UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 8-K/A
(Amendment No. 1)
________________________________________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): November 13, 2020
________________________________________________________________
(Exact name of registrant as specified in its charter)
________________________________________________________________
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||||||||
(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:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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. ☐
EXPLANATORY NOTE
As previously disclosed by Southwestern Energy Company (the “Company” or “Southwestern”) under Item 2.01 of its Current Report on Form 8-K filed on November 13, 2020 (the “Original 8-K”), 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 “Merger”).
This Current Report on Form 8-K/A amends the Original 8-K to file the financial information required by Items 9.01(a) and 9.01(b) of Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
The audited consolidated and combined balance sheets of Montage as of December 31, 2019 and 2018 and the audited consolidated and combined statements of operations, statements of cash flows and statements of changes in equity of Montage for the years ended December 31, 2019, 2018 and 2017, and the notes related thereto, are incorporated by reference as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated by reference into this Item 9.01(a).
The Report of Independent Registered Public Accounting Firm, issued by Grant Thornton LLP, dated March 10, 2020, relating to the audited consolidated and combined financial statements of Montage, is incorporated by reference as Exhibit 99.3 to this Current Report on Form 8-K/A and is incorporated by reference into this Item 9.01(a).
The unaudited consolidated balance sheet of Montage as of September 30, 2020 and the unaudited consolidated statements of operations, statements of cash flows and statements of changes in equity of Montage for the nine month periods ended September 30, 2020 and 2019, and the notes related thereto, are incorporated by reference as Exhibit 99.4 to this Current Report on Form 8-K/A and are incorporated by reference into this Item 9.01(a).
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 give effect to the Merger as if it had been consummated on January 1, 2019. The unaudited pro forma condensed combined balance sheet as of September 30, 2020 has been prepared to give effect to the Merger as if it had been consummated on September 30, 2020. 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/A are incorporated by reference as Exhibit 99.5 to this Current Report on Form 8-K/A and are incorporated by reference into this Item 9.01(b).
(d) Exhibits
| Exhibit No. | Descriptions | |||||||
| 23.1* | ||||||||
| 99.1 | ||||||||
| 99.2 | The audited consolidated and combined balance sheets of Montage Resources, as of December 31, 2019 and 2018, and the audited consolidated and combined statements of operations, statements of cash flows and statements of changes in equity of Montage Resources, for the years ended December 31, 2019, 2018 and 2017, and the notes related thereto (incorporated by reference to Montage Resources’ Form 10-K for the year ended December 31, 2019, File No. 001-36511, filed with the Commission on March 10, 2020). | |||||||
| 99.3 | ||||||||
| 99.4 | ||||||||
| 99.5* | ||||||||
| 104 | Cover 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: January 22, 2021 | By: | /s/ MICHAEL HANCOCK | |||||||||
| Name: | Michael Hancock | ||||||||||
Title: | Vice President, Chief Financial Officer (Interim) | ||||||||||
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 10, 2020 with respect to the consolidated financial statements of Montage Resources Corporation included in the Annual Report on Form 10-K for the year ended December 31, 2019, which are incorporated by reference in this Form 8-K/A. We consent to the incorporation by reference of the aforementioned report in this Form 8-K/A.
/s/ GRANT THORNTON LLP
Pittsburgh, Pennsylvania
January 22, 2021
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Acquisition of Montage Resources Corporation
On November 13, 2020, pursuant to the Agreement and Plan of Merger, dated as of August 12, 2020 (the “Merger Agreement”), by and between Southwestern Energy Company (“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 “Merger”).
In accordance with the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of Montage common stock, par value $0.01 per share (“Montage Common Stock”), was automatically converted into the right to receive 1.8656 shares (the “Exchange Ratio”) of Southwestern common stock, par value $0.01 per share (“Southwestern Common Stock”). No fractional shares of Southwestern Common Stock were issued in the Merger, and holders of Montage Common Stock received cash in lieu of any fractional shares of Southwestern Common Stock which such holders would otherwise be entitled to receive.
In addition, in accordance with the Merger Agreement, at the Effective Time, (i) each Montage restricted stock unit award that was outstanding immediately prior to the Effective Time was converted into an assumed restricted stock unit award, (ii) each Montage performance stock unit award was terminated and vested, and (iii) each Montage restricted stock award granted to a Montage non-employee director vested.
Additionally, in August 2020, the Company completed an underwritten public offering of 63,250,000 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. Also in August 2020, the Company completed an underwritten public offering of $350 million aggregate principal amount of 8.375% senior notes due 2028. The net proceeds from the offering, after deducting the underwriting discount and estimated offering expenses, were approximately $345 million. The Company used the net proceeds from the debt offering, together with the net proceeds received from the common stock offering and borrowings under its revolving credit facility, to fund the redemption of the $510 million aggregate principal amount of Montage’s outstanding 8.875% Senior Notes due 2023 (the “Montage Notes”), the pay off of the outstanding Montage credit facility balance and all related accrued interest in connection with the closing of the 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 Montage, and have been adjusted to reflect the Merger along with the related equity and debt issuances and the use of proceeds therefrom. The Merger was accounted for using the acquisition method of accounting with Southwestern identified as the acquirer. Under the acquisition method of accounting, Southwestern recorded assets acquired and liabilities assumed at their respective acquisition date fair values at the Effective Time. Certain of Montage’s historical amounts have been reclassified to conform to Southwestern’s financial statement presentation. The unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives effect to the Merger and related equity and debt issuances, along with the use of proceeds therefrom, as if each transaction had been completed on September 30, 2020. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 give effect to the Merger and the related equity and debt issuances as if each transaction had been completed on January 1, 2019.
