk, and the company’s strategies and objectives for using derivativeinstruments. SFAS No. 161 is 

 

29

----

Table of Contents

 

effective for financial statements issued forfiscal years beginning after December 15, 2008, and as such, will beadopted by us on January 1, 2009. We are currently evaluating the effectof adopting SFAS No. 161 on our financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles,” or SFAS No. 162. SFAS No. 162identifies the sources of accounting principles and the frame work forselecting the principles to be used in the preparation of financial statements.SFAS No. 162 is effective on November 15, 2008. We do not expect SFASNo. 162 to have an impact on our financial statements.

 

On October 10, 2008, the FASB issued FASB Staff Position No. FAS157-3, or FSP 157-3. The purpose of FSP 157-3 is to clarify the application ofSFAS No. 157 in a market that that is not active and provides an examplewhich illustrates key considerations on determining fair value of a financialasset when a market for that financial asset is not active.

 

**Our resultsof operations**

 

A summary of key financial data for the three andnine months ended September 30, 2008 and 2007 related to our results ofoperations is presented below:

 
| ** **                                                                                              | ** ** | **Three months ended** | ** ** | **Quarter to**     | ** ** | **Nine months ended** | ** ** | **Year to**     | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                                                                              | ** ** | **September 30,**           | ** ** | **quarter change** | ** ** | **September 30,**          | ** ** | **year change** | ** ** |
| **(dollars in thousands, except prices and per unit expenses)** | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **2008 - 2007**                 | ** ** | **2008**             | ** ** | **2007** | ** ** | **2008 - 2007** | ** ** |
| **Production:**                                                                                         |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil (Mbbls)                                                                                             |       | 590                              |       | 475                     |       | 115                             |       | 1,643                |       | 1,176 |   | 467 |   |
| Natural gas  (Mmcf)                                                                                     |       | 33,017                           |       | 31,608                  |       | 1,409                           |       | 97,687               |       | 79,591 |   | 18,096 |   |
| Total production  (Mmcfe)                                                                               |       | 36,557                           |       | 34,458                  |       | 2,099                           |       | 107,545              |       | 86,647 |   | 20,898 |   |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Oil and  natural gas revenues before derivative financial instrument activities:**                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil revenues                                                                                            |       | $                                | 68,456     |                    | $          | 34,520                          |       | $                    | 33,936     |   | $ | 183,454 |   | 75,682 |   | $ | 107,772 |   |
| Natural gas sales                                                                                       |       | 333,928                          |       | 193,796                 |       | 140,132                         |       | 972,524              |       | 534,545 |   | 437,979 |   |
| Total oil and  natural gas sales                                                                        |       | $                                | 402,384    |                    | $          | 228,316                         |       | $                    | 174,068    |   | $ | 1,155,978 |   | $ | 610,227 |   | $ | 545,751 |   |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Midstream  operations:**                                                                              |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Midstream  revenues (before intercompany eliminations)                                                  |       | $                                | 49,258     |                    | $          | 12,274                          |       | $                    | 36,984     |   | $ | 105,915 |   | $ | 33,603 |   | $ | 72,312 |   |
| Midstream  operating expenses (before intercompany eliminations)                                        |       | 41,410                           |       | 5,640                   |       | 35,770                          |       | 79,000               |       | 15,988 |   | 63,012 |   |
| Midstream  operating profit (before intercompany eliminations)                                          |       | 7,848                            |       | 6,634                   |       | 1,214                           |       | 26,915               |       | 17,615 |   | 9,300 |   |
| Intercompany  eliminations                                                                              |       | (9,664                           | )          | (6,438                  | )          | (3,226                          | )          | (24,734              | )          | (14,765 | ) | (9,969 | ) |
| Midstream  operating profit (after intercompany eliminations)                                           |       | $                                | (1,816     | )                       | $          | 196                             |       | $                    | (2,012     | ) | $ | 2,181 |   | $ | 2,850 |   | $ | (669 | ) |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Oil and  natural gas derivative financial instruments:**                                              |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Cash settlements  on derivative financial instruments                                                   |       | $                                | (70,019    | )                       | $          | 46,249                          |       | $                    | (116,268   | ) | $ | (157,383 | ) | $ | 84,951 |   | $ | (242,334 | ) |
| Non-cash change  in fair value of derivative financial instruments                                      |       | 970,332                          |       | 52,003                  |       | 918,329                         |       | 53,849               |       | (4,821 | ) | 58,670 |   |
| Total derivative  financial instrument activities                                                       |       | $                                | 900,313    |                    | $          | 98,252                          |       | $                    | 802,061    |   | $ | (103,534 | ) | $ | 80,130 |   | $ | (183,664 | ) |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Average  sales price (before cash settlements of derivative financial instruments):**                 |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil (Bbl)                                                                                               |       | $                                | 116.03     |                    | $          | 72.67                           |       | $                    | 43.36      |   | $ | 111.66 |   | $ | 64.36 |   | $ | 47.30 |   |
| Natural gas (per  Mcf)                                                                                  |       | 10.11                            |       | 6.13                    |       | 3.98                            |       | 9.96                 |       | 6.72 |   | 3.24 |   |
| Natural gas  equivalent (per Mcfe)                                                                      |       | 11.01                            |       | 6.63                    |       | 4.38                            |       | 10.75                |       | 7.04 |   | 3.71 |   |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Oil and  natural gas production costs:**                                                              |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil and natural  gas operating costs                                                                    |       | $                                | 42,290     |                    | $          | 30,072                          |       | $                    | 12,218     |   | $ | 116,086 |   | $ | 81,670 |   | $ | 34,416 |   |
| Gathering and  transportation                                                                           |       | 3,672                            |       | 3,387                   |       | 285                             |       | 10,503               |       | 6,662 |   | 3,841 |   |
| Production and ad  valorem taxes                                                                        |       | 20,689                           |       | 14,304                  |       | 6,385                           |       | 61,432               |       | 39,679 |   | 21,753 |   |
| Depletion                                                                                               |       | 119,800                          |       | 104,174                 |       | 15,626                          |       | 328,879              |       | 253,378 |   | 75,501 |   |
| Depreciation and  amortization                                                                          |       | 6,407                            |       | 5,151                   |       | 1,256                           |       | 17,826               |       | 12,419 |   | 5,407 |   |
| General and  administrative                                                                             |       | 21,002                           |       | 17,010                  |       | 3,992                           |       | 63,286               |       | 46,175 |   | 17,111 |   |
| Interest expense,  including impacts of interest rate swaps                                             |       | 44,874                           |       | 36,523                  |       | 8,351                           |       | 101,167              |       | 146,775 |   | (45,608 | ) |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Oil and  natural gas production costs (per Mcfe):**                                                   |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| Oil and natural  gas operating costs                                                                    |       | $                                | 1.16       |                    | $          | 0.87                            |       | $                    | 0.29       |   | $ | 1.08 |   | $ | 0.94 |   | $ | 0.14 |   |
| Gathering and  transportation                                                                           |       | 0.10                             |       | 0.10                    |       | 0.00                            |       | 0.10                 |       | 0.08 |   | 0.02 |   |
| Production and ad  valorem taxes                                                                        |       | 0.57                             |       | 0.42                    |       | 0.15                            |       | 0.57                 |       | 0.46 |   | 0.11 |   |
| Depletion                                                                                               |       | 3.28                             |       | 3.02                    |       | 0.26                            |       | 3.06                 |       | 2.92 |   | 0.14 |   |
| Depreciation and  amortization                                                                          |       | 0.18                             |       | 0.15                    |       | 0.03                            |       | 0.17                 |       | 0.14 |   | 0.03 |   |
| General and  administrative                                                                             |       | 0.57                             |       | 0.49                    |       | 0.08                            |       | 0.59                 |       | 0.53 |   | 0.06 |   |
|                                                                                                    |       |                             |       |                    |       |                            |       |                 |       |   |   |   |   |
| **Net  income (loss)**                                                                                  |       | $                                | (146,329   | )                       | $          | 56,462                          |       | $                    | (202,791   | ) | $ | (572,082 | ) | $ | 51,651 |   | $ | (623,733 | ) |

 

30

----

Table of Contents

 

The following is a discussion of our financialcondition and results of operations for the three and nine months ended September 30,2008 and 2007.

 

The comparability of our results of operations fromperiod to period is impacted by:

 

·                  propertiesacquired in the Vernon Field of Louisiana, or the Vernon Acquisition, on March 30,2007, properties acquired in the Mid-Continent region in May 2007, or theSouthern Gas Acquisition, the additional 45% interest acquired in the CanyonSand field in West Texas on October 9, 2007, or the Canyon SandAcquisition, the Appalachian Acquisition in February 2008, the New WaskomAcquisition in March 2008 and the Danville Acquisition in July 2008;

 

·                  dispositions of oil and natural gas properties, primarilythe sale of our non-operating interests in the Cement Field in Oklahoma in July 2007;

 

·                  significant changes in the amount of our long-term debt andthe issuance of $2.0 billion of preferred stock, which was converted to commonstock in July 2008, related to our acquisition efforts;

 

·                  changes in proved reserves and their impact on depletion;

 

·                  fluctuations in oil and natural gas prices which impact ouroil and natural gas reserves, revenues, net income or loss;

 

·                  mark-to-market accounting used for our derivative financialinstruments gains or losses; and

 

·                  the impact of a ceiling test write-down in the thirdquarter of 2008.

 

***General***

 

The availability of a ready market for oil andnatural gas and the prices of oil and natural gas are dependent upon a numberof factors that are beyond our control. These factors include, among otherthings:

 

·                  the level of domestic production and economic activity;

 

·                  the availability of imported oil and natural gas;

 

·                  actions taken by foreign oil producing nations;

 

·                  the cost and availability of natural gas pipelines withadequate capacity and other transportation facilities;

 

·                  the cost and availability of other competitive fuels,fluctuating and seasonal demand for oil, natural gas and refined products; and

 

·                  the extent of governmental regulation and taxation (underboth present and future legislation) of the production, refining,transportation, pricing, use and allocation of oil, natural gas, refinedproducts and substitute fuels.

 

Accordingly, in light of the many uncertaintiesaffecting the supply and demand for oil, natural gas and refined petroleumproducts, we cannot accurately predict the prices or marketability of oil andnatural gas from any producing well in which we have or may acquire aninterest.

 

***Marketing arrangements***

 

We produce oil and natural gas. We do not refine orprocess the oil we produce.

 

We sell the majority of the oil we produce undershort-term contracts using market sensitive pricing. The majority of ourcontracts are based on NYMEX pricing, which is typically calculated as theaverage of the daily closing prices of oil to be delivered one month in thefuture. We also sell a portion of our oil at F.O.B. field prices posted by theprincipal purchaser of oil where our producing properties are located. Oursales contracts are of a type common within the industry, and we usuallynegotiate a separate contract for each property. Generally, we sell our oil topurchasers and refiners near the areas of 

 

31

----

Table of Contents

 

our producing properties.

 

We sell the majority of our natural gas underindividually negotiated gas purchase contracts using market sensitive pricing.Our sales contracts vary in length from spot market sales of a single day toterm agreements that may extend for a year or more. Our natural gas customersinclude utilities, natural gas marketing companies and a variety of commercialand industrial end users. The natural gas purchase contracts define the termsand conditions unique to each of these sales. The price received for naturalgas sold on the spot market varies daily, reflecting changing market conditions.We also gather and transport natural gas for other producers for which we arecompensated.

 

We may not be able to market all of the oil andnatural gas we produce. If our oil and natural gas can be marketed, we may notbe able to negotiate favorable price and contractual terms. Changes in oil ornatural gas prices may significantly affect our revenues, cash flows, the valueof our oil and natural gas properties and the estimates of recoverable oil andnatural gas contained in our properties. Further, significant declines in theprices of oil or natural gas may have a material adverse effect on our businessand on our financial condition.

 

We engage in oil and natural gas productionactivities in geographic regions where, from time to time, the supply of oil ornatural gas available for delivery exceeds the demand. In this situation,companies purchasing oil or natural gas in these areas reduce the amount of oilor natural gas that they purchase from us. If we cannot locate other buyers forour production or for any of our newly discovered oil or natural gas reserves,we may shut-in our oil or natural gas wells for periods of time. If thisoccurs, we may incur additional payment obligations under our oil and naturalgas leases and, under certain circumstances, the oil and natural gas leasesmight be terminated. Recent economic conditions related to the liquidity andcreditworthiness of our purchasers may expose us to risk with respect to theability to collect payments for the oil and natural gas we deliver.

 

**Summary**

 

For the three months ended September 30, 2008,we reported a net loss available to common shareholders of $153.3 million,compared to a net income available to common shareholders of $10.7 million forthe quarter ended September 30, 2007. For the nine months ended September 30,2008, we reported a net loss available to common shareholders of $649.1million, compared to a net loss available to common shareholders of $46.3million for the nine months ended September 30, 2007.

 

The impact of our Appalachian Acquisition and ourDanvilleAcquisition in 2008 andthe Vernon Acquisition, the Southern Gas Acquisition and other acquisitions in2007 have increased our production, revenues, operating expenses and alsogeneral and administrative expenses when compared to the prior year. Derivativefinancial instruments have a significant impact, both on our revenues and onour results of operations, since we do not designate our derivative financialinstruments as hedges and are required to mark the non-cash changes in the fairvalue of our derivatives to market at the end of each reporting period. Asfurther discussed below, this can cause our reported oil and natural gasrevenues, total revenue and net income to decline, as was the case for thefirst six months of 2008, or increase significantly when oil and natural gasprices experience significant decreases, as occurred in the third quarter of2008.

 

**Total revenues**

 

Totalrevenues for the three months ended September 30, 2008 and 2007 were $1.3billion and $333.4 million, respectively. Excluding the impact on revenues fromderivative financial instruments, total revenues for such three-month periodswould have been $431.2 million and $235.2 million. The revenue adjustment dueto derivative financial instruments was $900.3 million and $98.3 million forthe three months ended September 30, 2008 and 2007, respectively.

 

Our revenues are comprised of sales of oil andnatural gas, revenues from our midstream operations, cash settlements andchanges in the fair value of our derivative financial instruments and otherincome. Our total revenues for the nine months ended September 30, 2008and 2007 were $1.1 billion and $712.1 million, respectively. Excluding theimpact of derivative financial instruments, our total revenues for the ninemonth-periods would have been $1.2 billion and $632.0 million, respectively.

 

The increases in the prices of oil and natural gasduring the first eight months of 2008 and changes in the fair value of ourderivative financial instruments resulted in negative revenue adjustments of$103.5 million for the nine months ended September 30, 2008. We recognizedgains of $80.1 million on our derivative financial instruments for the ninemonths ended September 30, 2007.

