My co-presenter is Jared Gustafson. Jared, did you want to go ahead and introduce yourself and give a little background?

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2 Thank you to everyone who's able to join us this afternoon. Our first slide here is going to be a Disclaimer. While we get that up, I just want to say, "Thank you," and we're hoping to send you all off into the holiday weekend with some specialized discussion and knowledge on Oil & Gas, and Unclaimed Property issues specific to that space. I'll go ahead and introduce myself. My name is Will King. I'm an Unclaimed Property attorney and I work in Keane Consulting and Advisory Group. I work with a lot of Oil & Gas Holders on special compliance issues and issues that they face under audit. My co-presenter is Jared Gustafson. Jared, did you want to go ahead and introduce yourself and give a little background? Jared Gustafson: Sure, thanks, Will. Yes, Jared Gustafson here. Thank you, everybody, for joining. I'm happy to be here with you today. I'm a Manager in the Keane Consulting Group. I am a CPA, and I have been working with Keane for almost four years now. I've also worked on several Oil & Gas projects, as well as worked with Holders in various other industries. So, looking forward to today and thanks, Will. Okay, so let's get started here. So, this first slide is just giving you the reason for why we're here. Over the last couple of years, as Oil & Gas production has boomed across the country, the quarterly Unclaimed Property effect of all of that increased production has been an increase in the amount of royalty Owners that have gone into suspense accounts or are being unpaid. As those amounts grow, so do the Unclaimed Property risks that are associated with holding that money, and the compliance challenges that come from it. This next slide is a couple of years old at this point. It's from 2012, I believe, and it's taken from one of the newspapers in Texas and specifically focusing on the mineral proceeds that the State of Texas is taking in year for year, from 2002 to As you can see from the chart, the State of Texas currently holds, as of the date of this chart, $461 Million in Unclaimed Property and Unclaimed Royal and Mineral Interest Proceed property. In 2012, they took in about $47.5 Million and returned just $19.5 Million of that. Keep in mind, that return is cumulative for all of the years that it's grown. And this is sort of an interesting one, because it does track and look specifically at the Mineral and Proceeds payments going to a State that takes in a very large quantity of Mineral Interest Proceed payments. Those of you who are familiar with reporting obligations know that we've got Texas coming up right around this corner here. We actually have some slides that Joe's going to run through a little later in the presentation that will go specifically into Texas's Unclaimed Property requirements. Page 1

3 So, why do we care about Unclaimed Property? Why are we here today to talk about it? Some of these reasons are common between Holders in many different industries. Compliance and more so, non-compliance, both have significant amounts of time and money associated with them. Keeping up with State laws can be challenging. Audits are a big reason why we've been talking about Unclaimed Property and maybe why you're on the phone today. For sure, the Oil & Gas industry is in a cycle of Unclaimed Property exams right now. And depending on the Auditor, some of these exams are quite rigorous and can take quite a bit of time. Again, that's something we are going to talk about in the next hour. But, for the Oil & Gas industry specifically, I think there is a unique Owner relations angle to Unclaimed Property here. And, I'll give you an example of this. We had a client who had inadvertently remitted some Owner's property to a particular state, and when that Owner went to claim that money back from the State, it was an incredibly rigorous and burdensome process for the Owner to do. The Holder was looped in to the claims process and it took over three years for that particular state to process that Owner's claim. And I don't want to say the state was reluctant to pay those funds back, but they definitely didn't facilitate the process. Now, not all states are the same, and we shouldn't paint all states with the same brush. This particular state is one that is particularly aggressive. But, it does have a unique impact in this space, which is where these companies have Owner relations departments and where a lot of the money that Oil & Gas Companies make is tied to how happy their Owners are. So, you guys have a unique bent on this, which is why we want to mitigate Unclaimed Property risk as much as humanly possible. Jared, would you like to get us started on the basics? Jared Gustafson: Sure, thanks, Will. So, that was a great introduction. Before we get into too much more detail about Oil & Gas specific issues, we'd like to give a little background on Unclaimed Property in general, and make sure everyone on the phone is up to date with the history of Unclaimed Property and why we're here today. We'll start with some basics. A few terms that I'd like to talk about, and they're not on the slide, but that probably will be coming up quite a few times today. First would be 'Holder' and 'Owner.' When you talk about Unclaimed Property, you have to keep in mind that there is a Holder of the Unclaimed Property. So, that would be you, as the Company, representatives of the Companies on the phone today. And then there is the Owner of the property to which the Unclaimed Property is owed. Another good term to think about is 'dormancy.' In order for property to be unclaimed, the property must age for a certain period Page 2

