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Organization and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The consolidated financial statements included in this Annual Report present the Company’s financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company evaluates subsequent events through the date the financial statements are issued.

The comparability of certain 2023 and 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) 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 include the accounts of Southwestern and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

In 2015, the Company purchased an 86% ownership in a limited partnership that owns and operates a gathering system in Appalachia. Because the Company owns a controlling interest in the partnership, the operating and financial results are consolidated with the Company’s E&P segment results. The minority partner’s share of the partnership activity is reported in retained earnings in the consolidated financial statements.

Major Customers

The Company sells the vast majority of its E&P natural gas, oil and NGL production to third-party customers through its marketing subsidiary. Customers include major energy companies, utilities and industrial purchasers of natural gas. For the year ended December 31, 2023 one purchaser accounted for approximately 14% of annual revenues. A default on this account could have a material impact on the Company, but the Company does not believe that there is a material risk of a default. For the year ended December 31, 2022, one purchaser accounted for 17% of annual revenues. No other purchasers accounted for more than 10% of consolidated revenues. The Company believes that the loss of any one customer would not have an adverse effect on its ability to sell its natural gas, oil and NGL production.

Cash and Cash Equivalents

Cash and cash equivalents are defined by the Company as short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash. Management considers cash and cash equivalents to have minimal credit and market risk as the Company monitors the credit status of the financial

institutions holding its cash and marketable securities. The Company had $21 million and $50 million in cash and cash equivalents as of December 31, 2023 and 2022, respectively.

Certain of the Company’s cash accounts are zero-balance controlled disbursement accounts. The Company presents the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets. Outstanding checks included as a component of accounts payable totaled $73 million and $100 million as of December 31, 2023 and 2022, respectively.

Property, Depreciation, Depletion and Amortization

Natural Gas and Oil Properties. The Company utilizes the full cost method of accounting for costs related to the exploration, development and acquisition of natural gas and oil properties. The following table shows the capitalized costs of natural gas and oil properties and the related accumulated depreciation, depletion and amortization as of December 31, 2023 and 2022:


(in millions)	2023		2022
Proved properties	$	35,697	$	33,546
Unproved properties	2,075		2,217
Total capitalized costs	37,772		35,763
Less: Accumulated depreciation, depletion and amortization	(28,031)		(25,033)
Net capitalized costs	$	9,741	$	10,730

Under the full cost method of accounting, productive and nonproductive costs, including salaries, benefits and other internal costs directly attributable to these activities, are capitalized on a country-by-country basis and amortized over the estimated lives of the properties using the units-of-production method. These capitalized costs are subject to a ceiling test that limits such pooled costs, net of applicable deferred taxes, to the aggregate of the present value of future net revenues attributable to proved natural gas, oil and NGL reserves discounted at 10% (standardized measure). Any costs in excess of the ceiling are written off as a non-cash expense. The expense may not be reversed in future periods, even though higher natural gas, oil and NGL prices may subsequently increase the ceiling. Companies using the full cost method are required to use the average quoted price from the first day of each month from the previous 12 months, including the impact of derivatives designated for hedge accounting, to calculate the ceiling value of their reserves. Prices used to calculate the ceiling value of reserves were as follows:


	For the years ended December 31,
	2023		2022		2021
Natural gas (per MMBtu)	$	2.64	$	6.36	$	3.60
Oil (per Bbl)	$	78.22	$	93.67	$	66.56
NGLs (per Bbl)	$	21.38	$	34.35	$	28.65

Using the average quoted prices above, adjusted for market differentials, the net book value of the Company’s United States natural gas and oil properties exceeded the ceiling amount at December 31, 2023, resulting in an impairment of $1,710 million. The net book value of its natural gas and oil properties did not exceed the ceiling amount at December 31, 2022 or 2021. The Company had no derivative positions that were designated for hedge accounting as of December 31, 2023, 2022 and 2021. Given the decline in commodity prices during 2023 and early 2024, the Company expects that an additional non-cash impairment of its asset will likely occur in the first quarter of 2024 and perhaps later.

