| CHAPTER 11 PROCEEDINGS | CHAPTER 11 PROCEEDINGS The commencement of the Chapter 11 Cases, as described in Note 1 Nature of Business, Summary of Significant Accounting Policies and Other , constituted an event of default that accelerated our obligations under the following agreements: (i) Credit Agreement, dated as of September 24, 2014, among JPMorgan Chase Bank, N.A., as administrative agent, and the lenders that are party thereto (2014 Revolving Credit Facility), (ii) Credit Agreement, dated as of August 12, 2016, among The Bank of New York Mellon Trust Company, N.A., as collateral and administrative agent, and the lenders that are party thereto (2016 Credit Agreement), (iii) Credit Agreement, dated as of November 17, 2017, among The Bank of America Mellon Trust Company, N.A., as administrative agent, and the lenders that are party thereto (2017 Credit Agreement), and (iv) the indentures governing our 8% Senior Secured Second Lien Notes due 2022 (Second Lien Notes), 5.5% Senior Notes due 2021 (2021 Notes) and 6% Senior Notes due 2024 (2024 Notes). This resulted in the automatic and immediate acceleration of all of our outstanding pre-petition long-term debt. Any efforts to enforce payment obligations related to the acceleration of our long-term debt were automatically stayed by the commencement of our Chapter 11 Cases, and the creditors’ rights of enforcement were subject to the applicable provisions of the Bankruptcy Code. Upon the Effective Date, the balances of the 2016 Credit Agreement, 2017 Credit Agreement, Second Lien Notes, 2021 Notes and 2024 Notes were cancelled pursuant to the terms of the Plan, resulting in a gain of approximately $4 billion included in "Reorganization items, net" on our consolidated statement of operations for the period ended October 31, 2020. Our 2014 Revolving Credit Facility was repaid in full with proceeds from our debtor-in-possession facilities described below and terminated. Debtor-in-Possession Credit Agreements On July 23, 2020, we entered into a Senior Secured Superpriority DIP Credit Agreement with JP Morgan, as administrative agent, and certain other lenders (Senior DIP Credit Agreement), which provided for the senior DIP facility in an aggregate principal amount of up to $483 million (Senior DIP Facility). The Senior DIP Facility included a $250 million revolving facility which was primarily used by us to (i) fund working capital needs, capital expenditures and additional letters of credit during the pendency of the Chapter 11 Cases and (ii) pay certain costs, fees and expenses related to the Chapter 11 Cases and the Senior DIP Facility. Following a hearing, the Bankruptcy Court entered a final order on August 14, 2020, which approved the Senior DIP Facility on a final basis. The Senior DIP Facility also included (i) a $150 million letter of credit facility which was used to redeem letters of credit outstanding under the 2014 Revolving Credit Facility as issued under the Senior DIP Facility, and (ii) $83 million of term loan borrowings which were used to repay a portion of the 2014 Revolving Credit Facility. The Senior DIP Facility allowed for the issuance of an additional $35 million of letters of credit. On July 23, 2020, we entered into a Junior Secured Superpriority DIP Credit Agreement with Alter Domus, as administrative agent, and certain lenders (Junior DIP Credit Agreement), which provided for a junior DIP facility in an aggregate principal amount of $650 million (Junior DIP Facility and together with the Senior DIP Facility, the DIP Facilities). The proceeds of the Junior DIP Facility were used to (i) refinance in full all remaining obligations under the 2014 Revolving Credit Facility and (ii) pay certain costs, fees and expenses related to the Chapter 11 Cases and the Junior DIP Facility. The Senior DIP Credit Agreement and Junior DIP Credit Agreement both contained representations, warranties, covenants and events of default that are customary for DIP facilities of their type, including certain milestones applicable to the Chapter 11 Cases, compliance with an agreed budget, hedging on not less than 25% of our share of expected crude oil production for a specified period, and other customary limitations on additional indebtedness, liens, asset dispositions, investments, restricted payments and other negative covenants, in each case subject to exceptions. Borrowings under the Senior DIP Facility bore interest at the London interbank offered rate (LIBOR) plus 4.5% for LIBOR loans and the alternative base rate (ABR) plus 3.5% for alternative base rate loans. We also agreed to pay an upfront fee equal to 1.0% on the commitment amount of the Senior DIP Facility