CHAPTER 11 PROCEEDINGS

9 Months Ended

Sep. 30, 2020

Plan of Reorganization [Abstract]

CHAPTER 11 PROCEEDINGS

CHAPTER 11 PROCEEDINGS

Except when the context otherwise requires or where otherwise indicated, all references to ‘‘CRC,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to California Resources Corporation and its subsidiaries.

Our spin–off from Occidental Petroleum Corporation (Occidental) on November 30, 2014 burdened us with significant debt which was used to pay a $6.0 billion cash dividend to Occidental. Together with the activity level and payables that we assumed from Occidental and due to Occidental's retention of the vast majority of our receivables, our debt peaked at approximately $6.8 billion in May 2015. Since then, we have engaged in a series of asset sales, joint ventures, debt exchanges, tenders, debt repurchases and other financing transactions to reduce our overall level of debt and improve our balance sheet prior to filing for bankruptcy. As of September 30, 2020, we had outstanding net long-term debt of approximately $5.1 billion, of which $4.4 billion is presented as liabilities subject to compromise on our condensed consolidated balance sheet.

On July 15, 2020, we filed voluntary petitions for relief under Chapter 11 of Title 11 of the Bankruptcy Code (Chapter 11 Cases) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (Bankruptcy Court). The Chapter 11 Cases were jointly administered under the caption In re California Resources Corporation, et al., Case No. 20-33568 (DRJ). We filed with the Bankruptcy Court, on July 24, 2020, the Debtors’ Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and, on October 8, 2020, the Amended Debtors’ Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as amended, supplemented or modified, the Plan). On October 13, 2020, the Bankruptcy Court confirmed the Plan, which was conditioned on certain items such as obtaining exit financing. The conditions to effectiveness of the Plan were satisfied and we emerged from Chapter 11 on October 27, 2020 (Effective Date).

During the course of the Chapter 11 Cases, the Bankruptcy Court granted the relief requested in certain motions, authorizing payments of pre-petition liabilities with respect to certain employee compensation and benefits, taxes, royalties, certain essential vendor payments and insurance and surety obligations, which allowed our business operations to continue uninterrupted during the pendency of the Chapter 11 Cases. All transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court.

On July 15, 2020, immediately prior to the commencement of the Chapter 11 Cases, we and certain affiliates of Ares Management L.P. (Ares), including ECR Corporate Holdings L.P., a portfolio company of Ares (ECR), entered into a Settlement and Assumption Agreement (Settlement Agreement) related to our midstream joint venture, Elk Hills Power, LLC (Ares JV or Elk Hills Power), which holds our Elk Hills power plant and a cryogenic gas processing plant. On August 25, 2020, the Bankruptcy Court entered an order approving the Settlement Agreement on a final basis. Among other things, the Settlement Agreement included a conversion right, which would be deemed exercised 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 secured notes (EHP Notes), approximately 20.8% of our new common stock (Ares Settlement Stock) and $2.5 million in cash. For more information on the Settlement Agreement, see Note 7 Joint Ventures.

The commencement of the Chapter 11 Cases 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 New York 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 and together with the 5% Senior Notes due 2020 and 2021 Notes, the Senior Notes). Additionally, other events of default, including cross-defaults, are present under these debt agreements. Under the Bankruptcy Code, the creditors under these debt agreements were stayed from taking any action against us, including exercising remedies as a result of any event of default. See Note 6 Debt for additional details about our debt.

Joint Plan of Reorganization Under Chapter 11

Pursuant to the Plan, the following transactions occurred on the Effective Date:

•We issued an aggregate of 83.3 million shares of new common stock and reserved 4.4 million shares for issuance upon exercise of the warrants described below;

•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 $2.5 million in cash (see Note 6 Debt and Note 7 Joint Ventures for additional information);

•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 offering and Backstop Commitment Agreement, 34.6 million shares of new common stock were issued in exchange for $446 million (net of a $4 million fee), the proceeds of which were used to pay down our debtor-in-possession financing;

•Our Subscription Rights offering was backstopped by certain creditors who received 3.5 million shares of new common stock as a backstop commitment premium (refer to Note 16 Equity for additional information on the backstop commitment premium);

•The holders of Unsecured Debt Claims (as defined in the Plan) under the 2016 Credit Agreement, Second Lien Notes, 2021 Notes and 2024 Notes received Tier 1 Warrants and Tier 2 Warrants (each as defined in the Plan and collectively, Warrants) to purchase up to 2% and 3%, respectively, of our outstanding shares (on a fully diluted basis calculated immediately after the Effective Date), with an initial exercise price of $36.00 per share, which expire on October 27, 2024 and have customary anti-dilution protections (refer to Note 16 Equity for additional information on the Warrants);

•All other general unsecured claims will be paid or disputed in the ordinary course of business; and

•All existing equity interests were cancelled and their holders received no distributions.

As a condition to our emergence, we repaid the outstanding balance of our debtor-in-possession financing with proceeds from our Subscription Rights offering, Backstop Commitment Agreement and a new senior secured revolving credit facility led by Citibank, N.A. We also issued approximately 821,000 shares of new common stock for a debtor-in-possession exit fee. For more information on our debtor-in-possession credit agreements and our post-emergence indebtedness, see Note 6 Debt.

One of the conditions of the Plan was to establish a new Board of Directors, which occurred on October 27, 2020.

Changes to our Stock-Based Compensation Programs

As a result of our bankruptcy, the outstanding stock-based awards under our Amended and Restated California Resources Corporation Long-Term Incentive Plan were cancelled on our Effective Date. Any new stock-based awards or compensation plans will be reviewed and approved by our Board of Directors, which includes seven new directors appointed on October 27, 2020.

The cancellation of these stock-based compensation awards resulted in the recognition of all previously unrecognized compensation expense for equity-settled awards and the liability related to our cash-settled awards was eliminated as the participants received no consideration. The net effect of these adjustments was not material to our financial statements.

Changes to the 2020 Compensation Programs in Second Quarter 2020

In the second quarter of 2020, resulting from the unprecedented circumstances affecting the industry and market volatility, we reviewed our incentive programs for the entire workforce to determine whether those programs appropriately aligned compensation opportunities with our 2020 goals and ensured the stability of our workforce. Following this review, effective May 19, 2020, our then Board of Directors approved changes in the variable compensation programs for all participating employees. The previously established target amounts of 2020 variable compensation programs did not change; however, all amounts that vest are being settled in cash. As a condition to receiving any award, participants waived participation in our 2020 annual incentive program and forfeited all stock-based compensation awards previously granted in 2020. At that time, there were no changes to stock-based compensation awards granted prior to February 2020; however, these pre-2020 awards were subsequently cancelled as part of the Plan. Changes to the variable compensation programs had the effect of accelerating the associated payments into 2020 from future periods. However, the total amount of compensation to be paid under the variable compensation programs at target for 2020 remained largely the same as the amounts that would have been paid at target prior to the changes. Our future compensation programs will be determined by our new Board of Directors.

Organizational Changes

During the course of the Chapter 11 Cases, we evaluated the structure of our workforce and, in August 2020, we implemented organizational changes that resulted in a reduction of our headcount from 1,250 to approximately 1,100 employees. We believe the steps taken improved and strengthened our business as we emerge from bankruptcy. We recorded a one-time $10 million restructuring charge in the third quarter of 2020. We will continue to evaluate resource levels depending on commodity prices.