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 Merger, which was accounted for using the acquisition method of accounting, with Southwestern identified as the acquirer, and the issuance of shares of Southwestern Common Stock in exchange of Montage Common Stock as Merger consideration;
•adjustments to conform Montage’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 conversion of Montage’s outstanding stock-based awards into shares of Southwestern Common Stock in accordance with the Merger Agreement;
•Southwestern’s related equity and debt issuances and the redemption of Montage’s outstanding senior 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 consummation of the Merger;
•adjustments to conform the classification of certain assets and liabilities in Montage’s historical balance sheet to Southwestern’s classification for similar assets and liabilities;
•adjustments to conform the classification of revenues and expenses in 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 Merger and related equity and debt issuances along with the use of proceeds therefrom. These adjustments are directly attributable to the Merger, 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 and Montage following the Merger.
The purchase price allocation is dependent upon certain valuations and other studies that, as of the date hereof, have yet to progress to a stage where there is sufficient information for a definitive measure. As of the date of this current report, Southwestern has performed an initial valuation analysis of the fair value of Montage’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 Montage to reflect preliminary estimates of the fair value necessary to prepare the unaudited pro forma condensed combined financial statements. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available, additional review and analysis is performed or additional information is obtained about the facts and circumstances that existed as of the acquisition date. 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 Montage’s assets and liabilities based on discussions with Montage’s management, initial valuation studies, due diligence, and information presented in Montage’s SEC filings. 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 Merger 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 Merger. The unaudited pro forma condensed combined financial information does not reflect future events that may occur after the 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 Merger and any associated costs that may be required to be incurred to achieve those synergies. The unaudited pro forma condensed combined statements of operations also exclude the effects of transaction costs associated with the Merger, costs associated with any restructuring, integration activities, and asset dispositions that may result from the Merger.
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 and Montage’s respective Annual Reports on Form 10-K for the year ended December 31, 2019 and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020, June 30, 2020, and September 30, 2020.
Southwestern Energy Company
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2020
(in millions)
| Southwestern Historical | Montage Historical | Reclassification Adjustments (Note 3) | Acquisition Adjustment (Note 3) | Retirement of Montage Debt (Note 3) | Pro Forma Combined | |||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 95 | $ | 4 | $ | — | $ | — | $ | (99) | (b) | $ | — | |||||||||||||||||||||||||
| Accounts receivable, net | 239 | 63 | — | — | — | 302 | ||||||||||||||||||||||||||||||||
| Derivative assets | 238 | — | 3 | (a) | — | — | 241 | |||||||||||||||||||||||||||||||
| Other current assets | 41 | 9 | (3) | (a) | — | — | 47 | |||||||||||||||||||||||||||||||
| Assets held for sale | — | 2 | — | — | — | 2 | ||||||||||||||||||||||||||||||||
| Total Current Assets | 613 | 78 | — | — | (99) | 592 | ||||||||||||||||||||||||||||||||
| Natural gas and oil properties | 25,969 | 3,365 | — | (2,292) | (d) | — | 27,042 | |||||||||||||||||||||||||||||||
| Other property, plant and equipment | 500 | 10 | — | 16 | (d) | — | 526 | |||||||||||||||||||||||||||||||
| Less: Accumulated depreciation, depletion and amortization | (23,247) | (1,669) | — | 1,669 | (d) | — | (23,247) | |||||||||||||||||||||||||||||||
| Total property, plant and equipment, net | 3,222 | 1,706 | — | (607) | — | 4,321 | ||||||||||||||||||||||||||||||||
| Operating lease assets | 145 | 31 | — | — | — | 176 | ||||||||||||||||||||||||||||||||
| Assets held for sale | — | 3 | — | — | — | 3 | ||||||||||||||||||||||||||||||||
| Other long-term assets | 177 | 5 | — | (3) | (e) | — | 179 | |||||||||||||||||||||||||||||||