 

32

----

Table of Contents

 

***Oil and natural gas revenues, production and prices***

 

For the three months ended September 30, 2008,total oil and natural gas revenues, excluding the impact of derivativefinancial instruments, were $402.4 million, a 76.2% increase over the threemonths ended September 30, 2007 total oil and natural gas revenues of$228.3 million. Total equivalent production volumes were 36.6 Bcfe for thethree months ended September 30, 2008, a 6.1% increase over the prior year’scomparable period production of 34.5 Bcfe. Increased volumes attributable tothe Canyon Sand Acquisition in November 2007 of 1.2 Bcfe, the AppalachianAcquisition in February 2008 of 1.4 Bcfe, and the DanvilleAcquisition in July 2008 of 1.4 Bcfe were offset by a loss of production of approximately 0.3 Bcfe due toHurricane Ike, which hit the Texas coast in August 2008. Additionally,production was partially offset by normal production declines, particularly inthe Vernon field where production declined by approximately 2.1 Bcfe from theprior year’s comparable quarter. While the decline of 2.1 Bcfe from our Vernonfield for the three months ended September 30, 2008 compared to the prioryear’s period is offsetting other production increases, we have been successfulin mitigating production decline which has resulted in our current productionrate from the Vernon field exceeding our original expectations.

 

For the nine months ended September 30, 2008,total oil and natural gas revenues, excluding the impact of derivativefinancial instruments, were $1.2 billion, an 89.4% increase over the ninemonths ended September 30, 2007 total oil and natural gas revenues of$610.2 million. Total equivalent production volumes were 107.6 Bcfe for thenine months ended September 30, 2008, a 24.2% increase over the prior year’scomparable period production of 86.6 Bcfe. The increased volumes are primarilyattributable to the Vernon Acquisition and the Southern Gas Acquisition, withadditional contributions from the Canyon Sand Acquisition, the AppalachianAcquisition and the Danville Acquisition. The increased volumes fromdevelopment drilling activities and acquisitions were partially offset by propertysales of our Cement field and other divestitures. The increase in productionvolumes for the nine months ended September 30, 2008 compared to the sameperiod in 2007 is presented below:

 

·                  the Vernon Acquisition which closed on March 30, 2007,produced 33.2 Bcfe for the nine months ended September 30, 2008 comparedwith 27.0 Bcfe in the prior year period, an increase of 6.2 Bcfe;

 

·                  the Southern Gas Acquisition which closed on May 2,2007, contributed an increase of 5.8 Bcfe for the nine months ended September 30,2008;

 

·                  increased volumes of 3.7 Bcfe from our Canyon SandAcquisition;

 

·                  the Appalachian Acquisition on February 20, 2008,which increased production by 3.3 Bcfe in our Appalachian region; and

 

·                  The Danville Acquisition on July 15, 2008, whichincreased production by 1.4 Bcfe.

 

Theseincreases were partially offset by reduced volumes relating to normal declinesand sales of producing properties during 2007, particularly from the Cementfield in Oklahoma, which had net production of 1.5 Bcfe during the nine monthsended September 30, 2007.

 

The average sales price per Bbl, excluding theimpact of derivative financial instruments, increased for oil during the ninemonths ended September 30, 2008 compared to the nine months ended September 30,2007 from $64.36 per Bbl to $111.66 per Bbl, or 73.5%. The average natural gassales price, excluding the impact of derivative financial instruments, was$9.96 per Mcf, an increase of 48.2% for the nine months ended September 30,2008 compared with $6.72 per Mcf for the nine months ended September 30,2007.

 

***Midstream revenues***

 

Our Midstream assets are principally comprised ofgathering systems and an intrastate pipeline system. The principle assets arediscussed below:

 

·                  TGG Pipeline, or TGG, is a 110-mileintrastate pipeline. TGG has access to 12 markets for natural gas andtransports natural gas for third-party producers. During 2008, we expanded ourTGG Pipeline in East Texas, adding 57 miles of pipeline to the original TGGsystem at a cost of approximately $37.6 million. Upon completion of thisexpansion in August 2008, TGG has 110 miles of pipeline and currentthroughput capacity of 390 Mmcf per day without compression. With compression,incremental throughput capacity could exceed 530 Mmcf per day. Currentthroughput volumes are approximately 150 Mmcf per day, of which 

 

33

----

Table of Contents

 

approximately 20% wasnatural gas delivered from our exploration and production operating segment.

 

·                  Our Talco midstream gathering system, orTalco, is a network of eight natural gas gathering systems comprised ofapproximately 607 miles of pipeline and gathers natural gas produced from theHolly/Caspiana, Longwood/Waskom fields and other fields in East Texas and NorthLouisiana. The assets of Talco include the New Waskom Acquisition and thegathering assets associated with the Danville Acquisition. Average throughputin Talco, including the New Waskom Acquisition volumes, is approximately 204Mmcf per day, of which approximately 63% is natural gas produced by ourexploration and production operating segment.

 

·                  A gathering system and treating facility inthe area of our Vernon field operations, or Vernon Gathering, gathers andtransports gas from our Vernon field and, to a lesser extent, gas fromthird-party producers. The gathering system transports natural gas to our CaneyLake treating facility where the natural gas is sweetened and delivered tointerstate pipeline systems. Average throughput in Vernon Gathering isapproximately 160 Mmcf per day, of which 96% was natural gas produced by ourexploration and production operating segment.

 

Weevaluate our midstream operations as if they were a stand alone operation.Accordingly, the results of operations discussed below are prior tointercompany eliminations.

 

For the three months ended September 30, 2008,midstream revenues were $49.3 million, a 301.3% increase over the three monthsended September 30, 2007 midstream revenues of $12.3 million. Increases inthe sales of natural gas account for 89.0% of the increase in the midstreamrevenues and are primarily attributable to the 2008 acquisitions. These assets,which were not in our portfolio in 2007, have several contracts whereby wepurchase and resell natural gas produced by third-parties. The remainingincrease in revenues was attributable to increases in drip sales and gatheringfees associated with the 2008 acquisitions, as well as increased throughput onour midstream assets.

 

For the nine months ended September 30, 2008,midstream revenues were $105.9 million, a 215.2% increase over the nine monthsended September 30, 2007 midstream revenues of $33.6 million. Increases inthe sales of natural gas account for 78.6% of the increase in midstreamrevenues and are primarily attributable to increased throughput from the 2008acquisitions and the remaining 21.4% of the increase is attributable toincreases in drip sales and gathering fees.

 

***Derivative financial instruments***

 

We use oil and natural gas derivatives and financialrisk management instruments to manage our exposures to commodity price andinterest rate fluctuations. We do not designate these instruments as hedginginstruments for financial accounting purposes and, as a result, we recognizethe change in the respective instrument’s fair value currently in earnings, asa gain or loss on oil and natural gas derivatives and as interest expense onfinancial risk management instruments. To illustrate the volatility of oil andnatural gas prices and the impact of derivative financial instruments, we hadunrealized mark-to-market losses in excess of $916.5 million for the six monthsended June 30, 2008 due to rapidly increasing prices for both oil andnatural gas. During the third quarter of 2008, commodity prices decreased andwe recorded unrealized mark-to-market gains of $970.3 million.

 

A significant portion of the revenue and netearnings impact of our derivative financial instruments relates to non-cashmark-to-market adjustments, which do not affect our cash flows, capitalresources or liquidity. The non-cash portion of the impact on revenues andresults of operations of derivative financial instruments increased revenues by$970.3 million and $53.8 million, respectively, for the three and nine monthsended September 30, 2008, compared to $52.0 million and negative $4.8million for the three and nine months ended September 30, 2007,respectively.

 

We expect that our revenues will continue to besignificantly impacted in future periods by changes in the fair value of ourderivative financial instruments as a result of the volatility in oil andnatural gas prices. In addition, prices for oil and natural gas have beendecreasing during the third quarter of 2008 and have continued to decreasesubsequent to September 30, 2008.Therefore, in the upcoming months weexpect our cash settlements on our derivatives to increase revenues as a resultof decreases in oil and natural gas prices that have occurred during the thirdquarter of 2008. For the remainder of 2008, approximately 80% of our expectedproduction volumes are subject to oil and natural gas derivative contracts. Inaddition to our oil and natural gas derivative financial instruments, weentered into interest rate swaps in February 2008. The impact of thesederivative financial instruments is presented on the following table:

 

34

----

Table of Contents

 
| ** **                                                                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                                    | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Oil and natural gas derivative financial  instruments:**                 |       |                             |       |                            |       |   |   |   |   |
| Cash settlements on derivative financial  instruments                      |       | $                                | (70,019    | )                               | $          | 46,249 |   | $ | (157,383 | ) | $ | 84,951 |   |
| Non-cash change in fair value of derivative  financial instruments         |       | 970,332                          |       | 52,003                          |       | 53,849 |   | (4,821 | ) |
| Total oil and natural gas derivative gain  (loss) on financial instruments |       | $                                | 900,313    |                            | $          | 98,252 |   | $ | (103,534 | ) | $ | 80,130 |   |
|                                                                       |       |                             |       |                            |       |   |   |   |   |
| **Interest rate swaps:**                                                   |       |                             |       |                            |       |   |   |   |   |
| Interest rate swaps settlement receipts                                    |       | $                                | 163        |                            | $          | — |   | $ | 924 |   | $ | — |   |
| Fair market value adjustment on interest  rate swaps                       |       | (2,215                           | )          | —                          |       | 5,155 |   | — |   |
| Total gain (loss) on interest rate swaps                                   |       | $                                | (2,052     | )                               | $          | — |   | $ | 6,079 |   | $ | — |   |

 

***Other income***

 

Other income consists of interest earned on our cashbalances, miscellaneous gathering income which is not designated as a componentof our midstream segment and income or losses resulting from periodicre-evaluation from natural gas imbalances. Our other income decreased to $1.8million for the three months ended September 30, 2008 from $2.4 millionfor the same period in the prior year. For the nine months ended September 30,2008, our other income decreased to $5.5 million compared with $7.6 million inthe same period in 2007. The decrease in other income for the three and ninemonths ended September 30, 2008 compared to the same periods in 2007 isrelated to slightly lower than average cash balances and lower interest rateson our invested cash.

 

***Oil and natural gas operating costs***

 

Our oil and natural gasoperating costs for the three and nine months ended September 30, 2008were $42.3 million and $116.1 million, respectively, and represent increases of$12.2 million and $34.4 million, respectively, or 40.6% and 42.1%, from thesame periods in 2007. Absolute increases in total dollar value are dueprimarily to operating expenses incurred from our acquisitions. Managementbelieves that analyses on a per Mcfe basis provide more meaningful measure thanthe absolute dollar increases since the acquisitions in 2007 were sosignificant. The following tables summarize direct operating expenses and unitrates per Mcfe for the three and nine months ended September 30, 2008 and2007:

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Quarter to**     | ** ** | **Nine months ended** | ** ** | **Year to**     | ** ** |
|-------------------------------------|------------|----------------------------------|------------|-------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **quarter change** | ** ** | **September 30,**          | ** ** | **year change** | ** ** |
| **(in thousands)**             | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **2008 - 2007**       | ** ** | **2008**             | ** ** | **2007** | ** ** | **2008 - 2007** | ** ** |
| Direct lease operating expense      |       | $                                | 37,781     |                    | $          | 26,998                          |       | $                    | 10,783     |   | $ | 106,181 |   | $ | 72,633 |   | $ | 33,548 |   |
| Workovers                           |       | 3,340                            |       | 2,344                   |       | 996                             |       | 6,616                |       | 7,540 |   | (924 | ) |
| Stock-based compensation (non-cash) |       | 1,169                            |       | 730                     |       | 439                             |       | 3,289                |       | 1,497 |   | 1,792 |   |
| Total oil and gas operating costs   |       | $                                | 42,290     |                    | $          | 30,072                          |       | $                    | 12,218     |   | $ | 116,086 |   | $ | 81,670 |   | $ | 34,416 |   |

 
| ** **                                | ** ** | **Three months ended** | ** ** | **Quarter to**     | ** ** | **Nine months ended** | ** ** | **Year to**     | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **quarter change** | ** ** | **September 30,**          | ** ** | **year change** | ** ** |
| **(per Mcfe)**                       | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **2008 - 2007**       | ** ** | **2008**             | ** ** | **2007** | ** ** | **2008 - 2007** | ** ** |
| Direct lease operating expense            |       | $                                | 1.04       |                    | $          | 0.78                            |       | $                    | 0.26       |   | $ | 0.99 |   | $ | 0.83 |   | $ | 0.16 |   |
| Workovers.                                |       | 0.09                             |       | 0.07                    |       | 0.02                            |       | 0.06                 |       | 0.09 |   | (0.03 | ) |
| Stock-based compensation (non-cash)       |       | 0.03                             |       | 0.02                    |       | 0.01                            |       | 0.03                 |       | 0.02 |   | 0.01 |   |
| Total oil and natural gas operating costs |       | $                                | 1.16       |                    | $          | 0.87                            |       | $                    | 0.29       |   | $ | 1.08 |   | $ | 0.94 |   | $ | 0.14 |   |

 

On a per Mcfe basis, oil and natural gas operatingexpenses for the three and nine months ended September 30, 2008 increased$0.29 and $0.14, respectively, from the same periods in 2007. Direct leaseoperating expenses per unit increased by $0.26 per Mcfe, or 33.3%, and $0.16per Mcfe, or 19.3%, for the three and nine months ended September 30,2008, respectively, from the same periods in 2007. These increases areprimarily the result of increases in chemicals, labor, utilities, and thegeneral increase in the costs of goods and services used in our operations. Workoverexpenses for the three months ended September 30, 2008 increased $0.02 perMcfe from the prior years’ quarter while such expenses decreased for the ninemonths ended September 30, 2008 by $0.03 per Mcfe from the same period inthe prior year.

 

The overall increase in oil and natural gasoperating costs for the nine months ended September 30, 2008 was primarilyattributable to:

 

·                  the Vernon Acquisition, which closed on March 30, 2007and added direct production expenses of $7.9 million for the nine months ended September 30,2008 when compared to the same period in 2007;

 

·                  the Southern Gas Acquisition, which closed on May 2,2007 and added $6.7 million of production expenses for the nine months ended September 30,2008;

 

35

----

Table of Contents

 

·                  the Appalachian Acquisition, which closed on February 20,2008, added $3.5 million of production expenses for the nine months ended September 30,2008;

 

·                  the Danville Acquisition, which closed on July 15,2008 and added $0.6 million of production expenses for the nine months ended September 30,2008;

 

·                  increased direct production expenses of approximately $3.5million in our Sugg Ranch area primarily due to the acquisition of incrementalworking interests in that area and incremental operating costs resulting fromour development of this field;

 

·                  increases of $1.8 million of non-cash stock-basedcompensation costs;

 

·                  a general increase in the cost of goods and services usedin our oil and natural gas operations, most notably motor fuel and utilitycosts during the second quarter of 2008; and

 

·                  increases from new well additions through our developmentand exploitation capital program.