No impairment expense was recorded in 2021 in relation to the Company’s natural gas and oil properties acquired from Montage. These properties were recorded at fair value as of November 13, 2020, in accordance with Accounting Standards Codification (“ASC”) Topic 820 – Fair Value Measurement. In the fourth quarter of 2020, pursuant to SEC guidance, the Company determined that the fair value of the properties acquired at the closing of the Montage Merger clearly exceeded the related full-cost ceiling limitation beyond a reasonable doubt and received a waiver from the SEC to exclude the properties acquired in the Montage Merger from the ceiling test calculation. This waiver was granted for all reporting periods through and including the quarter ending September 30, 2021, as long as the Company could continue to demonstrate that the fair value of properties acquired clearly exceeded the full cost ceiling limitation beyond a reasonable doubt in each reporting period. As part of the waiver received from the SEC, the Company was required to disclose what the full cost ceiling test impairment amounts for all periods presented in each applicable quarterly and annual filing would have been if the waiver had not been granted. The fair value of the properties acquired in the Montage Merger was based on future commodity market pricing for natural gas and oil pricing existing at the date of the Montage Merger, and management affirmed that there has not been a material decline to the fair value of these acquired assets since the Montage Merger. Had management not received the waiver from the SEC, no impairment charge would have been recorded in 2021 even when including the Montage natural gas and oil properties in the full cost ceiling test due to improved commodity prices during 2021.

Costs associated with unevaluated properties are excluded from the amortization base until the properties are evaluated or impairment is indicated. The costs associated with unevaluated leasehold acreage and related seismic data, wells currently drilling and related capitalized interest are initially excluded from the amortization base. Leasehold costs are either transferred to the amortization base with the costs of drilling a well on the lease or are assessed at least annually for possible impairment or reduction in value. The Company’s decision to withhold costs from amortization and the timing of the transfer of those costs into the amortization base involves judgment and may be subject to changes over time based on several factors, including drilling plans, availability of capital, project economics and drilling results from adjacent acreage. At December 31, 2023, the Company had a total of $2,075 million of costs excluded from the amortization base, all of which related to its properties in the United States.

Natural gas and oil properties not subject to amortization represent investments in unproved properties and major development projects in which the Company owns an interest. These unproved property costs include unevaluated costs associated with leasehold or drilling interests and unevaluated costs associated with wells in progress. The table below sets forth the composition of net unevaluated costs excluded from amortization as of December 31, 2023:


(in millions)	2023		2022		2021		Prior		Total
Property acquisition costs	$	63	$	86	$	559	$	1,005	$	1,713
Exploration and development costs	24		9		8		18		59
Capitalized interest	115		91		75		22		303
	$	202	$	186	$	642	$	1,045	$	2,075

Of the total net unevaluated costs excluded from amortization as of December 31, 2023, approximately $1,048 million is related to undeveloped properties in Appalachia which were acquired in 2014 and 2015, $137 million is related to Montage properties acquired in November 2020 and approximately $587 million is related to the acquisition of undeveloped properties in Haynesville which were acquired in September 2021 and December 2021. Additionally, the Company has approximately $303 million of unevaluated capitalized interest. The Company has $59 million of unevaluated costs related to wells in progress (included within the Appalachia, Montage and Haynesville amounts above). The remaining costs excluded from amortization are related to properties which are not individually significant and on which the evaluation process has not been completed. The timing and amount of property acquisition and seismic costs included in the amortization computation will depend on the location and timing of drilling wells, results of drilling and other assessments. The Company is, therefore, unable to estimate when these costs will be included in the amortization computation.

Capitalized Interest. Interest is capitalized on the cost of unevaluated natural gas and oil properties that are excluded from amortization.

Asset Retirement Obligations. Natural gas and oil properties require expenditures to plug and abandon the wells and reclaim the associated pads and other supporting infrastructure when the wells are no longer producing. An asset retirement obligation associated with the retirement of a tangible long-lived asset such as oil and gas properties is recognized as a liability in the period incurred or when it becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.