| Total Long-Term Assets | 322 | 39 | — | (3) | — | 358 | ||||||||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 4,157 | $ | 1,823 | $ | — | $ | (610) | $ | (99) | $ | 5,271 | ||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||||||||||||||||||||
| Accounts payable | $ | 416 | $ | 121 | $ | 23 | (a) | $ | — | $ | — | $ | 560 | |||||||||||||||||||||||||
| Taxes payable | 47 | — | 9 | (a) | — | — | 56 | |||||||||||||||||||||||||||||||
| Interest payable | 56 | 10 | — | — | (10) | (b) | 56 | |||||||||||||||||||||||||||||||
| Derivative liabilities | 287 | — | 23 | (a) | — | — | 310 | |||||||||||||||||||||||||||||||
| Current operating lease liabilities | 33 | 13 | — | — | — | 46 | ||||||||||||||||||||||||||||||||
| Accrued capital expenditures | — | 12 | (12) | (a) | — | — | — | |||||||||||||||||||||||||||||||
| Other current liabilities | 30 | 62 | (43) | (a) | — | — | 49 | |||||||||||||||||||||||||||||||
| Liabilities held for sale | — | 3 | — | — | — | 3 | ||||||||||||||||||||||||||||||||
| Total Current Liabilities | 869 | 221 | — | — | (10) | 1,080 | ||||||||||||||||||||||||||||||||
| Long-term debt | 2,450 | 503 | 170 | (a) | 19 | (d)(f) | (89) | (b) | 3,053 | |||||||||||||||||||||||||||||
| Revolving credit facility | — | 170 | (170) | (a) | — | — | — | |||||||||||||||||||||||||||||||
| Long-term operating lease liabilities | 107 | 19 | — | — | — | 126 | ||||||||||||||||||||||||||||||||
| Long-term derivative liabilities | 188 | — | 28 | (a) | — | — | 216 | |||||||||||||||||||||||||||||||
| Asset retirement obligation | — | 30 | (30) | (a) | — | — | — | |||||||||||||||||||||||||||||||
| Pension and other postretirement liabilities | 35 | — | — | — | — | 35 | ||||||||||||||||||||||||||||||||
| Other long-term liabilities | 124 | 31 | 2 | (a) | — | — | 157 | |||||||||||||||||||||||||||||||
| Long-term liabilities held for sale | — | 7 | — | — | — | 7 | ||||||||||||||||||||||||||||||||
| Total Long-Term Liabilities | 2,904 | 760 | — | 19 | (89) | 3,594 | ||||||||||||||||||||||||||||||||
| Equity: | ||||||||||||||||||||||||||||||||||||||
| Common stock | 7 | 1 | — | — | (g)(h) | — | 8 | |||||||||||||||||||||||||||||||
| Additional paid-in capital | 4,882 | 2,355 | — | (2,143) | (g)(h) | — | 5,094 | |||||||||||||||||||||||||||||||
| Accumulated deficit | (4,271) | (1,504) | — | 1,504 | (g) | — | (4,271) | |||||||||||||||||||||||||||||||
| Accumulated other comprehensive loss | (32) | — | — | — | — | (32) | ||||||||||||||||||||||||||||||||
| Common stock in treasury | (202) | (10) | — | 10 | (g) | — | (202) | |||||||||||||||||||||||||||||||
| Total Equity | 384 | 842 | — | (629) | — | 597 | ||||||||||||||||||||||||||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 4,157 | $ | 1,823 | $ | — | $ | (610) | $ | (99) | $ | 5,271 | ||||||||||||||||||||||||||
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 Nine Months Ended September 30, 2020
(in millions, except share/per share amounts)
| Southwestern Historical | Montage Historical | Reclassification Adjustments (Note 3) | Acquisition Adjustment (Note 3) | Issuance of Debt and Equity and Related Use of Proceeds ( Note 3) | Pro Forma Combined | |||||||||||||||||||||||||||||||||
| Operating Revenues: | ||||||||||||||||||||||||||||||||||||||
| Gas sales | $ | 611 | $ | — | $ | 217 | (a) | $ | 828 | |||||||||||||||||||||||||||||
| Oil sales | 111 | — | 53 | (a) | 164 | |||||||||||||||||||||||||||||||||
| NGL sales | 158 | — | 45 | (a) | 203 | |||||||||||||||||||||||||||||||||
| Natural gas, oil and natural gas liquids sales | — | 315 | (315) | (a) | — | |||||||||||||||||||||||||||||||||
| Marketing | 645 | 24 | 669 | |||||||||||||||||||||||||||||||||||
| Other | 4 | — | 4 | |||||||||||||||||||||||||||||||||||
| Total Revenues | 1,529 | 339 | — | — | — | 1,868 | ||||||||||||||||||||||||||||||||
| Operating Costs and Expenses: | ||||||||||||||||||||||||||||||||||||||
| Marketing purchases | 675 | 24 | 699 | |||||||||||||||||||||||||||||||||||
| Operating expenses | 577 | 33 | 158 | (a) | 768 | |||||||||||||||||||||||||||||||||
| Transportation, gathering and compression | — | 158 | (158) | (a) | — | |||||||||||||||||||||||||||||||||
| General and administrative expenses | 89 | 34 | 123 | |||||||||||||||||||||||||||||||||||
| Montage acquisition related expenses | 3 | — | 3 | |||||||||||||||||||||||||||||||||||
| (Gain) loss on sale of operating assets | — | (1) | (1) | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 12 | — | 12 | |||||||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 267 | 140 | (43) | (i) | 364 | |||||||||||||||||||||||||||||||||
| Impairments | 2,495 | — | 2,495 | |||||||||||||||||||||||||||||||||||
| Exploration | — | 34 | (34) | (a) | — | |||||||||||||||||||||||||||||||||
| Production and ad valorem taxes | — | 10 | (10) | (a) | — | |||||||||||||||||||||||||||||||||