 

***Midstream operating expenses***

 

Our midstream operatingexpenses for the three and nine months ended September 30, 2008 increased$35.8 million and $63.0 million, respectively, from the same periods in 2007. Theincrease in midstream operating expenses for the nine months ended September 30,2008 was primarily attributable to:

 

·                  increased cost of purchased gas of approximately $54.5million due primarily to purchased natural gas for resale from our March 2008New Waskom Acquisition; and

 

·                  increased operating expenses of approximately $6.5 millionrelated to the March 2008 New Waskom Acquisition and increased VernonGathering operating expenses due to 2008 containing nine months of operatingcosts and 2007 containing only three months of operating costs.

 

***Gathering and transportation***

 

We generally sell oil andnatural gas under two types of agreements which are common in our industry.Both types of agreements include a transportation charge. One is a netbackarrangement, under which we sell oil or natural gas at the wellhead and collecta price, net of the transportation incurred by the purchaser. In this case, werecord sales at the price received from the purchaser, net of thetransportation costs. Under the other arrangement, we sell oil or natural gasat a specific delivery point, pay transportation to a third party and receiveproceeds from the purchaser with no transportation deduction. In this case, werecord the transportation cost as gathering and transportation expense. Due tothese two distinct selling arrangements, our computed realized prices, beforethe impact of derivative financial instruments, contain revenues which arereported under two separate bases. Gathering and transportation expensestotaled $3.7 million and $10.5 million for the three and nine months ended September 30,2008, respectively, compared to $3.4 million and $6.7 million for the three andnine months ended September 30, 2007, respectively. As our marketingefforts expand, we expect our gathering and transportation expenses will alsoincrease.

 

***Production and ad valorem taxes***

 

Production and ad valorem taxes for the three monthsended September 30, 2008 increased by $6.4 million, or 44.6%, over thesame period in 2007. Production and ad valorem taxes for the nine months ended September 30,2008 increased by $21.8 million, or 54.8%, over the same period in 2007. Theseincreases are primarily attributable to higher oil and natural gas volumes andprices resulting from acquisitions and our development drilling. On apercentage of revenue basis, before the impact of derivative financialinstruments, production and ad valorem taxes were 5.1% and 5.3% of gross oiland natural gas sales for the three and nine months ended September 30,2008, compared with 6.3% and 6.5% during the same periods in the prior year.The decrease in the overall tax rate is primarily the result of a statutoryseverance tax rate reduction in the state of Louisiana, which lowered the ratefrom $0.37 per Mcf for 2007 to $0.27 per Mcf for 2008. The lower severance taxrate in Louisiana contributed to our consolidated decreased severance tax ratein 2008 when measured as a percentage of revenue due to a significant increasein Louisiana production volume resulting from the Vernon Acquisition anddevelopment drilling in North Louisiana. Production taxes are set by state andlocal governments and vary as to the tax 

 

36

----

Table of Contents

 

rate and the value to which that rate isapplied. Further, ad valorem taxes in Texas and other states are basedpartially on the value of oil and natural gas reserves, which have increasedsignificantly since the beginning of 2007 due to acquisitions. These taxes aregenerally based upon the price received for production.

 

***Depletion***

 

Our depletion expense for the three and nine monthsended September 30, 2008 increased by $15.6 million and $75.5 million, or15.0% and 29.8%, from the same periods in 2007. The primary reason for theincreases were from increases in equivalent oil and natural gas sales volumesfor the three months and nine months ended September 30, 2008 of 6.1% and24.1%, respectively. This increase in equivalent sales volumes for the ninemonths ended September 30, 2008 compared with the nine months ended September 30,2007 is largely due to our acquisitions of producing oil and natural gas properties.These acquisitions also increased our per unit depletion rate from $3.02 and$2.92 per Mcfe for the three and nine months ended September 30, 2007 to$3.28 and $3.06 per Mcfe for the three and nine months ended September 30,2008. As a result of the ceiling test write-down discussed below, our depletionrate will decrease to approximately $2.75 per Mcfe assuming prices do notdecrease.

 

***Depreciation and amortization***

 

Our depreciation and amortization costs for thethree and nine months ended September 30, 2008 increased by $1.3 millionand $5.4 million, or 24.4% and 43.5%, from the same periods in 2007. Theprimary reasons for the increases were from the increases in our depreciableasset base for the three and nine months ended September 30, 2008, whichwas directly related to our 2007 acquisition of Vernon gathering assets and theMarch 2008 New Waskom Acquisition gathering assets.

 

***Write-down of oil and naturalgas properties***

 

We recognized a pre-tax write-down of our oil and natural gasproperties of $1.2 billion ($723.2 million after-tax) for the three monthsended September 30, 2008. Under full cost accounting, we are required tocompute the after-tax present value of our proved oil and natural gasproperties using spot market prices for oil and natural gas at our balancesheet date. The base for our spot prices for natural gas is Henry Hub. On September 30,2008, the spot price for natural gas at Henry Hub was $7.12 per Mmbtu. Naturalgas, which is sold at other natural gas marketing hubs where we conductoperations, is subject to prices which reflect variables that can increase ordecrease spot natural gas prices at these hubs such as market demand,transportation costs and quality of the natural gas being sold. Thosedifferences are referred to as the basis differentials. Typically, basisdifferentials result in natural gas prices which are lower than Henry Hub,except in Appalachia, where we have historically received a premium to HenryHub.

 

On September 30, 2008, the basis differentials at our significantgeographic hubs widened significantly from their historical ranges. Thefollowing table represents the September 30, 2008 basis differentials fromHenry Hub for our significant geographic hubs compared to the averageyear-to-date average differentials as of September 30, 2008 for each ofthose hubs. The impact of these widening basis differentials was significantwhich increased the amount of the write-down.

 
| ** **                  | ** ** | ** **                 | ** ** | ** **                                | ** ** | ** **                       | ** ** | **Average**                      | ** ** | ** **                           | ** ** |
|-----------------------------|------------|----------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | ** **                 | ** ** | ** **                                | ** ** | ** **                       | ** ** | **September 30, 2008** | ** ** | **September 30, 2008**     | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | **September 30, 2008**          | ** ** | **September 30, 2008** | ** ** | **year to date**       | ** ** | **deviation from average** | ** ** |
| ** **                  | ** ** | **EXCO**                   | ** ** | **spot natural**                     | ** ** | **differential**                 | ** ** | **differential**                 | ** ** | **basis**                            | ** ** |
| **Sales Hub**          | ** ** | **operating region**  | ** ** | **gas prices (per Mmbtu)** | ** ** | **to Henry Hub**       | ** ** | **to Henry Hub**       | ** ** | **differential**                     | ** ** |
| Henry Hub                   |       | East Texas/North Louisiana |       | $                                         | 7.12       |                             | n/a        |                             | n/a        |                                 | n/a        |   |
| Houston Ship  Channel       |       | East Texas/North Louisiana |       | 6.70                                      |       | $                                | (0.42      | )                                | $          | (0.31                                | )          | $ | (0.11 | ) |
| Panhandle Eastern  Pipeline |       | Mid-Continent              |       | 3.69                                      |       | (3.43                            | )          | (1.55                            | )          | (1.88                                | )          |
| Waha                        |       | Permian                    |       | 4.81                                      |       | (2.31                            | )          | (1.07                            | )          | (1.24                                | )          |
| Columbia                    |       | Appalachia                 |       | 7.18                                      |       | 0.06                             |       | 0.38                             |       | (0.32                                | )          |
| Dominion                    |       | Appalachia                 |       | 7.15                                      |       | 0.03                             |       | 0.54                             |       | (0.51                                | )          |
|                             |            |                            |            |                                           |            |                                  |            |                                  |            |                                      |            |  |  |  |  |

 

Subsequent to September 30, 2008, prices foroil and natural gas have continued to decline. Accordingly, we may be subjectto additional ceiling test write-downs if prices or basis differentials do not increase.Finally, since we do not designate our derivative financial instruments ashedges, we are not allowed to use the impacts of derivative financialinstruments in our ceiling test computation. As a result, declines in commodityprices which contribute to ceiling test write-downs may be offset bymark-to-market gains which are not reflected in our ceiling test results.

 

***General and administrative***

 

Our general and administrative costs for the threemonths ended September 30, 2008 were $21.0 million, or $0.57 per Mcfecompared to $17.0 million, or $0.49 per Mmcfe for the same period in 2007. Ourgeneral and administrative costs 

 

37

----

Table of Contents

 

for the nine months ended September 30,2008 were $63.3 million, or $0.59 per Mcfe, compared to $46.2 million, or $0.53per Mcfe, for the same period in 2007, an increase of $17.1 million, or 37.1%.Significant components of the increase for the nine months ended September 30,2008, include the following items:

 

·                  increased personnel costs of $13.8 million due to hiring232 employees related primarily to our acquisitions and expanding our technicaland managerial staff to fully exploit our asset base;

 

·                  an increase in share-based compensation costs of $2.3million due primarily to additional headcount;

 

·                  increased consulting and contract labor costs of $1.0million due primarily to acquisitions and information technology-relatedsupport;

 

·                  increased information technology related costs of $2.1million primarily due to the information technology requirements attributableto our increased headcount;

 

·                  increased legal fees of $2.5 million, including $3.7million attributable to a write-off of our proposed master limited partnershipoffering, which was withdrawn in January 2008. The increase associatedwith this write-off was partially offset by lower external legal fees ofapproximately $1.2 million during the nine months ended September 30, 2008when compared with the prior year;

 

·                  increased occupancy costs of $0.5 million resulting fromexpansion of corporate facilities;

 

·                  increased franchise tax of $1.4 million due, primarily, tochanges in the jurisdictional make-up of our properties; and

 

·                  other expenses related to the overall growth of ourbusiness.

 

Partiallyoffsetting the above increases in general and administrative costs wereoperator overhead recoveries of $18.3 million for the nine months ended September 30,2008, a $5.5 million increase from the same period in the prior year.Additionally, we capitalized approximately $8.0 million in salary costs to ourfull cost pool, which was $4.0 million higher than the amount capitalized inthe same period in 2007. These increases from the same period in the prior yearare the result of the increased personnel, primarily attributable to theacquisitions in 2007 and 2008. 

 

Thefollowing table presents the components of our general and administrativeexpenses:

 
| ** **                                       | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(in thousands)**                          | ** ** | **2008**                                           | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Gross general and administrative expenses        |       | $                                                  | 31,047     |                                              | $          | 23,957 |   | $ | 89,613 |   | $ | 62,938 |   |
| Capitalized general and administrative  expenses |       | (3,441                                             | )          | (1,674                                            | )          | (8,022 | ) | (3,993 | ) |
| Reimbursed general and administrative  expenses  |       | (6,604                                             | )          | (5,273                                            | )          | (18,305 | ) | (12,770 | ) |
| Net general and administrative expenses          |       | $                                                  | 21,002     |                                              | $          | 17,010 |   | $ | 63,286 |   | $ | 46,175 |   |

 

***Interest expense***

 

Our interest expense increased approximately $8.4million for the three months ended September 30, 2008 from the same periodin 2007. The increase is primarily due to the Term Credit Agreement that wasentered into and drawn on in July 2008. The interest on this facilityrepresents $6.3 million of the increase. The remaining increase is due to ahigher outstanding balance on the EXCO Resources Credit Agreement at September 30,2008 compared to September 30, 2007. Our interest expense for the ninemonths ended September 30, 2008 decreased $45.6 million from the sameperiod in 2007. The decrease is primarily due to $32.1 million ofinterest-related charges taken in the first quarter of 2007 associated with theamendment of the EXCO Operating Credit Agreement and costs attributable toearly pay down on the EXCO Operating term loan, a loan which was initiated in October 2006and paid in full in March 2007. The following table presents the componentsof our interest expense:

 

38

----

Table of Contents

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest expense:**                                  |       |                             |       |                            |       |   |   |   |   |
| 7 1/4% senior notes due 2011                           |       | $                                | 7,212      |                            | $          | 7,264 |   | $ | 21,675 |   | $ | 21,829 |   |
| EXCO Resources Credit Agreement                        |       | 11,528                           |       | 8,420                           |       | 32,190 |   | 20,095 |   |
| EXCO Operating Credit Agreement                        |       | 12,848                           |       | 19,155                          |       | 39,979 |   | 50,696 |   |
| EXCO Operating term loan                               |       | —                           |       | —                          |       | — |   | 18,140 |   |
| EXCO Operating Senior Unsecured Term Credit  Agreement |       | 6,286                            |       | —                          |       | 6,286 |   | — |   |
| Amortization of deferred financing costs on            |       |                             |       |                            |       |   |   |   |   |
| EXCO Resources Credit Agreement                        |       | 493                              |       | 604                             |       | 1,463 |   | 914 |   |
| Amortization and write-off of deferred                 |       |                             |       |                            |       |   |   |   |   |
| financing costs on EXCO Operating loan                 |       | 754                              |       | 1,075                           |       | 2,260 |   | 2,981 |   |
| Amortization and write-off of deferred                 |       |                             |       |                            |       |   |   |   |   |
| financing costs on EXCO Operating term loan            |       | —                           |       | —                          |       | — |   | 32,100 |   |
| Amortization of deferred financing costs on  EXCO      |       |                             |       |                            |       |   |   |   |   |
| Operating Senior Unsecured Term Credit  Agreement      |       | 5,312                            |       | —                          |       | 5,312 |   | — |   |
| Interest rate swaps settlements                        |       | (163                             | )          | —                          |       | (924 | ) | — |   |
| Fair market value adjustment on interest  rate swaps   |       | 2,215                            |       | —                          |       | (5,155 | ) | — |   |
| Capitalized interest                                   |       | (1,609                           | )          | —                          |       | (1,925 | ) | — |   |
| Other interest expense                                 |       | (2                               | )          | 5                               |       | 6 |   | 20 |   |
| Total interest expense                                 |       | $                                | 44,874     |                            | $          | 36,523 |   | $ | 101,167 |   | $ | 146,775 |   |

 

***Income taxes***

 

Our effective income tax rate for the ninemonths ended September 30, 2008 and 2007 was a benefit of 31.6% and anexpense of 53.2%, respectively. For the three months ended September 30,2008, we recognized a valuation allowance of $63.3 million against futuredeferred tax benefits. The valuation allowance was primarily the result of theceiling test write-down, which decreased the book basis of our proved oil andnatural gas properties. Our effective income tax rate for the three monthsended September 30, 2008 excluding the valuation allowance would have been39.2% tax expense. A substantial portion of our stock-based compensationincluded in our results of operations for the nine months ended September 30,2008 and 2007 are in the form of incentive stock options which are notdeductible for tax purposes until a disqualifying event occurs. The change inthe tax rate from the prior year is mainly a result of a state rate change lastyear in our state income taxes and prior year recording of a valuationallowance for foreign tax credits.