4 of time, and we refer to that as the dormancy period, which varies with different states. So, as you see on the slide here, escheatment today, that's an interesting word. Escheat is another term often used interchangeably in Unclaimed Property. Today, escheatment is when the States take the property, the Unclaimed Property, from the Holder and hold it until the funds can be reunited with the Owner. Generally, the State does not take title to the money or the property, instead they are holding onto the property in hopes that it is reunited with the Owner at the end of the day. The 'Derivative Rights Doctrine' is an important concept, and the concept of that is that the State stands in the shoes of the Owner. So, after the dormancy period, after the property ages, if you as the Holder are not able to reunite the Owner with their funds, the State steps in and stands in the shoes of the Owner and holds onto that property that is owed. And, I just want to add, this is a fundamental underpinning of Unclaimed Property law, is this concept of Derivative Rights Doctrine. It has, in the Oil & Gas space, some very specific application, particularly when we talk about reasons that items are in suspense, or the way that items are coded for suspense. When we talk about title suspense, or unsigned division order and this idea that the State is really taking no greater or lesser claim to the funds that are reported to it than the original Owner is themselves entitled to. This Derivative Rights Doctrine, which I think has always been known to be very fundamental in the states, has definitely been eroded over the last several years, with the enforcement efforts and some of the interpretations that states have made about their Unclaimed Property laws. Not only in this space, but in others. In fact, in one recent briefing, by NADOA, it's a public document that's related to the current uniform law rewrite, NADOA actually says that the Derivative Rights Doctrine is the greatest threat to State Unclaimed Property law enforcement that the State's see today. But it's definitely something that we need to keep driving home and remember when we are determining what is escheatable property. Jared Gustafson: Sure. On this part, we'll just go a little bit more, as you can see the title there, "Unclaimed Property: is it a disguised tax?" Which is a great question, and a good concern. Unclaimed Property often times looks a lot like a tax, feels like a tax, you know, report must be filed once a year. A lot of times Unclaimed Property reporting falls within that department. However, really, Unclaimed Property is not a tax. Again, the objective here is that Unclaimed Property laws were established as a consumer protection statute. Again, the States step into Page 3

