1. The Basics of Regulatory Compliance Presented by: Leanna Howell Denver, Colorado March 18, 2013

2. www.encana.com 2 Overview What is Regulatory Compliance? Annual Tax Reports Allowable Deductions for Tax Purposes Federal & State Royalties Audits

3. www.encana.com 3 Regulatory Compliance v. Regulatory Reporting Regulatory Compliance reports production valuation Regulatory Reporting reports production volumes - Volumes reported to State and Federal Agencies from the Regulatory Reporting Group; must be the same volumes used for valuation on the Regulatory Compliance side

4. www.encana.com 4 Regulatory Compliance Team Responsible for the reporting and payment of state taxes along with Federal and State Royalties Work with Revenue Groups for booking accuracy based on Federal and State Regulations Responsible for Federal and State Royalty and Tax Audits by working with Marketing, Midstream, and Revenue Responsible for processing and providing annual reports: Print, mail and file 1099-MISC from the Revenue and Land system Report 1042’s – Foreign owner equivalent to a 1099 Report the 945 – Federal Backup Withholding Provide requests made by the Community/Public Relations Group

5. www.encana.com 5 Annual Reports 1099-MISC Tax ID Numbers Void Rental Checks 1042 Foreign Owner Withholding Withhold 30% of Gross Value 945 Federal Backup Withholding Owners with no Tax ID number; withhold 28% of Net Value DR21W - Colorado Properties Only An annual DR21W form is mailed to all owners that have an interest in wells located in Colorado. This form must report the amount of Severance tax paid to the State on their behalf. This form must show both a cash basis and an accrual basis.

6. www.encana.com 6 Inputs for Tax & Federal/State Compliance Marketing Accounting Marketing Accounting Land Administration Land Administration Revenue Accounting Revenue Accounting Revenue allocation details Well detail Pricing Spreadsheets, including deductions Maps/Physical Flow Operational Details Ownership Details Joint Operating Agreements Marketing Agreements TIK Owners Market Pricing Marketing Value & Volume Allocation Downstream Transportation Data Gathering Data Gathering Tax Due on $ & Vol. received Unprocessed Gas = Wellhead Processed Gas = Residue/NGL Allowable Deductions Prepare Reports & Pymt Filing Process Regulatory Reporting Volume Reports Meter Points Contracts Underlying contracts Contract Interpretation Regulatory Compliance Business Development Operations

7. www.encana.com 7 Tax Type by State Colorado – Severance, Conservation, Ad Valorem Wyoming – Severance, Tribal Severance, Conservation, Ad Valorem Michigan - Severance Utah – Severance and Conservation Texas – Severance, Regulatory Fee and Ad Valorem(based on equipment and reserves) Louisiana – Severance, Oilfield Restoration Fee and Ad Valorem(based on property and equipment) Mississippi – Severance and Maintenance Fee and Ad Valorem(based on property and equipment) Kansas – Severance, Conservation Fee, Oil & Gas Resources Fund and Ad Valorem(based on property, equipment and reserves) Oklahoma – Gross Production Tax, Marginal Producing Oil and Gas Wells, Energy Resources Revolving Fund, Petroleum Oil and Gas Tax and Ad Valorem Tax(based on property and equipment only)

8. www.encana.com 8 Allowable Deductions for Tax Purposes The determination of the allowable deductions are made by each state and county through the statutes and regulations. Transportation and Processing deductions are defined differently in each state. Colorado – Transportation & Processing Wyoming – Transportation & Processing Michigan – Transportation & Processing Utah – Transportation & Processing Texas – Marketing Costs (All costs from wellhead to the sales point, including Lease Use gas) Louisiana, Mississippi and Kansas – No deductions are allowed Oklahoma – Marketing Costs

9. www.encana.com 9 Tribal Severance Tax The Tribal Severance tax requires a Dual Accounting method for processed gas, to determine what price will be used for tax purposes – Dual Accounting determines the higher of: All residue gas and liquid products x residue & liquids pricing, respectively OR Wellhead MMBTU x Published Indian Index price –There are no deductions allowed for Tribal Tax purposes Dual Accounting is also used to determine how Indian Royalties are paid

10. www.encana.com 10 Federal and State Royalties

11. www.encana.com 11 Royalties Various types of royalty owners. We focus on Federal and State Federal and State have complex components regarding the payment and reporting of royalties Due to the Federal and State complexities, the Regulatory Compliance Group handles the reporting for these entities

12. www.encana.com 12 Federal Regulations & Leases Federal regulations are found in the “Code of Federal Regulation” 30 CFR At minimum, royalty is owed on “gross proceeds,” less applicable allowances. [1206.152(h),.153(h)] Cost of placing gas into “marketable condition” is not deductible. [1206.152(i),.153(i)] Two allowances: transportation and processing. [1206.153,.156] The Mineral Leasing Act of 1920: Competitive leases shall require royalty “at a rate of not less than 12.5 percent in amount or value of the production removed or sold from the lease.” [30 U.S.C. § 226(b).] Federal leases do not define how royalty is calculated, royalty is based on the marketing sales contract Leases incorporate regulations, including regulations adopted later “when not inconsistent with lease rights granted or specific provisions of this lease”. [BLM Form 3110-11 (July 2006). Settlement agreements, valuation agreements, and express lease terms supersede regulations. [1206.150(b)]