 

**Ourliquidity, capital resources and capital commitments**

 

***General***

 

Most of our growth has resulted from acquisitionsand our development and exploitation program. Consistent with our strategy ofacquiring and developing reserves, we have an objective of maintaining financingflexibility. In the past, we have utilized a variety of sources of capital tofund our acquisition, development and exploitation programs and to fund ouroperations. Our general financial strategy is to use a combination of cash flowfrom operations, bank financing, cash received from the sale of oil and naturalgas properties and the sale or issuance of equity and debt securities to fundour operations, conduct development and exploitation activities and to fund acquisitions.As of November 3, 2008, the aggregate borrowing base under our revolvingcredit agreements totaled approximately $2.5 billion, of which $2.2 billion wasoutstanding. We do not establish a budget for acquisitions, as these tend to beopportunity driven. On July 15, 2008, we entered into the Term CreditAgreement, of which $300.00 million was outstanding as of November 3, 2008.We are currently negotiating to refinance, renew and extend the Term CreditAgreement. The borrowings under the Term Credit Agreement were used to close aproducing oil and natural gas property acquisition, provide working capital forgeneral operations of EXCO Operating and reduce debt under the EXCO OperatingCredit Agreement. Historically, we have used the proceeds from the issuance ofequity and debt securities and borrowings under our credit agreements to raisecash to fund acquisitions. Our ability to borrow from sources other than ourcredit agreements is subject to restrictions imposed by our lenders. Inaddition, our indenture governing our Senior Notes contains restrictions onincurring indebtedness and pledging our assets.

 

Net cash provided by operating activities was $812.0million for the nine months ended September 30, 2008 compared with $380.3million for the nine months ended September 30, 2007. The increase isattributable primarily to net cash provided from oil and natural gas propertyacquisitions. At September 30, 2008, our cash and cash equivalents balancewas $95.1 million, an increase of $39.6 million from December 31, 2007 primarilyas a result of our results from operations and borrowings under our credit agreements.On November 3, 2008, our cash was $53.1 million. On January 15 and July 15,2008, we made an interest payment on our Senior Notes of $16.1 million. We madedividend payments to our preferred 

 

39

----

Table of Contents

 

shareholders of $35.0 million on March 14,2008, $35.0 million on June 16, 2008, and $12.8 million on July 18, 2008.

 

***Recent events affecting liquidity***

 

On October 3, 2008, the United Statesgovernment signed into law the Emergency Economic Stabilization Act of 2008, orEESA, in response to deterioration of worldwide credit markets. The deteriorationof the credit markets impacted several significant financial institutions, someof which were either acquired or filed for bankruptcy. While we are not able toassess the total impact of the EESA on our business, the constraints in creditmarkets creates substantial uncertainty regarding our ability to access capitalto fund our growth plans and execute our business strategies. We cannotdetermine the length of time that credit markets will remain constrained, andthe ultimate impact on our ability to access capital is expected to be equally uncertain.Should these conditions continue, our short-term and long-term liquidity andresults of operations could be impacted by requiring us to reduce capitalspending which will impact our production volumes. Additionally, the borrowingbase of our revolving credit facilities, compliance with debt covenants andstatus with credit rating agencies could be affected.

 

In addition to the credit market issues, prices foroil and natural gas began to decline significantly during the third quarter of2008 and thereafter. The spot price for oil and natural gas on November 3,2008 was $62.80 per Bbl and $6.20 per Mmbtu compared with $100.67 per Bbl and$7.12 per Mmbtu on September 30, 2008. Each of the aforementioned events couldimpact our near-term and perhaps long-term liquidity and operating revenuesresulting in changes to business plans or operations. As discussed in greaterdetail under “Item 3. Quantitative and Qualitative Disclosures About MarketRisk”, we use derivative financial instruments to mitigate commodity pricefluctuations and interest rate fluctuations to manage our debt service requirements.Lehman Brothers and its affiliates were lenders under our revolving creditagreements and a counterparty to one derivative financial instrument. LehmanBrothers’ aggregate commitments under our revolving credit agreements were lessthan $2.7 million. Our derivative financial instrument exposure was less than$0.5 million. Substantially all of the counterparties to our derivativefinancial instruments are lenders under our revolving credit agreements. Theremaining derivative counterparties are affiliates of lenders under ourrevolving credit agreements.

 

In response to the uncertainties arising from thecapital and credit markets and declines in commodity prices, management isassessing its current plans for capital expenditures, re-computing drillingeconomics with lower prices and evaluating certain funding alternatives,including, but not limited to, sales of non-strategic assets, joint venturesand timing of certain capital projects.

 

During the second and third quarters of 2008, we initiated aggressiveleasing of undeveloped acreage in two of our core operating areas, EastTexas/North Louisiana and Appalachia, to exploit the Haynesville, Marcellus andHuron shales. In Appalachia, our existing production areas and newly acquiredleasehold interests hold deep rights in the Marcellus and Huron shales. Similarly,in East Texas and North Louisiana, our existing production areas and newlyacquired leasehold interests hold deep rights in the Haynesville/Bossier shale.As of September 30, 2008, our program of leasing undeveloped acreage inAppalachia and East Texas/North Louisiana was essentially complete. Whilefurther leasing in these areas will continue, these activities will generallybe limited to leasing required to create drilling units.

 

Ourexpected 2008 capital expenditures are approximately $941.0 million. During thethird and fourth quarters of 2008, we have reallocated certain capitalexpenditures in East Texas and North Louisiana and Appalachia and decreased thenumber of conventional wells originally planned to be drilled in the secondhalf of 2008 to focus more time and capital on our shale assets. We have alsoreduced our shale leasing activities by only leasing acreage which enhances ourexisting positions. As a result of these recent actions, we expect our fourthquarter capital expenditures to be approximately $192.0 million, a substantialdecrease from the prior quarters where we were actively leasing acreage.

 

The2008 capital expenditures have differed from our spending in the past and havehad the following impacts on our liquidity and capital resources:

 

·                  the acquisition of the shale acreage differsfrom our traditional acquisitions of producing oil and natural gas assets sincethe acquisitions cause an increase in borrowings under our credit agreements,but do not provide immediate cash flows with which to service the debt;

 

·                  the EXCO Resources Credit Agreement was usedto fund approximately $88.4 million of Marcellus acreage purchases during thesecond and third quarters of 2008. We also have acreage acquisition commitmentstotaling $4.7 million as of September 30, 2008. As a result of theanticipated increase in indebtedness, without 

 

40

----

Table of Contents

 

the corresponding immediatecash flows, we requested and received from our lenders a temporary increase inthe leverage ratio covenant (from not greater than 3.5 to 1.0 to not greaterthan 4.0 to 1.0);

 

·                  the EXCO Operating Credit Agreement wassimilarly impacted by acreage acquisitions in the Haynesville/Bossier shaleplay, where we spent $60.6 million on acreage acquisitions during the secondand third quarters of 2008. We also have acreage acquisition commitmentstotaling approximately $3.4 million as of September 30, 2008;

 

·                  we incurred $300.0 million of unsecured debtto fund the Danville Acquisition on July 15, 2008; and

 

·                  our decision to exploit the shale plays hasresulted in increases to our drilling and leasehold acquisition expenditures. Consequently,substantial cash flows from operations that were previously used to reduce debtor fund acquisitions have been redeployed to these capital projects.

 

Our expected capitalexpenditures for the remainder of 2008 are approximately $200.0 million whichrepresents a substantial reduction from the third quarter. On a year-to-date basis,our expected capital spending is expected to be close to our amended 2008 budget.However, the total 2008 budget includes approximately $30.0 million ofcarried-in 2007 capital costs for midstream construction projects. Overall, our2008 spending for development and midstream operations will be approximately$25.0 to $30.0 million less due primarily to reallocation and reductions ofdrilling activities. We are also re-evaluating our 2009 capital budget in lightof recent commodity price decreases and economic capital market conditions. Weanticipate presenting to our Board of Directors a 2009 capital budget programthat will be fully funded within our 2009 expected cash flow. The expectedactivity level in 2009 will differ from 2008 with an emphasis on horizontalshale development, a reduced conventional drilling program, minimal leasing andcontinued midstream development in East Texas/North Louisiana and Appalachia.We also expect to focus our conventional technical teams on exploitationprojects to minimize the base decline of our properties.

 

Oil and natural gas prices increased significantly during the firstnine months of 2008 and we paid approximately $157.4 million to settle oil andnatural gas derivatives for the nine months ended September 30, 2008. Whileour revenues benefit from the increased prices, we do not receive full benefitas approximately 80% of our sold volumes are subject to derivative financial instruments.Beginning in September 2008, oil and natural gas prices began to decline significantly.As a result, we expect to receive cash payments from our counterparties in thefourth quarter of 2008 if price trends do not reverse. In addition, we arerequired to settle our derivative financial contracts prior to receiving thepayments for production, which is typically collected 30 to 60 days after ourderivative settlements are closed. This timing between settlement of thederivative financial instruments and actual collection of the physical proceedscan create short-term borrowing requirements. Although commodity pricesdecreased during the third quarter, we did not experience significant changesin our cash settlements as the declines occurred primarily in September.

 

Finally, on July 18, 2008, we converted all outstanding shares ofour preferred stock into our common stock, which will result in dividendsavings of $35.0 million per quarter, or $140.0 million annually.

 

Despite the recent negativeevents in capital markets, we believe that our capital resources from existingcash balances, cash flow from operating activities, including savings fromdividends previously associated with our preferred stock and remainingborrowing capacity under our credit agreements are adequate to meet the cashrequirements to fund our operations and capital expenditure programs. However,future cash flows are subject to a number of variables including productionvolumes, oil and natural gas prices and our ability to refinance our TermCredit Agreement. If cash flows decline, or we are unsuccessful in refinancingour Term Credit Agreement, we may be required to reduce our capital expenditurebudget, which in turn may affect our liquidity and results of operations infuture periods and impact our ability to maintain our borrowing base under ourrevolving credit agreements or comply with existing bank covenants. Ouroperations and other capital resources may not provide cash in sufficientamounts to maintain or initiate planned levels of capital expenditures. We haveexperienced increased costs for personnel, tubular goods and other servicesduring 2008. Further, we have encountered increased demand for drilling rigs,tubular goods, fuel, utilities and other services. Currently, we do not believethat these conditions have had a significant impact upon our capitalexpenditure programs or our results of operations. If the conditions continue,however, projects may be delayed due to lack of services or materials or we mayhave to delay projects to stay within our capital budget.

 

***Acquisitions and capital expenditures***

 

The following table presents our capitalexpenditures for the three and nine months ended September 30, 2008 and2007:

 

41

----

Table of Contents

 
| ** **                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**          | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Capital expenditures:**        |       |                             |       |                            |       |   |   |   |   |
| Property acquisitions            |       | $                                | 245,069    |                            | $          | 27,039 |   | $ | 722,247 |   | $ | 2,288,003 |   |
| Midstream acquisitions           |       | 10,974                           |       | 2,278                           |       | 66,641 |   | 119,730 |   |
| Lease purchases                  |       | 74,696                           |       | 5,812                           |       | 177,353 |   | 17,310 |   |
| Development capital expenditures |       | 201,356                          |       | 124,372                         |       | 489,693 |   | 304,404 |   |
| Midstream capital additions      |       | 15,112                           |       | 3,318                           |       | 40,770 |   | 8,910 |   |
| Corporate and other              |       | 16,284                           |       | 7,113                           |       | 41,407 |   | 20,651 |   |
| Total capital expenditures       |       | $                                | 563,491    |                            | $          | 169,932 |   | $ | 1,538,111 |   | $ | 2,759,008 |   |

 

OnFebruary 20, 2008, we closed the Appalachian Acquisition for $387.4million in cash, net of preliminary purchase price adjustments. The assetsinclude producing oil and natural gas properties, undeveloped oil and naturalgas properties, undeveloped acreage and related facilities in the Appalachiaregion. The Appalachian Acquisition was financed by the EXCO Resources CreditAgreement.

 

InMarch 2008 we closed the New Waskom Acquisition, which contained 230 milesof pipeline and a gathering system at a cost of approximately $55.6 million.The New Waskom system is located primarily in Harrison and Panola Counties inEast Texas and Caddo Parish in North Louisiana. The system has access to oneplant and three interstate pipelines.

 

During2008 we expanded our TGG pipeline, adding 57 miles of predominantly 20-inchdiameter pipe at a cost of approximately $37.6 million. Upon completion of thisexpansion in August 2008, TGG has 110 miles of pipeline with anincremental throughput capacity of 100 Mmcf per day without compression. Withcompression, incremental throughput volumes could exceed 200 Mmcf per day.

 

On July 15, 2008, we acquired producing oiland natural gas properties, acreage and other assets in Gregg, Rusk and Upshurcounties of Texas, known as the Danville Acquisition, for approximately $249.5million, including a $25.0 million deposit paid early in the second quarter of2008 and net of preliminary closing adjustments. Funding for this acquisitionwas provided by the Term Credit Agreement.

 

Additionally,we are contemplating other midstream projects in East Texas and North Louisianato expand our transport capabilities for our own production as well asproduction from unaffiliated producers.

 

Beginning with the secondquarter of 2008, we initiated aggressive acreage acquisition programs and spentapproximately $60.6 million in the Haynesville/Bossier shale plays in EastTexas and North Louisiana and approximately $88.4 million in the Marcellus andHuron shale plays in the Appalachia region of the United States. These acreageacquisition programs have significantly increased our capital expenditures forleaseholds and resulted in increases to our 2008 capital expenditures budget.In addition to our acreage acquisition program, we plan to drill threehorizontal wells and 17 vertical wells in the Haynesville/Bossier shale area.We plan to drill four horizontal wells and seven vertical wells in theMarcellus shale area and approximately eight horizontal wells in the Huronshale area during 2008. 

 

Our expected 2008 capital expenditures areapproximately $941.0 million for our development, exploitation, exploration,midstream and corporate activities, of which $307.4 million and $749.2 millionwas spent during the three and nine months ended September 30, 2008,respectively, exclusive of property and midstream acquisitions. For the fourthquarter of 2008, we are reducing some of our budgeted drilling activity to bothpreserve capital and focus on shale opportunities. We have also reduced ourleasing activity by only leasing acreage which enhances our existing positions.While we expect our total annual 2008 capital expenditures to be very close to the2008 budget, actual expenditures include approximately $30.0 million ofcarried-in 2007 capital costs for midstream construction projects. Excludingthese carried-in amounts, our reallocations and reductions in drillingactivities will take effect during the fourth quarter. As of September 30,2008, we were contractually obligated to spend approximately $94.1 million forour development, exploitation and exploration activities for the remainder of2008 and approximately $8.1 million for additional Haynesville and Marcellusacreage acquisitions. The increase in the capital expenditures budget islargely the result of acreage acquisitions and drilling in the Haynesville andMarcellus shale plays, additional drilling in our Vernon Field and capitalexpenditures associated with our Appalachian Acquisition and East Texasacquisition.