and quarterly commitment fees of 0.5% on the undrawn portion of the Senior DIP Facility. Borrowings under the Junior DIP Facility bore interest at a rate of LIBOR plus 9.0% for LIBOR loans and ABR plus 8.0% for alternate base rate loans. We also agreed to pay an upfront fee equal to 1.0% of the commitment amount funded on the closing date and a fronting fee to a fronting lender. Certain of our subsidiaries, including each of the debtors in the Chapter 11 Cases, guaranteed all obligations under the Senior DIP Credit Agreement and Junior DIP Credit Agreement. We also granted liens on substantially all of our assets, whether now owned or hereafter acquired to secure the obligations under the Senior DIP Credit Agreement and Junior DIP Credit Agreement. The Senior DIP Facility was repaid in full and terminated on the Effective Date using proceeds borrowed under our new Revolving Credit Facility discussed in Note 4 Debt . The Junior DIP Facility was also repaid in full and terminated on the Effective Date using (i) $200 million from the Second Lien Term Loan discussed in Note 4 Debt and (ii) $450 million from the Subscription Rights Offering discussed below. Ares JV Settlement Agreement and Noncontrolling Interest In February 2018, our wholly-owned subsidiary California Resources Elk Hills, LLC (CREH) entered into a midstream JV with ECR, a portfolio company of Ares, with respect to the Elk Hills power plant (a 550-megawatt natural gas fired power plant) and a 200 MMcf/day cryogenic gas processing plant. These assets were held by the joint venture entity, Elk Hills Power, LLC (Ares JV or Elk Hills Power), and each of CREH and ECR held an equity interest in this entity. Our consolidated statements of operations for the Predecessor reflect the operations of the Ares JV, with ECR's share of net income (loss) reported in net income attributable to noncontrolling interests. Distributions to ECR reduced the carrying amount of noncontrolling interests on our consolidated balance sheets and are reported as a financing cash outflow for the Predecessor on our consolidated statements of cashflows. ECR's redeemable noncontrolling interests were reported in mezzanine equity due to an embedded optional redemption feature. Prior to our Effective Date, we held 50% of the Class A common interest and 95.25% of the Class C common interest in the Ares JV. ECR held 50% of the Class A common interest, 100% of the Class B preferred interest and 4.75% of the Class C common interest. The Ares JV was required to distribute each month its excess cash flow over its working capital requirements first to the Class B holders and then to the Class C common interests, on a pro-rata basis. We entered into a Settlement Agreement with ECR and Ares which, among other things, granted us the right (Conversion Right) to acquire all (but not less than all) of the equity interests of Elk Hills Power owned by ECR in exchange for the EHP Notes, 17.3 million shares of common stock and approximately $2 million in cash. The Conversion Right was exercised on the Effective Date. See Note 4 Debt for more information on the EHP Notes. Although certain provisions in the Settlement Agreement were not effective until certain conditions were met, such as the Bankruptcy Court entering a final order, we determined that the amended terms were substantively different such that the existing Class A common, Class B preferred and Class C common member interests held by ECR were treated as redeemed in exchange for new member interests issued at fair value in the third quarter of 2020. The estimated fair value of the new member interests was lower than the carrying value of the existing member interests by $138 million. In accordance with GAAP, the modification of noncontrolling interest was recorded to additional paid-in capital and was included in our earnings per share calculations. See Note 11 Earnings per Share for adjustments to net income (loss) attributable to common stock of the Predecessor which includes a modification of noncontrolling interest. We exercised the Conversion Right on the Effective Date and issued the EHP Notes in the aggregate principal amount of $300 million, new common stock comprising approximately 20.8% (subject to dilution) of our outstanding common stock at that time and approximately $2 million in cash (Conversion). Upon the Conversion, Elk Hills Power became our indirect wholly-owned subsidiary, and Ares and its affiliates ceased to have any direct or indirect interest in Elk Hills Power. In connection with the Conversion, Elk Hills Power’s limited liability company agreement was amended and restated. The following table presents the changes in