Business Context and Reporting Period
Company: California Resources Corporation (CRC)
Filing Type: Form 8-K (Current Report)
Date: February 7, 2018
Event: Entry into a Material Definitive Agreement and Unregistered Sales of Equity Securities.
CRC entered into a joint venture (JV) with an Ares Management portfolio company, ECR Corporate Holdings L.P., to monetize certain midstream assets. The JV, named Elk Hills Power, LLC, owns a cryogenic gas plant and a 550 MW natural gas combined cycle power plant in Tupman, California.
Key Financial Metrics and Transaction Details
- JV Investment: Ares Portfolio Company invested $750 million in the JV.
- Cash Distribution to CRC: The JV distributed $739 million in cash to CRC immediately upon formation.
- Equity Private Placement: Ares funds and co-investors purchased $50 million of CRC common stock.
- Share Price: $21.33 per share (30-day volume-weighted average).
- Debt Repayment: Approximately $297 million of the proceeds was used to repay revolving loans under CRC's 2014 Credit Agreement.
- Preferred Return: Ares is entitled to a 13.5% annual preferred return on its investment (9.5% cash, 4.0% deferrable for the first three years).
- Cash Flow Split: After preferred distributions, remaining cash is split 95.25% to CRC and 4.75% to Ares.
Material Changes and Structure
The transaction represents a significant monetization of CRC's midstream assets without a full divestiture. Key structural changes include:
- Consolidation: CRC will consolidate the JV in its financial statements, with distributions to Ares reported as income attributable to noncontrolling interest.
- Commercial Agreement: CRC's subsidiary (CRC Sub) will purchase electricity, steam, and gas processing services exclusively from the JV in exchange for monthly capacity payments.
- Redemption Rights: CRC Sub may redeem Ares' preferred and certain common interests within the first five or seven and a half years, subject to make-whole premiums.
- Monetization Trigger: If redemption does not occur after seven and a half years, Ares can force a monetization transaction.
Outlook, Risks, and Management Commentary
Use of Proceeds: Beyond the $297 million debt repayment, remaining proceeds will be used for general corporate purposes, including capital expenditures, acquisitions, and further debt repayment.
Risks and Contingencies:
- Contractual Obligations: CRC is bound by long-term capacity payments to the JV to fund distributions to Ares.
- Redemption Costs: Early redemption of Ares' interests may incur significant make-whole premiums.
- Control: The JV board is split (3 CRC, 3 Ares, 1 Independent), with certain actions requiring Ares approval.
- Legal Disclaimer: Representations and warranties in the agreements are qualified and may not reflect the actual state of facts; stockholders are advised not to rely on them as characterizations of CRC's condition.
Investor Verification Checklist
- Verify the exact terms of the "make-whole premiums" for early redemption of Ares' interests.
- Confirm the impact of the new noncontrolling interest on CRC's reported net income and earnings per share.
- Review the specific geographical and operational limitations in the Commercial Agreement regarding exclusive service purchases.
- Assess the remaining liquidity position of CRC after the $297 million debt repayment and the allocation of remaining proceeds.
- Examine the Registration Rights Agreement to understand the timeline for potential dilution from the new investors' demand rights (available after 180 days).