ACQUISITIONS

9 Months Ended

Sep. 30, 2022

Business Combination and Asset Acquisition [Abstract]

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 September 30, 2022, revenues and operating income associated with the operations acquired through the Indigo and GEPH Mergers totaled $1,373 million and $1,055 million, respectively. For the nine months ended September 30, 2022, revenues and operating income associated with the operations acquired through the Indigo and GEPH Mergers totaled $3,279 million and $2,404 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.

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 ($1,263 million including post-close adjustments) 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)	1,263
Total consideration	$	1,726

(1)Reflects $6 million of customary post-close cash consideration adjustments.

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	$	1,726
Fair Value of Assets Acquired:
Cash and cash equivalents	11
Accounts receivable (1)	180
Other current assets (1)	1
Commodity derivative assets	56
Evaluated oil and gas properties	1,783
Unevaluated oil and gas properties	59
Other property, plant and equipment	2
Other long-term assets	3
Total assets acquired	2,095
Fair Value of Liabilities Assumed:
Accounts payable (1)	178
Other current liabilities	1
Derivative liabilities	75
Revolving credit facility	81

Asset retirement obligations	24
Other noncurrent liabilities (1)	10
Total liabilities assumed	369
Net Assets Acquired and Liabilities Assumed	$	1,726

(1)Reflects purchase price adjustments consisting of a $9 million increase to accounts receivable, a $2 million decrease to other current assets, an $8 million increase to accounts payable and a $5 million increase to other noncurrent liabilities during the nine months ended September 30, 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.

With the completion of the GEPH Merger, Southwestern acquired proved and unproved properties of approximately $1,783 million and $59 million (including post-closing adjustments), 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 fair value of the assets acquired and liabilities assumed as of the acquisition date. The purchase price allocation is complete as of the third quarter of 2022.


(in millions)	As of September 1, 2021
Consideration:
Total consideration	$	1,961
Fair Value of Assets Acquired:
Cash and cash equivalents	55
Accounts receivable (2)	193
Other current assets	2
Commodity derivative assets	2
Evaluated oil and gas properties	2,724
Unevaluated oil and gas properties (1)	690
Other property, plant and equipment	4
Other long-term assets	27
Total assets acquired	3,697
Fair Value of Liabilities Assumed:
Accounts payable (2)	285
Other current liabilities	55
Derivative liabilities	501
Revolving credit facility	95
Senior unsecured notes	726
Asset retirement obligations	8
Other noncurrent liabilities (2)	66
Total liabilities assumed	1,736
Net Assets Acquired and Liabilities Assumed	$	1,961

(1)Reflects $6 million purchase price adjustment during the nine months ended September 30, 2022 due to finalization of purchase accounting.

(2)Reflects purchase price adjustments consisting of a $1 million increase to accounts receivable, an $11 million increase to accounts payable and a $4 million decrease to other noncurrent liabilities during the nine months ended September 30, 2022 due to finalization of purchase accounting.

The assets acquired and liabilities assumed were recorded at their fair values at the date of the Indigo Merger. The valuation of certain assets, including property, are based on 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 $690 million (including post-closing adjustments), 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 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 September 30, 2022, up to approximately $31 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 $26 million as of September 30, 2022, primarily related to purchase or volume commitments associated with gathering and fresh water. These amounts will be recognized as payments are made over the next 10 months.

Merger-Related Expenses

The following table summarizes the merger-related expenses incurred:


	For the three months ended September 30,
	2022						2021
(in millions)	Indigo Merger		GEPH Merger		Total		Montage Merger		Indigo Merger		Total

Professional fees (bank, legal, consulting)	$	—	$	—	$	—	$	—	$	23	$	23
Representation & warranty insurance	—		—		—		—		4		4
Contract buyouts, terminations and transfers	—		—		—		—		5		5

Employee-related	—		—		—		—		1		1
Other	—		—		—		—		2		2
Total merger-related expenses	$	—	$	—	$	—	$	—	$	35	$	35


	For the nine months ended September 30,
	2022						2021
(in millions)	Indigo Merger		GEPH Merger		Total		Montage Merger		Indigo Merger		Total
Transition services	$	—	$	18	$	18	$	—	$	—	$	—
Professional fees (bank, legal, consulting)	—		1		1		1		25		$	26
Representation & warranty insurance	—		—		—		—		4		$	4
Contract buyouts, terminations and transfers	1		2		3		—		5		$	5
Due diligence and environmental	1		1		2		—		—		$	—
Employee-related	—		1		1		1		1		$	2
Other	—		2		2		—		2		$	2
Total merger-related expenses	$	2	$	25	$	27	$	2	$	37	$	39

Pro Forma Information

The following table summarizes the unaudited pro forma condensed financial information for the three and nine months ended September 30, 2021 as if the Indigo Merger and the GEPH Merger each had occurred on January 1, 2020:



(in millions)	For the three months ended September 30, 2021		For the nine months ended September 30, 2021
Revenues	$	2,084	$	5,031
Net loss attributable to common stock	$	(2,177)	$	(3,022)
Net loss attributable to common stock per share - basic	$	(1.95)	$	(2.71)
Net loss attributable to common stock per share - diluted	$	(1.95)	$	(2.71)

The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred had the Indigo Merger and the GEPH Merger each been completed at January 1, 2020, nor is it necessarily indicative of future operating results of the combined entities. The unaudited pro forma information gives effect to the Indigo Merger and the GEPH Merger and any related equity and debt issuances, along with the use of proceeds therefrom, as if they had occurred on January 1, 2020 and is a result of combining the statements of operations of Southwestern with the pre-merger results of Indigo and GEPH, including adjustments for revenues and direct expenses. The pro forma results exclude any cost savings anticipated as a result of the Indigo Merger and the GEPH Merger, and include adjustments to DD&A (depreciation, depletion and amortization) based on the purchase price allocated to property, plant, and equipment and the estimated useful lives as well as adjustments to interest expense. Interest expense was adjusted to reflect any retirement of assumed senior notes, credit facilities, all related accrued interest and the associated decrease in amortization of issuance costs related to notes retired and revolving lines of credit. Interest expense was also adjusted to include the impact of the assumption and exchange of Indigo’s $700 million of 5.375% Senior Notes due 2029 for equivalent Southwestern senior notes and to reflect the retirement of the Indigo and GEPH credit facilities, all related accrued interest and the associated decreases in amortization of issuance costs related to the respective revolving lines of credit. Management believes the estimates and assumptions are reasonable, and the relative effects of the Indigo Merger and the GEPH Merger are properly reflected.