noncontrolling interests for our consolidated joint ventures during the Predecessor periods ended December 31, 2019 and October 31, 2020, including both our BSP JV and Ares JV. Equity Attributable to Noncontrolling Interests Mezzanine Equity - Redeemable Noncontrolling Interest Ares JV BSP JV Total Ares JV Total (in millions) Balance, December 31, 2018 $ 15 $ 99 $ 114 $ 756 $ 756 Net (loss) income attributable to noncontrolling interests (7) 17 10 117 117 Contributions from noncontrolling interest holders, net — 49 49 — — Distributions to noncontrolling interest holders (8) (72) (80) (71) (71) Balance, December 31, 2019 $ — $ 93 $ 93 $ 802 $ 802 Net income (loss) attributable to noncontrolling interests 3 10 13 94 94 Distributions to noncontrolling interest holders (3) (34) (37) (67) (67) Modification of noncontrolling interest — — — (138) (138) Acquisition of noncontrolling interest — — — (691) (691) Fair value adjustment of noncontrolling interest in fresh start accounting — 7 7 — — Balance, October 31, 2020 $ — $ 76 $ 76 $ — $ — In connection with the Conversion, on the Effective Date, we entered into a Sponsor Support Agreement dated the Effective Date (Support Agreement) pursuant to which, among other things, the parties agreed that Elk Hills Power will be our primary provider of electricity to, and will be the primary processor of our natural gas produced from, the Elk Hills field, which is consistent with our current practice. On the Effective Date, in connection with the Conversion, we terminated: (a) the Commercial Agreement, dated as of February 7, 2018, by and between Elk Hills Power and CREH and (b) the Master Services Agreement, dated as of February 7, 2018, by and between Elk Hills Power and CREH. Rights Offering and Backstop Pursuant to the Plan, we issued subscription rights to holders of our 2017 Credit Agreement, 2016 Credit Agreement, Second Lien Notes, 2021 Notes and 2024 Notes (Rights Offering). These subscription rights entitled holders to purchase up to $450 million of newly issued shares of common stock at $13 per share upon our emergence from bankruptcy. Certain holders of our pre-emergence indebtedness agreed to backstop the Rights Offering and purchase additional shares in the event the Rights Offering was not fully subscribed in exchange for a premium. The Rights Offering closed on the Effective Date and we issued 38.1 million shares of common stock pursuant to the Rights Offering at that time, including 3.5 million common shares issued to the backstop parties as a premium. Emergence The following transactions occurred on October 27, 2020, the effective date of the Plan, where we issued an aggregate of 83.3 million shares of new common stock, reserved 4.4 million shares for future issuance upon exercise of the warrants described in Note 10 Equity and reserved 9.3 million shares for future issuance under our management incentive plan described in Note 9 Stock-Based Compensation : • We acquired all of the member interests in the Ares JV held by ECR in exchange for the EHP Notes, 17.3 million shares of new common stock and approximately $2 million in cash; • Holders of secured claims under the 2017 Credit Agreement received 22.7 million shares of new common stock in exchange for those claims, and holders of deficiency claims under the 2017 Credit Agreement and all outstanding obligations under the 2016 Credit Agreement, Second Lien Notes, 2021 Notes and 2024 Notes received 4.4 million shares of new common stock in exchange for those claims; • In connection with the Subscription Rights and Backstop Commitment Agreement, 34.6 million shares of new common stock were issued in exchange for $446 million (net of a $4 million allocation adjustment credit paid to certain backstop parties), the gross proceeds of which were used to pay down our Junior DIP Facility; • We issued 3.5 million shares as consideration for the backstop commitment premium; and • We issued an aggregate of 821,000 shares to the lenders under our Junior DIP Facility as an exit fee. All existing equity interests of the Predecessor, including contracts on equity, were cancelled and their holders received no recovery. As a condition to our emergence, we repaid the outstanding balance of our debtor-in-possession financing with proceeds from our equity offering, Second Lien Term Loan and our new Revolving Credit Facility. For more information on our post-emergence indebtedness, see Note 4 Debt . On October 27, 2020, all but one of our existing directors resigned and seven new non-employee directors were appointed to our Board of Directors (Board) in connection with our emergence from bankruptcy. In addition, our former Chief