swn-20210702
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

________________________________________________________________
FORM 8-K

________________________________________________________________

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of report (Date of earliest event reported): July 2, 2021
 
________________________________________________________________
SOUTHWESTERN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
 
________________________________________________________________
Delaware001-08246 71-0205415
(State or other jurisdiction of incorporation)(Commission File Number) (IRS Employer Identification No.)
 
10000 Energy Drive 
Spring, TX 77389
(Address of principal executive offices)(Zip Code)

(832) 796-1000
(Registrant's telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report)
 
________________________________________________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
         Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
         Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
         Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
         Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, Par Value $0.01SWNNew York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
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.




Item 8.01 Other Events.
On June 1, 2021, Southwestern Energy Company (“Southwestern”) entered into an Agreement and Plan of Merger with Ikon Acquisition Company, LLC (“Ikon”), Indigo Natural Resources LLC (“Indigo”) and Ibis Unitholder Representative (the “Indigo Merger Agreement”). Pursuant to the terms of the Indigo Merger Agreement, Indigo will merge with and into Ikon, a subsidiary of Southwestern, with Indigo surviving the merger (the “Indigo Merger”). The outstanding equity interests in Indigo will be cancelled and converted into the right to receive (i) $400 million in cash consideration, and (ii) 339,270,568 shares of Southwestern common stock. Additionally, Southwestern will assume $700 million in aggregate principal amount of 5.375% Senior Notes due 2029 of Indigo (the “Indigo Notes”).
Included in this filing as Exhibit 99.2 are the audited consolidated financial statements of Indigo for the periods described in Item 9.01(a) below, the notes related thereto and the report of an independent auditor. The unaudited condensed consolidated financial statements of Indigo for the periods described in Item 9.01(a) below and the notes related thereto are included in this filing as Exhibit 99.3.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
Audited consolidated financial statements of Indigo and its subsidiaries comprised of the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations, statements of members’ common equity and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes to the consolidated financial statements, attached as Exhibit 99.2 hereto.
Unaudited condensed consolidated financial statements of Indigo and its subsidiaries comprised of the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, and the related condensed consolidated statements of operations, statements of members’ common equity and cash flows for the three months ended March 31, 2021 and 2020, and the related notes to the unaudited condensed consolidated financial statements, attached as Exhibit 99.3 hereto.
(b) Unaudited Pro Forma Financial Information
The unaudited pro forma condensed combined financial statements are derived from the historical consolidated financial statements of Southwestern and Indigo. In addition, on November 13, 2020, pursuant to the Agreement and Plan of Merger, dated as of August 12, 2020, by and between Southwestern and Montage Resources Corporation (“Montage”), Southwestern completed its previously announced acquisition of Montage, by means of a merger of Montage with and into Southwestern, with Southwestern continuing as the surviving corporation (the “Montage Merger” and, together with the Indigo Merger, the “Mergers”). Accordingly, the unaudited pro forma condensed combined financial statements also incorporate the historical financial activity of Montage through November 13, 2020, and have been adjusted to reflect 1) the Montage-related equity offering and the Montage-related debt offering and the use of the proceeds therefrom and 2) the Indigo Merger, as described above.
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and the three months ended March 31, 2021 give effect to the Mergers as if they had been consummated on January 1, 2020. The unaudited pro forma condensed combined balance sheet as of March 31, 2021 has been prepared to give effect to the Indigo Merger as if it had been consummated on March 31, 2021. The pro forma financial information, and the related notes thereto, required to be filed under Item 9.01 of this Current Report on Form 8-K are incorporated by reference as Exhibit 99.4 to this Current Report on Form 8-K and are incorporated by reference into this Item 9.01(b).




(d) Exhibits
Exhibit No.Descriptions
23.1*
23.2*
99.1
99.2*
99.3*
99.4*
104Cover Page Interactive Date File (embedded within the Inline XBRL document)
Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
SOUTHWESTERN ENERGY COMPANY
Registrant
Dated: July 2, 2021
By:/s/ MICHAEL HANCOCK
Name:Michael Hancock
Title:
Vice President, Chief Financial Officer (Interim)


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CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-03787, 333-03789, 333-63558, 333-64961, 333-42494, 333-69720, 333-96161, 333-100702, 333-101160, 333-110140, 333-121720, 333-125714, 333-184885, 333-188744, 333-209752, 333-211546, 333-219081, 333-228629, 333-233049 and 333-248827) and on Form S-3 (No. 333-238633) of Southwestern Energy Company of our report dated March 25, 2021, except for the effects of the change in the accounting for redeemable preferred units discussed in Note 3 to the consolidated financial statements, as to which the date is July 1, 2021, relating to the financial statements of Indigo Natural Resources LLC, which appears in this Current Report on Form 8-K.

/s/PricewaterhouseCoopers LLP

Houston, Texas
July 1, 2021

Document


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CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS

As independent petroleum engineers, we hereby consent to (a) the use of our reserves report relating to the proved reserves of gas and oil of Indigo Natural Resources LLC, and (b) the incorporation by reference of our name and our reserves report into Southwestern Energy Company’s previously filed Registration Statements on Form S-8 (Nos. 333-03787, 333-03789, 333-42494, 333-63558, 333-64961, 333-69720, 333-96161, 333-100702, 333-101160, 333-110140, 333-121720, 333-125714, 333-184885, 333-188744, 333-209752, 333-211546, 333-219081, 333-228629, 333-233049 and 333-248827) and on Form S-3 (No. 333-238633) that incorporate by reference such Form 8-K.


NETHERLAND, SEWELL & ASSOCIATES, INC.

By: /s/ C. H. (SCOTT) REES III, P.E.
C.H. (Scott) Rees III, P.E.
Chairman and Chief Executive Officer

Dallas, Texas
July 2, 2021

Document












Indigo Natural Resources LLC
Consolidated Financial Statements
December 31, 2020 and 2019
























Indigo Natural Resources LLC
Index to Consolidated Financial Statements
December 31, 2020 and 2019

Page
Report of Independent Auditors1
Consolidated Financial Statements
Consolidated Balance Sheets2
Consolidated Statements of Operations3
Consolidated Statements of Members’ Common Equity4
Consolidated Statements of Cash Flows5
Notes to Consolidated Financial Statements6

































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Report of Independent Auditors

To the Management of Indigo Natural Resources LLC

We have audited the accompanying consolidated financial statements of Indigo Natural Resources LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations, of members' common equity and of cash flows for the years then ended.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Indigo Natural Resources LLC and its subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

https://cdn.kscope.io/c5d86c69cc2109084d30d121bdfd7a42-image1a.jpg
Houston, Texas
March 25, 2021, except for the effects of the change in the accounting for redeemable preferred units discussed in Note 3 to the consolidated financial statements, as to which the date is July 1, 2021


PricewaterhouseCoopers LLP, 1000 Louisiana St. Suite 5800 Houston, TX 77002
T: 713.356.4000, F: 713.356.4717, www.pwc.com/us








Consolidated Balance Sheets
December 31, 2020 and 2019
(in thousands, except unit amounts)20202019
Assets
Current assets
Cash and cash equivalents$85,162 $186,799 
Accounts receivable
Accounts receivable–trade, net of allowance for doubtful accounts of $1,524 and $597141,405 101,022 
Accounts receivable–related parties— 
Prepaid costs and other current assets2,471 2,973 
Derivative instruments24,434 131,719 
Total current assets253,472 422,518 
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment of $1,657,849 and $1,183,0142,731,443 2,743,782 
Investment in midstream joint venture15,465 59,109 
Debt issuance costs and other noncurrent assets, net6,650 5,268 
Derivative instruments29,968 104,323 
Total noncurrent assets2,783,526 2,912,482 
Total assets$3,036,998 $3,335,000 
Liabilities and members’ equity
Current liabilities
Accounts payable–trade$6,011 $13,073 
Royalties payable96,462 87,125 
Accrued capital expenditures48,997 80,898 
Accrued gathering and transportation expense24,384 30,040 
Accrued lease operating expense7,672 12,362 
Accrued interest expense17,510 17,401 
Other accrued liabilities55,674 12,831 
Accrued liabilities–related parties941 438 
Derivative instruments8,885 — 
Total current liabilities266,536 254,168 
Long-term debt779,414 637,312 
Asset retirement obligation47,461 40,464 
Other noncurrent liabilities26,460 2,245 
Derivative instruments9,010 45 
Total noncurrent liabilities862,345 680,066 
Total liabilities1,128,881 934,234 
Commitments and contingencies
Preferred equity, – and 1.6 million units authorized and outstanding— 182,016 
Members’ common equity, 13.9 million Class A units and 0.9 million Class B units issued and outstanding1,908,117 2,218,750 
Total liabilities and preferred and members’ common equity$3,036,998 $3,335,000 

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




2




Indigo Natural Resources LLC


Consolidated Statements of Operations
Years Ended December 31, 2020 and 2019
(in thousands)20202019
Revenue and other operating income
Natural gas, NGL and oil revenue$717,878 $851,833 
Gain on derivative instruments2,214 266,438 
Other47,721 18,205 
Total revenue and other operating income767,813 1,136,476 
Operating expenses
Lease operating expense100,875 107,159 
Gathering and transportation expense, including $- and $104,124 of related party transactions210,628 162,500 
Severance taxes, net of refunds received15,212 19,941 
Other operating costs, net46,414 11,859 
Exploration costs792 933 
Depreciation, depletion and amortization485,500 381,673 
Impairment5,149 4,657 
General and administrative expense51,496 57,070 
Gain on sale of assets(321)(472)
Total operating expenses915,745 745,320 
Operating (loss) income(147,932)391,156 
Other income (expense)
Interest and other financing expense(34,766)(68,980)
Income from equity method investment in midstream joint venture184,161 590,860 
Gain (loss) on extinguishment of debt1,906 (30,182)
Other, net211 287 
Total other income151,512 491,985 
Pretax income3,580 883,141 
State income tax benefit179 265 
Net income3,759 883,406 
Preferred dividends(14,736)(21,109)
Accretion of discount on preferred equity(3,727)(5,391)
Preferred tax distributions(4,180)— 
Loss on redemption of preferred equity(28,026)— 
Net (loss) income attributable to members’ common equity$(46,910)$856,906 

The accompanying notes are an integral part of these consolidated financial statements.
2




Indigo Natural Resources LLC
Consolidated Statements of Members’ Common Equity
Years Ended December 31, 2020 and 2019
(in thousands)20202019
Beginning balance at January 1$2,218,750 $1,351,776 
Indigo equity-based compensation expense10,020 9,768 
M5 Midstream LLC incentive unit distributions to Indigo employees1,157 3,964 
Repurchase of Class A incentive Tracking Units(4,136)(3,664)
Distributions(270,764)— 
Net (loss) income attributable to members’ common equity(46,910)856,906 
Balance at December 31$1,908,117 $2,218,750 

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
























3



Indigo Natural Resources LLC
Consolidated Statements of Cash Flows

Years Ended December 31, 2020 and 2019
(in thousands)20202019
Cash flows from operating activities
Net income$3,759 $883,406 
Adjustments to reconcile net income to net cash provided by operating activities
Equity-based compensation expense11,177 13,732 
Depreciation, depletion and amortization485,500 381,673 
Impairment5,149 4,657 
Gain on sale of assets(321)(472)
Non-cash interest expense on senior notes— 25,297 
Amortization of debt discount— 3,011 
Amortization of debt issuance costs3,888 3,587 
(Gain) loss on extinguishment of debt(1,906)30,182 
Income from equity method investment in midstream joint venture(184,161)(590,860)
Non-cash changes in derivative fair values199,490 (193,094)
Other, net(319)1,576 
Changes in assets and liabilities
Accounts receivable–trade and related parties, net(40,576)84,685 
Prepaid costs and other current assets190 (1,042)
Accounts payable–trade(7,062)6,420 
Accrued and other liabilities14,492 (8,597)
Net cash provided by operating activities489,300 644,161 
Cash flows from investing activities
Acquisitions(323)— 
Capital expenditures(502,860)(683,752)
Distributions from midstream joint venture240,500 855,000 
Adjustment to M5 Louisiana sale proceeds37,500 — 
Investments in midstream joint venture— (64,000)
Proceeds from sale of assets3,034 2,600 
Other investing activities367 341 
Net cash (used in) provided by investing activities(221,782)110,189 
Cash flows from financing activities
Proceeds from issuance of debt320,000 80,000 
Debt issuance costs(298)(284)
Repayment of debt(178,034)(685,825)
Make-whole premium on redemption of debt— (16,708)
Redemption of preferred equity(223,247)— 
Preferred dividends(7,807)(9,914)
Preferred tax distributions(4,180)— 
Member distributions(270,764)— 
Payment of capital lease obligations(689)(696)
Other financing activities(4,136)(4,526)
Net cash used in financing activities(369,155)(637,953)
Net (decrease) increase in cash, cash equivalents and restricted cash(101,637)116,397 
Cash, cash equivalents and restricted cash
Beginning of period, including restricted cash of $– and $731186,799 70,402 
End of period, including restricted cash of $– and $–$85,162 $186,799 
Supplemental cash flow information
Cash paid for interest, net of amounts capitalized$32,499 $35,961 
Non-cash investing and financing activities
Change in accrued capital expenditures$(31,901)$3,908 
Change in accrued capital expenditures–related parties$— $(594)
Change in accrued interest capitalized$2,127 $(1,531)
Asset retirement cost capitalized, net$4,163 $3,428 
Capital leases$892 $1,509 
Dividends accrued to the preference accrual$5,743 $11,057 
Accretion of discount on preferred equity$3,727 $5,391 
The accompanying notes are an integral part of these consolidated financial statements.
4

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
1.    Organization, Nature of Business and Basis of Presentation
Organization
Indigo Natural Resources LLC (“Indigo” or the “Company”) was formed on January 8, 2018, and on January 29, 2018, entered into a contribution agreement with the then existing owners of Indigo Minerals LLC (“Indigo Minerals”), Indigo Resources LLC (“Indigo Resources”) and Indigo Haynesville LLC (“Indigo Haynesville”), pursuant to which all of the common equity interests in Indigo Minerals, Indigo Resources and Indigo Haynesville and all of the preferred equity interests in Indigo Minerals were contributed to the Company on February 6, 2018 in exchange for common units and preferred units in the Company, respectively. The Company operates under the Indigo Natural Resources LLC Amended and Restated Limited Liability Company Agreement dated February 6, 2018 (the “2018 LLC Agreement”).

Nature of Business
Indigo owns working interest properties in North Louisiana and is primarily focused on natural gas development in the Haynesville Shale, the Bossier Shale and the Cotton Valley formation, where the Company specifically targets the Vaughn horizon in the Holly Field. The Company’s production is predominantly natural gas.

Basis of Presentation
These consolidated financial statements include the accounts of the Company’s majority-owned, controlled subsidiaries. Certain reclassifications have been made to the prior year financial statements to conform to the 2020 presentation. The effects of the reclassifications were not material to these consolidated financial statements.

2.    Accounting Standards
Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that changes the impairment model for financial assets, including trade receivables and certain other instruments. The update replaces the current “incurred loss” model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2019, the update’s effective date for Indigo was deferred to 2023, and the update must be adopted using a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. Early adoption is permitted. The Company is evaluating the provisions of this update, but based on its preliminary analysis, does not expect adoption to have a material impact on its results of operations, financial position and cash flows.

In February 2016, the FASB issued an amendment to the accounting standards for leases which requires lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on the balance sheet for substantially all leases, though not mineral leases. For operating leases, a lessee must recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and reflect cash payments as operating activities, except when the lease cost is capitalized as a development cost, in which case cash payments are reflected as investing activities. For finance leases, a lessee must recognize interest on the lease liability separately from amortization of the right-of-use asset and reflect repayments of the principal portion of the lease liability as financing activities and payments of interest as operating activities. Disclosure of key information about leasing arrangements is also required. In June 2020, the amendment’s effective date for Indigo was deferred to 2022 and early adoption is permitted. At adoption, entities are allowed the option to recognize and measure leases at the beginning of the earliest period presented using a modified-retrospective approach or to recognize the cumulative effect of applying the new
5

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The Company is evaluating the provisions of this amendment and assessing the impact it will have on its results of operations, financial position and cash flows.

Recently Adopted
In August 2018, the FASB issued amendments to the disclosure requirements regarding fair value measurements that (i) eliminate certain disclosure requirements, including those related to transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) modify certain other disclosure requirements and (iii) add disclosure requirements, including expanded disclosures regarding significant unobservable inputs used to develop Level 3 fair value measurements. On January 1, 2020, the Company adopted the amendments to the disclosure requirements regarding fair value measurements and adoption did not have a material impact on the Company’s fair value disclosures.

In May 2014, the FASB issued an update that superseded the then existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance, requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. On January 1, 2019, the Company adopted the update and all related amendments (collectively, the “new revenue standard”) using the modified- retrospective method. The Company evaluated the effect of transition by applying the provisions of the new revenue standard to contracts with customers with remaining obligations as of January 1, 2019. No cumulative adjustment to retained earnings was necessary as a result of adoption and adoption did not have a material impact on the Company’s results of operations, financial position and cash flows. See Note 4 for related disclosures.

In November and August 2016, the FASB issued accounting standards updates addressing specific cash flow issues, including the presentation of restricted cash activity, with the objective of reducing diversity in practice. Indigo adopted these updates on January 1, 2019 and applied them retrospectively. Adoption did not have a material impact on the Company’s cash flows.

In January 2016, the FASB issued an accounting standards update that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Indigo adopted this update on January 1, 2019 and it was applied retrospectively. Adoption did not have a material impact on the Company’s results of operations, financial position and cash flows.

3.    Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and short-term investments that have an original maturity of three months or less.

Property and Equipment
Proved Oil and Gas Properties
Oil and gas properties are accounted for using the successful efforts method. Under this method, all development costs and leasehold costs of proved properties are capitalized and amortized on a unit- of-production basis over the remaining life of proved developed reserves and proved reserves, respectively. Estimated asset retirement costs for oil and gas properties are capitalized
6

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
within oil and gas properties at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.

The Company evaluates the impairment of its proved oil and gas properties whenever events or changes in circumstances indicate an asset’s carrying amount may not be recoverable. Unamortized capital costs are reduced to fair value if the expected undiscounted future cash flows to be generated by the asset are less than the asset’s net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with the New York Mercantile Exchange (“NYMEX”) forward curve pricing, adjusted for estimated location and quality differentials.

Costs of retired, sold or abandoned properties that constitute a part of an amortization base (partial field), net of proceeds, are charged or credited to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate for an entire field, in which case a gain or loss is recognized currently. Gains or losses from the disposal of an entire field are recognized in the Consolidated Statement of Operations.