 

42

----

Table of Contents

 

***7 1/4% senior notes due January 15,2011***

 

As of September 30,2008, $444.7 million in principal was outstanding on our 7 1/4% senior notesdue January 15, 2011, or Senior Notes. The unamortized premium on theSenior Notes at September 30, 2008 was $8.4 million. The estimated fairvalue of the Senior Notes, based on quoted market prices for the Senior Notes,was $435.8 million on September 30, 2008. 

 

Interest ispayable on the Senior Notes semi-annually in arrears on January 15 and July 15of each year. Effective January 15, 2007, we may redeem some or all of theSenior Notes for the redemption price set forth in the Senior Notes. On July 15,2008, we paid $16.1 million of interest on the Senior Notes.

 

The indenturegoverning the Senior Notes contains covenants, which limit our ability and theability of our guarantor subsidiaries to:

 

·                  incur or guarantee additional debt and issuecertain types of preferred stock;

 

·                  pay dividends on our capital stock or redeem,repurchase or retire our capital stock or subordinated debt;

 

·                  make investments;

 

·                  create liens on our assets;

 

·                  enter into sale/leaseback transactions;

 

·                  create restrictions on the ability of ourrestricted subsidiaries to pay dividends or make other payments to us;

 

·                  engage in transactions with our affiliates;

 

·                  transfer or issue shares of stock ofsubsidiaries;

 

·                  transfer or sell assets; and

 

·                  consolidate, merge or transfer all orsubstantially all of our assets and the assets of our subsidiaries.

 

***Credit agreements***

 

*EXCO Resources Credit Agreement*

 

On February 20,2008, we entered into the first amendment to the EXCO Resources Credit Agreement.The primary change to the EXCO Resources Credit Agreement was an increasein the borrowing base from $900.0 million to approximately $1.2 billion,principally to reflect the assets acquired in the Appalachian Acquisition. On July 14,2008, we entered into the second amendment to the EXCO Resources Credit Agreement.This amendment, which was effective June 30, 2008, permitted the paymentof cash dividends in connection with the exercise of any right to convert ourpreferred stock into common stock without compliance with certain limitationson restricted payments. In addition, the leverage ratio covenant, as defined inthe agreement, was increased to provide that EXCO will not permit such ratio (i) asof the end of any fiscal quarter ending on or after June 30, 2008 and onor before December 31, 2008 to be greater than 4.00 to 1.00, (ii) asof the end of the fiscal quarter ending on March 31, 2009 to be greaterthan 3.75 to 1.00 and (iii) as the end of any fiscal quarter ending on orafter June 30, 2009 to be greater than 3.50 to 1.00. The other financialcovenants and all other terms, including maturity date and borrowing base,contained within the EXCO Resources Credit Agreement remained unchanged.

 

The borrowing baseis redetermined semi-annually with EXCO and the lenders having the right tointerim unscheduled redeterminations in certain circumstances. Scheduledredeterminations are on or about April 1 and October 1 of each year.On October 20, 2008, our banking group reaffirmed the existing borrowing base.The interest rate ranges from LIBOR plus 100 basis points, or bps, to LIBORplus 175 bps depending upon borrowing base usage. The facility also includes anAlternate Base Rate, or ABR, pricing alternative ranging from ABR plus 0 bps toABR plus 75 bps depending upon borrowing base usage. Borrowings under the EXCOResources Credit Agreement are collateralized by a first lien mortgageproviding a security interest in our oil and natural gas properties. EXCO hasalso agreed to have in place derivative financial instruments covering no morethan 80% of its forecasted production from total proved reserves (as defined)for each of the first two years of the forthcoming five year period and 70% foreach of the third through fifth years of the forthcoming five year period. EXCOis required to have in place mortgages covering 80% of the engineered value ofits Borrowing Base Properties (as defined). The foregoing description is notcomplete and is qualified in its entirety by the

 

43

----

Table of Contents

 

EXCO Resources CreditAgreement. As of September 30, 2008, EXCO was in compliance with thefinancial covenants contained in the EXCO Resources Credit Agreement whichrequire that we:

 

·                  maintain a consolidated current ratio (asdefined) of at least 1.0 to 1.0 as of the end of any fiscal quarter ending onor after September 30, 2007;

 

·                  not permit our ratio of consolidated fundedindebtedness (as defined) to consolidated EBITDAX (as defined) to be greaterthan (i) 4.0 to 1.0 at the end of any fiscal quarter ending on or after September 30,2008 and on or before December 31, 2008, (ii) 3.75 to 1.0 at the endof the fiscal quarter ending on March 31, 2009 and (iii) 3.5 to 1.0beginning with the quarter ending June 30, 2009 and each quarterthereafter; and

 

·                  maintain a consolidated EBITDAX toconsolidated interest expense (as defined) ratio of at least 2.5 to 1.0 at theend of any fiscal quarter ending on or after September 30, 2007.

 

At November 3, 2008, the six month LIBO rate was3.1%, which would result in an interest rate of approximately 4.6% on any newindebtedness we may incur under the EXCO Resources Credit Agreement. At November 3,2008 we had $1.0 billion of outstanding indebtedness under the EXCO ResourcesCredit Agreement.

 

*EXCO Operating Credit Agreement*

 

The EXCO Operating Credit Agreement has a borrowingbase of $1.3 billion. The borrowing base is scheduled to be redetermined on asemi-annual basis, with EXCO Operating and the lenders having the right tointerim unscheduled redeterminations in certain circumstances. Scheduledredeterminations will be made on or about April 1 and October 1 ofeach year. On October 20, 2008, our banking group reaffirmed theexisting borrowing rate. TheEXCO Operating Credit Agreement is secured by a first priority lien on theassets of EXCO Operating, including 100% of the equity of EXCO Operating’ssubsidiaries, and is guaranteed by all existing and future subsidiaries of EXCOOperating. EXCO Operating has agreed to have in place derivative financialinstruments covering no more than 80% of the “forecasted production from totalproved reserves” (as defined) for each of the first two years of theforthcoming five year period and 70% of the forecasted production from totalproved reserves for each of the third through fifth years of the forthcomingfive year period. On July 14, 2008, EXCO Operating entered into a secondamendment to the EXCO Operating Credit Agreement to (i) allow EXCOOperating to incur up to $500.0 million of indebtedness under a seniorunsecured term credit agreement, or Term Credit Agreement, and (ii) excludedrawings under the Term Credit Agreement from the consolidated current ratio,as defined in the EXCO Operating Credit Agreement through December 31,2008. The foregoing description is not complete and is qualified in itsentirety by the EXCO Operating Credit Agreement. As of September 30, 2008,EXCO Operating was in compliance with the financial covenants contained in theEXCO Operating Credit Agreement, which require that EXCO Operating:

 

·                  maintain a consolidated current ratio (asdefined) of at least 1.0 to 1.0 at the end of any fiscal quarter, beginningwith the quarter ended September 30, 2007;

 

·                  not permit our ratio of consolidatedindebtedness to consolidated EBITDAX (as defined) to be greater than 3.5 to 1.0at the end of each fiscal quarter, beginning with the quarter ended September 30,2007; and

 

·                  not permit our interest coverage ratio (asdefined) to be less than 2.5 to 1.0 at the end of each fiscal quarter,beginning with the quarter ended September 30, 2007.

 

The EXCO Operating Credit Agreement containsrepresentations, warranties, covenants, events of default and indemnitiescustomary for agreements of this type. The EXCO Operating Credit Agreementmatures March 30, 2012. Interest under the EXCO Operating Credit Agreementranges from LIBOR plus 100 bps to 175 bps. The facility also includes an ABRpricing alternative ranging from ABR plus 0 bps to ABR plus 75 bps.

 

At November 3,2008, the six month LIBO rate was 3.1%, which would result in an interest rateof approximately 4.9% on any new indebtedness we may incur under the EXCOOperating Credit Agreement. At November 3, 2008 we had $1.2 billion ofoutstanding indebtedness under the EXCO Operating Credit Agreement.

 

44

----

Table of Contents

 

*SeniorUnsecured Term Credit Agreement*

 

On July 15, 2008,EXCO Operating entered into a Term Credit Agreement, and drew $300.0 million,resulting in net proceeds of $289.4 million after transaction fees andadministrative expenses. Proceeds from the Term Credit Agreement were used tofund an acquisition of developed and undeveloped oil and natural gas propertiesand gathering and treating facilities located in East Texas from privatesellers for approximately $224.5 million, net of a $25.0 million deposit paidearly in the second quarter of 2008 and preliminary purchase price adjustments,provide working capital for general corporate purposes and to reduceindebtedness under the EXCO Operating Credit Agreement.

 

The Term Credit Agreementbalance of $300.0****million wasborrowed in a single draw on July 15, 2008. Thereafter through October 15,2008, EXCO Operating could have requested additional term loans of up to $200.0million in the aggregate, but the lenders had no obligation to provide therequested additional funding. EXCO Operating did not request any additionalborrowings under the Term Credit Agreement. The Term Credit Agreement is dueand payable on December 15, 2008 and is guaranteed by all existing andfuture direct or indirect subsidiaries of EXCO Operating, including anyguarantor of the EXCO Operating credit agreement.

 

Financial covenantsgoverning the Term Credit Agreement include a minimum current ratio of 1.00 to1.00, a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverageratio of 2.50 to 1.00. At the borrower’s election, term loans under the TermCredit Agreement may bear interest at a rate per annum equal to: (a) theAlternate Base Rate, or ABR (defined as the higher of (i) the rate ofinterest publicly announced by JPMorgan as its prime rate in effect at itsprincipal office in New York City and (ii) the federal funds effectiverate from time to time plus 0.50%), plus 4.75% or (b) the LIBO Rate(defined as the greater of (i) the rate at which Eurodollar deposits inthe London interbank market for one, two or three months, as selected by theborrower, are quoted on the Telerate screen and (ii) 3.50%), as adjustedfor actual statutory reserve requirements for Eurocurrency liabilities, plus6.00%. In the case of term loans bearing interest based upon ABR, interest ispayable quarterly in arrears. In the case of terms loans bearing interest basedupon the LIBO Rate, interest is payable on the last day of each relevantinterest period and, in the case of any interest period longer than threemonths, on each successive date three months after the first day of suchinterest period. The Term Credit Agreement contains representations,warranties, covenants, events of default and indemnities that are customary foragreements of this type and are substantially the same as the terms included inthe EXCO Operating Credit Agreement.

 

As of November 3,2008, we were negotiating with our lenders to refinance, renew and extend theTerm Credit Agreement, which is subject to approval of the banking group of theEXCO Operating Credit Agreement. If the refinancing, renewal and extension isnot successful, we believe that our available borrowings under our existingcredit facilities and operating cash flows will be sufficient to pay the TermCredit Agreement. However, future compliance with certain debt covenants underour existing credit agreements may not be met if we are required to draw onthose facilities. The ultimate outcome of these negotiations could furtherimpact our ability to fund our capital and development programs.

 

***Preferred stock***

 

TheSeries A-1, Series B and Series C 7.0% Cumulative ConvertiblePerpetual Preferred Stock, or the 7.0% Preferred Stock and Series A-1Hybrid Preferred Stock, or the Hybrid Preferred Stock, and together with the7.0% Preferred Stock, the Preferred Stock, were issued in several series at apurchase price of $10,000 per share on March 30, 2007. The Preferred Stockwas convertible into common stock at any time by the holder at a price of$19.00 per common share. We were entitled to force the conversion of thePreferred Stock at any time if the common stock traded for 20 days withina period of 30 consecutive days at a price (i) above 175% of the theneffective conversion price ($33.25 per share at the final conversion price of$19.00 per share) at any time during the 24 months after issuance, (ii) above150% of the then effective conversion price ($28.50 per share at the finalconversion price of $19.00 per share) thereafter through the 48th month afterissuance and (iii) above 125% of the then effective conversion price($23.75 per share at the final conversion price of $19.00 per share) at anytime thereafter. Cash dividends accrued at the rate of 7.0% per annum prior to March 30,2013 and at the rate of 9.0% per annum thereafter. Upon the occurrence of achange of control, holders of our Preferred Stock were able to force us torepurchase their shares for cash at the liquidation preference plus accumulateddividends. Holders of our Preferred Stock had the right to vote with theholders of common stock as a single class on all matters submitted to ourshareholders (except the election of directors) on an as-converted basis.Holders of Preferred Stock had the right to separately elect up to fourdirectors, subject to the rights of the holders of Series B 7.0% PreferredStock and Series C 7.0% Preferred Stock to vote as separate classes toeach elect one of such preferred directors. In addition, upon the occurrence ofspecified defaults in the Statements of Designation for the Preferred Stock,the holders of the Preferred Stock, voting together as a class, had the rightto elect four additional directors, or default directors, until such defaultwas cured. In connection with the mandatory conversion of our Preferred Stockinto common stock on July 18, 2008, the right to designate Preferred Stockdirectors terminated. However, pursuant to letter agreements entered into witheach of Ares Management, LLC and Oaktree Capital 

 

45

----

Table of Contents

 

Management, L.P. each of those entitiescontinue to have the right to nominate one director for election at any annualmeeting of shareholders so long as each entity beneficially owns at least10,000,000 shares of common stock. The remaining two Preferred Stock directorscurrently serving on our Board of Directors are entitled to serve until thenext annual meeting of shareholders.

 

We paid cash dividends totaling $82.8 million to the holders of ourPreferred Stock between January 1, 2008 and July 18, 2008, the dateupon which the preferred stock was converted into our common stock.

 

On July 18 2008, weconverted all outstanding shares of our Preferred Stock into a total ofapproximately 105.2 million shares of our common stock. The conversion of thePreferred Stock has the effect of increasing the book value of shareholders’equity by approximately $2.0 billion. We also paid all accrued but unpaiddividends in cash totaling approximately $12.8 million to the holders of theconverted shares of Preferred Stock as of July 18, 2008. After July 18,2008, dividends ceased to accrue on the Preferred Stock and all rights of theholders with respect to the Preferred Stock terminated, except for the right toreceive the whole shares of common stock issuable upon conversion, accrueddividends through July 18, 2008 and cash in lieu of any fractional shares.The conversion of all outstanding shares of Preferred Stock into common stockeliminated our obligation to pay quarterly cash dividends of $35.0 million,resulting in annual dividend savings of $140.0 million.

 

***Derivative financial instruments***

 

We use oil and natural gas derivatives and financialrisk management instruments to manage our exposure to commodity price andinterest rate fluctuations. We do not designate these instruments as hedginginstruments for financial accounting purposes, and, as a result, we recognizethe change in the respective instruments’ fair value currently in earnings, asa gain or loss on oil and natural gas derivatives and interest expense onfinancial risk management instruments.