Executive Officer and director Todd A. Stevens departed on December 31, 2020. Our new Board currently consists of nine directors. Fresh Start Accounting We adopted fresh start accounting upon emergence from bankruptcy because (1) the holders of existing voting shares prior to emergence received less than 50% of our new voting shares following our emergence from bankruptcy and (2) the reorganization value of our assets immediately prior to the confirmation of the Plan was less than the post-petition liabilities and allowed claims, which were included in liabilities subject to compromise as of our emergence date. For financial reporting purposes, fresh start accounting was applied as of October 31, 2020, an accounting convenience date, to coincide with the timing our normal month-end close process. We evaluated and concluded that events between October 28, 2020 and October 31, 2020 were not significant and the use of an accounting convenience date was appropriate. Under fresh start accounting, the reorganization value of the emerging entity was assigned to individual assets and liabilities based on their estimated relative fair values. Reorganization value represents the fair value of our total assets prior to the consideration of liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after a restructuring. The reorganization value was derived from our enterprise value, which was the estimated fair value of our long-term debt, asset retirement obligations and shareholder’s equity at emergence. In support of the Plan, our enterprise value was estimated and approved by the Bankruptcy Court to be in the range of $2.2 billion to $2.8 billion. This valuation analysis was prepared using reserve information, development schedules, other financial information and financial projections, and applying standard valuation techniques, including net asset value analysis, precedent transactions analyses and comparable public company analyses. We engaged third-party valuation advisors to assist in determining the value of our Elk Hills power plant, cryogenic gas processing plant, certain real estate and warrants. Using these valuations along with our own internal estimates and assumptions for the value of our proved oil and natural gas reserves, we estimated our enterprise value to be $2.5 billion for financial reporting purposes. The following is a summary of our valuation approaches and assumptions for significant non-current assets and liabilities, which excludes our working capital where our carrying value approximated fair value. Property, Plant and Equipment Our principal assets are our oil and natural gas properties. In valuing our proved oil and natural gas properties we used an income approach. Our estimated future revenue, operating costs and development plans were developed internally by our reserve engineers. We applied a discount rate using a market-participant weighted average cost of capital which utilized a blended expected cost of debt and expected returns on equity for similar industry participants. We used a risk-adjusted discount rate for our proved undeveloped locations only. We estimated futures prices to calculate future revenue, as reported on the ICE Brent for oil and NGLs and NYMEX Henry Hub for natural gas as of October 31, 2020, adjusted for pricing differentials and without giving effect to derivative transactions. Operating costs and realized prices for periods after the forward price curve becomes illiquid were adjusted for inflation. No value was ascribed to unproved locations. The fair value of our Elk Hills power plant, cryogenic gas processing facility (CGP-1) and commercial building in Bakersfield were estimated using a cost approach. The cost approach estimates fair value by considering the amount required to construct or purchase a new asset of equal utility at current prices, with adjustments for asset function, age, physical deterioration and obsolescence. We also considered the history of major capital expenditures. We internally valued our surface acreage based on recent market data. Right of Use Assets and Lease Liabilities The fair value of ROU assets and associated lease liabilities were measured at the present value of the remaining fixed minimum lease payments as if the leases were new leases at emergence. We used our incremental borrowing rate as the discount rate in determining the present value of the remaining lease payments. Based upon the corresponding lease term, our incremental borrowing rates ranged from 4% to 5%. Pension and Postretirement Benefit Plans The valuations of our pension liabilities and postretirement benefit obligations were performed by a third-party actuary. Valuation