| Taxes, other than income taxes | 38 | — | 10 | (a) | 48 | |||||||||||||||||||||||||||||||||
| Total Operating Costs and Expenses | 4,156 | 432 | (34) | (43) | — | 4,511 | ||||||||||||||||||||||||||||||||
| Operating Income (Loss) | (2,627) | (93) | 34 | 43 | — | (2,643) | ||||||||||||||||||||||||||||||||
| Interest Expense: | ||||||||||||||||||||||||||||||||||||||
| Interest on debt | 123 | 44 | (4) | (a) | (21) | (c) | 142 | |||||||||||||||||||||||||||||||
| Other interest charges | 7 | — | 4 | (a) | 11 | |||||||||||||||||||||||||||||||||
| Interest Capitalized | (67) | — | (1) | (j) | (68) | |||||||||||||||||||||||||||||||||
| Net Interest Expense | 63 | 44 | — | (1) | (21) | 85 | ||||||||||||||||||||||||||||||||
| Gain (Loss) on Derivatives | 38 | (11) | 27 | |||||||||||||||||||||||||||||||||||
| Gain on Early Extinguishment of Debt | 35 | — | 35 | |||||||||||||||||||||||||||||||||||
| Other Income, Net | 3 | — | 3 | |||||||||||||||||||||||||||||||||||
| Income (Loss) Before Income Taxes | (2,614) | (148) | 34 | 44 | 21 | (2,663) | ||||||||||||||||||||||||||||||||
| Provision (Benefit) for Income Taxes: | ||||||||||||||||||||||||||||||||||||||
| Current | (2) | — | (2) | |||||||||||||||||||||||||||||||||||
| Deferred | 408 | — | 408 | |||||||||||||||||||||||||||||||||||
| Total Provision for Income Taxes | 406 | — | — | — | — | 406 | ||||||||||||||||||||||||||||||||
| Income (Loss) from Continuing Operations | (3,020) | (148) | 34 | 44 | 21 | (3,069) | ||||||||||||||||||||||||||||||||
| Income (Loss) from Discontinued Operations, Net of Tax | — | (10) | (10) | |||||||||||||||||||||||||||||||||||
| Net Income (Loss) | (3,020) | (158) | 34 | 44 | 21 | (3,079) | ||||||||||||||||||||||||||||||||
| Earnings (Loss) Per Common Share: | ||||||||||||||||||||||||||||||||||||||
| Basic: | ||||||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations | $ | (5.48) | $ | (4.13) | $ | (4.55) | ||||||||||||||||||||||||||||||||
| Income (loss) from discontinued operations | — | (0.28) | (0.02) | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (5.48) | $ | (4.41) | $ | (4.57) | ||||||||||||||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations | $ | (5.48) | $ | (4.13) | $ | (4.55) | ||||||||||||||||||||||||||||||||
| Income (loss) from discontinued operations | — | (0.28) | (0.02) | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (5.48) | $ | (4.41) | $ | (4.57) | ||||||||||||||||||||||||||||||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||||||||||||||||||||||||
| Basic | 551,162,559 | 69,740,848 | (h) | 53,287,546 | (l) | 674,190,953 | ||||||||||||||||||||||||||||||||
| Diluted | 551,162,559 | 69,740,848 | (h) | 53,287,546 | (l) | 674,190,953 | ||||||||||||||||||||||||||||||||
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, 2019
(in millions, except share/per share amounts)
| Southwestern Historical | Montage Historical | Reclassification Adjustments (Note 3) | Acquisition Adjustment (Note 3) | Issuance of Debt and Equity and Related Use of Proceeds ( Note 3) | Pro Forma Combined | |||||||||||||||||||||||||||||||||
| Operating Revenues: | ||||||||||||||||||||||||||||||||||||||
| Gas sales | $ | 1,241 | $ | — | $ | 361 | (a) | $ | 1,602 | |||||||||||||||||||||||||||||
| Oil sales | 223 | — | 146 | (a) | 369 | |||||||||||||||||||||||||||||||||
| NGL sales | 274 | — | 85 | (a) | 359 | |||||||||||||||||||||||||||||||||
| Natural gas, oil and natural gas liquids sales | — | 592 | (592) | (a) | — | |||||||||||||||||||||||||||||||||
| Marketing | 1,297 | 42 | 1,339 | |||||||||||||||||||||||||||||||||||
| Other | 3 | 1 | 4 | |||||||||||||||||||||||||||||||||||
| Total Revenues | 3,038 | 635 | — | — | — | 3,673 | ||||||||||||||||||||||||||||||||
| Operating Costs and Expenses: | ||||||||||||||||||||||||||||||||||||||
| Marketing purchases | 1,320 | 43 | 1,363 | |||||||||||||||||||||||||||||||||||
| Operating expenses | 720 | 43 | 209 | (a) | 972 | |||||||||||||||||||||||||||||||||
| Transportation, gathering and compression | — | 209 | (209) | (a) | — | |||||||||||||||||||||||||||||||||
| Rig termination and standby | — | 1 | 1 | |||||||||||||||||||||||||||||||||||
| General and administrative expenses | 166 | 71 | 237 | |||||||||||||||||||||||||||||||||||
| (Gain) loss on sale of operating assets | 2 | — | 2 | |||||||||||||||||||||||||||||||||||
| Restructuring charges | 11 | — | 11 | |||||||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 471 | 156 | (26) | (i) | 601 | |||||||||||||||||||||||||||||||||
| Impairments | 16 | — | 16 | |||||||||||||||||||||||||||||||||||
| Exploration | — | 59 | (59) | (a) | — | |||||||||||||||||||||||||||||||||
| Production and ad valorem taxes | — | 12 | (12) | (a) | — | |||||||||||||||||||||||||||||||||
| Taxes, other than income taxes | 62 | — | 12 | (a) | 74 | |||||||||||||||||||||||||||||||||