Expenditures for maintenance, repairs and minor renewals necessary to maintain properties in operating condition are expensed as incurred as a component of lease operating expense. Major replacements and renewals are capitalized.

Unproved Oil and Gas Properties
Unproved properties consist of costs incurred to acquire unproved leasehold (“lease acquisition costs”) as well as costs incurred to acquire unproved resources. Unproved lease acquisition costs are initially capitalized and then are expensed when leases expire, are impaired, or when the Company specifically identifies leases that will revert to the lessor. Lease acquisition costs related to successful exploratory drilling are reclassified to proved properties and amortized on a unit-of- production basis. The Company assesses unproved oil and gas properties for impairment on the basis of lease expirations, drilling results on adjacent acreage, and future drilling plans.

The Company capitalizes interest on capital invested in unproved properties. As proved reserves are established, the related capitalized interest is included in costs subject to amortization. Interest capitalized in 2020 and 2019 was $19.8 million and $22.7 million, respectively.

Exploration Costs
Geological and geophysical costs related to exploration activities, delay rentals, and costs to drill exploratory wells that do not find proved reserves are expensed as exploration costs in the Consolidated Statement of Operations. The costs of an exploratory well are carried as an asset if the well finds a sufficient quantity of reserves to justify its capitalization as a producing well as long as the Company is making sufficient progress towards assessing the reserves and the economic and operating viability of the well.

Other Property and Equipment
Furniture, equipment, software and leasehold improvements are recorded at cost and are depreciated using the straight-line method based on the expected lives of the individual assets, which range from three to five years. The cost of assets sold or otherwise disposed of and the associated accumulated depreciation are removed from the Consolidated Balance Sheet with any gain or loss realized upon the sale or disposal included in the Consolidated Statement of Operations.

7

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Equity Method Investment
Investments in entities over which the Company has significant influence, but not control, are accounted for using the equity method of accounting. Equity method investments are initially recorded at cost and differences in the basis of the investments and the separate net asset values of the investees, if any, are amortized into net income over the remaining useful lives of the underlying assets, except for the excess related to goodwill. Equity method investments are reviewed for impairment if factors indicate that a decrease in the value of the investment has occurred. When the decrease is deemed to be other than temporary, the carrying value of the investment is written down to its fair value and the amount of the write-down is included in the Consolidated Statement of Operations.

Income from equity method investments represents the Company’s proportionate share of net income generated by the equity method investee and amortization of any investment basis differences.

Distributions from equity method investees are reflected in the Consolidated Statement of Cash Flows based on the nature of the investee’s activity that generated the distribution as either a return on investment, which is classified as an operating activity, or a return of investment, which is classified as an investing activity.

Debt Issuance Costs
The Company capitalizes costs incurred in connection with obtaining financing. The remaining unamortized costs are amortized over the term of the related financing using the straight-line method, which approximates the effective interest method. The unamortized costs relating to the revolving credit facility are reflected as debt issuance costs and other noncurrent assets, net and were $3.3 million and $4.8 million at December 31, 2020 and 2019, respectively. The unamortized costs relating to other debt instruments are presented as a direct reduction from the carrying amount of the debt and were $10.6 million and $12.7 million at December 31, 2020 and 2019, respectively.

Asset Retirement Obligation
The Company records the fair value of its asset retirement obligations ("ARO") as a liability in the period in which the obligations are incurred, with a corresponding capitalized asset retirement cost recorded as a component of the related oil and gas properties. The ARO represents the estimated amount the Company will incur to plug, abandon and remediate its oil and gas properties at the end of their productive lives, in accordance with applicable laws or regulations. Periodic accretion of the estimated liability and depreciation of capitalized asset retirement costs are recorded over time in the Consolidated Statement of Operations as depreciation, depletion and amortization. Depreciation is determined on a unit-of-production basis while accretion escalates over the lives of the oil and gas properties.

The Company has determined its ARO by calculating the present value of estimated cash flows related to the liability. Estimating the future cash flows requires management to make estimates and judgments regarding existence of a liability, timing and what constitutes adequate restoration. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the value of the existing ARO liability, a corresponding adjustment is made to the related asset.

Redeemable Preferred Units
Prior to redemption in 2020, the Company’s redeemable preferred units were originally carried at the fair value of the consideration received at issuance, net of transaction costs, plus dividends accrued to the preference accrual rather than paid in cash. In conjunction with the reissuance of
8

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
these consolidated financial statements, accretion of the discount to redemption value was also recorded over the period from the issuance date to the earliest date that the preferred units would have become redeemable at the holders’ election, using the effective interest method, in order to comply with Securities and Exchange Commission Regulation S-X, Rule 5-02. Because they were contingently redeemable, these preferred units were reflected as mezzanine equity in the Consolidated Balance Sheet prior to redemption. See Note 12 for related disclosures.

Revenue Recognition
General
The majority of the Company’s revenue is derived from the sale of natural gas it produces, along with associated natural gas liquids (“NGLs”) and oil. Such sales are recognized as natural gas, NGL and oil revenue in the Consolidated Statement of Operations at the point at which control of the commodity is transferred to the customer and collectability is reasonably assured. The delivery of each unit of natural gas, NGLs and oil represents a separate performance obligation, and revenue is recognized at the time each performance obligation is fulfilled. Revenues from the production of natural gas, NGLs and oil on properties in which Indigo has a joint ownership are recorded under the sales method. A liability is accrued for properties for which the imbalance owed to the Company’s joint interest partners exceeds the remaining proved reserves of the associated property.

Pricing under the Company’s contracts with customers is variable, primarily determined using a commodity market index, with adjustments for negotiated quality and location differentials. As a result, natural gas, NGL and oil revenue is highly dependent on market conditions and may fluctuate as commodity prices rise or fall.

Typically, the Company’s customers pay monthly, within a short period of time after delivery of the natural gas, NGLs or oil. As such, there is no financing element associated with the Company’s contracts. There are no issues related to returns or refunds, as product specifications are standardized for the industry and are typically measured when transferred to a common carrier or midstream entity, and other contractual mechanisms (e.g., price adjustments) are used when products do not meet those specifications.

Natural Gas
The majority of the Company’s natural gas production is sold without processing. In these cases, the contracts state the delivery point for the natural gas, at which point control passes to the purchaser and the Company recognizes revenue. The pricing provisions of the contracts are based on a market index with adjustments for applicable differentials.

Natural Gas with Associated NGLs
When selling natural gas with associated NGLs, the Company engages midstream entities to process its production stream by separating the natural gas from the NGLs. The Company evaluates if it is the principal or the agent in these transactions based on the point at which control transfers to the customer. For those contracts that the Company has concluded the midstream processing entity is its customer and controls the natural gas and NGLs, the Company recognizes natural gas and NGL revenue based on the amount of net proceeds received from the midstream entity. For those contracts that the Company has concluded the midstream entity is the Company’s agent and a third- party purchaser is the customer, the Company recognizes revenue on a gross basis, with expenses incurred to transport and process the natural gas and NGLs presented as gathering and transportation expense in the Consolidated Statement of Operations.

Under certain contracts, the Company delivers natural gas to the midstream processing entity at the inlet to their processing system. The midstream entity gathers and processes the natural gas and remits proceeds to the Company from the resulting sales of NGLs and residue gas. Under
9

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
these contracts, which represent the majority of the Company’s NGL revenue, the Company recognizes natural gas and NGL revenue based on the net amount of the proceeds received from the midstream processing entity.

Under its other natural gas processing agreements, the Company may elect to take its residue gas in-kind at the tailgate of the midstream entity's processing plant and subsequently market the product, while the midstream entity purchases the Company’s NGLs. Through the marketing process, the Company delivers the residue gas to a third-party purchaser at a contractually agreed-upon delivery point and receives a specified index price, adjusted for applicable differentials, from the purchaser. In this scenario, the Company recognizes natural gas revenue when control transfers to the purchaser at the delivery point based on the price received from the purchaser, and the Company recognizes NGL revenue when control passes to the midstream entity after processing has occurred. The gathering and processing expense attributable to the natural gas processing contracts, as well as any transportation expense incurred to deliver the product to the purchaser, are presented as gathering and transportation expense in the Consolidated Statement of Operations.

Oil
Under the Company's oil sales contracts, the Company generally sells its oil production at the wellhead and collects an agreed-upon index price, adjusted for applicable differentials. The Company recognizes revenue when control transfers to the purchaser at the wellhead at the net price received.

Natural Gas Produced by Third Parties
To facilitate management of Indigo’s forward sales contracts and transportation agreements, the Company periodically purchases natural gas from third parties at market prices for balancing purposes. When purchases and sales of natural gas with the same counterparty are entered into in contemplation of one another, such transactions are presented on a net basis in the Consolidated Statement of Operations. Sales of third-party natural gas volumes that are purchased without an associated sale to the same counterparty are recognized as other operating income in the Consolidated Statement of Operations at the point at which control passes to the purchaser, and the related costs, including associated transportation costs, are reflected as other operating costs, net, based on Indigo’s net revenue interest share in the transactions.

Jointly-Owned Oil and Gas Properties
The Company often serves as the operator for jointly-owned oil and gas properties. As part of this role, it performs activities to explore for, develop and produce oil and gas resources on behalf of and based on the collective decisions of the joint parties. Other working interest owners reimburse the Company for costs incurred based on governing agreements or state regulation. These activities are not performed as part of customer relationships, and therefore such reimbursements are not recorded as revenues.

In addition, as the operator of jointly-owned oil and gas properties, the Company commonly markets the other interest owners’ share of production. These marketing activities are carried out as part of the collaborative arrangement, and the Company does not purchase or otherwise obtain control of the other interest owners’ share of production. Therefore, the Company acts as a principal only in regards to the sale of its own share of production and recognizes revenue only for the volumes associated with that share of production.

Concentration of Credit Risk
Substantially all of the Company’s revenue and receivables result from oil and gas sales to third parties operating in the oil and gas industry. The Company’s receivables also include amounts owed by joint interest owners in the properties Indigo operates. Both the Company’s purchasers
10

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
and joint interest partners have recently experienced the impact of significant commodity price volatility as discussed below under Risks and Uncertainties. This concentration of customers and joint interest owners may impact the Company’s overall credit risk in that these entities may be similarly affected by changes in economic and other conditions, including the effects of economic disruptions caused by the COVID-19 pandemic. In the case of joint interest owners, the Company often has the ability to withhold future revenue disbursements to recover non-payment of joint interest billings. The Company uses the specific identification method to establish an allowance for doubtful accounts.

During 2020, the Company’s two largest customers accounted for 13% and 11%, respectively, of the Company’s receipts from natural gas, NGL and oil sales. During 2019, the Company’s two largest customers accounted for 16% and 11%, respectively, of the Company’s receipts from natural gas, NGL and oil sales.

Income Taxes
As a limited liability company, the Company does not generally pay corporate income taxes. Instead, the income or loss of the Company for tax purposes is typically allocated to the Company’s members for inclusion in their respective tax returns, except in cases such as the Texas Margin Tax.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates pertain to proved oil and gas reserves, related cash flow estimates used in impairment tests of long-lived assets and accounting for acquisitions, and estimates of future development, dismantlement and abandonment costs. Certain of these estimates require assumptions regarding future commodity prices, future costs and expenses, as well as future production rates. Actual results could differ from those estimates.

Estimates of natural gas, NGL and oil reserves and their values, future production rates and future costs and expenses are inherently uncertain for numerous reasons, including many factors beyond the Company’s control. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, prevailing commodity prices, operating costs and other factors. These revisions may be material and could materially affect future depreciation, depletion and amortization, ARO liabilities and impairment.

Risks and Uncertainties
As predominantly a natural gas producer, the Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for natural gas and NGLs, which are dependent upon numerous factors beyond its control such as economic, political, and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile, including a substantial decline in NYMEX natural gas prices during 2020 as a result of the COVID-19 pandemic. There can be no assurance that natural gas and NGL prices will not be subject to continued wide fluctuations in the future. A substantial or extended decline in such prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows, and quantities of natural gas, NGL and oil reserves that may be economically produced, which could result in impairment of the Company’s oil and gas properties.
11

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019


Derivative Instruments
The Company uses derivative instruments to achieve more predictable cash flows from its natural gas production by reducing its exposure to commodity price fluctuations. As of December 31, 2020 and/or 2019, natural gas derivative instruments were comprised of the following types of instruments:
Swaps: Indigo receives a fixed price and pays a floating market price to the counterparty for the hedged commodity.

Collars: Under a collar agreement, Indigo receives the difference between the published market price and a floor price if the market price is below the contracted floor price. Indigo pays the difference between the ceiling price and the market price if the market price is above the contracted ceiling price. No amounts are paid or received if the market price is between the floor and the ceiling prices.

The Company did not designate any of its contracts as hedges; therefore, the changes in fair value of these instruments are recorded in the Consolidated Statement of Operations and the related cash flows are reflected in operating activities in the Consolidated Statement of Cash Flows. The Company determines the fair value of its derivative financial instruments using various inputs including publicly available prices. See Notes 9 and 10 for additional details about the Company’s derivative instruments.

Indigo Equity-Based Compensation
Class A Incentive Tracking Units qualify as equity-based awards accounted for at fair value on the date of grant. The fair value of each Class A Incentive Tracking Unit is estimated to equal the fair value of the underlying Indigo Class A common unit. Equity-based compensation expense for Class A Incentive Tracking Unit awards with vesting requirements is recognized using the straight-line attribution method over the vesting period and forfeitures are recognized when they occur.

The Company’s agreement to sell common units subject to a partial recourse note is an equity- classified award accounted for as the issuance of an option on the date that the related subscription agreement was signed and the purchase commitment was made, due to the non-recourse nature of the partial recourse note. The fair value of awards under partial recourse notes is estimated using the Black-Scholes option pricing model. The model employs various assumptions, based on management’s best estimates at the time of the valuation, which impact the calculation of fair value and ultimately the amount of expense that is recognized. Of the required assumptions, the expected volatility and expected term have the most significant impact on the fair value calculation. Expected volatility is based on the volatility of similar companies in the industry. The expected term of the awards represents the period of time that management expects the awards to be outstanding. The risk-free rate used in the model is based on the U.S. Treasury yield curve in effect at the date of the valuation.

Indigo Incentive Units and Class B Incentive Tracking Units
Incentive units and the associated Class B Incentive Tracking Units allow the holder to participate in future distributions made by the Company once the common equity unit holders receive a return of their respective capital investment and achieve a return on such capital investment as defined in the 2018 LLC Agreement. These incentive units and associated Class B Incentive Tracking Units are considered to be compensatory profit-sharing awards and therefore are not accounted for as equity- based compensation. The Company recognizes compensation expense related to the Class B Incentive Tracking Units once a distribution to the incentive unit holder is probable of occurring.
12

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019


M5 Midstream LLC Incentive Units
M5 Midstream LLC (“M5”) incentive units granted to certain Indigo employees allowed the holders to participate in distributions made by M5 once their common equity unit holders received a return of their respective capital investment and achieved a return on such capital investment as defined in M5’s limited liability company agreement. Because M5 is a related party and the incentive units were granted as compensation for services provided to Indigo, the substance of the grants is a contribution from M5 to Indigo and compensation expense for Indigo. The Company recognized the associated compensation expense once a distribution to the incentive unit holders was probable of occurring.

4.    Operating Revenue
Adoption of the New Revenue Standard
On January 1, 2019, the Company adopted the new revenue standard using the modified- retrospective method. The Company evaluated the effect of transition by applying the provisions of the new revenue standard to contracts with customers with remaining obligations as of January 1, 2019. No cumulative adjustment to retained earnings was necessary as a result of adopting this standard. The primary impact of the new revenue standard on the Company’s Consolidated Financial Statements is the presentation of certain immaterial NGL processing costs as a reduction of natural gas, NGL and oil revenue rather than the historical presentation as gathering and transportation expense, based on the terms of the applicable processing contracts.

Disaggregation of Natural Gas, NGL and Oil Revenue
Natural gas, NGL and oil revenue from contracts with customers disaggregated by product type consisted of the following for 2020 and 2019 (in thousands):
20202019
Natural gas, NGL and oil revenue:
Natural gas$698,033 $818,021 
NGLs14,147 22,661 
Oil5,698 11,151 
Total natural gas, NGL and oil revenue from contracts with customers$717,878 $851,833 

Receivables from Contracts with Customers
At December 31, 2020 and 2019, accounts receivable—trade included $132.0 million and $89.9 million, respectively, of receivables from contracts with customers related to natural gas, NGL and oil revenue and third-party natural gas sales.

Remaining Performance Obligations
Indigo has executed forward natural gas sales contracts to lock in markets and fix basis differentials for a portion of its future natural gas production. In these cases, the Company has utilized the optional exemption which allows the Company to exclude the disclosure of the transaction price related to unsatisfied performance obligations and expected timing of revenue recognition if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Because each unit of natural gas to be delivered under these contracts represents a separate performance obligation, future performance obligations are wholly unsatisfied.

This forward sales program provides a significant portion of the Company’s gross marketed natural gas with a diverse mix of outlets, transportation and end-user markets. As of December 31, 2020, the Company has entered into contracts with purchasers with investment grade credit
13

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
ratings or adequate credit support for the following gross volumes in the years indicated: 1,409 billion British thermal units of natural gas per day (“BBtu/d”) in 2021, 1,287 BBtu/d in 2022, 1,116 BBtu/d in 2023, 950 BBtu/d in 2024 and 486 BBtu/d in 2025 through 2030. Portions of the sales proceeds from these gross deliveries will be recorded in the Consolidated Statement of Operations for the applicable periods, based on Indigo’s net revenue interest share, as (i) natural gas, NGL and oil revenue, reflecting the sales of Indigo’s natural gas production, and (ii) other operating income, reflecting third- party natural gas sales.

Other Operating Income
Other operating income for 2020 and 2019 included $43.0 million and $10.5 million, respectively, of third-party natural gas sales to facilitate management of the Company’s forward sales contracts and transportation agreements. Other operating income for 2020 and 2019 also included immaterial amounts for (i) service fees charged to joint interest partners for the use of company-owned field assets on wells Indigo operates, (ii) adjustments to the liability for gas imbalances as a result of natural gas price and proved reserve changes and (iii) various other items.

