SOUTHWESTERN ENERGY CO [SWN] Filings

10-Q 1 swn-20220331.htm 10-Q 2022 Q1 FORM 10Q swn-20220331

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the quarterly period ended March 31, 2022

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the transition period from ________ to ________

Commission file number: 001-08246

Southwestern Energy Company

(Exact name of registrant as specified in its charter)

Delaware

71-0205415

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

10000 Energy Drive

Spring, Texas 77389

(Address of principal executive offices)(Zip Code)

(832) 796-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01

SWN

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class						Outstanding as of April 26, 2022
Common Stock, Par Value $0.01						1,116,176,673

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SOUTHWESTERN ENERGY COMPANY

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022


PART I – FINANCIAL INFORMATION			Page

Item 1.	Financial Statements		4
	Consolidated Statements of Operations		4
	Consolidated Statements of Comprehensive Income (Loss)		5
	Consolidated Balance Sheets		6
	Consolidated Statements of Cash Flows		7
	Consolidated Statements of Changes in Equity		8
	Notes to Consolidated Financial Statements		9
		Note 1. Basis of Presentation	9
		Note 2. Acquisition	9
		Note 3. Restructuring Charges	13
		Note 4. Revenue Recognition	14
		Note 5. Cash and Cash Equivalents	15
		Note 6. Natural Gas and Oil Properties	15
		Note 7. Earnings per Share	16
		Note 8. Derivatives and Risk Management	17
		Note 9. Reclassifications From Accumulated Other Comprehensive Income (Loss)	23
		Note 10. Fair Value Measurements	23
		Note 11. Debt	26
		Note 1 2 . Commitments and Contingencies	31
		Note 1 3 . Income Taxes	32
		Note 1 4 . Pension Plan and Other Post r etirement Benefits	33
		Note 15. Long-Term Incentive Compensation	34
		Note 1 6 . Segment Information	37
		Note 1 7 . New Accounting Pronouncements	38

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
	Results of Operations		42
	Liquidity and Capital Resources		49
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		55
Item 4.	Controls and Procedures		56

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		57
Item 1A.	Risk Factors		57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3.	Defaults Upon Senior Securities		57
Item 4.	Mine Safety Disclosures		57
Item 5.	Other Information		57
Item 6.	Exhibits		58

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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact or present financial information, that address activities, outcomes and other matters that should or may occur in the future, including, without limitation, statements regarding the financial position, business strategy, production and reserve growth and other plans and objectives for our future operations, are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance. We have no obligation and make no undertaking to publicly update or revise any forward-looking statements, except as may be required by law.

Forward-looking statements include the items identified in the preceding paragraph, information concerning possible or assumed future results of operations and other statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) identified by words such as “anticipate,” “intend,” “plan,” “project,” “estimate,” “continue,” “potential,” “should,” “could,” “may,” “will,” “objective,” “guidance,” “outlook,” “effort,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “forecast,” “model,” “target” or similar words. Statements may be forward-looking even in the absence of these particular words.

You should not place undue reliance on forward-looking statements. They are subject to known and unknown risks, uncertainties and other factors that may affect our operations, markets, products, services and prices and cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. In addition to any assumptions and other factors referred to specifically in connection with forward-looking statements, risks, uncertainties and factors that could cause our actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

•the timing and extent of changes in market conditions and prices for natural gas, oil and natural gas liquids (“NGLs”) (including regional basis differentials) and the impact of reduced demand for our production and products in which our production is a component due to governmental and societal actions taken in response to the COVID-19 pandemic or other world health event;

•our ability to fund our planned capital investments;

•a change in our credit rating and an increase in interest rates;

•the extent to which lower commodity prices impact our ability to service or refinance our existing debt;

•the impact of volatility in the financial markets or other global economic factors, including the impact of COVID-19 or other diseases;

•geopolitical and business conditions in key regions of the world;

•difficulties in appropriately allocating capital and resources among our strategic opportunities;

•the timing and extent of our success in discovering, developing, producing, replacing and estimating reserves;

•our ability to maintain leases that may expire if production is not established or profitably maintained;

•our ability to meet natural gas delivery commitments and to utilize or monetize our firm transportation commitments;

•our ability to realize the expected benefits from acquisitions, including the Mergers (defined below);