| Total Operating Costs and Expenses | 2,768 | 594 | (59) | (26) | — | 3,277 | ||||||||||||||||||||||||||||||||
| Operating Income | 270 | 41 | 59 | 26 | — | 396 | ||||||||||||||||||||||||||||||||
| Interest Expense: | ||||||||||||||||||||||||||||||||||||||
| Interest on debt | 166 | 59 | (6) | (a) | (20) | (c) | 199 | |||||||||||||||||||||||||||||||
| Other interest charges | 8 | — | 6 | (a) | 14 | |||||||||||||||||||||||||||||||||
| Interest Capitalized | (109) | — | (2) | (j) | (111) | |||||||||||||||||||||||||||||||||
| Net Interest Expense | 65 | 59 | — | (2) | (20) | 102 | ||||||||||||||||||||||||||||||||
| Gain on Derivatives | 274 | 49 | 323 | |||||||||||||||||||||||||||||||||||
| Gain on Early Extinguishment of Debt | 8 | — | 8 | |||||||||||||||||||||||||||||||||||
| Other Loss, Net | (7) | — | (7) | |||||||||||||||||||||||||||||||||||
| Income Before Income Taxes | 480 | 31 | 59 | 28 | 20 | 618 | ||||||||||||||||||||||||||||||||
| Provision (Benefit) for Income Taxes: | ||||||||||||||||||||||||||||||||||||||
| Current | (2) | — | (2) | |||||||||||||||||||||||||||||||||||
| Deferred | (409) | — | 32 | (k) | (377) | |||||||||||||||||||||||||||||||||
| Total Provision for Income Taxes | (411) | — | — | 32 | — | (379) | ||||||||||||||||||||||||||||||||
| Income from Continuing Operations | 891 | 31 | 59 | (4) | 20 | 997 | ||||||||||||||||||||||||||||||||
| Income from Discontinued Operations, Net of Tax | — | 1 | 1 | |||||||||||||||||||||||||||||||||||
| Net Income | 891 | 32 | 59 | (4) | 20 | 998 | ||||||||||||||||||||||||||||||||
| Earnings Per Common Share: | ||||||||||||||||||||||||||||||||||||||
| Basic: | ||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 1.65 | $ | 0.92 | $ | 1.48 | ||||||||||||||||||||||||||||||||
| Income from discontinued operations | — | 0.04 | — | |||||||||||||||||||||||||||||||||||
| Net income | $ | 1.65 | $ | 0.96 | $ | 1.48 | ||||||||||||||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||||||||||||||||
| Income from continuing operations | $ | 1.65 | $ | 0.91 | $ | 1.48 | ||||||||||||||||||||||||||||||||
| Income from discontinued operations | — | 0.04 | — | |||||||||||||||||||||||||||||||||||
| Net income | $ | 1.65 | $ | 0.95 | $ | 1.48 | ||||||||||||||||||||||||||||||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||||||||||||||||||||||||
| Basic | 539,345,343 | 69,740,848 | (h) | 63,250,000 | (l) | 672,336,191 | ||||||||||||||||||||||||||||||||
| Diluted | 540,382,914 | 69,740,848 | (h) | 63,250,000 | (l) | 673,373,762 | ||||||||||||||||||||||||||||||||
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 Montage. Certain of Montage’s historical amounts have been reclassified to conform to Southwestern’s financial statement presentation. The unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives effect to the Merger and related equity and debt issuances along with the use of proceeds therefrom as if they had occurred on September 30, 2020. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and the year ended December 31, 2019 both give effect to the Merger and related equity and debt issuances along with the use of proceeds therefrom as if they had occurred on January 1, 2019.
The unaudited pro forma condensed combined financial statements reflect pro forma adjustments that are described in these 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 statements do not purport to represent what the Company’s financial position or results of operations would have been if the transaction 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 and Montage for the periods presented.
The unaudited pro forma condensed combined financial information includes adjustments to conform Montage’s accounting policies to Southwestern’s accounting policies, including adjusting Montage’s oil and gas properties to the full cost method. Montage follows 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 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 Merger was accounted for using the acquisition method of accounting using the accounting guidance in Accounting Standards Codification 805, Business Combinations. The allocation of the initial estimated purchase price is based upon management’s estimates of and assumptions related to the fair value of assets acquired and liabilities assumed as of September 30, 2020 using currently available information. Due to the fact that the unaudited pro forma condensed combined financial information has been prepared based on these initial 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.
The initial purchase price allocation is subject to change due to changes in the estimated fair value of Montage’s assets acquired and liabilities assumed as of the date of the transaction, resulting from the finalization of Southwestern’s detailed valuation analysis.