5.    Property and Equipment

Property and equipment consisted of the following at December 31, 2020 and 2019 (in thousands):
20202019
Proved properties$3,953,225 $3,410,140 
Unproved leasehold acquisition costs282,597 288,901 
Costs of wells in progress137,492 212,005 
Other property and equipment15,978 15,750 
Less: Accumulated depreciation, depletion, amortization and impairment(1,657,849)(1,183,014)
Property and equipment, net$2,731,443 $2,743,782 

The Company had no suspended exploration wells pending evaluation at December 31, 2020 or 2019.

During the first six months of 2020, NYMEX natural gas prices declined substantially as a result of a warm winter and the outbreak of the COVID-19 pandemic. Such a price decline represented a change in circumstances that could indicate that the carrying amount of the Company’s proved oil and gas properties may not have been recoverable. As such, the Company evaluated its proved oil and gas properties for impairment as of March 31, 2020 and June 30, 2020, and the expected undiscounted cash flows to be generated by the assets exceeded the assets’ carrying value at those dates; therefore, no impairment was identified. Natural gas prices increased subsequent to June 30, 2020 and therefore an impairment evaluation was not necessary as of December 31, 2020.

In 2020 and 2019, the Company recorded $481.1 million and $377.2 million, respectively, of depreciation, depletion and amortization related to oil and gas properties. In 2020 and 2019, the Company recorded $5.1 million and $4.7 million, respectively, for impairment of unproved properties that will not become productive. There were no proved property impairments in 2020 and 2019.

6.    Midstream JV
M5 Louisiana Holdings, LLC (the “Midstream JV”), through its wholly-owned subsidiaries (collectively, “M5 Louisiana”), owned gas gathering pipelines, centralized facilities for treating,
14

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
compression and dehydration, fresh water sourcing assets, produced water assets and a sand mine until the equity interests in M5 Louisiana were sold to DTE Pipeline Company (“DTE Midstream”) as discussed below. Indigo owns 50% of the Midstream JV and representatives of the Company comprise 50% of the Midstream JV’s board of directors, with the remaining 50% interest and board representation held by M5.

Sale of M5 Louisiana
In December 2019, DTE Midstream purchased 100% of M5 Louisiana for cash of $2.65 billion (before customary closing adjustments), including a milestone payment to be paid upon completion of the LEAP gathering system (“LEAP”), which was placed in service in July 2020, and $100.0 million held in escrow. The Company received net proceeds of $855.0 million at closing, which was net to its 50% interest after repayment of M5 Louisiana debt and transaction costs. The Company used a portion of the proceeds received to (i) repay in full the $355.0 million of borrowings then outstanding under the Amended and Restated Credit Facility (the “Revolver”) and (ii) redeem in full the outstanding 2024 Senior Unsecured Notes (the “2024 Notes”) for the $347.5 million redemption price, as discussed in Note 7.

In 2020, the Company received additional aggregate net proceeds of $240.5 million, upon completion of LEAP and release of escrowed funds. A portion of the funds received was used to repay $160.0 million of borrowings outstanding under the Revolver. The Company recorded $197.1 million as income from equity method investment in midstream joint venture during 2020, for its net share of the additional gain on the sale of M5 Louisiana associated with the additional proceeds. In January 2021, the Company received $15.5 million related to final closing adjustments.

In conjunction with the sale of M5 Louisiana, the Company entered into a letter agreement providing for incremental minimum volume commitments of natural gas through 2022 on the existing gathering system sold as part of M5 Louisiana, and M5 agreed to reimburse Indigo 50% of any deficiency fees incurred by the Company with respect to these incremental commitments. Because this letter agreement was entered into in conjunction with the M5 Louisiana sale and any deficiency fee payments to be made under the agreement would be shared equally between the owners of the Midstream JV, such deficiency fee payments are considered adjustments to the sale proceeds for M5 Louisiana and therefore Indigo’s share of the payments, after reimbursement from M5, are reflected as loss from equity method investment in midstream joint venture once payment is deemed probable. In August 2020, the Company amended its reimbursement agreement with M5 and received cash of $37.5 million in full settlement of M5’s reimbursement obligation. Upon receipt, the settlement was recorded as a deferred credit on the Consolidated Balance Sheet that will be reduced by M5’s share of deficiency fees accrued over the term of the DTE Midstream letter agreement.

Deficiency fees of $25.4 million were incurred in 2020 under the DTE Midstream letter agreement and are reflected as other accrued liabilities on the Consolidated Balance Sheet as of December 31, 2020, reflecting the Company’s obligation to DTE Midstream as of that date. Income from equity method investment in midstream joint venture for 2020 was reduced by $12.7 million, reflecting Indigo’s portion of this downward adjustment to the M5 Louisiana sale proceeds, net to its 50% equity interest in the Midstream JV. As of December 31, 2020, the remaining $24.8 million deferred credit for the M5 settlement payment discussed above is reflected as other noncurrent liabilities, for the settlement to be applied to deficiency fees that may be incurred in future years.

15

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Summarized Financial Information
Summarized financial information for the Midstream JV at December 31, 2020 and 2019, and for 2020 and 2019 is as follows (in thousands):
20202019
Current assets$30,962 $118,413 
Current liabilities32 194 
Total revenues$— $140,586 
Cost of sand production— 1,815 
Operations and maintenance expense— 20,589 
General and administrative expense471 6,638 
Depreciation and amortization— 16,243 
Gain on sale of subsidiaries(394,129)(1,220,765)
Operating income393,658 1,316,066 
Interest (income) expense(53)14,301 
Net income$393,711 $1,301,765 
This summarized financial information does not include the impact on the M5 Louisiana sale proceeds of the 2020 deficiency fees discussed above.

The Company’s basis in its investment in the Midstream JV exceeded the separate net asset value of that interest prior to the sale of M5 Louisiana. This excess was being amortized over the 38-year weighted average useful life of the underlying Midstream JV assets, as a reduction of income from equity method investment in midstream joint venture. This amortization totaled $1.5 million in 2019. Upon the sale of M5 Louisiana in December 2019, the remaining $58.5 million of basis difference was written off as a reduction of income from equity method investment in midstream joint venture.

LEAP
During 2019, the Midstream JV announced LEAP. Indigo invested its 50% of the equity consideration required, which totaled $60.0 million in 2019, prior to the sale of M5 Louisiana discussed above, which included this gathering system.

7.    Long-Term Debt
Long-term debt was comprised of the following at December 31, 2020 and 2019 (in thousands):
20202019
2026 Notes$644,965 $650,000 
Revolver145,000 — 
Total principal outstanding789,965 650,000 
Unamortized debt issuance costs(10,551)(12,688)
Long-term debt$779,414 $637,312 
2026 Senior Unsecured Notes
2021 Redemption
In February 2021, in conjunction with the issuance of the 2029 Senior Unsecured Notes (the “2029 Notes”) discussed in Note 19, the Company used a portion of the proceeds from the 2029 Notes to redeem the entire $645.0 million principal amount of the 2026 Notes.


16

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Terms
The 2026 Notes bore interest at an annual rate of 6.875% and such interest was payable on February 15 and August 15 of each year.

The indenture governing the 2026 Notes restricted Indigo’s ability and the ability of certain of its subsidiaries to, among other things: (i) incur additional debt; (ii) pay distributions on, or repurchase, equity interests or subordinated indebtedness; (iii) make certain investments; (iv) incur liens; (v) enter into transactions with affiliates; (vi) merge or consolidate with another company; and (vii) transfer and sell assets. These covenants were subject to a number of important exceptions and qualifications.

The 2026 Notes were senior unsecured obligations and ranked equally in right of payment with all of the Company’s other senior indebtedness and senior to any of its subordinated indebtedness. The 2026 Notes were fully and unconditionally guaranteed on a senior unsecured basis by each of Indigo’s restricted subsidiaries that guaranteed its indebtedness. The 2026 Notes were effectively subordinated to all of the Company’s secured indebtedness (including all borrowings and other obligations under the Revolver discussed below) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated in right of payment to all indebtedness and other liabilities (including trade payables) of any future subsidiaries or joint ventures which constitute subsidiaries that did not guarantee the 2026 Notes.

2020 Repurchases
In March 2020, the Company repurchased certain 2026 Notes with a principal amount of $5.0 million in the open market at a discount. A $1.9 million gain on extinguishment of debt is reflected in the 2020 Consolidated Statement of Operations, representing the excess of the carrying value over the amount paid for the repurchases.

2024 Senior Unsecured Notes
2019 Redemption
In December 2019, pursuant to the terms of the M5 Louisiana sale discussed in Note 6, the Company used a portion of the net proceeds it received to redeem the entire $319.9 million principal amount of the 2024 Notes for $347.5 million, including paid-in-kind interest and accrued and unpaid interest, resulting in a loss on extinguishment of debt of $30.2 million.

Terms
The 2024 Notes bore interest at an annual rate of 8.75%. Such interest was payable on January 15 and July 15 of each year and was payable (i) in cash for any interest period from the issue date to maturity or (ii) at Indigo’s option, in-kind for any interest period from the issue date until January 15, 2020. Prior to redemption in December 2019, all interest payments on the 2024 Notes were paid in-kind.

The indenture governing the 2024 Notes restricted Indigo’s ability and the ability of certain of its subsidiaries to, among other things: (i) incur additional debt; (ii) pay distributions on, or repurchase, equity interests or subordinated indebtedness; (iii) make certain investments; (iv) incur liens; (v) enter into transactions with affiliates; (vi) merge or consolidate with another company; and (vii) transfer and sell assets. These covenants were subject to a number of important exceptions and qualifications.

The 2024 Notes were senior unsecured obligations and ranked equally in right of payment with all of the Company’s other senior indebtedness and senior to any of its subordinated indebtedness. The 2024 Notes were fully and unconditionally guaranteed on a senior unsecured basis by each of Indigo’s restricted subsidiaries that guaranteed its indebtedness. The 2024 Notes were effectively subordinated to all of the Company’s secured indebtedness (including all borrowings
17

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
and other obligations under the Revolver discussed below) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated in right of payment to all indebtedness and other liabilities (including trade payables) of any future subsidiaries or joint ventures which constitute subsidiaries that did not guarantee the 2024 Notes.

Revolving Credit Facility
The Company had $145.0 million of borrowings outstanding under the Revolver at December 31, 2020 and had no borrowings outstanding under the Revolver at December 31, 2019. As of December 31, 2020, the borrowing base and elected commitment were each $750.0 million. Indigo’s weighted average interest rate was 2.6% and 4.6% under the Revolver for 2020 and 2019, respectively.

Terms
The Revolver provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base, (ii) the then-effective elected commitment amount and (iii) the total commitment amount of $1.5 billion. The termination date of the Revolver is February 6, 2023. Redetermination of the borrowing base occurs semi-annually as well as upon request by the Company or the lenders (limited to one each per year), and is based on oil and gas reserve reports that reflect commodity prices at such time. In addition, unless waived by the lenders, the borrowing base will be reduced by the product of 0.25 multiplied by the stated principal amount of any senior notes the Company issues in the future. The Revolver is collateralized by certain of the Company’s oil and gas interests reflecting not less than 85% of the value of proved properties, as defined in the Revolver.

At the Company’s option, after a November 2020 amendment to the Revolver, borrowings under the Revolver bear interest at specified margins ranging from 1.25% to 3.25% over an adjusted Federal Funds Rate or floating rate as established by the lenders (“Adjusted Base Rate Borrowing”) or an adjusted LIBOR rate (“Eurodollar Borrowing”). In addition, there is a commitment fee of 0.375% to 0.5%, payable quarterly on the unused elected commitment.

At the Company’s option, Eurodollar Borrowings are subject to interest periods ranging from one month to twelve months, not to exceed the termination date of the Revolver, with the interest rate resetting at the expiration of each interest period. As long as the Company files notices in accordance with the Revolver, the interest rate on each Eurodollar Borrowing resets and the borrowing remains outstanding.

In April and November 2020, the Revolver was amended to, among other things, (i) require that, if the Company’s cash and cash equivalents balance (as adjusted per the terms of the amendment) exceeds an established maximum, borrowings in the amount of such excess must be prepaid within two business days and (ii) establish a transition process from LIBOR to a replacement benchmark rate when applicable.

Related Party Lender
Bank of America, National Association, an affiliate of Banc of America Capital Investors, a member of the Company, is included in the group of financial institutions which make up the counterparties to the Revolver.

Covenants
The Company is subject to a financial covenant requiring the Company’s current ratio to be greater than or equal to 1.0 to 1.0 as of the end of any fiscal quarter. The current ratio is calculated as current assets, including the availability under the Revolver and excluding non-cash gains on derivative instruments, divided by current liabilities, excluding any principal classified as current under the Revolver and non-cash losses on derivative instruments.
18

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019

After a November 2020 amendment to the Revolver, the Company is also subject to a financial covenant requiring the Company’s total leverage ratio (debt to annual net income adjusted for non- cash and other items) to be less than or equal to 3.5 to 1.0 as of the end of any fiscal quarter. The adjusted annual net income for any quarter-end reflects the four quarters then ending.

The Company is also subject to certain restrictive covenants that limit its ability to, among other things, incur additional indebtedness, make loans to others, make certain acquisitions and investments, merge or consolidate with another entity, make changes to its organizational structure and organizational documents, make certain payments, including paying dividends or distributions in respect of its equity, incur liens, sell assets and engage in certain other transactions without the prior consent of the lenders. In November 2019, the Revolver was amended to, among other things, allow redemption of the preferred units discussed in Note 12.

Debt Issuance Costs and Interest Expense
The Company incurred $0.3 million in financing fees and expenses in 2020 and 2019, primarily related to amending the Revolver.

Interest and other financing expense for 2020 and 2019 was comprised of the following (in thousands):
20202019
Interest cost$(47,930)$(82,797)
Commitment fees(2,465)(1,996)
Amortization of debt issuance costs(3,888)(3,587)
Amortization of debt discount— (3,011)
Capitalized interest19,834 22,680 
Accretion on acquisition-related contract liabilities(78)(144)
Accretion related to capital leases(76)(54)
Other(163)(71)
Interest and other financing expense$(34,766)$(68,980)
19

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
8.    Asset Retirement Obligation
Activity related to the Company's asset retirement obligation for 2020 and 2019 was as follows (in thousands):
20202019
Beginning balance at January 1$40,797 $36,255 
Liabilities incurred through drilling2,145 1,824 
Liabilities incurred through acquisitions191 — 
Liabilities associated with assets sold(39)(285)
Current year accretion2,777 2,657 
Revisions in estimated cash flows2,018 1,604 
Settlements(27)(1,258)
Carrying amount of ARO at December 3147,862 40,797 
Less: Asset retirement obligation – current401 333 
Asset retirement obligation$47,461 $40,464 
The revisions in estimated cash flows for 2020 and 2019 were primarily related to changes in the estimated timing of settlement. Accretion expense is included in depreciation, depletion and amortization in the Consolidated Statement of Operations.

9.    Derivative Instruments Commodity Derivatives
The Company sells natural gas, NGLs and oil in the normal course of its business and utilizes derivative instruments to manage the variability in cash flows due to commodity price movements. The Company enters into derivative instruments to economically hedge a portion of its forecasted natural gas sales. The Company did not designate these contracts as hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. Commodity derivatives are recorded on the Consolidated Balance Sheet at fair value. See Note 10 for fair value disclosures about commodity derivatives.

The following summarizes gains and losses on natural gas derivative instruments included in other operating income for 2020 and 2019 (in thousands):
20202019
Unsettled (loss) gain$(199,490)$193,094 
Settled gain201,704 73,344 
Total gain on natural gas derivatives$2,214 $266,438 
20

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
The following summarizes open positions at December 31, 2020, and represents, as of such date, derivatives in place through December 31, 2024:
2021202220232024
Fixed price swaps:
Volume (MMBtu)245,416,458 146,317,980 76,000,000 56,630,000 
Weighted average price per MMBtu$2.71 $2.70 $2.60 $2.43 
Collars:
Volume (MMBtu)35,300,000 5,400,000 
Sold Calls (Weighted average price per MMBtu)$2.91 $3.28 
Purchased Puts (Weighted average price per MMBtu)$2.54 $2.68 
Consolidated Balance Sheet Presentation
At December 31, 2020 and 2019, the Company had the following outstanding derivative contracts recorded on the Consolidated Balance Sheets as indicated (in thousands):
Fair Value
Hedged itemBalance Sheet Classification20202019
Natural gasDerivative instruments – current assets$24,434 $131,719 
Natural gasDerivative instruments – noncurrent assets29,968 104,323 
Natural gasDerivative instruments – current liabilities(8,885)— 
Natural gasDerivative instruments – noncurrent liabilities(9,010)(45)
Total$36,507 $235,997 
10.    Fair Value Measurements
The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and do not prioritize among the techniques. These standards establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that management has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs that are corroborated by market data and may be used with internally-developed methodologies that result in management’s best estimate of fair value.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.


21

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Fair Values - Recurring
The Company estimates the fair value of derivative instruments using various inputs including publicly available prices. Fixed price commodity swaps and commodity collars are classified as Level 2 because the inputs used to value the instruments were substantially observable for the term of the instruments.

The following tables summarize the valuation and classification of the Company’s financial instruments accounted for at fair value on a recurring basis at December 31, 2020 and 2019 (in thousands):
2020Level 1Level 2Level 3Total
Assets:
Derivative instruments
Commodity derivatives
Fixed price swaps$— $52,117 $— $52,117 
Collars— 2,285 — 2,285 
Liabilities:
Derivative instruments
Commodity derivatives
Fixed price swaps— (15,300)— (15,300)
Collars— (2,595)— (2,595)
$— $36,507 $— $36,507 
2019Level 1Level 2Level 3Total
Assets:
Derivative instruments
Commodity derivatives
Fixed price swaps$— $236,042 $— $236,042 
Liabilities:
Derivative instruments
Commodity derivatives
Fixed price swaps— (45)— (45)
$— $235,997 $— $235,997 
Fair Values – Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to their short maturities.

Based on the variable rate applicable to the borrowings under the Revolver, the fair value of the facility approximates its carrying value at December 31, 2020. There were no borrowings under the Revolver at December 31, 2019.

At December 31, 2020 and 2019, the fair value of the 2026 Notes totaled $663.7 million and $617.5 million, respectively. The related aggregate carrying value was $634.4 million and $637.3 million, respectively, including unamortized debt issuance costs. The fair value of the 2026 Notes is measured based on quoted prices, which is classified as Level 1.


22

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
11.    Members' Common Equity
Common Units
During 2020 and 2019, the Company repurchased 38,723 and 35,541 Class A Incentive Tracking Units, respectively, upon surrender by the holders to cover estimated taxes triggered by vesting (see Note 13), and retired the associated Class A common units.