13. www.encana.com 13 Considerations for Deductions The Marketable Condition Rule Lessee must bear all costs to place gas into “marketable condition” Gas is in marketable condition when “sufficiently free from impurities and otherwise in a condition that [it] will be accepted by a purchaser under a sales contract typical for the field or area.” [1206.151] Marketable condition is dependent on a variety of factors and open to interpretation Gathering “Gathering” is not transportation “Gathering” is the movement of gas “to a central accumulation and/or treatment point on the lease, unit, or communitized area” [1206.151]

14. www.encana.com 14 Allowable Deductions Transportation Allowance Where value is determined at point off lease (including a plant), transportation allowance may apply Generally limited to 50% of gross value [1206.156(c)] Arms Length Contract or agreement between independent, “nonaffiliated persons with opposing economic interests” Example: Company ABC contracts with a third party processing plant that is owned by Company 123 Non-Arms Length contract or agreement with affiliated companies: Example: Company ABC has Ownership of the Processing Plant Facilities Processing Allowance Processing means “any process designed to remove elements or compounds from gas.” Royalty generally due on 100% of residue gas. Processing allowance applies to the NGL’s (general limited of 2/3 of NGL gross value less transportation) [1206.158(c)] A Percentage of Proceeds Contract (POP) is for the sale of gas prior to processing, where the value of the gas is based on a percentage of the purchaser’s proceeds resulting from processing

15. www.encana.com 15 Dual Accounting Required on federal leases where (i) lessee or affiliate processes the gas and (ii) after processing, residue gas not sold arm’s- length Dual Accounting determines the higher of: Residue gas and liquid products x residue and liquids pricing, respectively OR Wellhead MMBTU x Index price Where required, royalty paid on higher of processed or unprocessed gas value [1206.155]

16. www.encana.com 16 Volume on Which Royalty is Due For unprocessed gas, use volume measured at BLM royalty settlement point [1206.154(a)] For processed gas, use net output of plant [1206.154(b)] No royalty due on gas used on or for benefit of lease or unit, or unavoidably lost [1202.150(b),.151(b)]

17. www.encana.com 17 Federal & State Filing Inputs Federal & State Lease Numbers (Drillsite Lease) Participating Agreement Numbers & Leases involved with the allocation (Exhibit B) Communitization Agreement Numbers & Leases involved with the allocation (Exhibit B) Royalty Rates for the Leases Sliding Scale Royalty Leases TIK Parties and their Leases Terminated or segregated Leases and Dates

18. www.encana.com 18 Monthly Report - ONRR-2014 The Form ONRR-2014 is the “Report of Sales and Royalty Remittance” and is used to report and document royalties (revenues) and other obligations due on Federal and Indian oil and gas leases, as well as on geothermal leases When filing the ONRR-2014 the details of royalty payments and sales of minerals are documented. The report is filled out by the “payor” (the oil and gas company that operates the lease) and is sent to ONRR To report all details accurately, each product of the monthly production volume must be broken out and reported separately. For example when reporting gas; the Residue Gas, Natural Gas Liquids (NGL’s) and Wellhead volumes and values must be reported and paid on an individual basis

19. www.encana.com 19 Audit

20. www.encana.com 20 Audit Types Production Tax Examination of financial records to ensure production taxes have been collected, remitted or paid as required Federal and State Royalty Examines how oil and gas royalties were computed and paid on for a specific time period and largely focuses on deductions The statue of limitations varies depending on the entity conducting the audit and the scope of the audit For example ONRR has a 7 year statute of limitations. While a State has a 3 year statute of limitations

21. www.encana.com 21 Generally Required Audit Documents Division of interest documents and non-operator agreements Pricing documents, processed gas purchase and sales contracts, transportation contracts, invoices and meter statements Site schematics to show where and how production and sales are measured Processing plant statements, processing operations, including the plant name, location, sales, and transportation of production from the leases Source documents such as internal audit worksheets, purchaser or settlement statements, revenue spread sheets, etc. that support the submitted Form ONRR-2014

22. www.encana.com 22 Data Requested for Tax and Royalty Compliance Audits Marketing Accounting Marketing Accounting Land Administration Land Administration Revenue Accounting Revenue Accounting Revenue allocation details Well detail Pricing Spreadsheets, including deductions Maps/Physical Flow Operational Details Ownership Details Joint Operating Agreements Marketing Agreements TIK Owners Market Pricing Marketing Value & Volume Allocation Downstream Transportation Regulatory Reporting Volume Reports Meter Points Contracts, Business Development and Operations – are pulled into audit discussion when needed, but do play a significant role in the payment of royalties Land Administration – Provides ownership details as it pertains to Federal and State Royalty payments Marketing Accounting – provides the market price received and the downstream transportation costs to get the product to market Regulatory Reporting – provides wellhead volumes as reported to Federal and State Agencies Revenue Accounting – compiles and provides well detail information used in the distribution process Contracts Underlying contracts Contract Interpretation Regulatory Compliance Business Development Business Development Operations

23. www.encana.com 23 Questions?