NOTES TO FINANCIAL STATEMENTS
December 31, 2022 and 2021
NOTE A – DESCRIPTION OF PLAN
The following description of the Southwestern Energy Company 401(k) Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions. The Plan agreement, as amended and restated effective January 1, 2021, and all subsequent amendments have been considered in the following description; the amendments made to the restated Plan agreement have no significant effect on net assets.
1. General
The Plan is a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code (the “IRC”). The Plan covers all employees of Southwestern Energy Company (the “Company” or “Employer”) and its subsidiaries except for:
a. Employees whose terms of employment are covered by a collective bargaining agreement that does not provide for participation in the Plan, provided that retirement benefits have been the subject of good faith bargaining,
b. Employees who are under the age of twenty-one (21),
c. Seasonal employees who have less than one thousand (1,000) hours of service for the applicable computation period,
d. Employees or other persons who perform services pursuant to written agreement with the Employer or with a third party, unless such agreement provides for participation in the Plan,
e. Leased employees, and
f. Non-resident aliens with no United States source income.
The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
2. Contributions
Participants may contribute from 1% to 75% of eligible compensation, as defined in the Plan. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions. Salary deferrals consist of pretax and/or Roth 401(k) contributions. Participants may also rollover amounts from other qualified defined benefit or defined contribution plans. Beginning on January 1, 2021, the Company began matching 100% of the first 6% of eligible compensation that a participant contributes to the Plan. All contributions to the Plan are invested under the direction of the participant in 22 investment options including Company stock. Investments in the stock of Entergy Corporation originated from a previous plan merger and are no longer an active investment option. Contributions are subject to certain limitations.
On January 1, 2021, the existing Montage 401(k) plan assets of all former Montage employees that became full-time SWN employees at the close of the Montage acquisition on November 13, 2020 were merged into Southwestern Energy Company’s 401(k) plan. The remaining Montage 401(k) plan assets for former
Montage employees and current Montage retirees were merged into Southwestern Energy Company’s 401(k) plan effective June 3, 2021.
On February 1, 2022, the existing Indigo 401(k) plan assets of all former Indigo employees that became full-time SWN employees at the close of the Indigo acquisition on September 1, 2021 were merged into Southwestern Energy Company’s 401(k) plan.
3. Participant Accounts
Each participant’s account is credited with the participant’s contributions and allocations of the Company’s contribution and Plan earnings. Allocations are based on participant earnings or account balances, as defined in the Plan. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account balance.
4. Vesting
Participants are immediately vested in their contributions and Company contributions plus actual earnings thereon.
5. Notes Receivable from Participants
Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of the value of the accounts. Participants may have up to two loans outstanding. The loans are secured by the balance in the participant’s account and bear fixed interest at one percentage point above the prime lending rate at the inception of the loan. Principal and interest is paid through payroll deductions. Amounts repaid are reinvested in investment options based on the participant’s current investment elections. At December 31, 2022, interest rates ranged from 3.25% to 8.0%.
6. Payment of Benefits
On termination of service due to death, disability or retirement, a participant or a participant’s estate may receive the full value of his or her account in a lump-sum or over an installment period of not more than 10 years. For termination of service for other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution.
Beginning in April 2020, the Plan enacted a provision from The CARES Act that allowed plan participants to withdraw up to $100,000 due to adverse financial consequences from COVID-19 throughout the remainder of 2020, with repayment terms of up to three years.
7. Transfers to and from Other Plans
The Plan transfers certain net assets to other plans in connection with participants who have terminated employment and began participating in other employer plans. Such transfers are recorded in benefits paid to participants at the fair value of the assets on the date transferred. Similarly, the Plan allows new participants to rollover or transfer-in assets held in other qualified plans. Such transfers are recorded in rollover contributions at fair value.
8. Rollovers
The Company commenced the termination of its pension plan during 2022. All active participants were provided benefit election options. One of the election options was a direct rollover into the company's 401(k) plan which occurred in December 2022.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Accounting
The Plan’s financial statements are presented using the accrual basis of accounting.
2. 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 and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
3. Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note C for discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan’s gains and losses on investments bought and sold as well as held during the year.
4. Administrative Expenses
Loan origination fees paid by the Plan participants to the Plan’s record-keeper are reflected as administrative expenses. During 2022 and 2021, the Company paid $182,097 and $206,573, respectively, of expenses on behalf of the Plan. Brokerage commissions and transfer taxes incurred in connection with securities transactions are treated as part of the purchase cost or a reduction of sales proceeds.
5. Payments of Benefits
Benefits are recorded when paid. Amounts allocated to accounts of participants who have elected to withdraw from the Plan, but have not yet received payments from the Plan, totaled $269,225 and $50,408 as of December 31, 2022 and 2021, respectively.
6. Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid balance plus any accrued but unpaid interest. Delinquent loans are reclassified as distributions based upon the terms of the Plan document. No allowance for credit losses has been recorded as of December 31, 2022 and 2021.
7. Trustee Liability
Due to timing differences, Bank of America, the trustee of the Plan, may make investments as directed by participants of the Plan before funding is received. If applicable, these amounts are shown as trustee payable, a liability on the statement of net assets available for benefits.
NOTE C – FAIR VALUE MEASUREMENTS
The Plan’s investments are reported at fair value in the accompanying statements of net assets available for benefits. The Plan defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three-tier fair value hierarchy is described as follows:
Level 1: Quoted market prices (unadjusted) in active markets for identical assets and liabilities.