Partial Recourse Note
At December 31, 2020 and 2019, the Company had a partial recourse note receivable from a member of management (“Notes Member”). The partial recourse note was issued in exchange for common units and performance of the Notes Member’s obligations under the partial recourse note is secured by the respective common units purchased. At December 31, 2020 and 2019, the principal amount outstanding under the partial recourse note was $8.2 million, with an interest rate of 0% and a term ending in February 2022.

Payments on Behalf of Members
Occasionally, the Company is required to pay certain state taxes on behalf of its members. Rather than reimburse Indigo, some members choose to have these amounts withheld from future distributions. As of December 31, 2020 and 2019, unreimbursed payments in the amount of $0.1 million are classified as a component of members’ common equity in the Consolidated Balance Sheets.

12.    Redeemable Preferred Units
2020 Redemption
In September 2020, the Company used a portion of the funds received in connection with the sale of M5 Louisiana discussed in Note 6, available cash and borrowings under the Revolver to fully redeem the preferred units at a redemption price of $223.2 million, resulting in a loss on redemption of preferred equity of $28.0 million.

A summary of preferred equity activity for 2020 and 2019 is presented below (in thousands):
20202019
Beginning balance at January 1$182,016 $165,568 
Dividends accrued to the preference accrual5,743 11,057 
Accretion of discount on preferred equity3,727 5,391 
Redemption of preferred equity(191,486)— 
Preferred equity at December 31$— $182,016 
Dividends
Dividends on the preferred units were cumulative and due at the end of each quarter. At the Company’s election, a portion of the quarterly dividends could have been accrued to each unit’s “preference accrual,” as defined in the 2018 LLC Agreement, rather than paid in cash. The quarterly dividends were based on an annual rate of 10.5% applied to each unit’s preference accrual, which was $100 per preferred unit at issuance and which increased by the amount of any quarterly dividends the Company elected not to pay in cash.

23

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
The following summarizes dividends recorded on the redeemable preferred units for 2020 and 2019 (in thousands):
20202019
Dividends accrued to the preference accrual$5,743 $11,057 
Cash dividends5,221 10,052 
Dividends accrued on preferred units prior to redemption3,772 — 
Total dividends recorded$14,736 $21,109 
13.    Incentive Units and Incentive Tracking Units
Indigo Class A Incentive Tracking Units
As of December 31, 2020 and 2019, Indigo Parent Incentive Holdings LLC (“Parent Incentive Holdings”) held 618,494 and 657,217 Indigo Class A common units, respectively, and had 616,977 and 655,733 associated Class A Incentive Tracking Units outstanding, respectively. The following is a summary of the unvested Class A Incentive Tracking Unit activity during 2020:
2020Weighted Average Grant Date Fair Value
Unvested at January 1225,385 $100 
Granted2,741 $113 
Vested(110,453)$100 
Forfeited(2,775)$100 
Unvested at December 31114,898 $100 
Equity-based compensation expense of $10.0 million and $9.8 million was recognized during 2020 and 2019, respectively, related to Class A Incentive Tracking Units, which generally vest in three equal installments over either 40 months or 36 months. As of December 31, 2020, there was $7.3 million of unrecognized compensation expense related to unvested Class A Incentive Tracking Units which is expected to be recognized over a weighted average period of one year.

The vesting date fair value of the Class A Incentive Tracking Units that vested in 2020 and 2019 was $11.8 million and $10.9 million, respectively. The vesting of Class A Incentive Tracking Units resulted in taxable income for the applicable holders. Each of these individuals was given the option to surrender a portion of their vested Class A Incentive Tracking Units to cover the estimated taxes triggered by the vesting, based on the estimated fair value per Class A Incentive Tracking Unit on the vesting date. In 2020 and 2019, 38,723 and 35,541 vested Class A Incentive Tracking Units, respectively, valued at $4.1 million and $3.7 million, respectively, were surrendered and the Company’s Class A common units issued to Parent Incentive Holdings associated with these Class A Incentive Tracking Units were retired, resulting in reductions of members’ common equity during 2020 and 2019.

Indigo Class B Incentive Tracking Units
As of December 31, 2020 and 2019, Parent Incentive Holdings held 2,550,000 Indigo incentive units and had 2,485,833 and 2,490,559 associated Class B Incentive Tracking Units outstanding, respectively. The incentive units allow Parent Incentive Holdings to participate in future distributions made by the Company once its Class A and Class B common unit holders receive a return of their capital investments and achieve a return on such capital investments as defined in the 2018 LLC Agreement. The incentive units issued to Parent Incentive Holdings and the associated Class B Incentive Tracking Units, are considered to be compensatory profit-sharing awards and therefore are not accounted for as equity-based compensation.
24

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
No compensation expense associated with the Company’s incentive units was recognized in 2020 and 2019 as a distribution to Parent Incentive Holdings did not occur, nor was it deemed probable.

M5 Incentive Units
M5 granted a number of its incentive units to certain of the Company’s employees that allowed the holders to participate in distributions made by M5 once its common unit holders received a return of their capital investments and achieved a return on such capital investments as defined in M5’s limited liability company agreement. In conjunction with the sale of M5 Louisiana discussed in Note 6, M5 made cash distributions to its incentive unit holders in 2020 and 2019. Such distributions to Indigo employees are reflected as equity-based compensation expense in the Company’s Consolidated Statement of Operations and Consolidated Statement of Cash Flows and as a common equity contribution from M5 to Indigo. For 2020 and 2019, equity-based compensation expense and common equity contributions associated with the M5 incentive units granted to Indigo employees totaled $1.2 million and $4.0 million, respectively.

14.    Tax Distributions
There were tax implications related to the sale of M5 Louisiana discussed in Note 6. Indigo made tax distributions of $270.8 million and $4.2 million to its common and preferred unit holders, respectively, in January 2020. The distributions on common units are reflected as a reduction of members’ common equity during 2020. The distributions on preferred units are reflected as preferred tax distributions in the Statement of Operations for 2020.

15.    Related Party Transactions
Transactions with Momentum and M5 Louisiana
Certain of the Company’s members are also members of M5 and M6 Midstream LLC (collectively, “Momentum”). The Company and Momentum co-employ certain of the Company’s executive management and are parties to a shared services agreement under which employees of Momentum provide various services to the Company.

The following summarizes the costs incurred under these shared services arrangements and where these costs are reflected in the Consolidated Statements of Operations for 2020 and 2019 (in thousands):
20202019
General and administrative expense$2,257 $1,526 
Gathering and transportation expense— 1,038 
Total$2,257 $2,564 
Prior to the sale of M5 Louisiana discussed in Note 6, the Company was party to gas gathering, water services and sand supply agreements with M5 Louisiana, under which M5 Louisiana provided gas gathering and treating, produced water gathering and disposal, fresh water services and sand supply to the Company. The Company was also party to a produced water assets operating agreement with M5 Louisiana, under which the Company served as operator of certain saltwater disposal wells associated with M5 Louisiana’s produced water assets.

During 2019, Indigo paid amounts to M5 Louisiana under the agreements described above. Portions of these costs were recorded as gathering and transportation expense and lease operating expense in the Consolidated Statements of Operations and as oil and gas properties in the Consolidated Balance Sheet, reflecting Indigo’s net revenue interest or working interest share of these costs, as applicable, with the remainder charged to certain other revenue interest owners
25

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
or joint interest partners, as applicable. The following summarizes the costs incurred for 2019 (in thousands):
2019
Gas gathering$124,143 
Produced water disposal10,210 
Fresh water sourcing6,067 
Sand supply2,031 
Total$142,451 
In addition, Indigo incurred deficiency fees under the water services agreement with M5 Louisiana totaling $0.1 million in 2019, which is reflected as other operating costs, net in the Consolidated Statement of Operations for 2019.

In 2019, M5 Louisiana paid Indigo $0.6 million under the produced water asset operating agreement, which is reflected as other operating income in the Consolidated Statement of Operations for 2019.

To facilitate management of Indigo’s forward sales contracts during 2019, the Company periodically purchased small amounts of natural gas from M5 Louisiana at market prices for balancing purposes. The Company paid M5 Louisiana $0.9 million for such natural gas purchases, and Indigo’s net revenue interest share is reflected as other operating costs, net in the Consolidated Statement of Operations for 2019.

At December 31, 2020 and 2019, accrued liabilities–related parties included an aggregate $0.9 million and $0.4 million, respectively, due to Momentum related to the co-employment and shared services agreement. At December 31, 2019, accounts receivable–related parties included an aggregate $5 thousand due from Momentum, related to costs the Company incurred on behalf of Momentum.

See Note 6 for discussion of the $37.5 million payment received from M5 for full settlement of their obligation to reimburse the Company for 50% of the deficiency fees that may be incurred under the Company’s letter agreement with DTE Midstream.

Other Related Party Transactions
During 2020 and 2019, Indigo paid $0.2 million to Martin Timberlands LLC, an affiliate of Martin Sustainable Resources, L.L.C., a member of the Company, for rights-of-way and related costs associated with certain drilling locations.

During 2019, Indigo sold the Bossier formation rights associated with certain undeveloped properties in North Louisiana to Beland Energy LLC, a member of the Company, for cash proceeds of $0.2 million, which was recorded as a reduction to oil and gas properties. Beland also holds royalty interests in certain of the Company’s operated wells and the Company makes royalty distributions on those interests monthly.

NRI Energy Partners LLC, whose sole member is also a member of the Company, holds royalty interests in certain of the Company’s operated wells and the Company makes royalty distributions on those interests monthly.

See Note 11 for discussion of receivables related to tax payments on behalf of common unit holders.

26

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
16.    Commitments and Contingencies
Legal and Regulatory Proceedings
On June 12, 2018, a collection of 51 individuals and entities filed a lawsuit against fifteen oil and gas company defendants, including the Company, in Louisiana state court claiming damages arising out of current and historical exploration and production activity on certain acreage located in DeSoto Parish, Louisiana. The plaintiffs, who claim to own the properties at issue, assert that the Company’s actions and the actions of other current operators conducting exploration and production activity, combined with the improper plugging and abandoning of legacy wells by former operators, have caused environmental contamination to their properties. Among other things, the plaintiffs contend that the defendants’ conduct resulted in the migration of natural gas, along with oilfield contaminants, into the Carrizo-Wilcox aquifer system underlying certain portions of DeSoto Parish. The plaintiffs assert claims based in tort, breach of contract, and for violations of the Louisiana Civil and Mineral Codes, and they seek injunctive relief and monetary damages in an unspecified amount, including punitive damages.

The presence of natural gas in a localized area of the Carrizo-Wilcox aquifer system is currently the subject of a regulatory investigation by the Louisiana Office of Conservation (“Conservation”) in a nine-section Area of Interest (“AOI”), and the Company is cooperating and coordinating with Conservation in that investigation.

On September 13, 2018, the Company filed a variety of exceptions in response to the plaintiffs’ petition in this matter. Since the initial filing, supplemental petitions have been filed joining additional individuals and entities as plaintiffs in the matter, and a total of 52 tracts are at issue. To date, the Company has obtained dismissals of all environmental claims for 18 of those tracts, and partial dismissal of environmental claims for 27 additional tracts. Additionally, on November 4, 2019, Conservation reduced the size of the AOI by eliminating seven of the nine sections in the original AOI. On April 28, 2020, Conservation further reduced the size of the AOI by eliminating another half section from the original AOI.

On June 15, 2020, the court held a hearing on the exceptions filed by the Company and several other defendants challenging the sufficiency of plaintiffs’ allegations and the collective nature of their claims. The court sustained the challenges, ruling that plaintiffs’ claims were improperly vague and failed to identify with reasonable specificity the defendants’ allegedly wrongful conduct and ordered plaintiffs to correct the deficiencies in their allegations.

The court also granted the Company’s motion to enforce an earlier compromise reached with respect to four plaintiffs, resulting in the partial dismissal of their claims without prejudice, consistent with the dismissals discussed above.

On September 29, 2020, plaintiffs filed their fourth supplemental and amending petition in response to the court’s order sustaining defendants’ exceptions to their prior petitions. The Company and the majority of the other defendants filed several exceptions to plaintiffs’ fourth amended petition challenging the sufficiency of plaintiffs’ allegations. In addition, through the fourth supplemental and amending petition, several plaintiffs are seeking to rejoin certain claims that were previously dismissed by agreement as outlined above. The Company and the other defendants are challenging these efforts and seeking dismissal of those claims, with the hearing on these motions set for May 19, 2021. Plaintiffs recently filed a fifth supplemental and amending petition, which seeks to augment the claims of select plaintiffs based largely on water sampling conducted by Plaintiffs’ experts.

The Company is vigorously defending itself in these legal and regulatory proceedings and does not believe they will have a material adverse effect on its business. However, the Company cannot predict the outcome of these proceedings with certainty, and if the Company is
27

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
unsuccessful in these matters and any loss exceeds its available insurance, this could have a material adverse effect on its results of operations.

The Company is party to various litigation matters arising out of the normal course of its business. The ultimate outcome of each of these matters cannot be absolutely determined, and the liability the Company may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued. However, management does not believe any such matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Contractual Obligations
The following is a schedule by year of future contractual commitments under leases and contracts with minimum volume commitments, based on agreements in place at December 31, 2020 having initial non-cancellable terms in excess of one year (in thousands):
Gathering and Transportation Contracts(1)(2)
Water Services Contracts(2)
Sand Supply Contract(2)
Operating Lease Obligations(2)
Capital Lease ObligationsTotal
2021$246,907 $12,786 $10,262 $3,792 $778 $274,525 
2022256,540 12,786 13,202 2,145 680 285,353 
2023175,656 9,143 — 2,115 506 187,420 
2024173,215 5,574 — 2,138 155 181,082 
2025166,695 5,559 — 2,161 — 174,415 
Thereafter649,951 10,646 — 2,131 — 662,728 
Total minimum payments$1,668,964 $56,494 $23,464 $14,482 $2,119 $1,765,523 
Less: Imputed interest costs(106)
Present value of minimum capital lease payments$2,013 
(1)The gathering and transportation commitments for 2021 and 2022 include the full $78.1 million and $86.0 million, respectively, of incremental minimum volume commitments to DTE Midstream made as part of the M5 Louisiana sale discussed in Note 6. During 2020, M5 paid the Company $37.5 million to settle its obligation to reimburse Indigo 50% of any deficiency fees that may be incurred with respect to these incremental commitments, none of which is reflected in the table above. In February 2021, the Company paid deficiency fees totaling $25.4 million to DTE Midstream associated with the incremental volume commitment for 2020.
(2)The commitments for gathering and transportation, water services and sand supply contracts and operating lease obligations represent the gross amounts that Indigo is committed to pay. However, the Company will record in its Consolidated Financial Statements its proportionate share of costs based on the Company’s net revenue interests or working interests, as applicable, with the remainder charged to certain other revenue interest owners or joint interest partners, as applicable.

In addition, the Company has entered into compression services agreements with various terms, with the latest expiring in 2022. As of December 31, 2020, future minimum payments under these agreements are $1.4 million and $0.6 million in 2021 and 2022, respectively. However, the Company will record in its Consolidated Statement of Operations its proportionate share of costs based on the Company’s working interests, with the remainder charged to certain other joint interest partners.

During 2020 and 2019, the Company incurred $2.1 million and $2.3 million, respectively, of rent expense included in general and administrative expense in the Consolidated Statements of Operations. The Company also paid $4.6 million and $2.1 million during 2020 and 2019, respectively, under field operations leases, a portion of which is included in lease operating expense in the Consolidated Statement of Operations, reflecting Indigo’s net working interest share of these costs, with the remainder charged to certain other joint interest partners.

28

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
17.    Employee Benefit Plan
The Company provides a defined contribution benefit plan for its employees. During 2020 and 2019, the plan provided a dollar-for-dollar matching contribution by the Company on the first 6% of an employee’s contributions not to exceed a Company match of 6%. Expenses under the plan during 2020 and 2019 were $1.5 million and $1.4 million, respectively.

18.    COVID-19
Indigo is focused on protecting the health and safety of its employees and contractors while striving for business continuity. The Company has implemented certain mitigation procedures and, to date, the Company has not experienced any material operational or supply chain impacts from COVID-19. Indigo currently does not expect COVID-19 or any applicable government order to have a material impact on its drilling and completion activities. However, the situation surrounding COVID-19 and various government orders is fluid and circumstances may change. To the extent COVID-19 or any related governmental orders restrict the drilling and completion of natural gas wells or disrupt our supply chain, the Company’s business and financial condition could be adversely impacted. Indigo is continuing to monitor the COVID-19 pandemic and evaluate what impacts it may have on its business and operations going forward.

19.    Subsequent Events
Issuance of 2029 Notes
In February 2021, the Company issued $700.0 million of 5.375% senior notes due in 2029. A portion of the proceeds was used to redeem the entire $645.0 million principal amount of the 2026 Notes for $689.2 million, including a make-whole premium and accrued and unpaid interest, resulting in a $33.9 million loss on extinguishment of debt to be recorded in 2021. In addition, the Company repaid $20.0 million of borrowings outstanding under the Revolver. A waiver was received from the lenders under the Revolver and therefore this issuance of senior notes did not impact the Revolver’s borrowing base.
Equity Distributions
Subsequent to December 31, 2020, the Company made distributions totaling $35.0 million to its common equity holders using cash on hand.

Subsequent events were evaluated through March 25, 2021, the date the consolidated financial statements were issued.

Events Subsequent to Original Issuance of Financial Statements (Unaudited)
In connection with the reissuance of these consolidated financial statements, subsequent events were reevaluated through July 1, 2021, the date the consolidated financial statements were issued.

Pending Merger with Southwestern Energy Company
In June 2021, the Company entered into a definitive merger agreement with Southwestern Energy Company (“SWN”) under which SWN will acquire Indigo for $400.0 million of cash, approximately 339 million shares of SWN common stock and SWN’s assumption of the Company’s 2029 Notes, subject to customary closing adjustments. The transaction is expected to close early in the fourth quarter of 2021, subject to customary closing conditions.

Conventional Cotton Valley Assets Divestiture
In May 2021, the Company closed the divestiture of substantially all of its interests in operated and non-operated conventional Cotton Valley oil and gas properties and related assets in North Louisiana for a sale price of $135.0 million in cash, before customary closing adjustments. A
29

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
portion of the cash proceeds received at closing was used to repay $90.0 million of borrowings outstanding under the Revolver.

Amendment to the Revolver
In May 2021, the Revolver was amended to decrease the borrowing base and elected commitment to $675.0 million based on the regularly-scheduled semi-annual redetermination, reflecting the divestiture of the conventional Cotton Valley assets discussed above.