 

***Oil and natural gas derivatives***

 

Our production is generally sold at prevailingmarket prices. However, we periodically enter into oil and natural gascontracts for a portion of our production when market conditions are deemedfavorable and oil and natural gas prices exceed our minimum internal pricetargets.

 

Our objective in entering into oil and natural gascontracts is to manage price fluctuations and achieve a more predictable cashflow associated with our acquisition activities and borrowings under our creditagreements. These transactions limit exposure to declines in prices, but alsolimit the benefits we would realize if prices increase. As of September 30,2008, we had contracts in place for the volumes and prices shown below:

 
| ** **                                       | ** ** | **Natural gas** | ** ** | **Weighted**                  | ** ** | ** **     | ** ** | **Weighted**                | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-------------------------------|------------|----------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **volume/**          | ** ** | **average strike**       | ** ** | **Oil**        | ** ** | **average strike**     | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu**            | ** ** | **price per Mmbtu** | ** ** | **volume/Bbl** | ** ** | **price per Bbl** | ** ** |
| **Natural Gas:**                                 |       |                 |       |                          |       |           |       |                        |       |
| Swaps (NYMEX):                                   |       |                 |       |                          |       |           |       |                        |       |
| Q4 2008                                          |       | 26,910               |       | $                             | 8.39       |           | 450        |                        | $          | 78.60 |   |
| 2009                                             |       | 100,530              |       | 8.18                          |       | 1,580          |       | 80.64                       |       |
| 2010                                             |       | 44,397               |       | 8.10                          |       | 1,568          |       | 104.64                      |       |
| 2011                                             |       | 9,125                |       | 7.97                          |       | 1,095          |       | 112.99                      |       |
| 2012                                             |       | 1,830                |       | 4.51                          |       | 92             |       | 109.30                      |       |
| 2013                                             |       | 1,825                |       | 4.51                          |       | —         |       | —                      |       |
|                                                  |            |                      |            |                               |            |                |            |                             |            |  |  |

 

***Interest rate swaps***

 

In January 2008, we entered into interest rate swaps to mitigateour exposure to fluctuations in interest rates on $700.0 million inprincipal through February 14, 2010 at LIBO rates ranging from 2.45% to2.8%. For the nine months ended September 30, 2008, we had $5.2 million ofnon-cash unrealized gains attributable to our interest rate swaps.

 

***Off-balance sheet arrangements***

 

None.

 

46

----

Table of Contents

 

***Contractual obligations and commercial commitments***

 

The following table presents a summary of ourcontractual obligations at September 30, 2008:

 
| ** **                                            | ** ** | **Less than one** | ** ** | **One to three** | ** ** | **Three to five** | ** ** | **More than five** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|------------------------------|------------|------------|------------|
| **(in thousands)**                               | ** ** | **year**                    | ** ** | **years**                  | ** ** | **years**                   | ** ** | **years**                    | ** ** | **Total**  | ** ** |
| **Contractual obligations:**                          |       |                        |       |                       |       |                        |       |                         |       |       |       |
| Long-term debt - senior notes (1)                     |       | $                           | —     |                       | $          | 444,720                     |       | $                            | —     |       | $          | — |   | $ | 444,720 |   |
| Long-term debt - EXCO Resources Credit  Agreement (2) |       | —                      |       | —                     |       | 1,014,000                   |       | —                       |       | 1,014,000  |       |
| Long-term debt - EXCO Operating Credit  Agreement (3) |       | —                      |       | —                     |       | 1,218,485                   |       | —                       |       | 1,218,485  |       |
| Term Credit Agreement (4)                             |       | 300,000                     |       | —                     |       | —                      |       | —                       |       | 300,000    |       |
| Tubular and other commitments                         |       | 30,659                      |       | —                     |       | —                      |       | —                       |       | 30,659     |       |
| Operating leases (5)                                  |       | 7,558                       |       | 11,665                     |       | 10,651                      |       | 2,021                        |       | 31,895     |       |
| Drilling/work commitments                             |       | 57,047                      |       | 81,096                     |       | 23,134                      |       | —                       |       | 161,277    |       |
| Total contractual cash obligations                    |       | $                           | 395,264    |                       | $          | 537,481                     |       | $                            | 2,266,270  |       | $          | 2,021 |   | $ | 3,201,036 |   |

 

----

| (1) | Our Senior Notes are due on January 15, 2011. The annual  interest obligation is $32.2 million. |
|-----|------------------------------------------------------------------------------------------------------|
| (2) | The EXCO Resources Credit Agreement matures on March 30, 2012.                                  |
| (3) | The EXCO Operating Credit Agreement matures on March 30, 2012.                                  |
| (4) | The Term Credit Agreement matures on December 15, 2008.                                         |
| (5) | Excludes month-to-month rental expense on compressors.                                               |

 

***Item 3****.**Quantitative and Qualitative Disclosures AboutMarket Risk***

 

Some of the information below containsforward-looking statements. The primary objective of the following informationis to provide forward-looking quantitative and qualitative information aboutour potential exposure to market risks. The term “market risk” refers to therisk of loss arising from adverse changes in oil and natural gas prices,interest rates charged on borrowings and earned on cash equivalent investments,and adverse changes in the market value of marketable securities. Thedisclosure is not meant to be a precise indicator of expected future losses,but rather an indicator of reasonably possible losses. This forward-lookinginformation provides an indicator of how we view and manage our ongoing marketrisk exposures. Our market risk sensitive instruments were entered into forhedging and investment purposes, not for trading purposes.

 

***Commodity pricerisk***

 

We use oil and natural gas derivatives and financialrisk management instruments to manage our exposures to commodity price andinterest rate fluctuations. We do not designate these instruments as hedginginstruments for financial accounting purposes and, as a result, we recognizethe change in the respective instrument’s fair value currently in earnings, asa gain or loss on oil and natural gas derivatives and as interest expense onfinancial risk management instruments. To illustrate the volatility of oil andnatural gas prices and the impact of derivative financial instruments, we had unrealizedmark-to-market losses in excess of $916.5 million for the six months ended June 30,2008 due to rapidly increasing prices for both oil and natural gas. During thethird quarter of 2008, commodity prices decreased and we recorded unrealizedmark-to-market gains of $970.3 million.

 

Our major market risk exposure is in the pricingapplicable to our oil and natural gas production. Realized pricing is primarilydriven by the prevailing worldwide price for crude oil and spot market pricesfor natural gas. Pricing for oil and natural gas production is volatile.

 

The following table sets forth our oil and naturalgas derivatives management activities as of September 30, 2008.

 

47

----

Table of Contents

 
| ** **                                       | ** ** | ** **    | ** ** | **Weighted**            | ** ** | ** **          | ** ** |
|--------------------------------------------------|------------|---------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **Volume**    | ** ** | **average strike** | ** ** | ** **          | ** ** |
| **(in thousands, except prices)** | ** ** | **Mmbtu/Bbl** | ** ** | **price**               | ** ** | **Fair value** | ** ** |
| **Natural Gas:**                                 |       |          |       |                    |       |                |       |
| Swaps (NYMEX):                                   |       |          |       |                    |       |                |       |
| Remainder of 2008                                |       | 26,910        |       | $                       | 8.39       |                | $          | 22,458 |   |
| 2009                                             |       | 100,530       |       | 8.18                    |       | 5,968               |       |
| 2010                                             |       | 44,397        |       | 8.10                    |       | (17,452             | )          |
| 2011                                             |       | 9,125         |       | 7.97                    |       | (3,504              | )          |
| 2012                                             |       | 1,830         |       | 4.51                    |       | (5,088              | )          |
| 2013                                             |       | 1,825         |       | 4.51                    |       | (4,701              | )          |
| **Total Natural Gas**                            |       | 184,617       |       |                    |       | (2,319              | )          |
|                                             |       |          |       |                    |       |                |       |
| **Oil:**                                         |       |          |       |                    |       |                |       |
| Swaps (NYMEX):                                   |       |          |       |                    |       |                |       |
| Remainder of 2008                                |       | 450           |       | 78.60                   |       | (9,065              | )          |
| 2009                                             |       | 1,580         |       | 80.64                   |       | (30,940             | )          |
| 2010                                             |       | 1,568         |       | 104.64                  |       | 967                 |       |
| 2011                                             |       | 1,095         |       | 112.99                  |       | 7,539               |       |
| 2012                                             |       | 92            |       | 109.30                  |       | 279                 |       |
| **Total Oil**                                    |       | 4,785         |       |                    |       | (31,220             | )          |
| **Total Oil and Natural Gas**                    |       |          |       |                    |       | $                   | (33,539    | ) |
|                                                  |            |               |            |                         |            |                     |            |  |  |

 

At September 30, 2008, the average forwardNYMEX oil prices per Bbl for the remainder of 2008 and for calendar year 2009were $100.49 and $102.46, respectively, and the average forward NYMEX naturalgas prices per Mmbtu for the remainder of 2008 and for calendar 2009 were $7.57and $8.15, respectively.

 

DuringOctober 2008, the average forward NYMEX oil and natural gas prices decreased.At October 31, 2008, the average forward NYMEX oil prices per barrel forthe remainder of 2008 and calendar year 2009 decreased by $29.33 per barrel and$29.83 per barrel, respectively. The natural gas prices for the same periodsdecreased by $0.66 per Mcf and $0.82 per Mcf, respectively. The impact on ourmark-to-market liability, as of September 30, 2008, using these October 31,2008 NYMEX strip prices would result in a net asset of $202.3 million, oran increase of $235.9 million. Our reported earnings and assets orliabilities for derivative financial instruments will continue to be subject tosignificant fluctuations in value due to price volatility.

 

Realized gains or losses from the settlement of ouroil and natural gas derivatives are recorded in our financial statements asincreases or decreases in oil and gas revenue. For example, using the oil swapsin place at September 30, 2008, for the remainder of 2008, if thesettlement price exceeds the actual weighted average strike price of $78.60 perBbl, then a reduction in oil and natural gas revenue would be recorded for thedifference between the settlement price and $78.60 per Bbl, multiplied by thehedged volume of 450 Mbbls. Conversely, if the settlement price is less than$78.60 per Bbl, then an increase in oil and natural gas revenue would berecorded for the difference between the settlement price and $78.60 per Bbl,multiplied by the hedged volume of 450 Mbbls. For example, for a hedged volumeof 450 Mbbls, if the settlement price is $79.60 per Bbl then oil and naturalgas revenue would decrease by $0.5 million. Conversely, if the settlement priceis $77.60 per Bbl, oil and natural gas revenue would increase by $0.5 million.

 

***Interest rate risk***

 

At September 30, 2008, our exposure to interestrate changes related primarily to borrowings under our credit agreements andinterest earned on our short-term investments. The interest rate is fixed at 71/4% on the $444.7 million in Senior Notes we have outstanding. Interestis payable on borrowings under our credit agreements and the Term CreditAgreement is based on a floating rate as more fully described in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Ourliquidity, capital resources and capital commitments.” At September 30,2008, we had $2.5 billion in outstanding borrowings under our current andnon-current credit agreements. A 1% change in interest rates based on thevariable borrowings as of September 30, 2008 would result in an increaseor decrease in our interest costs of $25.3 million per year. The interestwe pay on these borrowings is set periodically based upon market rates.

 

In January 2008, we entered into financial riskmanagement instruments to mitigate our exposure to fluctuations in interestrates on $700.0 million in principal through February 14, 2010 atLIBO rates ranging from 2.45% to 2.8%. As of September 30, 2008, we had$5.2 million of unrealized gains on our interest rate swaps.

 

48

----

Table of Contents

 

***Item 4.  ******Controls and Procedures***

 

**Evaluationof disclosure controls and procedures**

 

We maintain “disclosure controls and procedures,” assuch term is defined in Rule 13a-15(e) under the Exchange Act thatare designed to ensure that information required to be disclosed by us inreports that we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer (CEO), Chief FinancialOfficer (CFO) and Chief Accounting Officer (CAO), as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognizes that disclosurecontrols and procedures, no matter how well conceived and operated, can provideonly reasonable assurance of achieving the desired control objectives, and weare required to apply our judgment in evaluating the cost-benefit relationshipof possible disclosure controls and procedures.

 

Our management evaluated, under the supervision andwith the participation of our CEO, CFO and CAO, the effectiveness of the designand operation of our disclosure controls and procedures as of September 30,2008 and concluded our controls were effective.

 

**Changes ininternal control over financial reporting**

 

Nochanges in EXCO’s internal control over financial reporting occurred during thecurrent quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II—OTHER INFORMATION**

 

**Item 1.        Legalproceedings**

 

Effective March 18,2008, we entered into an agreement to settle all claims arising under aputative royalty owner class action filed against our subsidiaries, North CoastEnergy, Inc. and North Coast Energy Eastern, Inc., styled *PRC Holdings, LLC, et al. v. North Coast Energy, Inc.*for $40,000*.*In connection withthis settlement, all claims alleged by the plaintiffs were dismissed withprejudice by the federal district court on July 11, 2008.

 

**Item 1A.     Riskfactors**

 

Our business has manyrisks. The risk factors noted in this section and other factors notedthroughout this report, including those risks identified in Part I, Item2. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” describe examples of risks, uncertainties and events that maycause our actual results to differ materially from those contained in anyforward-looking statement. If one or more of these risks or uncertaintiesmaterialize, or if underlying assumptions prove incorrect, actual outcomes mayvary materially from those included in this report. Additional factors thatcould materially and adversely affect our business, financial condition, operatingresults or liquidity and the trading price of our common stock are describedunder the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2007, which was filed with the SEC on February 29,2008. This information should be considered carefully, together with otherinformation in this report and other reports and materials we file with theSEC.

 

***The global financial and credit crisis and anyassociated prolonged decline in the price of oil and natural gas similar to theconditions that existed in the third quarter of 2008 and thereafter will likelylimit our access to liquidity and credit and curtail our ability to fund ourplanned exploration, development, and production activity, which could adverselyaffect our business, financial condition and results of operations.***

 

Theglobal financial and credit crisis has reduced the availability of liquidityand credit to fund the continuation and expansion of industrial businessoperations worldwide. Significant write-offs in the financial services sector,the repricing of credit risk and the current weak economic conditions havemade, and will likely continue to make, it difficult to obtain funding. As aresult of concerns about the stability of financial markets generally and thesolvency of counterparties specifically, the cost of obtaining money from thecredit markets generally has increased as many lenders and institutionalinvestors have increased interest rates and enacted tighter lending standards.As a result of the current credit environment, we may be unable to obtainadequate funding under our existing credit agreements because (i) ourlending counterparties may be unwilling or unable to meet their fundingobligations or (ii) our borrowing bases under our existing creditagreements, which 

 

49

----

Table of Contents

 

are redetermined at least twice a year, maydecrease as a result of lower oil or natural gas prices, operatingdifficulties, declines in reserves, lending requirements or regulations, or forany other reason. In addition, the Term Credit Agreement is scheduled to matureon December 15, 2008. We are negotiating with our lenders to refinance,renew and extend the Term Credit Agreement, but we may not be able tosuccessfully negotiate a renewal or extension or such renewal or extension maybe on terms and conditions less favorable than currently exist in the TermCredit Agreement.

