ACQUISITION

6 Months Ended

Jun. 30, 2021

Indigo Natural Resources Merger

On June 1, 2021, Southwestern entered into an Agreement and Plan of Merger with Ikon Acquisition Company, LLC (“Ikon”), Indigo Natural Resources LLC (“Indigo”) and Ibis Unitholder Representative LLC (the “Indigo Merger Agreement”). Pursuant to the terms of the Indigo Merger Agreement, Indigo 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”). The shares of Southwestern common stock had an aggregate dollar value equal to $1.6 billion, based on the volume weighted average sales price as traded on the New York Stock Exchange of such shares calculated for the thirty trading day period ending on May 28, 2021. Following the closing of the Indigo Merger, Southwestern’s existing shareholders and Indigo’s existing equity holders will own approximately 67% and 33%, respectively, of the outstanding shares of the combined company. The transaction is expected to close in the second half of 2021, subject to customary closing conditions, including the approval of Southwestern’s shareholders.

The Company has recorded approximately $2 million in transaction expenses for the three and six months ended June 30, 2021 related to the Indigo Merger.

Montage Resources Merger

On August 12, 2020, Southwestern entered into an Agreement and Plan of Merger (the “Montage Agreement and Plan of Merger”) with Montage whereby Montage would merge with and into Southwestern, with Southwestern continuing as the surviving company (the "Montage Merger"). On November 12, 2020, Montage’s stockholders voted to approve the Montage Merger and it was made effective on November 13, 2020. The Montage Merger added to Southwestern’s oil and gas portfolio in Appalachia.

In exchange for each share of Montage common stock, Montage stockholders 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 the average price of $3.05 per share of Southwestern common stock on the NYSE on November 13, 2020. Following the closing of the Montage Merger, Southwestern's existing shareholders and Montage's existing shareholders owned approximately 90% and 10%, respectively, of the outstanding shares of the combined company.

In anticipation of the Montage Merger, in August 2020 Southwestern issued $350 million of new senior unsecured notes and 63,250,000 shares of common stock for $152 million after deducting underwriting discounts and offering expenses. The Company used the net proceeds from the debt and common stock offerings and borrowings under its revolving credit facility to fund a redemption of $510 million aggregate principal amount of Montage's outstanding 8.875% senior notes due 2023 (the “Montage Notes”) and related accrued interest in connection with the closing of the Montage Merger. See Note 7 and Note 11 for additional information.

The Montage Merger constituted a business combination and was accounted for using the acquisition method of accounting. The following table presents the fair value of consideration transferred to Montage stockholders as a result of the Montage Merger:


(in millions, except share, per share amounts)	As of November 13, 2020
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
Total consideration (fair value of Southwestern common shares issued)	$	213
Increase in Southwestern common stock ($0.01 par value per share)	1
Increase in Southwestern additional paid-in capital	$	212

The assets acquired and liabilities assumed were recorded at their preliminary estimated fair values at the date of the Montage Merger. The following table sets forth the fair value of the assets acquired and liabilities assumed as of the acquisition date. Although the purchase price allocation is substantially complete as of the date of this filing, there may be further adjustments to the Company’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. For the six months ended June 30, 2021 there were no changes to the allocation presented in the 2020 Form 10-K.


(in millions)	As of November 13, 2020
Consideration:
Fair value of Southwestern’s stock issued on November 13, 2020	$	213
Fair Value of Assets Acquired:
Cash and cash equivalents	3
Accounts receivable	73
Other current assets	1
Commodity derivative assets	11
Evaluated oil and gas properties	1,012
Unevaluated oil and gas properties	90
Other property, plant and equipment	28
Other long-term assets	26
Total assets acquired	1,244
Fair Value of Liabilities Assumed:
Accounts payable	145
Other current liabilities	49
Derivative liabilities	70
Revolving credit facility	200
Senior unsecured notes	522
Asset retirement obligations	28
Other noncurrent liabilities	17
Total liabilities assumed	1,031
Net Assets Acquired and Liabilities Assumed	$	213

For the six months ended June 30, 2021, revenues and operating income associated with the operations acquired through the Montage Merger totaled $250 million and $121 million, respectively.

The following table presents selected unaudited pro forma condensed financial information for the three and six months ended June 30, 2020 as if the Montage Merger had occurred on January 1, 2019:


	Pro forma results
(in millions, except per share amounts)	For the three months ended June 30, 2020		For the six months ended June 30, 2020
Revenues	$	501	$	1,226
Loss from continuing operations	$	(925)	$	(2,415)

The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred had the Montage Merger been completed at January 1, 2019, nor is it necessarily indicative of future operating results of the combined entity. The unaudited pro forma information gives effect to the Montage 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 information for 2020 is a result of combining the statements of operations of Southwestern with the pre-Montage Merger results of Montage from January 1, 2020 and included adjustments for revenues and direct expenses. The pro forma results exclude any cost savings anticipated as a result of the Montage Merger and the impact of any Montage Merger-related costs. The pro forma results include adjustments to DD&A (depreciation, depletion and amortization) based on the purchase price allocated to property, plant, and equipment and the estimated useful lives as well as adjustments to interest expense. Interest expense was adjusted to reflect the retirement of the Montage senior 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. Management believes the estimates and assumptions are reasonable, and the relative effects of the Montage Merger are properly reflected.

Montage Merger-Related Expenses

For the three and six months ended June 30, 2021, the Company incurred $1 million and $2 million, respectively, in Montage Merger-related expenses primarily related to one-time severance costs and the accelerated vesting of certain Montage share-based awards, based on the terms of the Montage Agreement and Plan of Merger, for former Montage employees that continued to assist with the transition into 2021.