•costs in connection with the Mergers and the transactions contemplated thereby;

•integration of operations and results subsequent to the Mergers;

•risks related to the Mergers, including potential litigation relating to the Mergers, and the effect of the consummation of the Mergers on business relationships, operating results, employees, stakeholders and business generally of the parties;

•our ability to transport our production to the most favorable markets or at all;

•availability and costs of personnel and of products and services provided by third parties;

•the impact of government regulation, including changes in law, the ability to obtain and maintain permits, any increase in severance or similar taxes, and legislation or regulation relating to hydraulic fracturing or other drilling and completing techniques, climate and over-the-counter derivatives;

•the impact of the adverse outcome of any material litigation against us or judicial decisions that affect us or our industry generally;

•the effects of weather or power outages;

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•increased competition;

•the financial impact of accounting regulations and critical accounting policies;

•the comparative cost of alternative fuels;

•credit risk relating to the risk of loss as a result of non-performance by our counterparties;

•our hedging strategy and results;

•our ability to obtain debt or equity financing on satisfactory terms; and

•any other factors listed in the reports we have filed and may file with the Securities and Exchange Commission (“SEC”).

Should one or more of the risks or uncertainties described above or elsewhere in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to update publicly any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages.

Reserve engineering is a process of estimating underground accumulations of natural gas, oil and NGLs that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and our development program. Accordingly, reserve estimates may differ significantly from the quantities of natural gas, oil and NGLs that are ultimately recovered.

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the three months ended March 31,
(in millions, except share/per share amounts)	2022		2021
Operating Revenues:
Gas sales	$	1,692	$	464
Oil sales	111		81
NGL sales	272		173
Marketing	866		352
Other	2		2
	2,943		1,072
Operating Costs and Expenses:
Marketing purchases	862		356
Operating expenses	381		250
General and administrative expenses	44		38
Merger-related expenses	25		1
Restructuring charges	—		6

Depreciation, depletion and amortization	275		96

Taxes, other than income taxes	57		24
	1,644		771
Operating Income	1,299		301
Interest Expense:
Interest on debt	68		50
Other interest charges	3		3
Interest capitalized	(30)		(22)
	41		31

Loss on Derivatives	(3,927)		(191)
Loss on Early Extinguishment of Debt	(2)		—
Other Income, Net	—		1

Income (Loss) Before Income Taxes	(2,671)		80
Provision (Benefit) for Income Taxes:
Current	4		—
Deferred	—		—
	4		—
Net Income (Loss)	$	(2,675)	$	80


Earnings (Loss) Per Common Share:
Basic	$	(2.40)	$	0.12
Diluted	$	(2.40)	$	0.12

Weighted Average Common Shares Outstanding:
Basic	1,114,610,964		675,385,145
Diluted	1,114,610,964		679,867,825

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

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	For the three months ended March 31,
(in millions)	2022		2021
Net income (loss)	$	(2,675)	$	80

Change in value of pension and other postretirement liabilities:
Settlement adjustment (1)	—		—

Comprehensive income (loss)	$	(2,675)	$	80

(1)Settlement adjustment was less than $1 million for the three months ended March 31, 2022.

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

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2022		December 31, 2021

ASSETS	(in millions)
Current assets:
Cash and cash equivalents	$	21	$	28
Accounts receivable, net	1,071		1,160
Derivative assets	103		183
Other current assets	43		42
Total current assets	1,238		1,413
Natural gas and oil properties, using the full cost method, including $2,228 million as of March 31, 2022 and $2,231 million as of December 31, 2021 excluded from amortization	34,184		33,631

Other	513		509
Less: Accumulated depreciation, depletion and amortization	(24,482)		(24,202)
Total property and equipment, net	10,215		9,938
Operating lease assets	186		187
Long-term derivative assets	126		226
Deferred tax assets	—		—
Other long-term assets	82		84
Total long-term assets	394		497
TOTAL ASSETS	$	11,847	$	11,848
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	5	$	206
Accounts payable	1,488		1,282
Taxes payable	80		93
Interest payable	49		75