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 September 30, 2020 (in millions) | |||||
| Consideration: | |||||
| Fair value of Southwestern’s stock issued | $ | 213 | |||
| Fair Value of Assets Acquired: | |||||
| Cash and cash equivalents | 4 | ||||
| Accounts receivable | 63 | ||||
| Other current assets | 8 | ||||
| Commodity derivative assets | 3 | ||||
| Evaluated oil and gas properties | 998 | ||||
| Unevaluated oil and gas properties | 75 | ||||
| Other property, plant and equipment | 26 | ||||
| Other long-term assets | 36 | ||||
| Total assets acquired | 1,213 | ||||
| Fair Value of Liabilities Assumed: | |||||
| Accounts payable | 144 | ||||
| Other current liabilities | 77 | ||||
| Revolving credit facility | 170 | ||||
| Senior unsecured notes | 522 | ||||
| Asset retirement obligations | 30 | ||||
| Other noncurrent liabilities | 57 | ||||
| Total liabilities assumed | 1,000 | ||||
| Net Assets Acquired and Liabilities Assumed | $ | 213 | |||
Under the Merger Agreement, Montage shareholders received 1.8656 shares of Southwestern common stock for each share of Montage common stock issued and outstanding immediately prior to the Effective Time of the Merger. In addition, certain members of Montage’s management team with 471,326 outstanding restricted stock units (“RSU”) and 831,059 outstanding performance units (“PSU”) received 1.8656 shares of Southwestern common stock for each RSU and PSU outstanding under existing change of control agreements. This resulted in Southwestern issuing approximately 69.7 million shares of Southwestern common stock, or approximately $213 million in value (based on Southwestern common stock closing price as of November 13, 2020 of $3.05), as Merger consideration.
The Merger was non-taxable, and Montage’s tax basis in the assets and liabilities carried over to Southwestern.
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 eliminations were made as a result of the transaction to conform to Southwestern’s presentation:
Pro Forma Condensed Combined Balance Sheet as of September 30, 2020:
•Reflects reclassification of approximately $3 million from other current assets to derivative assets;
•Reflects reclassification of approximately $12 million from accrued capital expenditures and $11 million from other current liabilities to accounts payable;
•Reflects reclassification of approximately $9 million from other current liabilities to taxes payable;
•Reflects reclassification of approximately $23 million from other current liabilities to derivative liabilities;
•Reflects reclassification of approximately $170 million from revolving credit facility to long-term debt; and
•Reflects reclassification of approximately $30 million from asset retirement obligation to other long-term liabilities.
•Reflects reclassification of approximately $28 million from other long-term liabilities to long-term derivative liabilities
Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 2020:
•Reflects reclassification of approximately $315 million from natural gas, oil and natural gas liquids sales to the respective sales revenues by product ($217 million for gas sales, $53 million for oil sales and $45 million for NGL sales);
•Reflects reclassification of approximately $158 million from transportation, gathering and compression to operating expenses;
•Reflects the elimination of $34 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 $10 million from production and ad valorem 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 debt issuance costs.
Pro Forma Condensed Combined Statement of Operations for the twelve months ended December 31, 2019:
•Reflects reclassification of approximately $592 million from natural gas, oil and natural gas liquids sales to the respective sales revenues by product ($361 million for gas sales, $146 million for oil sales and $85 million for NGL sales);
•Reflects reclassification of approximately $209 million from transportation, gathering and compression to operating expenses;
•Reflects the elimination of $59 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 production and ad valorem taxes to taxes, other than income; and
•Reflects reclassification of $6 million of interest on debt to other interest charges related to the amortization of letter of credit costs and debt issuance costs.
(b)Upon closing of the Merger, Southwestern assumed Montage's long-term debt balance which included their 8.875% Senior Notes due 2023 with a principal balance of $510 million (the "Montage Notes") and the Montage credit facility balance of $170 million as of September 30, 2020. These adjustments reflect the use of available cash and cash equivalents and incremental borrowings under the Southwestern credit facility, to fund a redemption of Montage Notes and the Montage credit facility shortly after the consummation of the Merger. The redemption of the Montage Notes includes a $12 million
premium related to the call price of 102.219% for a total required payment of $522 million, plus accrued interest of $10 million.
•The following adjustments were made to reflect the sources of funds utilized to retire the $510 million Montage Notes, the Montage credit facility and related accrued interest:
| (in millions) | |||||
| Cash needed to retire the Montage Notes, Montage credit facility and related accrued interest: | |||||
| Principal on notes | $ | 510 | |||
| Call premium on notes | 12 | ||||
| Principal on credit facility | 170 | ||||
| Accrued interest on notes | 10 | ||||
| 702 | |||||
| Sources of funds used to retire the Montage Notes: | |||||
| Cash on hand | 99 | ||||
| Borrowings on Southwestern’s credit facility | 603 | ||||
| $ | 702 | ||||
•The following reconciles the net change in long-term debt as a result of the retirement of the Montage Notes and the Montage credit facility:
| (in millions) | |||||
| Decrease in long-term debt to reflect the retirement of the Montage debt balances: | |||||
| Montage Notes at fair value after acquisition adjustment | $ | (522) | |||
| Montage credit facility | (170) | ||||
| Increase to long-term debt as a result of borrowings on Southwestern credit facility used to retire the Montage Notes: | |||||
| Borrowings on Southwestern’s credit facility used to retire the Montage Notes, Montage credit facility and related accrued interest | 603 | ||||
| Net change in long-term debt balance | $ | (89) | |||
(c)During August 2020, in contemplation of the 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 estimated offering expenses (the “Southwestern Debt Offering”). The proceeds from the Southwestern Debt Offering were temporarily used to pay down the balance on Southwestern’s credit facility as of September 30, 2020. These adjustments reflect the use of the net proceeds from the Southwestern 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 Merger.
Pro Forma Condensed Combined Statement of Operations as of September 30, 2020:
•Reflects an approximately $21 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 new 8.375% Senior Notes due 2028 related to the Southwestern Debt Offering and borrowings under Southwestern’s credit facility used to pay off the Montage Notes, Montage credit facility and related accrued interest.