Equity Distribution Approval
In June 2021, Indigo’s board of directors approved distributions totaling $25.0 million to be made to the Company’s common equity holders prior to the closing of the merger with SWN discussed above.


30

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Supplementary Information on Oil and Gas Producing Activities (Unaudited)

Estimated Quantities of Net Proved Natural Gas, NGL and Oil Reserves
The net proved reserves at December 31, 2020 presented below are located in the United States and were prepared by the independent reserves engineers Netherland, Sewell & Associates, Inc. Proved natural gas, NGL and oil reserves are the estimated quantities of natural gas, NGLs and oil which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions (i.e., prices and costs) existing at the time the estimate is made. Proved developed natural gas, NGL and oil reserves are proved reserves that can be expected to be recovered through existing wells and equipment in place and under operating methods being utilized at the time the estimates were made. Reserve estimates are inherently imprecise and estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available.

The following table sets forth changes in the Company’s net proved reserves for 2020 and 2019:
Natural Gas (MMcf)NGLs (MBbls)Oil (MBbls)Equivalent (MMcfe)
Proved developed and undeveloped reserves:
Beginning of year – 20194,444,593 41,607 3,127 4,712,995 
Extensions and discoveries1,107,330 5,124 357 1,140,212 
Production(331,306)(1,234)(203)(339,928)
Sales of minerals in place(12,361)(7)(7)(12,446)
Revisions of previous estimates(648,132)(22,470)(1,039)(789,181)
End of year – 20194,560,124 23,020 2,235 4,711,652 
Extensions and discoveries779,967 249 22 781,594 
Purchase of minerals in place140 — — 140 
Production(367,092)(1,063)(168)(374,478)
Sales of minerals in place(5,238)(2)— (5,252)
Revisions of previous estimates(1,317,784)(4,784)(231)(1,347,872)
End of year – 20203,650,117 17,420 1,858 3,765,784 
Proved developed reserves:
Beginning of year – 20191,145,725 12,993 1,493 1,232,644 
End of year – 20191,268,972 7,660 1,175 1,321,982 
End of year – 20201,191,034 5,521 797 1,228,943 
Proved undeveloped reserves:
Beginning of year – 20193,298,868 28,614 1,634 3,480,351 
End of year – 20193,291,152 15,360 1,060 3,389,670 
End of year – 20202,459,083 11,899 1,061 2,536,841 
In 2020, proved reserves decreased 20% from 2019 largely due to a $0.59 per million British thermal unit of natural gas (“MMBtu”) decrease in the average natural gas price used in the reserves estimates. The 1.3 trillion cubic feet of natural gas equivalent (“Tcfe”) of revisions of previous estimates was primarily driven by the decrease in the average natural gas price, which caused many undeveloped locations at year-end 2019 to become uneconomic, partially offset by positive revisions as a result of capital savings, performance revisions and other factors. The Company’s successful 2020 development program generated extensions and discoveries that increased proved reserves by 782 billion cubic feet of natural gas equivalent (“Bcfe”), or 17%,
31

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
from year-end 2019, primarily related to continued acreage acquisition and additional activity in the Desoto East area of the Haynesville Shale and Bossier Shale.
In 2019, proved reserves remained consistent with 2018 despite a $0.52 per MMBtu decrease in the average natural gas price used in the reserves estimates. The Company’s successful 2019 development program generated extensions and discoveries that increased proved reserves by 1.1 Tcfe, or 24%, from year-end 2018, of which 529 Bcfe is directly tied to the Desoto East area. The Company continued to acquire acreage in the Desoto East area of the Haynesville Shale and Bossier Shale and directed additional activity to this area. The Company also rescheduled certain 2018 proved undeveloped locations to beyond five years. Of the 790 Bcfe of downward revisions of previous estimates, 644 Bcfe were due to the aforementioned rescheduling of proved undeveloped reserves beyond five years and 257 Bcfe were the result of the decrease in the average natural gas price. These downward revisions were partially offset by 111 Bcfe of increases due to performance revisions and category reclassification.

Costs Incurred for Property Acquisition, Exploration and Development
The costs incurred for property acquisition, exploration and development for 2020 and 2019 were as follows (in thousands):
20202019
Property acquisition costs:
Proved$325 $1,168 
Unproved27,462 36,645 
Exploration costs792 933 
Development costs451,934 624,181 
Total$480,513 $662,927 
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves
The following assumptions were used in determining the standardized measure of discounted future net cash flows relating to the Company’s proved reserves:
Future cash inflows were computed by applying the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December of each year to the Company’s year-end net quantities of proved reserves. Prices were held constant throughout the lives of the properties.

Future production and development costs were computed by estimating the expenditures to be incurred in developing and producing the Company’s net proved reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions.

The Company’s calculations of the standardized measure of discounted future net cash flows do not include the effect of future income tax expenses as the Company is a limited liability company and generally not subject to income taxes.

An annual discount rate of 10% was used to reflect the timing of the future net cash flows relating to proved reserves.

The assumptions used to compute the standardized measure are those prescribed by the FASB and the Securities and Exchange Commission. These assumptions do not necessarily reflect the Company’s expectations of actual revenues to be derived or costs to be incurred related to its net proved reserves, nor their present value. The standardized measure of discounted future net cash flows does not purport, nor should it be interpreted, to present the fair value of the
32

Indigo Natural Resources LLC
Notes to Consolidated Financial Statements
Years Ended December 31, 2020 and 2019
Company’s net proved reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.

The components of the Company’s discounted future net cash flows related to its net proved reserves as of December 31, 2020 and 2019 were as follows (in thousands):
20202019
Future cash inflows$7,178,019 $11,976,784 
Future production costs(3,755,854)(5,043,480)
Future development costs(1,946,383)(2,722,729)
Future net cash flows1,475,782 4,210,575 
10% annual discount for estimated timing of cash flows(826,570)(2,166,894)
Standardized measure of discounted future net cash flows$649,212 $2,043,681 
Changes in the Standardized Measure of Discounted Future Net Cash Flows
The changes in the standardized measure of discounted future net cash flows for 2020 and 2019 were as follows (in thousands):
20202019
Sales of natural gas, NGLs and oil$(391,163)$(562,233)
Net change in prices and production costs related to future production(1,385,492)(1,342,781)
Net change in estimated future development costs918,077 502,588 
Previously estimated development costs incurred271,248 351,993 
Revisions of previous quantity estimates(1,155,930)(863,583)
Extensions and discoveries155,785 535,697 
Purchase of minerals in place(44)— 
Sales of minerals in place242 (3,314)
Accretion of discount192,808 292,093 
Aggregate change(1,394,469)(1,089,540)
Beginning of year2,043,681 3,133,221 
End of year$649,212 $2,043,681 
33
Document








Indigo Natural Resources LLC
Unaudited Condensed Consolidated Financial Statements
March 31, 2021 and 2020



Indigo Natural Resources LLC
Index to Consolidated Financial Statements
March 31, 2021 and 2020


Page
Condensed Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2021 and December 31, 20201
Consolidated Statements of Operations for the three months ended March 31, 2021 and 20202
Consolidated Statements of Members’ Common Equity for the three months ended March 31,3
2021 and 2020
Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and4
2020
Notes to Condensed Consolidated Financial Statements5




Indigo Natural Resources LLC
Consolidated Balance Sheets (Unaudited)

(in thousands, except unit amounts)March 31, 2021December 31, 2020
Assets
Current assets
Cash and cash equivalents$59,388 $85,162 
Accounts receivable–trade, net of allowance for doubtful accounts of $1,535 and $1,524144,091 141,405 
Prepaid costs and other current assets3,093 2,471 
Derivative instruments7,498 24,434 
Total current assets214,070 253,472 
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment of $1,151,680 and $1,657,8491,920,715 2,731,443 
Property and equipment held for sale170,537 — 
Investment in midstream joint venture— 15,465 
Debt issuance costs and other noncurrent assets, net6,756 6,650 
Derivative instruments26,360 29,968 
Total noncurrent assets2,124,368 2,783,526 
Total assets$2,338,438 $3,036,998 
Liabilities and members’ equity
Current liabilities
Accounts payable–trade$4,959 $6,011 
Royalties payable76,791 96,462 
Accrued capital expenditures54,271 48,997 
Accrued gathering and transportation expense44,256 24,384 
Accrued lease operating expense9,929 7,672 
Accrued interest expense6,975 17,510 
Other accrued liabilities51,470 55,674 
Accrued liabilities–related parties124 941 
Accrued liabilities held for sale16,691 — 
Derivative instruments27,472 8,885 
Total current liabilities292,938 266,536 
Long-term debt814,039 779,414 
Asset retirement obligation11,815 47,461 
Asset retirement obligation for property and equipment held for sale36,938 — 
Other noncurrent liabilities8,244 26,460 
Derivative instruments9,334 9,010 
Total noncurrent liabilities880,370 862,345 
Total liabilities1,173,308 1,128,881 
Commitments and contingencies
Members’ common equity, 13.9 million Class A units and 0.9 million Class B units issued and outstanding1,165,130 1,908,117 
Total liabilities and members’ common equity$2,338,438 $3,036,998 

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




1

Indigo Natural Resources LLC
Consolidated Statements of Operations (Unaudited)
Three Months Ended
March 31,
(in thousands)20212020
Revenue and other operating income
Natural gas, NGL and oil revenue$224,949 $162,185 
(Loss) gain on derivative instruments(37,776)86,314 
Other41,115 4,318 
Total revenue and other operating income228,288 252,817 
Operating expenses
Lease operating expense21,689 29,815 
Gathering and transportation expense56,594 44,002 
Severance taxes, net of refunds received3,017 4,567 
Other operating costs, net36,744 3,035 
Exploration costs196 205 
Depreciation, depletion and amortization117,989 107,595 
Impairment22,088 32 
General and administrative expense13,418 13,226 
Loss (gain) on sale of assets620,444 (10)
Total operating expenses892,179 202,467 
Operating (loss) income(663,891)50,350 
Other income (expense)
Interest and other financing expense(8,226)(8,747)
Loss from equity method investment in midstream joint venture(4,411)(72)
(Loss) gain on extinguishment of debt(33,886)1,906 
Other, net32 54 
Total other expense(46,491)(6,859)
Pretax (loss) income(710,382)43,491 
State income tax (expense) benefit(9)190 
Net (loss) income(710,391)43,681 
Preferred dividends— (5,445)
Accretion of discount on preferred equity— (1,378)
Preferred tax distribution— (4,180)
Net (loss) income attributable to members’ common equity$(710,391)$32,678 

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














2

Indigo Natural Resources LLC
Consolidated Statements of Members’ Common Equity (Unaudited)
(in thousands)20212020
Beginning balance at January 1$1,908,117 $2,218,750 
Indigo equity-based compensation expense2,404 2,575 
M5 Midstream LLC incentive unit distributions to Indigo employees— 343 
Distributions(35,000)(270,764)
Net (loss) income attributable to members’ common equity(710,391)32,678 
Balance at March 31$1,165,130 $1,983,582 

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









































3

Indigo Natural Resources LLC
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
(in thousands)20212020
Cash flows from operating activities
Net (loss) income$(710,391)$43,681 
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Equity-based compensation expense2,404 2,918 
Depreciation, depletion and amortization117,989 107,595 
Impairment22,088 32 
Loss (gain) on sale of assets620,444 (10)
Amortization of debt issuance costs812 911 
Loss (gain) on extinguishment of debt33,886 (1,906)
Loss from equity method investment in midstream joint venture4,411 72 
Non-cash changes in derivative fair values39,455 (24,220)
Other, net(2,737)(192)
Changes in assets and liabilities
Accounts receivable–trade, net(3,954)19,981 
Prepaid costs and other current assets(622)(325)
Accounts payable–trade(1,052)25,628 
Accrued and other liabilities11,455 (17,736)
Net cash provided by operating activities134,188 156,429 
Cash flows from investing activities
Acquisitions— (25)
Capital expenditures(116,439)(179,165)
Distributions from midstream joint venture15,465 — 
Adjustment to M5 Louisiana sale proceeds(25,376)— 
Proceeds from sales of assets365 — 
Other investing activities455 48 
Net cash used in investing activities(125,530)(179,142)
Cash flows from financing activities
Proceeds from issuance of debt700,000 145,000 
Debt issuance costs(10,769)(100)
Repayment of debt(664,965)(3,034)
Make-whole premium on extinguishment of debt(23,515)— 
Preferred dividends— (2,585)
Preferred tax distribution— (4,180)
Member distributions(35,000)(270,764)
Payment of capital lease obligations(183)(162)
Net cash used in financing activities(34,432)(135,825)
Net decrease in cash and cash equivalents(25,774)(158,538)
Cash and cash equivalents
Beginning of period85,162 186,799 
End of period$59,388 $28,261 
Supplemental cash flow information
Cash paid for interest, net of amounts capitalized$14,045 $17,171 
Non-cash investing and financing activities
Change in accrued capital expenditures$5,274 $(9,664)
Change in accrued interest capitalized$(3,871)$(1,607)
Asset retirement cost capitalized, net$455 $310 
Dividends accrued to the preference accrual$— $2,852 
Accretion of discount on preferred equity$— $1,378 

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



4

Indigo Natural Resources LLC
Consolidated Statements of Cash Flows (Unaudited)

1.    Basis of Presentation
These condensed consolidated financial statements include the accounts of Indigo Natural Resources LLC’s (“Indigo” or the “Company”) majority-owned, controlled subsidiaries and are unaudited; however, they reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These condensed consolidated financial statements, including notes, have been prepared in conformity with accounting principles generally accepted in the United States of America and do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements.

These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for 2020 and 2019. Other operating income and other operating costs, net for the three months ended March 31, 2020 were overstated by $3.0 million in the Company’s previously-issued Consolidated Statement of Operations for that period, related to the presentation of third-party natural gas sales and purchases. The accompanying Consolidated Statement of Operations for the three months ended March 31, 2020 has been revised to correct this error, which had no effect on net income and was not material to the previously-issued financial statements. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

2.    Accounting Standards

Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that changes the impairment model for financial assets, including trade receivables and certain other instruments. The update replaces the current “incurred loss” model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2019, the update’s effective date for Indigo was deferred to 2023, and the update must be adopted using a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. Early adoption is permitted. The Company is evaluating the provisions of this update, but based on its preliminary analysis, does not expect adoption to have a material impact on its results of operations, financial position and cash flows.

In February 2016, the FASB issued an amendment to the accounting standards for leases which requires lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on the balance sheet for substantially all leases, though not mineral leases. For operating leases, a lessee must recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and reflect cash payments as operating activities, except when the lease cost is capitalized as a development cost, in which case cash payments are reflected as investing activities. For finance leases, a lessee must recognize interest on the lease liability separately from amortization of the right-of-use asset and reflect repayments of the principal portion of the lease liability as financing activities and payments of interest as operating activities. Disclosure of key information about leasing arrangements is also required. In June 2020, the amendment’s effective date for Indigo was deferred to 2022 and early adoption is permitted. At adoption, entities are allowed the option to recognize and measure leases at the beginning of the earliest period presented using a modified-retrospective approach or to recognize the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The Company is evaluating the provisions of this amendment and assessing the impact it will have on its results of operations, financial position and cash flows.

5

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recently Adopted
In August 2018, the FASB issued amendments to the disclosure requirements regarding fair value measurements that (i) eliminate certain disclosure requirements, including those related to transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) modify certain other disclosure requirements and (iii) add disclosure requirements, including expanded disclosures regarding significant unobservable inputs used to develop Level 3 fair value measurements. On January 1, 2020, the Company adopted the amendments to the disclosure requirements regarding fair value measurements and adoption did not have a material impact on the Company’s fair value disclosures.

3.    Divestiture
Assets Held for Sale – Conventional Cotton Valley Assets
In March 2021, Indigo’s board of directors approved the divestiture of substantially all of the Company’s interests in operated and non-operated conventional Cotton Valley oil and gas properties and related assets located in North Louisiana. In April 2021, the Company entered into a purchase and sale agreement, and under the terms of the agreement, the sale price for these non-core assets was $135.0 million in cash, before customary closing adjustments. The divestiture closed in May 2021. A $620.9 million loss on the conventional Cotton Valley divestiture is reflected as loss (gain) on sale of assets in the Consolidated Statement of Operations for the three months ended March 31, 2021.

As of March 31, 2021, the conventional Cotton Valley assets and associated liabilities held for sale were reflected in the Consolidated Balance Sheet as property and equipment held for sale, current liabilities and asset retirement obligation for property and equipment held for sale, as follows (in thousands):

March 31, 2021
Assets classified as held for sale:
Property and equipment$170,537 
Liabilities associated with assets held for sale:
Current liabilities$16,691 
Asset retirement obligation$36,938 

The pretax loss of the conventional Cotton Valley assets was $6.4 million and $12.7 million for the three months ended March 31, 2021 and 2020, respectively.

4.    Operating Revenue
Disaggregation of Natural Gas, NGL and Oil Revenue
Natural gas, NGL and oil revenue from contracts with customers disaggregated by product type consisted of the following for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended
March 31,
20212020
Natural gas, NGL and oil revenue:
Natural gas$217,837 $155,988 
NGLs5,241 3,965 
Oil1,871 2,232 
Total natural gas, NGL and oil revenue from contracts with customers$224,949 $162,185 

6

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Receivables from Contracts with Customers
At March 31, 2021 and December 31, 2020, accounts receivable—trade included $133.3 million and $132.0 million, respectively, of receivables from contracts with customers related to natural gas, NGL and oil revenue and third-party natural gas sales.

Remaining Performance Obligations
Indigo has executed forward natural gas sales contracts to lock in markets and fix basis differentials for a portion of its future natural gas production. In these cases, the Company has utilized the optional exemption which allows the Company to exclude the disclosure of the transaction price related to unsatisfied performance obligations and expected timing of revenue recognition if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Because each unit of natural gas to be delivered under these contracts represents a separate performance obligation, future performance obligations are wholly unsatisfied.

This forward sales program provides a significant portion of the Company’s gross marketed natural gas with a diverse mix of outlets, transportation and end-user markets. As of March 31, 2021, the Company has entered into contracts with purchasers with investment grade credit ratings or adequate credit support for the following gross volumes in the years indicated: 1,312 billion British thermal units of natural gas per day (“BBtu/d”) in the remainder of 2021, 1,188 BBtu/d in 2022, 1,075 BBtu/d in 2023, 950 BBtu/d in 2024 and 486 BBtu/d in 2025 through 2030. Portions of the sales proceeds from these gross deliveries will be recorded in the Consolidated Statement of Operations for the applicable periods as (i) natural gas, NGL and oil revenue, reflecting Indigo’s net revenue interest share of the sales of its natural gas production, and (ii) other operating income, reflecting third-party natural gas sales.