 

Theshortage of liquidity and credit combined with recent substantial losses inworldwide equity markets could lead to an extended national or global economic recession.A slowdown in economic activity caused by a recession would likely reducenational and worldwide demand for energy and result in lower oil and naturalgas prices. Our revenues, cash flow and profitability and our ability tomaintain or increase our borrowing capacity, to repay current or futureindebtedness and to obtain additional capital on attractive terms dependsubstantially upon oil and natural gas prices. Prolonged decline in the priceof oil and natural gas similar to the conditions that existed in the thirdquarter of 2008 and thereafter will likely limit our access to liquidity andcredit and curtail our ability to fund our planned exploration, development,and production activity, which could adversely affect our business, financialcondition and results of operations.

 

**Item 6.        Exhibits**

 

See “Index to Exhibits” fora description of our exhibits.

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                         |   | EXCO  RESOURCES, INC. |
|------------------------------|--------|----------------------------|
|                         |   | (Registrant)               |
|                         |   |                       |   |
| Date:  November 6, 2008 |   | By:                        | /s/  DOUGLAS H. MILLER |
|                         |   |                       | Douglas  H. Miller |
|                         |   |                       | Chairman  and Chief Executive Officer |
|                         |   |                       |   |
|                         |   | By:                        | /s/  J. DOUGLAS RAMSEY |
|                         |   |                       | J.  Douglas Ramsey, Ph.D. |
|                         |   |                       | Vice  President and Chief Financial Officer |
|                         |   |                       |   |
|                         |   | By:                        | /s/  MARK E. WILSON |
|                         |   |                       | Mark  E. Wilson 

Vice  President, Chief Accounting Officer |
|                         |   |                       | and  Controller |

 

50

----

Table of Contents

 

**Index to Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Merger  Agreement, dated July 22, 2006, by and among Winchester  Acquisition, LLC, Progress Fuels Corporation, Winchester Energy  Company, Ltd., and WGC Holdco, LLC, filed as an Exhibit to  EXCO’s Current Report on Form 8-K, dated July 22, 2006 and  filed on July 25, 2006 and incorporated by reference herein.                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.2                 |       | First  Amendment to Agreement and Plan of Merger, dated as of September 28,  2006, by and among Winchester Acquisition, LLC, Progress Fuels  Corporation, Winchester Energy Company, Ltd., and WGC Holdco, LLC, filed  as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment No. 2,  dated July 22, 2006 and filed on October 4, 2006 and incorporated  by reference herein.                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.3                 |       | Purchase  and Sale Agreement by and among Anadarko Petroleum Corporation and Anadarko  Gathering Company, as Seller, and Vernon Holdings, LLC, as Purchaser,  dated December 22, 2006, filed as an Exhibit to EXCO’s  Pre-Effective Amendment No. 1 to the Registration Statement on  Form S-1 (File No. 333-139568) filed on January 16, 2007 and  incorporated by reference herein.                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.4                 |       | Purchase  and Sale Agreement by and among EXCO Resources, Inc., as Purchaser,  Anadarko Petroleum Corporation, Anadarko E&P Company, LP, Howell  Petroleum Corporation and Kerr-McGee Oil & Gas Onshore LP, as  Seller, dated February 1, 2007, filed as an Exhibit to EXCO’s  Annual Report on Form 10-K filed on March 19, 2007 and incorporated  by reference herein.                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.5                 |       | First  Amendment to Purchase and Sale Agreement and Assignment of Partial Interest  in the Purchase and Sale Agreement by and among Anadarko Petroleum  Corporation, Anadarko Gathering Company, EXCO Partners Operating  Partnership, LP (successor by merger to Vernon Holdings, LLC) and  Vernon Gathering, LLC, dated March 30, 2007, filed as an  Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed on  April 2, 2007 and incorporated by reference herein.                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.6                 |       | First  Amendment Letter Agreement by and among EXCO Resources, Inc., Southern G  Holdings, LLC, Anadarko Petroleum Corporation, Anadarko E&P  Company, LP, Howell Petroleum Corporation, and Kerr-McGee Oil &  Gas Onshore LP, dated April 13, 2007, filed as an Exhibit to  EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein.                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.7                 |       | Second  Amendment to Purchase and Sale Agreement, effective as of February 1,  2007, by and among Anadarko Petroleum Corporation, Anadarko E&P Company LP,  Howell Petroleum Corporation, Kerr-McGee Oil & Gas Onshore LP,  EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an  Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on  May 8, 2007 and incorporated by reference herein.                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.8                 |       | Third  Amendment to Purchase and Sale Agreement and Assignment of Partial Interest  in the Purchase and Sale Agreement, effective as of February 1, 2007, by  and among Anadarko Petroleum Corporation, Anadarko E&P Company LP,  Howell Petroleum Corporation, Kerr-McGee Oil & Gas Onshore LP,  EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an  Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on  May 8, 2007 and incorporated by reference herein. |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.9                 |       | Membership  Interest Purchase and Sale Agreement, dated May 8, 2007, by and among  EXCO Resources, Inc., Southern G Holdings, LLC and Crimson  Exploration Inc. and Crimson Exploration Operating, Inc., filed as  an Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on  May 8, 2007 and incorporated by reference herein.                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.10                |       | Asset  Purchase Agreement, dated December 7, 2007, between EXCO  Appalachia, Inc., as purchaser, and EOG Resources, Inc., EOG  Resources Appalachian LLC and Energy Search, Incorporated, as sellers,  filed as an Exhibit to EXCO’s Current Report on Form 8-K dated  February 20, 2008 and filed on February 26, 2008 and incorporated  by reference herein.                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.11                |       | First  Amendment to Asset Purchase Agreement, dated February 20, 2008, between  EXCO Appalachia, Inc., as purchaser, and EOG Resources, Inc., EOG  Resources Appalachian LLC, and Energy Search, Incorporated,                                                                                                                                                                                                                                                                                                            |

 

51

----

Table of Contents

 
|   |   | as  sellers, filed as an exhibit to EXCO’s Current Report on Form 8-K dated  February 20, 2008 and filed on February 26, 2008 and incorporated  by reference herein.                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1    |   | Third  Amended and Restated Articles of Incorporation of EXCO Resources, Inc.,  filed as an Exhibit to EXCO’s Current Report on Form 8-K, dated  February 8, 2006 and filed on February 14, 2006 and incorporated by  reference herein.                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2    |   | Amended  and Restated Bylaws of EXCO Resources, Inc., filed as an Exhibit to  EXCO’s Current Report on Form 8-K, dated November 14, 2007 and  filed on November 16, 2007 and incorporated by reference herein.                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.3    |   | Statement  of Designation of Series A-1 7.0% Cumulative Convertible Perpetual  Preferred Stock of EXCO Resources, Inc., filed as an Exhibit to  EXCO’s Form 8-K dated March 28, 2007 and filed on April 2,  2007 and incorporated by reference herein.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.4    |   | Statement  of Designation of Series A-2 7.0% Cumulative Convertible Perpetual  Preferred Stock of EXCO Resources, Inc., filed as an Exhibit to  EXCO’s Form 8-K dated March 28, 2007 and filed on April 2,  2007 and incorporated by reference herein.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.5    |   | Statement  of Designation of Series B 7.0% Cumulative Convertible Perpetual  Preferred Stock of EXCO Resources, Inc., filed as an Exhibit to  EXCO’s Form 8-K dated March 28, 2007 and filed on April 2,  2007 and incorporated by reference herein.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.6    |   | Statement  of Designation of Series C 7.0% Cumulative Convertible Perpetual  Preferred Stock of EXCO Resources, Inc., filed as an Exhibit to  EXCO’s Form 8-K dated March 28, 2007 and filed on April 2,  2007 and incorporated by reference herein.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.7    |   | Statement  of Designation of Series A-1 Hybrid Preferred Stock of EXCO  Resources, Inc., filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 3.8    |   | Statement  of Designation of Series A-2 Hybrid Preferred Stock of EXCO  Resources, Inc., filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1    |   | Indenture  among EXCO Resources, Inc., the Subsidiary Guarantors and Wilmington  Trust Company, as Trustee, dated as of January 20, 2004, filed as  exhibit (b)(2) to Amendment No. 4 to the Schedule TO  filed by NCE Acquisition, Inc. and EXCO Resources, Inc. on January 21,  2004 and incorporated by reference herein.   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2    |   | First  Supplemental Indenture by and among EXCO Resources, Inc., North Coast  Energy, Inc., North Coast Energy Eastern, Inc. and Wilmington Trust  Company, as Trustee, dated as of January 27, 2004, filed as an  Exhibit to EXCO’s Registration Statement on Form S-4 filed  March 25, 2004 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3    |   | Second  Supplemental Indenture by and among EXCO Resources, Inc., Pinestone  Resources, LLC and Wilmington Trust Company, as Trustee, filed as an  Exhibit to EXCO’s Annual Report on Form 10-K for 2004 filed  March 31, 2005 and incorporated by reference herein.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4    |   | Third  Supplemental Indenture by and among EXCO Resources, Inc., TXOK  Acquisition, Inc. and Wilmington Trust Company, as Trustee, filed as an  Exhibit to EXCO’s Current Report on Form 8-K filed on  February 21, 2006 and incorporated by reference herein.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5    |   | Form of  71/4% Global  Note Due 2011, filed as an Exhibit to EXCO’s Pre-effective Amendment  No. 1 to its Registration Statement on Form S-4 filed  April 20, 2004 and incorporated by reference herein.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6    |   | Specimen  Stock Certificate for EXCO’s common stock, filed as an Exhibit to EXCO’s  Amendment No. 2 to the Form S-1 (File No. 333- 129935) filed  on January 27, 2006 and incorporated by reference herein.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.7    |   | Fourth  Supplemental Indenture, dated as of May 4, 2006, by and among EXCO  Resources, Inc., Power Gas Marketing & Transmission, Inc.  and Wilmington Trust Company, as Trustee, filed as an Exhibit to EXCO’s                                                                                                                            |

 

52

----

Table of Contents

 
|   |   | Current  Report on Form 8-K, dated May 4, 2006 and filed on May 10,  2006 and incorporated by reference herein.                                                                                                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    |   | Fifth  Supplemental Indenture, dated as of May 2, 2007, by and among EXCO  Resources, Inc., Southern G Holdings, LLC and Wilmington Trust  Company, as Trustee, filed as an Exhibit to EXCO’s Current Report on  Form 8-K, dated May 2, 2007 and filed on May 8, 2007  and incorporated by reference herein.                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    |   | Sixth  Supplemental Indenture, dated as of February 12, 2008, by and among EXCO  Resources, Inc., EXCO Services, Inc. and Wilmington Trust Company,  as Trustee, filed as an Exhibit to EXCO’s Annual Report on  Form 10-K for 2007 filed February 29, 2008 and incorporated by  reference herein.                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.10   |   | First  Amended and Restated Registration Rights Agreement, by and among EXCO  Holdings Inc. and the Initial Holders (as defined therein), effective January 5,  2006, filed as an Exhibit to EXCO’s Amendment No. 1 to its  Registration Statement on Form S-1 (File No. 333-129935) filed  on January 6, 2006 and incorporated by reference herein.   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.11   |   | Registration  Rights Agreement, dated March 28, 2007, by and among EXCO  Resources, Inc. and the other parties thereto with respect to the 7.0%  Cumulative Convertible Perpetual Preferred Stock and the Hybrid Preferred  Stock, filed as an Exhibit to EXCO’s Form 8-K dated March 28,  2007 and filed on April 2, 2007 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.12   |   | Registration  Rights Agreement, dated March 28, 2007, by and among EXCO  Resources, Inc. and the other parties thereto with respect to the Hybrid  Preferred Stock, filed as an Exhibit to EXCO’s Form 8-K dated March 28,  2007 and filed on April 2, 2007 and incorporated by reference herein.                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Indenture  among EXCO Resources, Inc., the Subsidiary Guarantors and Wilmington  Trust Company, as Trustee, dated as of January 20, 2004, filed as  exhibit (b)(2) to Amendment No. 4 to the Schedule TO  filed by NCE Acquisition, Inc. and EXCO Resources, Inc. on  January 21, 2004 and incorporated by reference herein.                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | First  Supplemental Indenture by and among EXCO Resources, Inc., North Coast  Energy, Inc., North Coast Energy Eastern, Inc. and Wilmington Trust  Company, as Trustee, dated as of January 27, 2004, filed as an  Exhibit to EXCO’s Registration Statement on Form S-4 filed  March 25, 2004 and incorporated by reference herein.                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Second  Supplemental Indenture by and among EXCO Resources, Inc., Pinestone  Resources, LLC and Wilmington Trust Company, as Trustee, dated as of  December 21, 2004, filed as an Exhibit to EXCO’s Annual Report on  Form 10-K for 2004 filed March 31, 2005 and incorporated  by reference herein.                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4   |   | Third  Supplemental Indenture by and among EXCO Resources, Inc., TXOK  Acquisition, Inc. and Wilmington Trust Company, as Trustee, filed as an  Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 1, dated February 8, 2006 and filed on February 21, 2006  and incorporated by reference herein.                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5   |   | Fourth  Supplemental Indenture, dated as of May 4, 2006, by and among EXCO  Resources, Inc., Power Gas Marketing & Transmission, Inc.  and Wilmington Trust Company, as Trustee, filed as an Exhibit to EXCO’s  Current Report on Form 8-K, dated May 4, 2006 and filed  on May 10, 2006 and incorporated by reference herein.           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6   |   | Form of  71/4% Global  Note Due 2011, filed as an Exhibit to EXCO’s Pre-effective Amendment  No. 1 to its Registration Statement on Form S-4 filed  April 20, 2004 and incorporated by reference herein.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7   |   | Amended  and Restated 2005 Long-Term Incentive Plan, filed as an Exhibit to  EXCO’s Current Report on Form 8-K, dated November 14, 2007 and  filed on November 16, 2007 and incorporated by reference herein.*                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | Form of  Incentive Stock Option Agreement for the EXCO Resources, Inc. 2005  Long-Term Incentive Plan, filed as an Exhibit to EXCO’s Current Report  on Form 8-K, dated November 14, 2007 and filed on November 16,  2007 and incorporated by reference herein.*                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9   |   | Form of  Nonqualified Stock Option Agreement for the EXCO Resources, Inc. 2005  Long-Term Incentive                                                                                                                                                                                                                                                                                       |

 