Pro Forma Condensed Combined Statement of Operations as of December 31, 2019:
•Reflects an approximately $20 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 new 8.375% Senior Notes due 2028 related to the Southwestern Debt
Offering and borrowings under Southwestern’s credit facility used to pay off the Montage Notes, Montage credit facility and related accrued interest.
(d)The allocation of the estimated fair value of consideration transferred (based on the closing price of Southwestern common stock of $3.05 per share at November 13, 2020) to the estimated fair value of the assets acquired and liabilities assumed resulted in the following purchase price allocation adjustments:
•$623 million decrease to Montage’s net book basis of oil and gas properties to reflect them at fair value;
•$16 million increase to other property, plant and equipment to reflect them at fair value; and
•$12 million increase in long-term debt to reflect the Montage Notes at fair value.
(e)Reflects the write-off of approximately $3 million in unamortized debt issuance costs related to Montage’s revolving credit facility.
(f)Reflects the increase in long-term debt as a result of the write-off of approximately $7 million in unamortized debt discount and debt issuance costs related to the Montage Notes.
(g)Reflects the elimination of Montage’s historical equity balances in accordance with the acquisition method of accounting as follows:
| (in millions) | |||||
| Common stock | $ | (1) | |||
| Additional paid-in capital | (2,355) | ||||
| Accumulated deficit | 1,504 | ||||
| Common stock in treasury | 10 | ||||
| Total Montage historical equity | $ | (842) | |||
(h)Reflects the increase in shares of Southwestern common stock resulting from the issuance of shares of Southwestern common stock to Montage shareholders and management team to effect the transaction as follows:
| (in millions, except share, per share amounts) | |||||
| Shares of Southwestern common stock issued in respect of outstanding Montage common stock | 67,311,166 | ||||
| Shares of Southwestern common stock issued in respect of Montage stock-based awards | 2,429,682 | ||||
| 69,740,848 | |||||
NYSE closing price per share of Southwestern common shares on November 13, 2020 | $ | 3.05 | |||
| Fair value of Southwestern common shares issued | $ | 213 | |||
| Increase in Southwestern common stock ($0.01 par value per share) as of September 30, 2020 | 1 | ||||
| Increase in Southwestern additional paid-in capital as of September 30, 2020 | $ | 212 | |||
(i)Reflects the pro forma Depletion, Depreciation and Amortization expense calculated in accordance with the full cost method of accounting for oil and gas properties, which was based on the initial purchase price allocation.
(j)Reflects the increase in capitalized interest related to the initial fair value associated with the unevaluated oil and gas properties acquired from Montage.
(k)Reflects the income tax effects on Montage’s historical income before tax and the pro forma adjustments presented at a blended federal and state statutory rate of approximately 23.2 percent for the year ended December 31, 2019.
(l)During August 2020, in contemplation of the Merger, Southwestern completed an equity offering of 63.25 million shares resulting in net proceeds of $152 million, which were already reflected in our historical consolidated condensed balance sheet
as of September 30, 2020. These adjustments reflect the impact of these additional shares on the weighted average basic and diluted shares outstanding used to calculate the respective earnings per share amounts.
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, 2019, along with a summary of changes in the quantities of net remaining proved reserves during the year ended December 31, 2019. The pro forma reserve information set forth below gives effect to the Merger as if the Merger had been completed on January 1, 2019.
Natural Gas (Bcf) | |||||||||||||||||
| Southwestern Historical | Montage Historical | Southwestern Pro Forma Combined Total | |||||||||||||||
| December 31, 2018 | 8,044 | 1,531 | 9,575 | ||||||||||||||
| Revisions of previous estimates | 205 | (77) | 128 | ||||||||||||||
| Extensions, discoveries and other additions | 992 | 419 | 1,411 | ||||||||||||||
| Production | (609) | (154) | (763) | ||||||||||||||
| Acquisition of reserves in place | — | 419 | 419 | ||||||||||||||
| Disposition of reserves in place | (2) | — | (2) | ||||||||||||||
| December 31, 2019 | 8,630 | 2,138 | 10,768 | ||||||||||||||
| Proved developed reserves as of: | |||||||||||||||||
| December 31, 2018 | 4,395 | 501 | 4,896 | ||||||||||||||
| December 31, 2019 | 4,906 | 1,183 | 6,089 | ||||||||||||||
| Proved undeveloped reserves as of: | |||||||||||||||||
| December 31, 2018 | 3,649 | 1,030 | 4,679 | ||||||||||||||
| December 31, 2019 | 3,724 | 955 | 4,679 | ||||||||||||||
Oil (MBbls) | |||||||||||||||||
| Southwestern Historical | Montage Historical | Southwestern Pro Forma Combined Total | |||||||||||||||