Derivative liabilities	3,940		1,279
Current operating lease liabilities	44		42
Other current liabilities	64		75
Total current liabilities	5,670		3,052
Long-term debt	4,895		5,201
Long-term operating lease liabilities	139		142
Long-term derivative liabilities	1,023		632
Pension and other postretirement liabilities	25		23
Other long-term liabilities	214		251
Total long-term liabilities	6,296		6,249
Commitments and contingencies (Note 12)
Equity/(deficit):
Common stock, $0.01 par value; 2,500,000,000 shares authorized; issued 1,160,451,456 shares as of March 31, 2022 and 1,158,672,666 shares as of December 31, 2021	12		12

Additional paid-in capital	7,159		7,150
Accumulated deficit	(7,063)		(4,388)
Accumulated other comprehensive loss	(25)		(25)
Common stock in treasury, 44,353,224 shares as of March 31, 2022 and December 31, 2021	(202)		(202)
Total equity/(deficit)	(119)		2,547
TOTAL LIABILITIES AND EQUITY	$	11,847	$	11,848

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

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the three months ended March 31,
(in millions)	2022		2021
Cash Flows From Operating Activities:
Net income (loss)	$	(2,675)	$	80
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	275		96
Amortization of debt issuance costs	2		2


Loss on derivatives, unsettled	3,232		169
Stock-based compensation	1		—
Loss on early extinguishment of debt	2		—

Other	(1)		—
Change in assets and liabilities, excluding impact from acquisitions:
Accounts receivable	89		(33)
Accounts payable	126		33
Taxes payable	(13)		(8)
Interest payable	(16)		(2)
Inventories	4		9
Other assets and liabilities	(54)		1
Net cash provided by operating activities	972		347

Cash Flows From Investing Activities:
Capital investments	(500)		(227)
Proceeds from sale of property and equipment	—		1
Other	—		(1)
Net cash used in investing activities	(500)		(227)

Cash Flows From Financing Activities:
Payments on current portion of long-term debt	(202)		—

Payments on long-term debt	(21)		—
Payments on revolving credit facility	(2,803)		(923)
Borrowings under revolving credit facility	2,517		790
Change in bank drafts outstanding	34		7

Cash paid for tax withholding	(4)		(3)

Net cash used in financing activities	(479)		(129)

Decrease in cash and cash equivalents	(7)		(9)
Cash and cash equivalents at beginning of year	28		13
Cash and cash equivalents at end of period	$	21	$	4

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

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Common Stock in Treasury			Total
	Shares Issued	Amount								Shares	Amount

	(in millions, except share amounts)
Balance at December 31, 2021	1,158,672,666	$	12	$	7,150	$	(4,388)	$	(25)	44,353,224	$	(202)	$	2,547
Comprehensive loss:
Net loss	—	—		—		(2,675)		—		—	—		(2,675)
Other comprehensive income	—	—		—		—		—		—	—		—
Total comprehensive loss	—	—		—		—		—		—	—		(2,675)
Stock-based compensation	—	—		1		—		—		—	—		1





Performance units vested	2,499,860	—		12		—		—		—	—		12
Tax withholding – stock compensation	(721,070)	—		(4)		—		—		—	—		(4)
Balance at March 31, 2022	1,160,451,456	$	12	$	7,159	$	(7,063)	$	(25)	44,353,224	$	(202)	$	(119)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Common Stock in Treasury			Total
	Shares Issued	Amount								Shares	Amount

	(in millions, except share amounts)
Balance at December 31, 2020	718,795,700	$	7	$	5,093	$	(4,363)	$	(38)	44,353,224	$	(202)	$	497
Comprehensive income:
Net income	—	—		—		80		—		—	—		80
Other comprehensive income	—	—		—		—		—		—	—		—
Total comprehensive income	—	—		—		—		—		—	—		80


Issuance of restricted stock	10,067	—		—		—		—		—	—		—
Cancellation of restricted stock	(405)	—		—		—		—		—	—		—

Restricted units vested	2,136,882	—		8		—		—		—	—		8
Performance units vested	1,001,505	—		4		—		—		—	—		4
Tax withholding – stock compensation	(748,627)	—		(3)		—		—		—	—		(3)
Balance at March 31, 2021	721,195,122	$	7	$	5,102	$	(4,283)	$	(38)	44,353,224	$	(202)	$	586

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

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

Nature of Operations

Southwestern Energy Company (including its subsidiaries, collectively “Southwestern” or the “Company”) is an independent energy company engaged in natural gas, oil and NGLs development, exploration and production (“E&P”). The Company is also focused on creating and capturing additional value through its marketing business (“Marketing”). Southwestern conducts most of its business through subsidiaries and operates principally in two segments: E&P and Marketing.