Level 2: Inputs, other than the quoted prices in active markets included within Level 1 that are observable for the asset or liability either directly or indirectly.
Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about what market participants would use in pricing the asset or liability.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities being measured and their placement or changes in their placement within the fair value hierarchy. Transfers between levels are recognized on the actual date of the event resulting in the transfer.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2022 and 2021.
The Company’s fair value classification is based on its interest in the fund itself and does not include a “look through” to the underlying assets and liabilities.
Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-ended funds that are registered with the Securities and Exchange Commission and are actively traded. These funds are required to publish their daily net asset value (“NAV”) and to transact at that price. The mutual funds held by the Plan are classified as Level 1.
Common stocks: Valued at the closing price reported on the New York Stock Exchange on which the individual securities are actively traded. All of the common stocks are registered with the Securities and Exchange Commission and are publicly traded. Therefore, all common stocks are classified as Level 1.
Collective trust: Valued using the NAV provided by the administrator of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, less its liabilities, divided by the number of shares owned. The NAV is a quoted price in a market that is not active. These funds transact at their NAV. There are no restrictions in place with respect to the daily redemption of the collective trust funds. There are no unfunded commitments at December 31, 2022 and 2021. In accordance with Subtopic 820-10, investments that were measured at net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
The preceding methods described may produce fair value calculations that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following are assets measured at fair value on a recurring basis at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Mutual funds | | $ | 144,873,769 | | | $ | 144,873,769 | | | $ | — | | | $ | — | |
| Common stocks | | 4,361,287 | | | 4,361,287 | | | — | | | — | |
| Total investments in the fair value hierarchy | | 149,235,056 | | | 149,235,056 | | | — | | | — | |
Investments valued at NAV (1) | | 8,115,781 | | | — | | | — | | | — | |
| Total investments at fair value | | $ | 157,350,837 | | | $ | 149,235,056 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | 2021 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Mutual funds | | $ | 158,025,083 | | | $ | 158,025,083 | | | $ | — | | | $ | — | |
| Common stocks | | 3,377,552 | | | 3,377,552 | | | — | | | — | |
| Total investments in the fair value hierarchy | | 161,402,635 | | | 161,402,635 | | | — | | | — | |
Investments valued at NAV (1) | | 7,632,182 | | | — | | | — | | | — | |
| Total investments at fair value | | $ | 169,034,817 | | | $ | 161,402,635 | | | $ | — | | | $ | — | |
(1) The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the statement of net assets available for benefits.
NOTE D – TAX STATUS
The Plan obtained its latest determination letter on August 24, 2017, in which the Internal Revenue Service stated that the Plan, as designed, was in compliance with the applicable requirements of the Internal Revenue Code (the “Code”). The Plan administrator believes that the amendments (and other changes) to the Plan agreement since the application for the determination letter have not changed this determination. Therefore, no provision for income taxes has been included in the Plan’s financial statements.
Accounting principles generally accepted in the United States of America require Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
NOTE E – PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA.
NOTE F – RISKS AND UNCERTAINTIES
The Plan provides for various investment options in any combination of mutual funds, common stocks and collective trusts. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Market values of investments may decline for a number of reasons, including changes in prevailing market and interest rates, increases in defaults, credit rating downgrades, and global events such as a pandemic or international conflict. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term
and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
NOTE G – RELATED PARTY AND PARTY-IN-INTEREST TRANSACTIONS
Plan investments include shares of Southwestern Energy Company common stock. These transactions represent investments in the Company and, therefore, qualify as party-in-interest transactions. At December 31, 2022 and 2021, the Plan held 713,345 and 682,884 shares of common stock of the Company, respectively, with fair value of $4,173,070 and $3,182,240, respectively, and a cost basis of $5,434,198 $5,370,196, respectively. There were no fees paid by the Plan for the investment management services for the years ended December 31, 2022 and 2021. Bank of America is the 2022 trustee and record-keeper as defined by the Plan, and is also a bank in Southwestern Energy Company’s revolving credit facility and a provider of banking and benefit-related services for Southwestern Energy. The Plan participants paid loan origination fees to Bank of America amounting to $8,175 and $7,200 during 2022 and 2021, respectively.
NOTE H – PARTIAL PLAN TERMINATION
On February 24, 2021, the Company notified affected employees of workforce reduction plans, which resulted primarily from previously announced studies of structural, process and organizational changes to enhance shareholder value and continued with respect to other aspects of the Company’s business activities. Affected employees were offered severance packages, which included a one-time cash payment depending on length of service and, if applicable, also included the current value of a portion of equity awards that were forfeited due to the workforce reduction.
Under ERISA, a partial plan termination may occur if a significant percentage of the Plan participants are terminated due to actions taken by the Plan Sponsor. The workforce reductions did not constitute partial plan terminations, which occur if 20% or more of plan participants are terminated. Partial plan terminations result in affected participants becoming fully vested in the accrued benefits at the termination date. Participants of the Plan are fully vested on their first day of employment, therefore, partial plan terminations have no effect on the Plan or its participants. The remaining participants' vesting continues to be determined according to the provisions.
NOTE I – SUBSEQUENT EVENTS
Management evaluates events occurring subsequent to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements.
Southwestern Energy Company
401(k) Savings Plan
Form 5500 - Schedule H, Line 4i - Schedule of assets (held at end of year)