| December 31, 2018 | 69,007 | 20,852 | 89,859 | ||||||||||||||
| Revisions of previous estimates | 1,666 | (1,570) | 96 | ||||||||||||||
| Extensions, discoveries and other additions | 6,948 | 11,078 | 18,026 | ||||||||||||||
| Production | (4,696) | (2,951) | (7,647) | ||||||||||||||
| Acquisition of reserves in place | — | 2,915 | 2,915 | ||||||||||||||
| Disposition of reserves in place | — | — | — | ||||||||||||||
| December 31, 2019 | 72,925 | 30,324 | 103,249 | ||||||||||||||
| Proved developed reserves as of: | |||||||||||||||||
| December 31, 2018 | 18,037 | 8,059 | 26,096 | ||||||||||||||
| December 31, 2019 | 26,124 | 12,512 | 38,636 | ||||||||||||||
| Proved undeveloped reserves as of: | |||||||||||||||||
| December 31, 2018 | 50,970 | 12,793 | 63,763 | ||||||||||||||
| December 31, 2019 | 46,801 | 17,812 | 64,613 | ||||||||||||||
NGLs (MBbls) | |||||||||||||||||
| Southwestern Historical | Montage Historical | Southwestern Pro Forma Combined Total | |||||||||||||||
| December 31, 2018 | 577,063 | 34,731 | 611,794 | ||||||||||||||
| Revisions of previous estimates | 28,377 | 4,454 | 32,831 | ||||||||||||||
| Extensions, discoveries and other additions | 26,941 | 19,016 | 45,957 | ||||||||||||||
| Production | (23,620) | (4,686) | (28,306) | ||||||||||||||
| Acquisition of reserves in place | — | 14,844 | 14,844 | ||||||||||||||
| Disposition of reserves in place | — | — | — | ||||||||||||||
| December 31, 2019 | 608,761 | 68,359 | 677,120 | ||||||||||||||
| Proved developed reserves as of: | |||||||||||||||||
| December 31, 2018 | 175,480 | 20,214 | 195,694 | ||||||||||||||
| December 31, 2019 | 226,271 | 39,316 | 265,587 | ||||||||||||||
| Proved undeveloped reserves as of: | |||||||||||||||||
| December 31, 2018 | 401,583 | 14,517 | 416,100 | ||||||||||||||
| December 31, 2019 | 382,490 | 29,043 | 411,533 | ||||||||||||||
Total (Bcfe) | |||||||||||||||||
| Southwestern Historical | Montage Historical | Southwestern Pro Forma Combined Total | |||||||||||||||
| December 31, 2018 | 11,921 | 1,865 | 13,786 | ||||||||||||||
| Revisions of previous estimates | 385 | (60) | 325 | ||||||||||||||
| Extensions, discoveries and other additions | 1,195 | 599 | 1,794 | ||||||||||||||
| Production | (778) | (200) | (978) | ||||||||||||||
| Acquisition of reserves in place | — | 526 | 526 | ||||||||||||||
| Disposition of reserves in place | (2) | — | (2) | ||||||||||||||
| December 31, 2019 | 12,721 | 2,730 | 15,451 | ||||||||||||||
| Proved developed reserves as of: | |||||||||||||||||
| December 31, 2018 | 5,557 | 671 | 6,228 | ||||||||||||||
| December 31, 2019 | 6,421 | 1,494 | 7,915 | ||||||||||||||
| Proved undeveloped reserves as of: | |||||||||||||||||
| December 31, 2018 | 6,364 | 1,194 | 7,558 | ||||||||||||||
| December 31, 2019 | 6,300 | 1,236 | 7,536 | ||||||||||||||
The pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves as of December 31, 2019 is as follows:
| (in millions) | Southwestern Historical | Montage Historical | Southwestern Pro Forma Combined Total | ||||||||||||||
| Future cash inflows | $ | 27,003 | $ | 8,212 | $ | 35,215 | |||||||||||
| Future production costs | (14,981) | (3,867) | (18,848) | ||||||||||||||
Future development costs (1) | (3,246) | (982) | (4,228) | ||||||||||||||
| Future income tax expense | (476) | (633) | (1,109) | ||||||||||||||
| Future net cash flows | 8,300 | 2,730 | 11,030 | ||||||||||||||
| 10% annual discount for estimated timing of cash flows | (4,600) | (1,534) | (6,134) | ||||||||||||||
| Standardized measure of discounted future net cash flows | $ | 3,700 | $ | 1,196 | $ | 4,896 | |||||||||||
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, 2019 are as follows:
| (in millions) | Southwestern Historical | Montage Historical | Southwestern Pro Forma Combined Total | ||||||||||||||
| Standardized measure, beginning of year | $ | 5,999 | $ | 1,329 | $ | 7,328 | |||||||||||
| Sales and transfers of natural gas and oil produced, net of production costs | (923) | (327) | (1,250) | ||||||||||||||
| Net changes in prices and production costs | (3,510) | (531) | (4,041) | ||||||||||||||
| Extensions, discoveries, and other additions, net of future production and development costs | 234 | 251 | 485 | ||||||||||||||
| Acquisition of reserves in place | — | 387 | 387 | ||||||||||||||
| Sales of reserves in place | (2) | — | (2) | ||||||||||||||
| Revisions of previous quantity estimates | 152 | 7 | 159 | ||||||||||||||
| Net change in income taxes | 491 | (237) | 254 | ||||||||||||||
| Changes in estimated future development costs | 621 | 29 | 650 | ||||||||||||||
| Previously estimated development costs incurred during the year | 704 | 246 | 950 | ||||||||||||||
| Changes in production rates (timing) and other | (718) | (91) | (809) | ||||||||||||||
| Accretion of discount | 652 | 133 | 785 | ||||||||||||||
| Standardized measure, end of year | $ | 3,700 | $ | 1,196 | $ | 4,896 | |||||||||||