assumptions, including discount rates, expected future returns on plan assets, rates of future salary increases, rates of future increases in medical costs, turnover and mortality rates were developed in consultation with the third-party actuary based on current market conditions, current mortality rates and our expectation for future salary increases. Long-term Debt Obligations The fair value of our post-emergence long-term debt approximated carrying value based on the terms of the debt instruments and stated interest rates. Asset Retirement Obligations The fair value of our asset retirement obligations was estimated using a discounted cash flow approach for existing idle and currently producing wells and facilities. We estimated an average plugging and abandonment cost by field based on historical averages. We also factored in our testing plans related to idle well management and estimated failure rates to determine the timing of the cash flows. We utilized a credit adjusted risk free rate as our discount rate which was based on our credit rating and expected cost of borrowing at our emergence date. Our asset retirement obligations were reduced to our working interest share and factored in cost recovery related to our PSCs. Warrants The fair value of the warrants was estimated using a Black-Scholes model, a commonly used option pricing model. The Black-Scholes was used to estimate the fair value of our warrants with a stock price equal to book equity value per share, strike price, time to expiration, risk-free rate, equity volatility, which was based on a peer group of energy companies and dividend yield, which we estimated to be zero. Reorganization Value The following table summarizes our enterprise value upon emergence (in millions): Fair value of total equity upon emergence $ 1,345 Fair value of long-term debt 725 Fair value of asset retirement obligations 593 Less: Unrestricted cash (a) (163) Total Enterprise Value $ 2,500 (a) Includes $118 million of cash used to temporarily collateralize letters of credit at our emergence date. The following table reconciles our enterprise value to our reorganization value, or total asset value, upon emergence (in millions): Enterprise value $ 2,500 Add: Unrestricted cash (a) 163 Add: Current liabilities (b) 396 Add: Other long-term liabilities (b) 231 Less: Other (2) Reorganization value $ 3,288 (a) Includes $118 million of cash used to temporarily collateralize letters of credit. (b) Excludes asset retirement obligations of $50 million in current liabilities and $543 million in other long-term liabilities. Consolidated Balance Sheet The following consolidated balance sheet, with accompanying explanatory notes, illustrates the effects of the transactions contemplated by the Plan (Reorganization Adjustments) and fair value adjustments resulting from the adoption of fresh start accounting (Fresh Start Adjustments) as of October 31, 2020 (in millions): Predecessor Reorganization Adjustments Fresh Start Adjustments Successor CURRENT ASSETS Cash $ 106 $ 97 (1) $ — $ 203 Trade receivables 149 — — 149 Inventories 61 — — 61 Other current assets, net 104 (2) (2) — 102 Total current assets 420 95 — 515 PROPERTY, PLANT AND EQUIPMENT 22,918 — (20,236) (12) 2,682 Accumulated depreciation, depletion and amortization (18,588) — 18,588 (12) — Total property, plant and equipment, net 4,330 — (1,648) 2,682 OTHER ASSETS 77 18 (3) (4) (13) 91 TOTAL ASSETS $ 4,827 $ 113 $ (1,652) $ 3,288 Predecessor Reorganization Adjustments Fresh Start Adjustments Successor CURRENT LIABILITIES Debtor-in-possession financing 733 (733) (4) — — Accounts payable 215 — — 215 Accrued liabilities 233 (16) (5) 14 (14) 231 Total current liabilities 1,181 (749) 14 446 LONG-TERM DEBT, NET — 723 (6) — 723 OTHER LONG-TERM LIABILITIES 725 — 49 (15) 774 LIABILITIES SUBJECT TO COMPROMISE 4,516 (4,516) (7) — — MEZZANINE EQUITY Redeemable noncontrolling interests 691 (691) (8) — — EQUITY Predecessor preferred stock — — — — Predecessor common stock — — — — Predecessor additional paid-in capital 5,149 (5,149) (9) — — Successor preferred stock — — — Successor common stock — 1 (10) — 1 Successor additional paid-in capital — 1,253 (10) — 1,253 Successor warrants — 15 (10) — 15 Accumulated deficit (7,481) 9,226 (11) (1,745) (16) — Accumulated other comprehensive loss (23) — 23 (17) — Total equity attributable to common stock (2,355) 5,346 (1,722) 1,269 Equity attributable to noncontrolling interests 69 — 7 (18) 76 Total equity (2,286) 5,346 (1,715) 1,345 TOTAL LIABILITIES AND EQUITY $ 4,827 $ 113 $ (1,652) $ 3,288 Reorganization Adjustments (1) Net change in cash upon our emergence included the following transactions (in millions): Proceeds from Revolving Credit Facility $ 225 Proceeds from Subscription Rights and Backstop Commitment, net 446 Proceeds from Second Lien Term Loan 200 Repayment of debtor-in-possession facilities (733) Payment of legal, professional and other fees (15) Debt issuance costs for the Revolving Credit Facility (18) Debt issuance costs for the Second Lien Term Loan (2) Acquisition of noncontrolling interest as part of the Settlement Agreement (2) Distribution to noncontrolling interest holder (3) Payment of accrued interest and bank fees (1) Net change $ 97 Our cash balance of $203 million at October 31, 2020 included $158 million of restricted cash, of which $118 million was used to temporarily collateralize letters of credit, $22 million was held for distributions to a JV partner and $18 million was reserved for legal and professional fees related to our Chapter 11 Cases. (2) Represents the write-off of unamortized insurance premiums for our directors and officers policy, which was cancelled as a result of changing the composition of our Board of Directors. (3) Represents the capitalization of debt issuance costs for our Revolving Credit Facility. (4) Represents the payoff of $733 million of debtor-in-possession financing including $83 million of borrowings that were outstanding under our Senior DIP Facility and $650 million of borrowings that were outstanding under our Junior DIP Facility. Refer to Note 14 Chapter 11 Proceedings for more information on our debtor-in-possession credit agreements. (5) Reflects the payment of $15 million for legal, professional and other fees related to our bankruptcy proceedings upon emergence and $1 million for accrued interest and bank fees. (6) Our exit financing at emergence included the following: October 31, 2020 ($ in millions) Revolving Credit Facility $ 225 Second Lien Term Loan 200 EHP Notes 300 Long-term debt (principal amount) $ 725 Debt issuance costs (2) Total long-term debt, net $ 723 For additional information on our Successor debt, refer to Note 4 Debt . (7) Our liabilities subject to compromise at emergence included the following (in millions): Long-term debt (principal amount): 2017 Credit Agreement $ 1,300 2016 Credit Agreement 1,000 Second Lien Notes 1,808 2021 Notes 100 2024 Notes 144 Accrued interest 164 Total liabilities subject to compromise $ 4,516 (8) Represents the acquisition of the noncontrolling interest in our Ares JV. In accordance with the Settlement Agreement, we exercised a conversion right upon our emergence from bankruptcy, allowing us to acquire all (but not less than all) of the equity interests in the Ares JV held by ECR in exchange for the EHP Notes, 17.3 million shares of common stock and approximately $2 million in cash. (9) Represents the elimination of Predecessor additional paid-in capital. (10) Represents the fair value of 83.3 million shares of Successor common stock and Warrants issued in accordance with the Plan as follows (in millions): Par value $ 1 Additional paid-in capital 1,253 Warrants 15 Total $ 1,269 (11) Represents the decrease in accumulated deficit resulting from reorganization adjustments and the reclassification from Predecessor additional paid-in capital. Fresh Start Adjustments (12) Represents fair value adjustments to property, plant and equipment (PP&E), including the elimination of Predecessor accumulated depreciation, depletion and amortization. The fair value of our PP&E at emergence consisted of the following: Proved oil and natural gas properties $ 2,409 Facilities and other 273 Total PP&E $ 2,682 (13) Represents an adjustment to our right of use assets as if our lease agreements were new leases on our emergence date. See Note 5 Leases for more information on our leases. (14) Represents a $20 million fair value adjustment to the current portion of asset retirement obligations partially offset by a $5 million decrease in our liability for self-insured medical. Also included are fair value adjustments for our postretirement benefits and a remeasurement of the current portion of our lease liability. (15) Represents a $36 million fair value adjustment related to the long-term portion of asset retirement obligations and $8 million related to environmental and other abandonment obligations. The adjustment also includes $5 million related to remeasuring our long-term lease liability as if our contracts were new leases. (16) Represents the elimination of Predecessor accumulated deficit. (17) Represents the elimination of Predecessor accumulated other comprehensive loss. (18) Represents a fair value adjustment of the noncontrolling interest in the BSP JV based on discounted expected future cash flows. |