Other Operating Income
Other operating income for the three months ended March 31, 2021 and 2020 included $36.4 million and $3.0 million, respectively, of third-party natural gas sales to facilitate management of the Company’s forward sales contracts and transportation agreements. Other operating income for the three months ended March 31, 2021 and 2020 also included immaterial amounts for (i) service fees charged to joint interest partners for the use of company-owned field assets on wells Indigo operates, (ii) adjustments to the liability for gas imbalances as a result of natural gas price and proved reserve changes and (iii) various other items.

5.    Property and Equipment
Property and equipment consisted of the following at March 31, 2021 and December 31, 2020 (in thousands):

Three Months Ended
March 31,
20212020
Proved properties$2,848,240 $3,953,225 
Unproved leasehold acquisition costs82,246 282,597 
Costs of wells in progress126,426 137,492 
Other property and equipment15,483 15,978 
Less: Accumulated depreciation, depletion, amortization and impairment(1,151,680)(1,657,849)
Property and equipment, net$1,920,715 $2,731,443 

The Company had no suspended exploration wells pending evaluation at March 31, 2021 or December 31, 2020.

7

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
During the three months ended March 31, 2021 and 2020, the Company recorded $22.1 million and $32 thousand for impairment of unproved properties that will not become productive. The impairment charge during the three months ended March 31, 2021 primarily reflects changes to the Company’s development plans as a result of the divestiture of the conventional Cotton Valley assets discussed in Note 3.

6.    Incremental Minimum Volume Commitments Associated with M5 Louisiana Sale
The Company has determined it is probable that deficiency fees will be incurred in 2021 under the letter agreement entered into in conjunction with M5 Louisiana Holdings, LLC’s (the “Midstream JV”) sale of its wholly-owned subsidiaries (collectively, “M5 Louisiana”) in 2019, that provided for incremental minimum volume commitments on the gathering system sold as part of M5 Louisiana. As of March 31, 2021, such deficiency fees were estimated to be $35.4 million for the full year, and therefore $8.8 million is recorded as other accrued liabilities, reflecting the Company’s estimated obligation to the buyer of M5 Louisiana incurred through the first three months of 2021. The $4.4 million loss from equity method investment in midstream joint venture for the three months ended March 31, 2021 reflects Indigo’s portion of this downward adjustment to the M5 Louisiana sale proceeds, net to its 50% equity interest in the Midstream JV. As of March 31, 2021, the remaining $20.4 million deferred credit for the M5 Midstream LLC (“M5”) deficiency fee settlement paid to Indigo in 2020 is reflected as other current liabilities of $13.3 million, for M5’s share of the estimated deficiency fees not yet accrued for the remainder of 2021 that will be due in 2022, and other noncurrent liabilities of $7.1 million, for the settlement to be applied to deficiency fees that may be incurred in the future.

7.    Long-Term Debt
Long-term debt was comprised of the following at March 31, 2021 and December 31, 2020 (in thousands):

March 31,December 31,
20212020
2029 Notes$700,000 $— 
2026 Notes— 644,965 
Revolver125,000 145,000 
Total principal outstanding825,000 789,965 
Unamortized debt issuance costs(10,961)(10,551)
Long-term debt$814,039 $779,414 

2029 Senior Unsecured Notes
Issuance
In February 2021, the Company issued $700.0 million of Senior Unsecured Notes due 2029 (the “2029 Notes”). The 2029 Notes bear interest at an annual rate of 5.375% and such interest is payable on February 1 and August 1 of each year. The 2029 Notes will mature on February 1, 2029.

A portion of the proceeds from the issuance of the 2029 Notes was used to redeem the Senior Unsecured Notes due 2026 (the “2026 Notes”) discussed below. In addition, the Company repaid $20.0 million of borrowings outstanding under its Amended and Restated Revolving Credit Facility (the “Revolver”). A waiver was received from the lenders under the Revolver and therefore the issuance of the 2029 Notes did not impact the Revolver’s borrowing base.

Terms
At any time prior to February 1, 2024, the Company may on any one or more occasions redeem up to 40% of the aggregate principal amount of the 2029 Notes with an amount of cash not greater than the net proceeds of certain equity offerings at a redemption price equal to 105.375% of the principal amount of
8

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
the 2029 Notes redeemed, plus accrued and unpaid interest to the redemption date, if at least 60% of the aggregate principal amount of the 2029 Notes remains outstanding after the redemption and the redemption occurs within 180 days of the closing of such equity offering. In addition, at any time prior to February 1, 2024, the Company may redeem some or all of the 2029 Notes at a price equal to 100% of the principal amount of the notes redeemed, plus a “make-whole” premium equal to the excess, if any, of (a) the present value at the time of redemption of (i) the redemption price of such notes on February 1, 2024 plus (ii) all required interest payments on such notes through February 1, 2024, computed using a discount rate equal to a reference treasury rate at such time plus 50 basis points over (b) the principal amount of the notes redeemed, and any accrued and unpaid interest to the redemption date. On and after February 1, 2024, the Company may redeem the 2029 Notes, in whole or in part, at the redemption prices set forth in the indenture governing the 2029 Notes, plus any accrued and unpaid interest to the redemption date. If the Company experiences certain kinds of changes of control accompanied by a ratings decline, holders of the 2029 Notes may have the right to require the Company to repurchase their notes for cash at 101% of the principal amount of the notes, plus any accrued and unpaid interest to the date of purchase.

The indenture governing the 2029 Notes restricts the Company’s ability and the ability of certain of its subsidiaries to, among other things: (i) incur additional debt; (ii) pay distributions on, or repurchase, equity interests or subordinated indebtedness; (iii) make certain investments; (iv) incur liens; (v) enter into transactions with affiliates; (vi) merge or consolidate with another company; and (vii) transfer and sell assets. These covenants are subject to a number of important exceptions and qualifications.

The 2029 Notes are senior unsecured obligations and rank equally in right of payment with all of the Company’s other senior indebtedness and senior to any of its subordinated indebtedness. The 2029 Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of Indigo’s restricted subsidiaries that guarantee its indebtedness. The 2029 Notes are effectively subordinated to all of the Company’s secured indebtedness (including all borrowings and other obligations under the Revolver) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated in right of payment to all indebtedness and other liabilities (including trade payables) of any future subsidiaries or joint ventures which constitute subsidiaries that do not guarantee the 2029 Notes.

2026 Senior Unsecured Notes
2021 Redemption
In February 2021, in conjunction with the issuance of the 2029 Notes discussed above, the Company used a portion of the proceeds from the 2029 Notes to redeem the entire $645.0 million principal amount of the 2026 Notes for $689.2 million, including a make-whole premium and accrued and unpaid interest, resulting in a $33.9 million loss on extinguishment of debt, which is reflected in the Consolidated Statement of Operations for the three months ended March 31, 2021.

2020 Redemption
During the three months ended March 31, 2020, the Company repurchased certain 2026 Notes with a principal amount of $5.0 million in the open market at a discount. A $1.9 million gain on extinguishment of debt is reflected in the Consolidated Statement of Operations for that period, representing the excess of the carrying value over the amount paid for the repurchases.

8.    Derivative Instruments
Commodity Derivatives
The Company sells natural gas, NGLs and oil in the normal course of its business and utilizes derivative instruments to manage the variability in cash flows due to commodity price movements. The Company enters into derivative instruments to economically hedge a portion of its forecasted natural gas sales. The Company did not designate these contracts as hedges; therefore, the changes in fair value of these
9

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
instruments are recorded in current earnings. Commodity derivatives are recorded on the Consolidated Balance Sheet at fair value. See Note 9 for fair value disclosures about commodity derivatives.

The following summarizes gains and losses on natural gas derivative instruments included in other operating income for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended
March 31,
20212020
Unsettled (loss) gain$(39,455)$24,220 
Settled gain1,679 62,094 
Total (loss) gain on natural gas derivatives$(37,776)$86,314 

The following summarizes open positions at March 31, 2021, and represents, as of such date, derivatives in place through December 31, 2024:

2021202220232024
Fixed price swaps:
Volume (MMBtu)182,232,880 152,227,980 76,000,000 56,630,000 
Weighted average price per MMBtu$2.71 $2.71 $2.60 $2.43 
Collars:
Volume (MMBtu)35,615,000 16,440,000 
Sold calls (Weighted average price per MMBtu)$2.80 $3.16 
Purchased puts (Weighted average price per MMBtu)$2.56 $2.69 

Consolidated Balance Sheet Presentation
The Company had the following outstanding derivative contracts recorded on the Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, as indicated (in thousands):

Fair Value
Hedged itemBalance Sheet ClassificationMarch 31, 2021December 31, 2020
Natural gasDerivative instruments – current assets$7,498 $24,434 
Natural gasDerivative instruments – noncurrent assets26,360 29,968 
Natural gasDerivative instruments – current liabilities(27,472)(8,885)
Natural gasDerivative instruments – noncurrent liabilities(9,334)(9,010)
Total$(2,948)$36,507 

9.    Fair Value Measurements
The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and do not prioritize among the techniques. These standards establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

10

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that management has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs that are corroborated by market data and may be used with internally-developed methodologies that result in management’s best estimate of fair value.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

Fair Values – Recurring
The Company estimates the fair value of derivative instruments using various inputs including publicly available prices. Fixed price commodity swaps and commodity collars are classified as Level 2 because the inputs used to value the instruments were substantially observable for the term of the instruments.

The following tables summarize the valuation and classification of the Company’s financial instruments accounted for at fair value on a recurring basis at March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021Level 1Level 2Level 3Total
Assets:
Derivative instruments
Commodity derivatives
Fixed price swaps$— $31,767 $— $31,767 
Collars— 2,091 — 2,091 
Liabilities:
Derivative instruments
Commodity derivatives
Fixed price swaps— (33,287)— (33,287)
Collars— (3,519)— (3,519)
$— $(2,948)$— $(2,948)

December 31, 2020Level 1Level 2Level 3Total
Assets:
Derivative instruments
Commodity derivatives
Fixed price swaps$— $52,117 $— $52,117 
Collars— 2,285 — 2,285 
Liabilities:
Derivative instruments
Commodity derivatives
Fixed price swaps— (15,300)— (15,300)
Collars— (2,595)— (2,595)
$— $36,507 $— $36,507 

11

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Fair Value – Nonrecurring
During the three months ended March 31, 2021, the Company recognized a loss on the pending sale of conventional Cotton Valley assets, as discussed in Note 3, These assets held for sale are reflected on the Consolidated Balance Sheet as of March 31, 2021 at their estimated fair value less costs to sell, based on the estimated sale price at that date. This fair value estimate is classified as Level 2.

Fair Values – Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to their short maturities.

Based on the variable rate applicable to the borrowings under the Revolver, the fair value of the facility approximates its carrying value at March 31, 2021 and December 31, 2020.

At March 31,2021 and December 31, 2020, the fair value of the 2029 Notes and 2026 Notes, respectively, totaled $689.1 million and $663.7 million, respectively. The related aggregate carrying value was $689.0 million and $634.4 million, respectively, including unamortized debt issuance costs. The fair value of the 2029 Notes and 2026 Notes is measured based on quoted prices, which is classified as Level 1.

10.    Equity Distributions
2021
During the three months ended March 31, 2021, Indigo made distributions totaling $35.0 million to its common equity holders using cash on hand.

2020
There were tax implications related to the sale of M5 Louisiana. Indigo made tax distributions of $270.8 million and $4.2 million to its common and preferred unit holders, respectively, in January 2020. The distributions on the common units are reflected as a reduction of members’ common equity during the three months ended March 31, 2020. The distributions on preferred units are reflected as preferred tax distributions in the Statement of Operations for the three months ended March 31, 2020.

11.    Related Party Transactions
Transactions with Momentum
Certain of the Company’s members are also members of M5 and M6 Midstream LLC (collectively, “Momentum”). The Company and Momentum co-employ certain of the Company’s executive management and are parties to a shared services agreement under which employees of Momentum provide various services to the Company.

The Company incurred $0.4 million and $0.3 million, respectively, under these shared services arrangements and these costs are reflected as general and administrative expense in the Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020.

At March 31, 2021 and December 31, 2020, accrued liabilities–related parties included an aggregate $0.1 million and $0.9 million, respectively, due to Momentum related to the co-employment and shared services agreement.

Other Related Party Transactions
During the three months ended March 31, 2020 Indigo paid $0.1 million to Martin Timberlands LLC, an affiliate of Martin Sustainable Resources, L.L.C., a member of the Company, for rights-of-way and related costs associated with certain drilling locations.

12

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Beland Energy LLC, a member of the Company, and NRI Energy Partners LLC, whose sole member is also a member of the Company, hold royalty interests in certain of the Company’s operated wells and the Company makes royalty distributions on those interests monthly.

12.    Commitments and Contingencies
Legal and Regulatory Proceedings
On June 12, 2018, a collection of 51 individuals and entities filed a lawsuit against fifteen oil and gas company defendants, including Indigo, in Louisiana state court claiming damages arising out of current and historical exploration and production activity on certain acreage located in DeSoto Parish, Louisiana. The plaintiffs, who claim to own the properties at issue, assert that Indigo’s actions and the actions of other current operators conducting exploration and production activity, combined with the improper plugging and abandoning of legacy wells by former operators, have caused environmental contamination to their properties. Among other things, the plaintiffs contend that the defendants’ conduct resulted in the migration of natural gas, along with oilfield contaminants, into the Carrizo-Wilcox aquifer system underlying certain portions of DeSoto Parish. The plaintiffs assert claims based in tort, breach of contract, and for violations of the Louisiana Civil and Mineral Codes, and they seek injunctive relief and monetary damages in an unspecified amount, including punitive damages.
On September 13, 2018, Indigo filed a variety of exceptions in response to the plaintiffs’ petition in this matter. Since the initial filing, supplemental petitions have been filed joining additional individuals and entities as plaintiffs in the matter. On September 29, 2020, plaintiffs filed their fourth supplemental and amending petition in response to the court’s order ruling that plaintiffs’ claims were improperly vague and failed to identify with reasonable specificity the defendants’ allegedly wrongful conduct. Indigo and the majority of the other defendants filed several exceptions to plaintiffs’ fourth amended petition challenging the sufficiency of plaintiffs’ allegations and seeking dismissal of certain claims. On February 18, 2021, plaintiffs filed a fifth supplemental and amending petition, which seeks to augment the claims of select plaintiffs.

The presence of natural gas in a localized area of the Carrizo-Wilcox aquifer system in DeSoto Parish is currently the subject of a regulatory investigation by the Louisiana Office of Conservation (“Conservation”), and Indigo is cooperating and coordinating with Conservation in that investigation. The Conservation matter number is EMER18-003.

Indigo is vigorously defending itself in these legal and regulatory proceedings and does not believe they will have a material adverse effect on its business. However, Indigo cannot predict the outcome of these proceedings with certainty, and if Indigo is unsuccessful in these matters and any loss exceeds any available insurance it may have, this could have a material adverse effect on its results of operations.

Indigo is party to various other litigation matters arising out of the normal course of its oil and gas business. The ultimate outcome of each of these matters cannot be absolutely determined, and the liability Indigo may ultimately incur with respect to any one of these matters in the event of a negative outcome may be in excess of amounts currently accrued. However, Indigo does not believe any such matters will have a material adverse effect on Indigo’s financial position, results of operations or cash flows.

13.    Subsequent Events
Divestiture of Conventional Cotton Valley Assets
See Note 3 for discussion of the purchase and sale agreement executed in April 2021.

Subsequent events were evaluated through May 13, 2021, the date the condensed consolidated financial statements were issued.

13

Indigo Natural Resources LLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
Events Subsequent to Original Issuance of Financial Statements
In connection with the reissuance of these condensed consolidated financial statements, subsequent events were reevaluated through July 1, 2021, the date the condensed consolidated financial statements were issued.

Pending Merger with Southwestern Energy Company
In June 2021, the Company entered into a definitive merger agreement with Southwestern Energy Company (“SWN”) under which SWN will acquire Indigo for $400.0 million of cash, approximately 339 million shares of SWN common stock and SWN’s assumption of the Company’s 2029 Notes, subject to customary closing adjustments. The transaction is expected to close early in the fourth quarter of 2021, subject to customary closing conditions.

Closing of Conventional Cotton Valley Assets Divestiture
The divestiture of conventional Cotton Valley assets discussed in Note 3 closed in May 2021. A portion of the cash proceeds received at closing was used to repay $90.0 million of borrowings outstanding under the Revolver.

Amendment to the Revolver
In May 2021, the Revolver was amended to decrease the borrowing base and elected commitment to $675.0 million based on the regularly-scheduled semi-annual redetermination, reflecting the divestiture of the conventional Cotton Valley assets discussed in Note 3.

Equity Distribution Approval
In June 2021, Indigo’s board of directors approved distributions totaling $25.0 million to be made to the Company’s common equity holders prior to the closing of the merger with SWN discussed above.
14
Document

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Acquisition of Indigo Natural Resources LLC

On June 1, 2021, Southwestern Energy Company (“Southwestern”) entered into an Agreement and Plan of Merger with Ikon Acquisition Company, LLC (“Ikon”), Indigo Natural Resources LLC (“Indigo”) and Ibis Unitholder Representative (the “Indigo Merger Agreement”). Pursuant to the terms of the Indigo Merger Agreement, Indigo will merge with and into Ikon, a subsidiary of Southwestern, with Indigo surviving the merger (the “Indigo Merger”). The outstanding equity interests in Indigo will be cancelled and converted into the right to receive (i) $400 million in cash consideration, and (ii) 339,270,568 shares of Southwestern common stock, in each case, subject to adjustment as provided in the Indigo Merger Agreement. Additionally, Southwestern will assume $700 million in aggregate principal amount of 5.375% Senior Notes due 2029 of Indigo (the “Indigo Notes”).

Acquisition of Montage Resources LLC

On November 13, 2020, pursuant to the Agreement and Plan of Merger, dated as of August 12, 2020, by and between Southwestern and Montage Resources Corporation (“Montage”), Southwestern completed its previously announced acquisition of Montage, by means of a merger of Montage with and into Southwestern, with Southwestern continuing as the surviving corporation (the “ Montage Merger” and, together with the Indigo Merger, the “Mergers”).