Other Property and Equipment. The Company’s non-full cost pool assets include water facilities, gathering systems, technology infrastructure, land, buildings and other equipment with useful lives that range from 3 to 30 years.

The estimated useful lives of those assets depreciated under the straight-line method are as follows:


Water facilities			3 – 10 years
Gathering systems			15 – 25 years
Technology infrastructure			3 – 10 years
Drilling rigs and equipment			3 years
Buildings and leasehold improvements			5 – 30 years

Other property, plant and equipment is comprised of the following:


(in millions)	December 31, 2023		December 31, 2022
Water facilities	$	252	$	238
Gathering systems	60		56
Technology infrastructure	146		135
Drilling rigs and equipment	35		31
Land, buildings and leasehold improvements	16		16
Other	57		51
Less: Accumulated depreciation and impairment	(394)		(354)
Total	$	172	$	173

Impairment of Long-Lived Assets. The carrying value of non-full cost pool long-lived assets is evaluated for recoverability whenever events or changes in circumstances indicate that it may not be recoverable. Should an impairment exist, the impairment loss would be measured as the amount that the asset’s carrying value exceeds its fair value. The Company did not recognize an impairment on its non-full cost pool long-lived assets during the years ended December 31, 2023 and December 31, 2022. The Company recognized an impairment of $6 million related to non-core assets for the year ended December 31, 2021.

Intangible Assets. The carrying value of intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate that it may not be recoverable. Intangible assets are amortized over their useful life. At December 31, 2023 and 2022, the Company had $38 million and $43 million, respectively, in marketing-related intangible assets, of which $33 million and $38 million were included in Other long-term assets on the respective consolidated balance sheets. The Company amortized $5 million of its marketing-related intangible asset in 2023, $5 million in 2022 and $8 million in 2021. The Company expects to amortize $5 million during each year from 2024 to 2027 and $4 million in 2028.

Leases

The Company determines if a contract contains a lease at inception or as a result of an acquisition. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. A right-of-use asset and corresponding lease liability are recognized on the balance sheet at commencement at an amount based on the present value of the remaining lease payments over the lease term. As the implicit rate of the lease is not always readily determinable, the Company uses the incremental borrowing rate to calculate the present value of the lease payments based on information available at commencement date, such as the initial lease term. Operating right-of-use assets and operating lease liabilities are presented separately on the consolidated balance sheet. The Company does not have any finance leases as of December 31, 2023. By policy election, leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis, and variable lease payments are recognized in the period as incurred.

Certain leases contain both lease and non-lease components. The Company has chosen to account for most of these leases as a single lease component instead of bifurcating lease and non-lease components. However, for compression service leases and fleet vehicle leases, the lease and non-lease components are accounted for separately.

The Company leases drilling rigs, pressure pumping equipment, vehicles, office space, certain water transportation lines and other equipment under non-cancelable operating leases expiring through 2036. Certain lease agreements include options to renew the lease, early terminate the lease or purchase the underlying asset(s). The Company determines the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when such an option is reasonably certain to be exercised. The Company’s water transportation lines are the only leases with renewal options that are reasonably certain to be exercised. These renewal options are reflected in the right-of-use asset and lease liability balances.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the tax rate expected to be in effect for the year in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Deferred income taxes are provided to recognize the income tax effect of reporting certain transactions in different years for income tax and financial reporting purposes. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized.

The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations.

Derivative Financial Instruments

The Company uses derivative financial instruments to manage defined commodity price risks and does not use them for speculative trading purposes. The Company uses derivative instruments to financially protect sales of natural gas, oil and NGLs. In addition, the Company uses interest rate swaps to manage exposure to unfavorable interest rate changes. Since the Company does not designate its derivatives for hedge accounting treatment, gains and losses resulting from the settlement of derivative contracts have been recognized in gain (loss) on derivatives in the consolidated statements of operations when the contracts expire and the related physical transactions of the underlying commodity are settled. Additionally, changes in the fair value of the unsettled portion of derivative contracts are also recognized in gain (loss) on derivatives in the consolidated statement of operations.

Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding during the reportable period. The diluted earnings per share calculation adds to the weighted average number of common shares outstanding: the incremental shares that would have been outstanding assuming the exercise of dilutive stock options, the vesting of unvested restricted shares of common stock, restricted stock units and performance units. An antidilutive impact is an increase in earnings per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.

Stock-Based Compensation

The Company accounts for stock-based compensation transactions using a fair value method and recognizes an amount equal to the fair value of the stock options and stock-based payment cost in either the consolidated statement of operations or capitalizes the cost into natural gas and oil properties included in property and equipment. Costs are capitalized when they are directly related to the acquisition, exploration and development activities of the Company’s natural gas and oil properties.

Liability-Classified Awards

The Company classifies certain awards that can or will be settled in cash as liability awards. The fair value of a liability-classified award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value of liability-classified awards are recorded to general and administrative expense, operating expense and capitalized expense over the vesting period of the award. The liability-based performance unit awards granted in 2020 include a performance condition based

on return on average capital employed and a market condition based on relative total shareholder return (“TSR”). In 2021, two types of performance unit awards were granted. One type of award includes a performance condition based on return on capital employed and a performance condition based on a reinvestment rate, and the second type of award includes one market condition based on relative TSR. In 2022 and 2023, two types of performance units were granted. One type of award includes performance conditions based on return on capital employed and reinvestment rate. The other awards granted in 2022 and 2023 were accounted for as equity classified awards. The fair values of the market conditions discussed above are calculated by Monte Carlo models on a quarterly basis.

Cash-Based Compensation

The Company classifies certain awards that will be settled in cash as cash-based compensation. The Company recognizes the cost of these awards as general and administrative expense, operating expense and capitalized expense over the vesting period of the awards. The performance cash awards include a performance condition determined annually by the Company. If the Company, in its sole discretion, determines that the threshold was not met, the amount for that vesting period will not vest and will be cancelled.

Treasury Stock

In 2022, the Company repurchased 17,261,469 shares of its outstanding common stock per a previously announced share repurchase program at an average price of $7.24 per share for approximately $125 million.

The Company maintains a frozen legacy non-qualified deferred compensation supplemental retirement savings plan for certain key employees whereby participants could elect to defer and contribute a portion of their compensation to a Rabbi Trust, as permitted by the plan. The Company includes the assets and liabilities of its supplemental retirement savings plan in its consolidated balance sheet. Shares of the Company’s common stock purchased under the non-qualified deferred compensation arrangement are held in the Rabbi Trust, are presented as treasury stock and are carried at cost. As of December 31, 2023 and 2022, 1,455 shares and 1,743 shares, respectively, were held in the Rabbi Trust and were accounted for as treasury stock.

Foreign Currency Translation

The Company has designated the Canadian dollar as the functional currency for its activities in Canada. The cumulative translation effects of translating the accounts from the functional currency into the U.S. dollar at current exchange rates are included as a separate component of other comprehensive income within stockholders’ equity.

New Accounting Standards Implemented in this Report and New Accounting Standards Not Yet Adopted in this Report

New Accounting Standards Implemented in this Report

None that are expected to have a material impact.

New Accounting Standards Not Yet Adopted in this Report

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The purpose of this update is to enhance disclosures on reportable segments and provide additional detailed information about significant segment expenses. The guidance in ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company continues to assess the impact of the new guidance, but it is not expected to have a material impact on the consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The purpose of this update is to enhance disclosures through further disaggregated information on the effective tax rate reconciliation based on specified categories, as well as disaggregation of income taxes paid by jurisdiction. The guidance in ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. The Company continues to assess the impact of the new guidance, but it is not expected to have a material impact on the consolidated financial statements.