E&P. Southwestern’s primary business is the development and production of natural gas as well as associated NGLs and oil, with ongoing operations focused on unconventional natural gas and oil reservoirs located in Pennsylvania, West Virginia, Ohio and Louisiana. The Company’s operations in Pennsylvania, West Virginia and Ohio, herein referred to as “Appalachia,” are primarily focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and liquids reservoirs. The Company’s operations in Louisiana, herein referred to as “Haynesville,” are primarily focused on the Haynesville and Bossier natural gas reservoirs (“Haynesville and Bossier Shales”). The Company also operates drilling rigs and provides certain oilfield products and services, principally serving the Company’s E&P operations through vertical integration.

Marketing. Southwestern’s marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil and NGLs primarily produced in its E&P operations.

Basis of Presentation

The accompanying consolidated financial statements were prepared using accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been appropriately condensed or omitted in this Quarterly Report.

The comparability of certain 2022 amounts to prior periods could be impacted as a result of the Indigo Merger (as defined below) completed on September 1, 2021, and the GEPH Merger (as defined below) completed on December 31, 2021. The Company believes the disclosures made are adequate to make the information presented not misleading.

Principles of Consolidation

The consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented herein. It is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”).

The Company’s significant accounting policies, which have been reviewed and approved by the Audit Committee of the Company’s Board of Directors, are summarized in Note 1 in the Notes to the Consolidated Financial Statements included in the Company’s 2021 Annual Report.

(2) ACQUISITIONS

In September 2021, Southwestern completed the Indigo Merger, as defined and described below, to establish operations into the Haynesville and Bossier Shales. In December 2021, Southwestern completed the GEPH Merger, as defined and described below, to extend those operations in the Haynesville and Bossier Shales. For the three months ended March 31, 2022, revenues and operating income associated with the operations acquired through the Indigo and GEPH Mergers totaled $753 million and $482 million, respectively.

GEP Haynesville, LLC Merger

On November 3, 2021, Southwestern entered into an Agreement and Plan of Merger with Mustang Acquisition Company, LLC (“Mustang”), GEP Haynesville, LLC (“GEPH”) and GEPH Unitholder Rep, LLC (the “GEPH Merger Agreement”). Pursuant to the terms of the GEPH Merger Agreement, GEPH merged with and into Mustang, a subsidiary of Southwestern, and became a wholly-owned subsidiary of Southwestern (the “GEPH Merger”). The GEPH Merger closed on December 31, 2021 and expanded the Company’s operations in the Haynesville.

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Under the terms and conditions of the GEPH Merger Agreement, the outstanding equity interests in GEPH were cancelled and converted into the right to receive $1,269 million in cash consideration and 99,337,748 shares of Southwestern common stock. These shares of Southwestern common stock had an aggregate dollar value equal to approximately $463 million, based on the closing price of $4.66 per share of Southwestern common stock on the NYSE on December 31, 2021. In addition, the Company assumed GEPH’s revolving line of credit balance of $81 million as of December 31, 2021. This balance was subsequently repaid, and the GEPH revolving line of credit was retired on December 31, 2021. See Note 11 for additional information.

The GEPH Merger constituted a business combination, and was accounted for using the acquisition method of accounting. For tax purposes, the GEPH Merger was treated as a sale of partnership interests and an acquisition of assets. The following table presents the fair value of consideration transferred to GEPH equity holders as a result of the GEPH Merger:


(in millions, except share, per share amounts)	As of December 31, 2021
Shares of Southwestern common stock issued	99,337,748
NYSE closing price per share of Southwestern common shares on December 31, 2021	$	4.66
	$	463
Cash consideration	1,269
Total consideration	$	1,732

The following table sets forth the preliminary fair value of the assets acquired and liabilities assumed as of the acquisition date. Certain data necessary to complete the purchase price allocation is still under evaluation, including, but not limited to, the final actualization of accrued liabilities and receivable balances as well as the valuation of natural gas and oil properties. The Company will finalize the purchase price allocation during the twelve-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.