In exchange for each share of Montage common stock, Montage shareholders received 1.8656 shares of Southwestern common stock, plus cash in lieu of any fractional share of Southwestern common stock that otherwise would have been issued, based on an average price of $3.05 per share of Southwestern common stock on the NYSE on November 13, 2020. Approximately 69.7 million total shares were issued to Montage shareholders and its management team as consideration for the Montage Merger.

Additionally, in August 2020, Southwestern completed an underwritten public offering of 63.25 million shares of common stock with an offering price to the public of $2.50 per share, with net proceeds from the offering totaling $152 million after deducting underwriting discounts and offering expenses (the “Equity Offering”). Also in August 2020, Southwestern completed an underwritten public offering of $350 million aggregate principal amount of 8.375% senior notes due 2028 (the “Debt Offering”). The net proceeds from the Debt Offering, after deducting the underwriting discount and offering expenses, were approximately $345 million. Southwestern used the net proceeds from the Debt Offering, together with the net proceeds received from the Equity Offering and borrowings under Southwestern’s credit facility, to fund the redemption of $510 million aggregate principal amount of Montage’s outstanding 8.875% Senior Notes due 2023 (the “Montage Notes”) and to pay off of the outstanding Montage credit facility balance and all related accrued interest in connection with the closing of the Montage Merger.

Unaudited Pro Forma Condensed Combined Financial Statements

The following unaudited pro forma condensed combined financial statements are derived from the historical consolidated financial statements of Southwestern and Indigo and from the historical financial activity of Montage through November 13, 2020, the closing date of the Montage Merger, and have been adjusted to reflect 1) the Equity Offering and the Debt Offering and the use of the proceeds therefrom as described above and 2) the Indigo Merger, as described above.

The proposed Indigo Merger will be accounted for using the acquisition method of accounting with Southwestern identified as the acquirer. Under the acquisition method of accounting, Southwestern will record assets acquired and liabilities assumed at their respective acquisition date fair values at the effective time of the Indigo Merger.

Certain historical amounts of Montage and Indigo have been reclassified to conform to Southwestern’s financial statement presentation. The unaudited pro forma condensed combined balance sheet as of March 31, 2021 gives effect to the Indigo Merger as if the transaction had been completed on March 31, 2021. The unaudited pro forma



condensed combined statements of operations for the year ended December 31, 2020 and the three months ended March 31, 2021 give effect to the Mergers, the Equity Offering and the Debt Offering as if each transaction had been completed on January 1, 2020.

The unaudited pro forma condensed combined financial statements reflect the following Merger-related pro forma adjustments, based on available information and certain assumptions that Southwestern believes are reasonable:

the Mergers, accounted for using the acquisition method of accounting, with Southwestern identified as the acquirer, and, in the case of Montage, the issuance of shares of Southwestern common stock in exchange for each share of Montage, and, in the case of Indigo, the issuance of shares of Southwestern common stock and $400 million in cash for all of the company units of Indigo as merger consideration;
adjustments to conform Montage’s and Indigo’s historical accounting policies related to oil and natural gas properties from the successful efforts method of accounting to the full cost method of accounting used by Southwestern;
the Equity Offering and the Debt Offering and the redemption of the Montage Notes as well as repayment in full and termination of Montage’s revolving credit facility and all related accrued interest, each of which occurred in connection with the Montage Merger;
Southwestern’s related $400 million borrowing on its credit facility to fund the cash portion of the acquisition consideration and the planned assumption of the Indigo Notes as well as repayment in full and termination of Indigo’s revolving credit facility, each of which is expected to occur in connection with the consummation of the Indigo Merger or soon thereafter;
adjustments to conform the classification of certain assets and liabilities in Indigo’s historical balance sheet to Southwestern’s classification for similar assets and liabilities;
adjustments to conform the classification of revenues and expenses in Indigo’s and Montage’s historical statements of operations to Southwestern’s classification for similar revenues and expenses; and
the recognition of estimated tax impacts of the pro forma adjustments.
Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed combined financial statements. In Southwestern’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to the Mergers, the Equity Offering and the Debt Offering along with the use of proceeds therefrom. These adjustments are directly attributable to the Mergers, factually supportable and, with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results of Southwestern following the Mergers.

The assets acquired and liabilities assumed from Montage were recorded at their preliminary estimated fair values at the date of the Montage Merger. Although the purchase price allocation for Montage is substantially complete as of the date of this filing, there may be further adjustments to Montage’s natural gas and oil properties as the studies necessary to determine the fair value are finalized. These amounts will be finalized no later than one year from the acquisition date. There have been no material changes to the allocation presented in Southwestern’s Form 10-Q for the three-month period ended March 31, 2021.

The acquisition method of accounting as it relates to the Indigo Merger is dependent upon certain valuations and other studies that, as of the date hereof, have yet to commence or progress to a stage where there is sufficient information for a definitive measure. As of the date of this current report, Southwestern has performed a preliminary valuation analysis of the fair value of Indigo’s assets to be acquired and liabilities to be assumed and has made certain adjustments to the historical book values of the assets and liabilities of Indigo to reflect preliminary estimates of the fair value necessary to prepare the unaudited pro forma condensed combined financial statements. A final determination of the fair value of Indigo’s assets and liabilities, including potential intangible assets with both indefinite or finite lives, will be based on the actual net tangible and intangible assets and liabilities of Indigo that exist as of the closing date of the Indigo Merger and, therefore, cannot be made prior to the completion of the Indigo



Merger. In addition, the value of the consideration to be paid by Southwestern upon the consummation of the Indigo Merger will be determined based on the closing price of Southwestern common stock on the closing date of the Indigo Merger. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed combined financial statements presented below. Southwestern estimated the fair value of Indigo’s assets and liabilities based on discussions with Indigo’s management, preliminary valuation studies, due diligence, and information presented in Indigo’s historical financial statements. Until the Indigo Merger is completed, both companies are limited in their ability to share certain information. Any increases or decreases in the fair value of assets acquired and liabilities assumed upon completion of the final valuations will result in adjustments to the unaudited pro forma condensed combined balance sheet and/or statements of operations. The final purchase price allocation may be materially different than that reflected in the pro forma purchase price allocation presented herein.
The unaudited pro forma condensed combined financial information is not intended to represent what Southwestern’s financial position or results of operations would have been had the Mergers actually been consummated on the assumed dates nor does it purport to project the future operating results or financial position of the combined company following the Indigo Merger. The unaudited pro forma condensed combined financial information does not reflect future events that may occur after the Indigo Merger, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, asset dispositions, cost savings, or economies of scale that the combined company may achieve with respect to the combined operations. Specifically, the unaudited pro forma condensed combined statements of operations do not include projected synergies expected to be achieved as a result of the Mergers and any associated costs that may be required to be incurred to achieve the identified synergies. The unaudited pro forma condensed combined statements of operations also exclude the effects of transaction costs associated with the Indigo Merger, costs associated with any restructuring, integration activities, and asset dispositions that may result from the Mergers. Further, the unaudited pro forma condensed combined financial statements do not reflect the effect of any regulatory actions that may impact the results of the combined company following the Mergers.

The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in Southwestern’s Annual Report on Form 10-K for the year ended December 31, 2020, Southwestern’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, and Indigo’s historical financial statements and accompanying notes as of and for the year ended December 31, 2020 and as of and for the three-month period ended March 31, 2021 included as an exhibit to the accompanying Current Report on Form 8-K.





Southwestern Energy Company
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2021
(in millions)
Southwestern HistoricalIndigo HistoricalReclassification Adjustments (Note 3)Acquisition Adjustment (Note 3)Pro Forma Combined
Assets
Current Assets
Cash and cash equivalents$$59 $(10)(m)$— $53 
Accounts receivable, net400 144 — — 544 
Derivative assets157 — — 165 
Other current assets41 — — 44 
Total Current Assets602 214 (10)— 806 
Natural gas and oil properties27,532 3,057 — (29)(c)30,560 
Other property, plant and equipment493 16 — (12)(c)497 
Less: Accumulated depreciation, depletion and amortization(23,741)(1,152)— 1,152 (c)(23,741)
Total property, plant and equipment, net4,284 1,921 — 1,111 7,316 
Operating lease assets155 — — — 155 
Assets held for sale— 170 (170)(m)— — 
Other long-term assets206 33 — (3)(d)236 
Total Long-Term Assets361 203 (170)(3)391 
TOTAL ASSETS$5,247 $2,338 $(180)$1,108 $8,513 
Liabilities and Stockholders’ Equity
Current Liabilities:
Current portion of long-term debt$207 $— $— $— $207 
Accounts payable639 135 52 (a)— 826 
Taxes payable67 — (a)— 72 
Interest payable55 — — 62 
Derivative liabilities338 28 — — 366 
Current operating lease liabilities41 — — — 41 
Accrued capital expenditures— 54 (54)(a)— — 
Liabilities held for sale— 18 (18)(m)— — 
Other current liabilities23 51 (3)(a)— 71 
Total Current Liabilities1,370 293 (18)— 1,645 
Long-term debt2,812 814 (125)(m)438 (c)(f)3,939 
Long-term operating lease liabilities111 — — — 111 
Asset retirement obligation— 12 (12)(a)— — 
Long-term derivative liabilities168 — — 177 
Pension and other postretirement liabilities40 — — — 40 
Other long-term liabilities160 12 (a)— 180 
Long-term liabilities held for sale— 37 (37)(m)— — 
Total Long-Term Liabilities3,291 880 (162)438 4,447 
Equity:
Members’ common equity— 1,165 — (1,165)(g)— 
Common stock— — (h)10 
Additional paid-in capital5,102 — — 1,832 (h)6,934 
Retained earnings (accumulated deficit)(4,283)— — — (4,283)
Accumulated other comprehensive loss(38)— — — (38)
Common stock in treasury(202)— — — (202)
Total Equity586 1,165 — 670 2,421 
TOTAL LIABILITIES AND EQUITY$5,247 $2,338 $(180)$1,108 $8,513 
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.



Southwestern Energy Company
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 2021
(in millions, except share/per share amounts)
Southwestern HistoricalIndigo HistoricalReclassification and Conforming Adjustments (Note 3)Acquisition Adjustment (Note 3)Pro Forma Combined
Operating Revenues:
Gas sales$464 $— $218 (a)$— $682 
Oil sales81 — (a)— 83 
NGL sales173 — (a)— 178 
Natural gas, oil and natural gas liquids sales— 225 (225)(a)— — 
Marketing352 — 36 (a)— 388 
Other(a)— 
Total Revenues1,072 228 38 — 1,338 
Operating Costs and Expenses:
Marketing purchases356 — 36 (a)— 392 
Operating expenses250 58 21 (a)— 329 
Gathering and transportation expense— 57 (57)(a)— — 
General and administrative expenses38 13 — — 51 
Montage merger-related expenses— — — 
(Gain) loss on sale of operating assets— 621 (621)(a)— — 
Restructuring charges— — — 
Depreciation, depletion and amortization96 118 — (42)(i)172 
Impairments— 22 — — 22 
Exploration— — — — — 
Severance taxes— (3)(a)— — 
Taxes, other than income taxes24 — (a)— 27 
Total Operating Costs and Expenses771 892 (621)(42)1,000 
Operating Income (Loss)301 (664)659 42 338 
Interest Expense:
Interest on debt50 (a)(1)(l)60 
Other interest charges— (a)— 
Interest capitalized(22)— (4)(a)(7)(e)(33)
Net Interest Expense31 — (8)31 
Loss on Derivatives(191)— (38)(a)— (229)
Loss on Early Extinguishment of Debt— (34)— — (34)
Loss from Equity Method Investment— (4)— — (4)
Other Income, Net— — — 
Income (Loss) Before Income Taxes80 (710)621 50 41 
Provision for Income Taxes:
Current— — — — — 
Deferred— — — — — 
Total Provision for Income Taxes— — — — — 
Net Income (Loss)$80 $(710)$621 $50 $41 
Earnings Per Common Share:
Basic$0.12 $0.04 
Diluted$0.12 $0.04 
Weighted Average Common Shares Outstanding:
Basic675,385,145 339,270,568 (h)1,014,655,713 
Diluted679,867,825 339,270,568 (h)1,019,138,393 

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.



Southwestern Energy Company
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2020
(in millions, except share/per share amounts)
Southwestern HistoricalMontage Historical Through November 12, 2020Indigo HistoricalMontage Reclassification and Conforming Adjustments (Note 3)Indigo Reclassification and Conforming Adjustments (Note 3)Montage-Related Issuance of Debt and Equity and Related Use of Proceeds (Note 3)Montage Acquisition Adjustment (Note 3)Indigo Acquisition Adjustment (Note 3)Pro Forma Combined
Operating Revenues:
Gas sales$967 $— $— $250 (a)$698 (a)$— $— $— $1,915 
Oil sales154 — — 60 (a)(a)— — — 220 
NGL sales265 — — 55 (a)14 (a)— — — 334 
Natural gas, oil and natural gas liquids sales— 365 718 (365)(a)(718)(a)— — — — 
Marketing917 28 — — 43 (a)— — — 988 
Other— 49 — (45)(a)— — — 
Total Revenues2,308 393 767 — (2)— — — 3,466 
Operating Costs and Expenses:
Marketing purchases946 28 — — 42 (a)— — — 1,016 
Operating expenses813 37 147 183 (a)169 (a)— — — 1,349 
Gathering and transportation expense— 183 211 (183)(a)(211)(a)— — — — 
General and administrative expenses121 38 51 — — — — — 210 
Montage merger-related expenses41 — — — — — — — 41 
Gain on sale of operating assets— (1)— — — — — — (1)
Restructuring charges16 — — — — — — — 16 
Depreciation, depletion and amortization357 165 485 — — — (53)(i)(76)(i)878 
Impairments2,830 — — — — — — 2,835 
Exploration— 38 (38)(a)(1)(a)— — — — 
Severance taxes— 12 15 (12)(a)(15)(a)— — — — 
Taxes, other than income taxes55 — — 12 (a)15 (a)— — — 82 
Total Operating Costs and Expenses5,179 500 915 (38)(1)— (53)(76)6,426 
Operating Loss(2,871)(107)(148)38 (1)— 53 76 (2,960)
Interest Expense:
Interest on debt171 51 35 (4)(a)16 (a)(25)(b)— (3)(l)241 
Other interest charges11 — — (a)(a)— — — 19 
Interest capitalized(88)— — — (20)(a)— (e)(23)(e)(129)
Net Interest Expense94 51 35 — — (25)(26)131 



Southwestern HistoricalMontage Historical Through November 12, 2020Indigo HistoricalMontage Reclassification and Conforming Adjustments (Note 3)Indigo Reclassification and Conforming Adjustments (Note 3)Montage-Related Issuance of Debt and Equity and Related Use of Proceeds (Note 3)Montage Acquisition Adjustment (Note 3)Indigo Acquisition Adjustment (Note 3)Pro Forma Combined
Gain (Loss) on Derivatives224 (17)— — (a)— — — 209 
Gain on Early Extinguishment of Debt35 — — — — — — 37 
Income from Equity Method Investment— — 184 — — — — — 184 
Other Income, Net— — — — — — 
Income (Loss) Before Income Taxes(2,705)(175)38 25 51 102 (2,659)
Provision (Benefit) for Income Taxes:
Current(2)— — — — — — — (2)
Deferred409 — — — — — — — 409 
Total Provision (Benefit) for Income Taxes407 — — — — — — — 407 
Income (Loss) from Continuing Operations$(3,112)$(175)$$38 $$25 $51 $102 $(3,066)
Loss Per Common Share:
Basic$(5.42)$(3.03)
Diluted$(5.42)$(3.03)
Weighted Average Common Shares Outstanding:
Basic573,889,502 39,856,164 (k)60,378,378 (j)339,270,568 (h)1,013,394,612 
Diluted573,889,502 39,856,164 (k)60,378,378 (j)339,270,568 (h)1,013,394,612 

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.



Southwestern Energy Company
Notes to Unaudited Pro Forma Condensed Combined Financial Statements

Note 1. Basis of Presentation

The unaudited pro forma condensed combined financial information has been derived from the historical consolidated financial statements of Southwestern and Indigo, from the historical financial activity of Montage through November 13, 2020, the date the Montage Merger was completed, and have been adjusted to reflect 1) the Equity Offering and Debt Offering and the use of the proceeds therefrom and 2) the proposed Indigo Merger, as described above. Certain of Montage’s and Indigo’s historical amounts have been reclassified to conform to Southwestern’s financial statement presentation. The unaudited pro forma condensed combined balance sheet as of March 31, 2021 gives effect to the Indigo Merger as if it had occurred on March 31, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and the three months ended March 31, 2021 give effect to the Mergers and the Equity Offering and Debt Offering as if each transaction had been completed on January 1, 2020.

The unaudited pro forma condensed combined financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions that Southwestern believes are reasonable, however, actual results may differ from those reflected in these statements. In Southwestern’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The unaudited pro forma condensed combined financial statements do not purport to represent what Southwestern’s financial position or results of operations would have been if the transactions had actually occurred on the dates indicated above, nor are they indicative of Southwestern’s future financial position or results of operations. These unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and related notes of Southwestern, Montage and Indigo, as applicable, for the periods presented.

The unaudited pro forma condensed combined financial information includes adjustments to conform Montage’s and Indigo’s accounting policies to Southwestern’s accounting policies, including adjusting Montage’s and Indigo’s oil and gas properties to the full cost method. Both Montage and Indigo follow the successful efforts method of accounting for oil and gas properties, while Southwestern follows the full cost method of accounting for oil and gas properties. Certain costs that are expensed under the successful efforts method are capitalized under the full cost method, including unsuccessful exploration drilling costs, geological and geophysical costs, delay rentals on leases and general and administrative expenses directly related to exploration and development activities. Under the full cost method of accounting, property acquisition costs, costs of wells, related equipment and facilities and future development costs are all included in a single full cost pool, which is amortized on a units-of-production basis over total proved reserves. Under the successful efforts method of accounting, property acquisition costs are amortized on a units-of-production basis over total proved reserves, while costs of wells and related equipment and facilities are amortized on a units-of-production basis over proved developed reserves. The pro forma condensed combined financial information has reclassified Montage’s and Indigo’s exploration expenses, which are capitalized under the full cost method of accounting for oil and gas properties.

Note 2. Unaudited Pro Forma Combined Balance Sheet

The Indigo Merger will be accounted for using the acquisition method of accounting using the accounting guidance in Accounting Standards Codification 805, Business Combinations. The allocation of the preliminary estimated purchase price is based upon management’s estimates of and assumptions related to the fair value of assets to be acquired and liabilities to be assumed as of March 31, 2021 using currently available information. Due to the fact that the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein. Southwestern expects to finalize its allocation of the purchase consideration as soon as practicable after completion of the proposed transaction.