53

----

Table of Contents

 
|   |   | Plan,  filed as an Exhibit to EXCO’s Current Report on Form 8-K, dated  November 14, 2007 and filed on November 16, 2007 and incorporated  by reference herein.*                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Form of  Restricted Stock Award Agreement for the EXCO Resources, Inc. 2005  Long-Term Incentive Plan, filed as an Exhibit to EXCO’s Registration  Statement on Form S-8 (File No. 333-132551) filed on March 17,  2006 and incorporated by reference herein.*                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Merger  Agreement, dated July 22, 2006, by and among Winchester  Acquisition, LLC, Progress Fuels Corporation, Winchester Energy  Company, Ltd., and WGC Holdco, LLC., filed as an Exhibit to  EXCO’s Current Report on Form 8-K, dated July 22, 2006  and filed on July 25, 2006 and incorporated by reference herein.                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | First  Amendment to Agreement and Plan of Merger, dated as of September 28,  2006, by and among Winchester Acquisition, LLC, Progress Fuels  Corporation, Winchester Energy Company, Ltd., and WGC Holdco, LLC, filed  as an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Senior  Revolving Credit Agreement, dated October 2, 2006, among EXCO Partners  Operating Partnership, LP, certain of its subsidiaries, JPMorgan Chase  Bank, N.A., as Administrative Agent, and the lenders party thereto, filed as  an Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | First  Amendment to Credit Agreement, dated October 2, 2006, among EXCO  Resources, Inc., certain of its subsidiaries, JPMorgan Chase Bank, N.A.,  as Administrative Agent, and the lenders party thereto, filed as an  Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | Amended  and Restated Equity Contribution Agreement, dated October 4, 2006, among  EXCO Resources, Inc., EXCO Partners Operating Partnership, LP, and  JPMorgan Chase Bank, N.A., as Administrative Agent, filed as an  Exhibit to EXCO’s Current Report on Form 8-K/A-Amendment  No. 2, dated July 22, 2006 and filed on October 4, 2006 and  incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | Senior  Term Credit Agreement, dated October 2, 2006, as amended and restated as  of October 13, 2006, among EXCO Partners Operating Partnership, LP,  certain of its subsidiaries, JPMorgan Chase Bank, N.A., as Administrative  Agent, and the lenders party thereto, filed as an Exhibit to EXCO’s  Current Report on Form 8-K/A-Amendment No. 3, dated July 22,  2006 and filed on October 19, 2006 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | Second  Amended and Restated Equity Contribution Agreement, dated October 13,  2006, among EXCO Resources, Inc., EXCO Partners Operating  Partnership, LP, and JPMorgan Chase Bank, N.A., as Administrative Agent,  filed as an Exhibit to EXCO’s Current Report on  Form 8-K/A-Amendment No. 3, dated July 22, 2006 and filed on  October 19, 2006 and incorporated by reference herein.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | Third  Amended and Restated EXCO Resources, Inc. Severance Plan, filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated  November 14, 2007 and filed on November 16, 2007 and incorporated  by reference herein.*                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | Amended  and Restated 2007 Director Plan of EXCO Resources, Inc., filed as an  Exhibit to EXCO’s Current Report on Form 8-K, dated  November 14, 2007 and filed on November 16, 2007 and incorporated  by reference herein.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | Purchase  and Sale Agreement by and among Anadarko Petroleum Corporation and Anadarko  Gathering Company, as Seller, and Vernon Holdings, LLC, as Purchaser,  dated December 22, 2006, filed as an Exhibit to EXCO’s  Pre-Effective Amendment No. 1 to the Registration Statement on  Form S-1 (File No. 333-139568) filed on January 16, 2007 and  incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | First  Amendment to Purchase and Sale Agreement and Assignment of Partial Interest  in the Purchase and Sale Agreement by and among Anadarko Petroleum  Corporation, Anadarko Gathering Company, EXCO Partners Operating  Partnership, LP (successor by merger to Vernon Holdings, LLC) and  Vernon Gathering, LLC,                                                                                                                                                         |

 

54

----

Table of Contents

 
|   |   | dated  March 30, 2007, filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                                                                                                                                                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.22  |   | Guaranty  dated December 22, 2006 by EXCO Resources, Inc. in favor of  Anadarko Petroleum Corporation and Anadarko Gathering Company, filed as an  Exhibit to EXCO’s Pre-Effective Amendment No. 1 to the Registration  Statement on Form S-1 (File No. 333-139568) filed on  January 16, 2007 and incorporated by reference herein.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.23  |   | Purchase  and Sale Agreement by and among EXCO Resources, Inc., Anadarko Petroleum  Corporation, Anadarko E&P Company, LP, Howell Petroleum Corporation,  and Kerr-McGee Oil & Gas Onshore LP, dated February 1,  2007, filed as an Exhibit to EXCO’s Annual Report on Form 10-K  filed on March 19, 2007 and incorporated by reference herein.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.24  |   | First  Amendment to Credit Agreement effective as of December 31, 2006 among  EXCO Partners Operating Partnership, LP, certain of its subsidiaries,  JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party  thereto, filed as an exhibit to EXCO’s Current Report on Form 8-K, dated  March 8, 2007 and filed March 13, 2007 and incorporated by reference  herein.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.25  |   | Preferred  Stock Purchase Agreement, dated March 28, 2007, by and among EXCO  Resources, Inc. and the other parties thereto filed as an  Exhibit to EXCO’s Form 8-K dated March 28, 2007 and filed on  April 2, 2007 and incorporated by reference herein.                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.26  |   | Letter  Agreement, dated March 28, 2007, with OCM Principal Opportunities Fund  IV, L.P. and OCM EXCO Holdings, LLC, filed as an Exhibit to  EXCO’s Form 8-K dated March 28, 2007 and filed on April 2,  2007 and incorporated by reference herein.*                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.27  |   | Letter  Agreement, dated March 28, 2007, with Ares Corporate Opportunities Fund,  ACOF EXCO, L.P., ACOF EXCO 892 Investors, L.P., Ares Corporate  Opportunities Fund II, L.P., Ares EXCO, L.P. and Ares EXCO 892  Investors, L.P, filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.28  |   | Amended  and Restated Credit Agreement, dated as of March 30, 2007, among EXCO  Partners Operating Partnership, LP, as Borrower, certain subsidiaries of  Borrower, as Guarantors, the lenders party thereto, JPMorgan Chase Bank,  N.A., as Administrative Agent, and J.P. Morgan Securities Inc., as Sole  Bookrunner and Lead Arranger, filed as an Exhibit to EXCO’s  Form 8-K dated March 28, 2007 and filed on April 2, 2007 and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.29  |   | Registration  Rights Agreement, dated March 28, 2007, by and among EXCO  Resources, Inc. and the other parties thereto with respect to the 7.0%  Cumulative Convertible Perpetual Preferred Stock and the Hybrid Preferred  Stock, filed as an Exhibit to EXCO’s Form 8-K dated March 28,  2007 and filed on April 2, 2007 and incorporated by reference herein.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.30  |   | Registration  Rights Agreement, dated March 28, 2007, by and among EXCO  Resources, Inc. and the other parties thereto with respect to the Hybrid  Preferred Stock, filed as an Exhibit to EXCO’s Form 8-K dated  March 28, 2007 and filed on April 2, 2007 and incorporated by  reference herein.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.31  |   | First  Amendment to Letter Agreement by and among EXCO Resources, Inc.,  Southern G Holdings, LLC, Anadarko Petroleum Corporation,  Anadarko E&P Company, LP, Howell Petroleum Corporation, and  Kerr-McGee Oil & Gas Onshore LP, dated April 13, 2007, filed  as an Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed  on May 8, 2007 and incorporated by reference herein.                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.32  |   | Second  Amended and Restated Credit Agreement, dated as of May 2, 2007, among  EXCO Resources, Inc. as Borrower, certain of its subsidiaries, as  Guarantors, the Lenders defined therein, JPMorgan Chase Bank, N.A., as  Administrative Agent, and J.P. Morgan Securities Inc., as Sole  Bookrunner and Lead Arranger, filed as an Exhibit to EXCO’s  Form 8-K dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein.                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.33  |   | Fifth  Supplemental Indenture, dated as of May 2, 2007, by and among EXCO  Resources, Inc., Southern G Holdings, LLC and Wilmington Trust  Company, as Trustee, filed as an Exhibit to EXCO’s Current Report on                                                                                                                                                                                                                                                                          |

 

55

----

Table of Contents

 
|   |   | Form 8-K, dated May 2,  2007 and filed on May 8, 2007 and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.34  |   | Second  Amendment to Purchase and Sale Agreement, effective as of February 1,  2007, by and among Anadarko Petroleum Corporation, Anadarko E&P  Company LP, Howell Petroleum Corporation, Kerr-McGee Oil & Gas  Onshore LP, EXCO Resources, Inc. and Southern G Holdings, LLC,  filed as an Exhibit to EXCO’s Form 8-K dated May 2, 2007 and  filed on May 8, 2007 and incorporated by reference herein.                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.35  |   | Third  Amendment to Purchase and Sale Agreement and Assignment of Partial Interest  in the Purchase and Sale Agreement, effective as of February 1, 2007, by  and among Anadarko Petroleum Corporation, Anadarko E&P Company LP,  Howell Petroleum Corporation, Kerr-McGee Oil & Gas Onshore LP,  EXCO Resources, Inc. and Southern G Holdings, LLC, filed as an Exhibit to  EXCO’s Form 8-K dated May 2, 2007 and filed on May 8, 2007 and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.36  |   | Membership  Interest Purchase and Sale Agreement, dated May 8, 2007, by and among  EXCO Resources, Inc., Southern G Holdings, LLC, Crimson  Exploration Inc. and Crimson Exploration Operating, Inc., filed as  an Exhibit to EXCO’s Form 8-K dated May 2, 2007 and filed on May 8,  2007 and incorporated by reference herein.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.37  |   | Purchase  Agreement, effective August 15, 2007, between OCM GW Holdings, LLC  and EXCO Resources, Inc., filed as an Exhibit to EXCO’s Current  Report on Form 8-K, dated August 15, 2007 and filed on August 21,  2007 and incorporated by reference herein.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.38  |   | Asset  Purchase Agreement, dated December 7, 2007, between EXCO Appalachia, Inc.,  as purchaser, and EOG Resources, Inc., EOG Resources  Appalachian LLC and Energy Search, Incorporated, as sellers, filed as an  Exhibit to EXCO’s Current Report on Form 8-K dated February 20,  2008 and filed on February 26, 2008 and incorporated by reference  herein.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.39  |   | Sixth  Supplemental Indenture, dated as of February 12, 2008, by and among EXCO  Resources, Inc., EXCO Services, Inc. and Wilmington Trust Company,  as Trustee, filed as an Exhibit to EXCO’s Annual Report on Form 10-K  for 2007 filed February 29, 2008 and incorporated by reference herein.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.40  |   | Counterpart  Agreement, dated February 4, 2008, to that Certain Second Amended and  Restated Credit Agreement, dated May 2, 2007, among EXCO Resources, Inc.,  as Borrower, and certain subsidiaries of Borrower and the lender parties  thereto, filed as an Exhibit to EXCO’s Annual Report on Form 10-K  for 2007 filed February 29, 2008 and incorporated by reference herein.                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.41  |   | First  Amendment to Second Amended and Restated Credit Agreement, dated as of February 20,  2008, by and among EXCO Resources, Inc., as Borrower, certain of its  subsidiaries, as Guarantors, the Lenders defined herein, and JP Morgan Chase  Bank, N.A., as Administrative Agent, filed as an Exhibit to EXCO’s  Current Report on Form 8-K, dated February 20, 2008 and filed on February 26,  2008 and incorporated by reference herein.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.42  |   | First  Amendment to Amended and Restated Credit Agreement, dated as of February 20,  2008, by and among EXCO Partners Operating Partnership, LP, as Borrower,  certain of its subsidiaries, as Guarantors, the Lenders defined therein and  JP Morgan Chase Bank, N.A., as Administrative Agent, filed as an exhibit to  EXCO’s Current Report on Form 8-K, dated February 20,  2008 and filed on February 26, 2008 and incorporated by reference  herein.                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.43  |   | First  Amendment to Asset Purchase Agreement, dated February 20, 2008, between  EXCO Appalachia, Inc., as purchaser, and EOG Resources, Inc., EOG  Resources Appalachian LLC, and Energy Search, Incorporated, as sellers,  filed as an exhibit to EXCO’s Current Report on Form 8-K dated February 20,  2008 and filed on February 26, 2008 and incorporated by reference  herein.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.44  |   | Seventh  Supplemental Indenture, dated as of September 30, 2008, by and among  EXCO Resources, Inc., EXCO-North Coast Energy, Inc. and Wilmington  Trust Company, as Trustee, filed as an Exhibit to EXCO’s Quarterly  Report on Form 10-Q filed on August 6, 2008 and incorporated by  reference herein.

                                                                                                                                                                                           |
| 10.45  |   | Senior  Unsecured Term Credit Agreement, dated as of July 15, 2008, among EXCO  Operating Company, LP, as borrower, and certain of its subsidiaries, as  guarantors, and JP Morgan Chase Bank, N.A., as administrative agent, and the  Lenders signatories thereto, filed as an exhibit to EXCO’s Current Report on Form 8-K  dated                                                                                                                                                                                            |

 

56

----

Table of Contents

 
|   |   | July 14,  2008 and filed on July 16, 2008 and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.46  |   | Second  Amendment to Amended and Restated Credit Agreement, dated as of July 14,  2008, among EXCO Operating Company, LP, as borrower, and certain of its  subsidiaries as guarantors, and JP Morgan Chase Bank, N.A., as administrative  agent, and the lenders signatories thereto, filed as an exhibit to EXCO’s  Current Report on Form 8-K dated July 14, 2008 and filed on  July 16, 2008 and incorporated by reference herein.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.47  |   | Second  Amendment to Second Amended and Restated Credit Agreement, dated as of  July 14, 2008 and effective as of September 30, 2008, among EXCO  Resources, Inc., as borrower, and certain of its subsidiaries, as  guarantors, and JP Morgan Chase Bank, N.A., as administrative agent, and the  lenders signatories thereto, filed as an exhibit to EXCO’s Current Report on  Form 8-K dated July 14, 2008 and filed on July 16, 2008 and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief  Executive Officer of EXCO Resources, Inc., filed herewith.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief  Financial Officer of EXCO Resources, Inc., filed herewith.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.3   |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief  Accounting Officer of EXCO Resources, Inc., filed herewith.                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief  Executive Officer and Chief Financial Officer of EXCO Resources, Inc.,  filed herewith.                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 99.1   |   | Audit  Committee Charter, filed as an Exhibit to EXCO’s Quarterly Report on  Form 10-Q filed on August 6, 2008 and incorporated by reference  herein.                                                                                                                                                                                                                                                                                                                                          |

 

----

*These exhibits are management contracts.

 

57

----