(in millions)	As of December 31, 2021
Consideration:
Total consideration	$	1,732
Fair Value of Assets Acquired:
Cash and cash equivalents	11
Accounts receivable	171
Other current assets	3
Commodity derivative assets	56
Evaluated oil and gas properties	1,783
Unevaluated oil and gas properties (1)	58
Other property, plant and equipment	2
Other long-term assets	3
Total assets acquired	2,087
Fair Value of Liabilities Assumed:
Accounts payable (2)	164
Other current liabilities	1
Derivative liabilities	75
Revolving credit facility	81

Asset retirement obligations	24
Other noncurrent liabilities (2)	10
Total liabilities assumed	355
Net Assets Acquired and Liabilities Assumed	$	1,732

(1)Reflects $1 million purchase price adjustment during the three months ended March 31, 2022.

(2)Reflects purchase price adjustments reflecting a decrease of $6 million to accounts payable and a $5 million increase to other noncurrent liabilities during the three months ended March 31, 2022.

The assets acquired and liabilities assumed were recorded at their preliminary estimated fair values at the date of the GEPH Merger. Acquired working capital amounts are expected to approximate fair value due to their short-term nature. The valuation of certain assets, including property, are based on preliminary appraisals. The fair value of acquired equipment is based on both available market data and a cost approach.

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With the completion of the GEPH Merger, Southwestern acquired proved and unproved properties of approximately $1,783 million and $58 million, respectively, primarily associated with the Haynesville and Bossier formations. The remaining $2 million in Other property, plant and equipment consists of land, facilities and various equipment.

The income approach was utilized for unevaluated and evaluated oil and gas properties based on underlying reserve projections at the GEPH Merger date. Income approaches are considered Level 3 fair value estimates and include significant assumptions of future production, commodity prices, and operating and capital cost estimates, discounted using weighted average cost of capital for industry peers, and risk adjustment factors based on reserve category. Price assumptions were based on observable market pricing adjusted for historical differentials. Cost estimates were based on current observable costs inflated based on historical and expected future inflation. Taxes were based on current statutory rates.

The Company considered the borrowings under the revolving credit facility to approximate fair value as the balance on the GEPH revolving credit facility was immediately paid off after the GEPH Merger close. The value of derivative instruments was based on observable inputs, primarily forward commodity-price curves, and is considered Level 2.

Indigo Natural Resources Merger

On June 1, 2021, Southwestern entered into an Agreement and Plan of Merger with Ikon Acquisition Company, LLC (“Ikon”), Indigo Natural Resources LLC (“Indigo”) and Ibis Unitholder Representative LLC (the “Indigo Merger Agreement”). Pursuant to the terms of the Indigo Merger Agreement, Indigo merged with and into Ikon, a subsidiary of Southwestern, and became a wholly-owned subsidiary of Southwestern (the “Indigo Merger”). On August 27, 2021, Southwestern’s stockholders voted to approve the Indigo Merger and the transaction closed on September 1, 2021. The Indigo Merger established Southwestern’s natural gas operations in the Haynesville and Bossier Shales.

The outstanding equity interests in Indigo were cancelled and converted into the right to receive (i) $373 million in cash consideration, subject to adjustment as provided in the Indigo Merger Agreement, and (ii) 337,827,171 shares of Southwestern common stock. These shares of Southwestern common stock had an aggregate dollar value equal to approximately $1,588 million, based on the closing price of $4.70 per share of Southwestern common stock on the NYSE on September 1, 2021. Additionally, Southwestern assumed $700 million in aggregate principal amount of Indigo’s 5.375% Senior Notes due 2029 (the “Indigo Notes”) with a fair value of $726 million as of September 1, 2021, which were subsequently exchanged for $700 million of newly issued 5.375% Senior Notes due 2029. In addition, the Company assumed Indigo’s revolving line of credit balance of $95 million as of September 1, 2021. This balance was subsequently repaid in September 2021, and the Indigo revolving line of credit was retired in September 2021. See Note 7 and Note 11 for additional information.