The preliminary purchase price allocation is subject to change due to several factors, including but not limited to:
changes in the estimated fair value of Southwestern’s common stock consideration transferred to Indigo’s equity holders, based on Southwestern’s share price at the date of closing of the Indigo Merger;
changes in the estimated fair value of Indigo’s assets acquired and liabilities assumed as of the date of the closing of the Indigo Merger, resulting from the finalization of Southwestern’s detailed valuation analysis, including changes in future oil and gas commodity prices, reserve estimates, interest rates and other factors;
the implementation of ASC 842 Leases as it relates to Indigo’s lease obligations and right of use assets expected to be recorded as part of purchase accounting upon the closing of the Indigo Merger; and
the resolution of certain matters that Southwestern is indemnified for under the Indigo Merger Agreement for which not enough information is available to assess the fair value of at this time.
The preliminary consideration to be transferred and the fair value of assets acquired and liabilities assumed is as follows:
Preliminary Purchase Price Allocation
as of March 31, 2021
(in millions)
Consideration:
Fair value of Southwestern’s stock to be issued (1)
$1,835 
   Cash consideration to be paid
400 
Total Consideration$2,235 
Fair Value of Assets Acquired:
Cash and cash equivalents$49 
Accounts receivable144 
Other current assets
Commodity derivative assets
Evaluated oil and gas properties2,112 
Unevaluated oil and gas properties916 
Other property, plant and equipment
Other long-term assets30 
Total assets acquired$3,266 
Fair Value of Liabilities Assumed:
Accounts payable$186 
Other current liabilities89 
Senior notes727 
Asset retirement obligations12 
Other noncurrent liabilities17 
Total liabilities assumed1,031 
Net Assets Acquired and Liabilities Assumed$2,235 
(1)Based on 339,270,568 shares of Southwestern common stock at $5.41 per share (closing price as of June 23, 2021).
Under the Indigo Merger Agreement, Indigo equity holders will receive 339,270,568 shares of Southwestern common stock or approximately $1,835 million in value (based on the Southwestern common stock closing price on the NYSE as of June 23, 2021 of $5.41) and $400 million in cash as merger consideration, in each case, subject to adjustment as provided in the Indigo Merger Agreement.

The Indigo Merger will be non-taxable to Southwestern, and, because Indigo is a partnership, the tax basis in Indigo’s assets and liabilities will be stepped up to fair market value upon closing of the Indigo Merger. The Company is in the process of assessing the impacts of the Indigo Merger on our existing tax attributes.




From June 1, 2021, the last trading date prior to the public announcement of the proposed Indigo Merger, to June 23, 2021, the preliminary value of Southwestern’s merger consideration to be transferred had decreased approximately $115 million, as a result of the decrease in the closing share price of Southwestern common stock on the NYSE from $5.75 to $5.41. The final value of the Indigo Merger consideration will be determined based on the market price of Southwestern common stock on the closing date of the Indigo Merger. A 20 percent increase or decrease in the closing price of a share of Southwestern common stock, as compared to the June 23, 2021 closing price of $5.41, would increase or decrease the purchase price by approximately $367 million, assuming all other factors are held constant.

Note 3. Pro Forma Adjustments

The following adjustments have been made to the accompanying unaudited pro forma condensed combined financial statements:

(a)The following reclassifications and conforming adjustments were made as a result of the transactions to conform to Southwestern’s presentation and full-cost accounting methodology for oil and gas properties:
Pro Forma Condensed Combined Balance Sheet as of March 31, 2021:
Indigo Reclassification Adjustments
Reflects reclassification of approximately $54 million from accrued capital expenditures to accounts payable;
Reflects reclassification of approximately $2 million from accounts payable and $3 million from other current liabilities to taxes payable; and
Reflects reclassification of approximately $12 million from asset retirement obligation to other long-term liabilities.
Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2021:
Indigo Reclassification and Conforming Adjustments
Reflects reclassification of approximately $225 million from natural gas, oil and natural gas liquids (“NGL”) sales to the respective sales revenues by product ($218 million for gas sales, $2 million for oil sales and $5 million for NGL sales);
Reflects reclassification of approximately $57 million from gathering and transportation expense to operating expenses;
Reflects the elimination of $621 million of loss on sale of operating assets related to the sale of oil and gas properties which is not recorded on the income statement under the full cost method of accounting for oil and gas properties (used by Southwestern) as the sale would not significantly alter the relationship between capitalized costs and proved reserves in Southwestern’s full cost pool;
Reflects reclassification of approximately $3 million from severance taxes to taxes, other than income;
Reflects reclassification of a $38 million loss in other revenue to loss on derivatives;
Reflects reclassification of $36 million in third party gas sales from other revenues to marketing revenues;
Reflects reclassification of $36 million in third party gas purchases from operating expenses to marketing purchases; and
Reflects the gross up of capitalized interest of $4 million, gross up of interest paid of $3 million, and gross up of $1 million in other interest charges related to the amortization of debt issuance costs to demonstrate the components that comprised net interest expense.



Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2020:
Montage Reclassification and Conforming Adjustments
Reflects reclassification of approximately $365 million from natural gas, oil and NGL sales to the respective sales revenues by product ($250 million for gas sales, $60 million for oil sales and $55 million for NGL sales);
Reflects reclassification of approximately $183 million from transportation, gathering and compression to operating expenses;
Reflects the elimination of $38 million of exploration expenses which are capitalized under the full cost method of accounting for oil and gas properties (used by Southwestern);
Reflects reclassification of approximately $12 million from severance taxes to taxes, other than income; and
Reflects reclassification of $4 million of interest on debt to other interest charges related to the amortization of letter of credit costs and debt issuance costs incurred during the period.
Indigo Reclassification and Conforming Adjustments
Reflects reclassification of approximately $718 million from natural gas, oil and NGL sales to the respective sales revenues by product ($698 million for gas sales, $6 million for oil sales and $14 million for NGL sales);
Reflects reclassification of approximately $211 million from gathering and transportation expense to operating expenses;
Reflects the elimination of $1 million of exploration expenses which are capitalized under the full cost method of accounting for oil and gas properties (used by Southwestern);
Reflects reclassification of approximately $15 million from severance taxes to taxes, other than income;
Reflects reclassification of approximately $2 million from other revenue to gain on derivatives;
Reflects reclassification of $43 million in third party gas sales from other revenues to marketing revenues;
Reflects reclassification of $42 million in third party gas purchases from operating expenses to marketing purchases; and
Reflects the gross up of capitalized interest of $20 million, gross up of interest paid of $16 million, and gross up of $4 million in other interest charges related to amortization of debt issuance costs to demonstrate the components that comprised net interest expense.
(b)During August 2020, in contemplation of the Montage Merger, Southwestern completed an offering of $350 million aggregate principal amount of 8.375% Senior Notes due 2028 resulting in net proceeds of $345 million after deducting the underwriting discount and offering expenses. This adjustment reflects the use of the net proceeds from the Debt Offering, available cash and cash equivalents and incremental borrowings under the Southwestern credit facility, to fund a redemption of Montage Notes, the Montage credit facility and all related accrued interest shortly after the consummation of the Montage Merger.
•    The adjustment reflects an approximately $25 million net decrease in interest on debt related to the retirement of the Montage Notes, the Montage credit facility, all related accrued interest and the associated decrease in amortization of issuance costs related to the Montage Notes and revolving line of credit. This decrease was partially offset by increases in interest on debt associated with the issuance of $350 million in Southwestern’s new 8.375% Senior Notes due 2028 related to the Debt Offering and borrowings under Southwestern’s credit facility used to pay off the Montage Notes, Montage credit facility and related accrued interest.
(c)The allocation of the estimated fair value of consideration transferred (based on the closing price of Southwestern common stock on the NYSE of $5.41 per share at June 23, 2021) to the estimated fair value



of the Indigo assets acquired and liabilities assumed resulted in the following purchase price allocation adjustments:
$1,111 million increase to Indigo’s net book basis of total property, plant and equipment to reflect fair value;
$27 million increase in long-term debt to reflect the Indigo Notes at fair value; and
$400 million increase in long-term debt to reflect the borrowing under Southwestern’s credit facility to fund the cash portion of the Indigo Merger consideration payment.

(d)Reflects the write-off of approximately $3 million in unamortized debt issuance costs related to Indigo’s revolving credit facility.
(e)Reflects a $7 million increase and a $23 million increase in capitalized interest related to the fair value of the unevaluated oil and gas properties acquired from Indigo for the three months ended March 31, 2021 and twelve months ended December 31, 2020, respectively, and a $2 million decrease in capitalized interest related to the fair value of the unevaluated oil and gas properties acquired from Montage for the 12 months ended December 31, 2020.
(f)Reflects the increase in long-term debt as a result of the write-off of approximately $11 million in unamortized debt discount and debt issuance costs related to the Indigo Notes.
(g)Reflects the elimination of Indigo’s historical members’ common equity balances in accordance with the acquisition method of accounting.
(h)Reflects the estimated increase in shares of Southwestern common stock resulting from the issuance of shares of Southwestern common stock to Indigo’s equity holders to effect the transaction as follows:
(in millions, except share, per share amounts)
Shares of Southwestern common stock to be issued to Indigo equity holders339,270,568 
NYSE closing price per share of Southwestern common stock on June 23, 2021
$5.41 
Fair value of Southwestern common shares to be issued$1,835 
Increase in Southwestern common stock ($0.01 par value per share) as of March 31, 2021
Increase in Southwestern additional paid-in capital as of March 31, 2021$1,832 
(i)Reflects the pro forma depreciation, depletion and amortization (“DD&A”) expense calculated in accordance with the full cost method of accounting for oil and gas properties, which was based on the preliminary purchase price allocations for both Montage and Indigo, as applicable.
(j)Reflects the impact of the issuance of shares of Southwestern common stock to Montage shareholders and management team to effect the Montage Merger, which were already reflected in Southwestern’s historical condensed consolidated balance sheet as of March 31, 2021. This adjustment reflects the impact of these additional shares on the weighted average basic and diluted shares outstanding used to calculate the respective earnings per share amounts.
(k)During August 2020, in contemplation of the Montage Merger, Southwestern completed the Equity Offering of 63.25 million shares resulting in net proceeds of $152 million, which were already reflected in Southwestern’s historical condensed consolidated balance sheet as of March 31, 2021. This adjustment reflects the impact of these additional shares on the weighted average basic and diluted shares outstanding used to calculate the respective earnings per share amounts.
(l)Reflects an approximately $1 million and $3 million net decrease in interest on debt for the three months ended March 31, 2021 and year ended December 31, 2020, respectively, related to the pay-off and retirement of the Indigo credit facility, all related accrued interest and the associated decrease in amortization of issuance costs related to Indigo’s revolving line of credit . These decreases are partially offset by an increase in interest expense related to the $400 million borrowing under Southwestern’s credit facility to fund the cash portion of the merger consideration associated with the Indigo Merger.



(m)During the second quarter of 2021, Indigo finalized the sale of its non-core conventional Cotton Valley assets, which are designated as held for sale on Indigo’s March 31, 2021 historical balance sheet. The pro forma adjustments give effect to $115 million of divestiture proceeds, the retirement of $170 million in related asset value, $18 million in revenue suspense and other current liabilities assumed by the buyer and $37 million in asset retirement obligations assumed by the buyer as if the sale of these assets had been completed on March 31, 2021. The adjustments also reflect the actual use of the net sale proceeds of $115 million and $10 million in existing cash to pay down the $125 million Indigo credit facility balance that existed at March 31, 2021.
Note 4. Supplemental Pro Forma Oil and Natural Gas Reserves Information
The following tables present the estimated pro forma combined net proved developed and undeveloped natural gas, oil and NGL reserves as of December 31, 2020, along with a summary of changes in the quantities of net remaining proved reserves during the year ended December 31, 2020. The pro forma reserve information set forth below gives effect to the Indigo Merger as if it had been completed on January 1, 2020.
Natural Gas (Bcf)
Southwestern Historical
Indigo
Historical (1)
Southwestern Pro Forma Combined Total (1)
December 31, 20198,630 4,560 13,190 
Revisions of previous estimates(1,380)(1,318)(2,698)
Extensions, discoveries and other additions714 780 1,494 
Production(694)(367)(1,061)
Acquisition of reserves in place1,911 — 1,911 
Disposition of reserves in place— (5)(5)
December 31, 20209,181 3,650 12,831 
Proved developed reserves as of:
December 31, 20194,906 1,269 6,175 
December 31, 20206,342 1,191 7,533 
Proved undeveloped reserves as of:
December 31, 20193,724 3,291 7,015 
December 31, 20202,839 2,459 5,298 
(1) The Indigo Historical and Southwestern Pro Forma Combined Total reserves as of December 31, 2020 both include 562 Bcf of natural gas reserves associated with the conventional Cotton Valley oil and gas properties which were sold in the second quarter of 2021 prior to the signing of the Indigo Merger Agreement. Of the 562 Bcf of natural gas reserves sold, 179 Bcf were proved developed reserves and 383 Bcf were proved undeveloped reserves.



Oil (MBbls)
Southwestern Historical
Indigo
Historical (1)
Southwestern Pro Forma Combined Total (1)
December 31, 201972,925 2,235 75,160 
Revisions of previous estimates(28,691)(231)(28,922)
Extensions, discoveries and other additions135 22 157 
Production(5,141)(168)(5,309)
Acquisition of reserves in place18,796 — 18,796 
Disposition of reserves in place— — — 
December 31, 202058,024 1,858 59,882 
Proved developed reserves as of:
December 31, 201926,124 1,175 27,299 
December 31, 202033,563 797 34,360 
Proved undeveloped reserves as of:
December 31, 201946,801 1,060 47,861 
December 31, 202024,461 1,061 25,522 
(1) The Indigo Historical and Southwestern Pro Forma Combined Total reserves as of December 31, 2020 both include 1,749 MBbls of oil reserves associated with the conventional Cotton Valley oil and gas properties which were sold by Indigo in the second quarter of 2021 prior to the signing of the Indigo Merger Agreement. Of the 1,749 MBbls of oil reserves sold, 688 MBbls were proved developed reserves and 1,061 MBbls were proved undeveloped reserves.

NGLs (MBbls)
Southwestern Historical
Indigo
Historical (1)
Southwestern Pro Forma Combined Total (1)
December 31, 2019608,761 23,020 631,781 
Revisions of previous estimates(232,195)(4,784)(236,979)
Extensions, discoveries and other additions4,371 249 4,620 
Production(25,927)(1,063)(26,990)
Acquisition of reserves in place55,141 — 55,141 
Disposition of reserves in place— (2)(2)
December 31, 2020410,151 17,420 427,571 
Proved developed reserves as of:
December 31, 2019226,271 7,660 233,931 
December 31, 2020276,548 5,521 282,069 
Proved undeveloped reserves as of:
December 31, 2019382,490 15,360 397,850 
December 31, 2020133,603 11,899 145,502 
(1) The Indigo Historical and Southwestern Pro Forma Combined Total reserves as of December 31, 2020 both include 17,383 MBbls of NGL reserves associated with the conventional Cotton Valley oil and gas properties which were sold by Indigo in the second quarter of 2021 prior to the signing of the Indigo Merger Agreement. Of the 17,383 MBbls of NGL reserves sold, 5,484 MBbls were proved developed reserves and 11,899 MBbls were proved undeveloped reserves.



Total (Bcfe)
Southwestern Historical
Indigo
Historical (1)
Southwestern Pro Forma Combined Total (1)
December 31, 201912,721 4,711 17,432 
Revisions of previous estimates(2,946)(1,348)(4,294)
Extensions, discoveries and other additions741 782 1,523 
Production(880)(374)(1,254)
Acquisition of reserves in place2,354 — 2,354 
Disposition of reserves in place— (5)(5)
December 31, 202011,990 3,766 15,756 
Proved developed reserves as of:
December 31, 20196,421 1,322 7,743 
December 31, 20208,203 1,229 9,432 
Proved undeveloped reserves as of:
December 31, 20196,300 3,389 9,689 
December 31, 20203,787 2,537 6,324 
(1) The Indigo Historical and Southwestern Pro Forma Combined Total reserves as of December 31, 2020 both include 677 Bcfe of proved reserves associated with the conventional Cotton Valley oil and gas properties which were sold by Indigo in the second quarter of 2021 prior to the signing of the Indigo Merger Agreement. Of the 677 Bcfe of proved reserves sold, 216 Bcfe were proved developed reserves and 461 Bcfe were proved undeveloped reserves.




The pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves as of December 31, 2020 is as follows:
(in millions)Southwestern Historical
Indigo
Historical (1)
Southwestern Pro Forma Combined Total (1)
Future cash inflows$17,997 $7,178 $25,175 
Future production costs(11,969)(3,756)(15,725)
Future development costs (1)
(1,924)(1,946)(3,870)
Future income tax expense— — — 
Future net cash flows4,104 1,476 5,580 
10% annual discount for estimated timing of cash flows(2,257)(827)(3,084)
Standardized measure of discounted future net cash flows$1,847 $649 $2,496 
(1) The Indigo Historical and Southwestern Pro Forma Combined Total standardized measure as of December 31, 2020 both include $45 million of standardized measure associated with the conventional Cotton Valley oil and gas properties which were sold by Indigo in the second quarter of 2021 prior to the signing of the Indigo Merger Agreement.
The changes in the pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the year ended December 31, 2020 are as follows:
(in millions)Southwestern Historical
Indigo
Historical (1)
Southwestern Pro Forma Combined Total (1)
Standardized measure, beginning of year$3,700 $2,044 $5,744 
Sales and transfers of natural gas and oil produced, net of production costs(478)(391)(869)
Net changes in prices and production costs(2,720)(1,386)(4,106)
Extensions, discoveries, and other additions, net of future production and development costs81 156 237 
Acquisition of reserves in place443 — 443 
Sales of reserves in place— — — 
Revisions of previous quantity estimates(987)(1,156)(2,143)
Net change in income taxes35 — 35 
Changes in estimated future development costs1,241 918 2,159 
Previously estimated development costs incurred during the year624 271 895 
Changes in production rates (timing) and other(466)— (466)
Accretion of discount374 193 567 
Standardized measure, end of year$1,847 $649 $2,496 
(1) The Indigo Historical and Southwestern Pro Forma Combined Total standardized measure as of December 31, 2020 both include $45 million of standardized measure associated with the conventional Cotton Valley oil and gas properties which were sold by Indigo in the second quarter of 2021 prior to the signing of the Indigo Merger Agreement.

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