The Indigo Merger constituted a business combination, and was accounted for using the acquisition method of accounting. For tax purposes, the Indigo Merger was treated as a sale of partnership interests and an acquisition of assets. The following table presents the fair value of consideration transferred to Indigo equity holders as a result of the Indigo Merger:


(in millions, except share, per share amounts)	As of September 1, 2021
Shares of Southwestern common stock issued	337,827,171
NYSE closing price per share of Southwestern common shares on September 1, 2021	$	4.70
	$	1,588
Cash consideration	373
Total consideration	$	1,961

The following table sets forth the preliminary fair value of the assets acquired and liabilities assumed as of the acquisition date. Certain data necessary to complete the purchase price allocation is still under evaluation, including, but not limited to, the valuation of natural gas and oil properties and the resolution of certain matters that the Company is indemnified for under the Indigo Merger Agreement. The Company will finalize the purchase price allocation during the twelve-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.

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(in millions)	As of September 1, 2021
Consideration:
Total consideration	$	1,961
Fair Value of Assets Acquired:
Cash and cash equivalents	55
Accounts receivable	192
Other current assets	2
Commodity derivative assets	2
Evaluated oil and gas properties	2,724
Unevaluated oil and gas properties (1)	693
Other property, plant and equipment	4
Other long-term assets	27
Total assets acquired	3,699
Fair Value of Liabilities Assumed:
Accounts payable (1)	283
Other current liabilities	55
Derivative liabilities	501
Revolving credit facility	95
Senior unsecured notes	726
Asset retirement obligations	8
Other noncurrent liabilities	70
Total liabilities assumed	1,738
Net Assets Acquired and Liabilities Assumed	$	1,961

(1)Reflects $9 million purchase price adjustment during the three months ended March 31, 2022.

The assets acquired and liabilities assumed were recorded at their preliminary estimated fair values at the date of the Indigo Merger. Acquired working capital amounts are expected to approximate fair value due to their short-term nature. The valuation of certain assets, including property, are based on preliminary appraisals. The fair value of acquired equipment is based on both available market data and a cost approach.

With the completion of the Indigo Merger, Southwestern acquired proved and unproved properties of approximately $2,724 million and $693 million, respectively, primarily associated with the Haynesville and Bossier formations. The remaining $4 million in Other property, plant and equipment consists of land, water facilities and various equipment.

The income approach was utilized for unevaluated and evaluated oil and gas properties based on underlying reserve projections at the Indigo Merger date. Income approaches are considered Level 3 fair value estimates and include significant assumptions of future production, commodity prices, and operating and capital cost estimates, discounted using weighted average cost of capital for industry peers, and risk adjustment factors based on reserve category. Price assumptions were based on observable market pricing adjusted for historical differentials. Cost estimates were based on current observable costs inflated based on historical and expected future inflation. Taxes were based on current statutory rates.

The measurement of senior unsecured notes was based on unadjusted quoted prices in an active market and are Level 1. The Company considered the borrowings under the 2018 credit facility to approximate fair value as the outstanding Indigo revolving credit facility was immediately paid off after the Indigo Merger close. The value of derivative instruments was based on observable inputs, primarily forward commodity-price and interest-rate curves and is considered Level 2.

Prior to the Indigo Merger, in May 2021, Indigo closed on an agreement to divest its Cotton Valley natural gas and oil properties. Indigo retained certain contractual commitments related to volume commitments associated with natural gas gathering, for which Southwestern has assumed the obligation to pay the gathering provider for any unused portion of the volume commitment under the agreement through 2027, depending on the buyer’s actual use. As of March 31, 2022, up to approximately $34 million of these contractual commitments remain, and the Company has recorded a $17 million liability for the estimated future payments.

Excluding the Cotton Valley gathering agreement (discussed above), the Company has recorded additional liabilities totaling $35 million as of March 31, 2022, primarily related to purchase or volume commitments associated with gathering and fresh water. These amounts will be recognized as payments are made over a period of two years.

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Merger-Related Expenses

The following table summarizes the merger-related expenses incurred:


	For the three months ended March 31,
	2022						2021
(in millions)	Indigo Merger		GEPH Merger		Total		Montage Merger
Transition services	$	—	$	18	$	18	$	—
Professional fees (bank, legal, consulting)	—		1		1		—

Contract buyouts, terminations and transfers	—		2		2		—
Due diligence and environmental	1		—		1		—