5 the shoes of the Owner to protect the Owner or consumer, to hold onto that property for them. The initial goal, again, the purpose of Unclaimed Property laws, was to prevent companies from being unjustly enriched. So, instead of allowing that property to age and stay with the Holder, the purpose of the laws was for the State to step in for the Owner and hold onto that property. On the next slide, we go into a little more, along the same lines, again, a disguised tax. It looks like a tax, but Unclaimed Property is today being viewed as more of a non-tax revenue source. So, as we said in the last slide, initially, the purpose of the Unclaimed Property laws was consumer protection; however, now, many States are viewing this as an additional revenue source. Some ways that States are being more aggressive and increasing their revenue, dormancy periods, we're seeing, are being reduced. Whereas in the past, if some States may have had dormancy periods of five or more years, now those are being shortened down into the three, or two, or one year period. Another large generator of revenue, for states of incorporation, especially Delaware, is estimation of the result of audits or BDAs. Many times, we've seen in audits, the auditors attempting to, or requiring Companies to estimate a liability back into the 1980s. That estimate that is calculated has no name or address tied to it, and when it is reported to the State, it is just a pure line item, estimated liability, and that property goes directly to the State and likely will never be returned to any rightful Owners. There's a good bullet point at the bottom there. Will, maybe you want to discuss a little more, but as you can see, Unclaimed Property in the state of Delaware at least, has made up 15% of the state budget. That's right. Delaware, for various reasons, if you don't know on the phone, which we're going to run through in a second... When we talk about the Texas v. New Jersey case, Delaware takes a disproportionate amount of Unclaimed Property relative to its 900,000 citizens. And, there are other ways that States are taking in this property, which we see routine, is through new interpretation of the Unclaimed Property statute. For example, when these laws were first written and adopted by many of the States, some of the property types that they attempt to [inaudible 00:13:23] didn't even exist. Things like Health Savings Accounts, or certain retirement products didn't exist at the time of the law adoption. But, that hasn't stopped the states from applying their Unclaimed Property laws against those property types, which significantly increases the compliance risk for Holders. Part of that is because the laws themselves contain a catch-all provision in almost every State. And that catch-all provision states that all other intangible property held, issued or owned in the ordinary course of business that is presumed abandoned Page 4

6 should be reportable to the State. That catch-all provision is actually, in most States, where Mineral Interest Proceeds are reported under. Most states do not have specific provisions for Mineral Interest Proceeds. We have a little bullet here about the impact of the Texas reporting change. Texas was, when this happened, very up front about why this happened. As you all know, who are preparing your reports right now, or getting ready to file in Texas, Texas switched a couple of years ago to being a summer reporting State. And what that allows Texas to do, is in one fiscal year, take in two cycles of Unclaimed Property receipt. And it helps make up for a budget shortfall in that year. So, while the underpinnings and the goals of these laws are consumer protection, Owner reunification, when we look at Unclaimed Property from a risk perspective, we still have to keep in mind this idea that it is a non-tax revenue source for a lot of States. We approach it, as just like in any other tax, you can mitigate that risk. Jared Gustafson: The next slide, we just went a little more about Unclaimed Property basics. After the last couple of slides, you might be wondering, "So, how is that revenue going to the State? Just how much is actually returned to the Owners?" You know, of course, we don't have a set percentage that, you know, across the country, what's the percentage of Unclaimed Property returned. Many States do have extensive outreach efforts to reunite Owners and do have a high rate of return, but on average, the reality is, today's States do pay back a small percentage of those amounts back to the rightful Owners. Again, it's an additional non-tax revenue source for the States, and then the last bullet point there, is talking about Texas v. New Jersey, which is a very important case that is coming up again in a few slides that we'll be discussing. And then finally on this slide here, here's a definition of Unclaimed Property. Some key concepts, I'll let you read through that, but some key concepts to keep in mind are, or a few questions to ask are, is the property in question owed? Is it a liability? Is it something that your Company owes? If it is, is the amount that is owed known? Is it fixed and certain liability, and lastly, has their been Owner activity? Can you document that, even though you may have a delimerent check that hasn't been cashed, can you document and generate some Owner activity? Next, we're going to go into some detail on Uniform Acts, and I'll let Will take over. Thanks, Jared. So, those of you who know compliance, and one of the key compliance challenges that come from Unclaimed Property laws, are the sheer multitude of different jurisdictions that can come into play. And right now, we have 55 reporting jurisdictions throughout the United States and its territories. Page 5

7 That's all States, plus the District of Columbia, Guam, Puerto Rico, the US Virgin Islands, and most recently to adopt Unclaimed Property law, the Northern Mariana Islands, in the Pacific. There have been several attempts, over the years, to try to get all of the States onto the same page with regards to the Unclaimed Property act. The first Uniform Act was passed in 1954, and was amended in 1966 following the Texas v. New Jersey court case. There was a large Uniform law rewrite effort in 1981, and another large one in 1995, to try to bring the Acts into the modern age. However, there are some States that present particular compliance challenges that do not have a Uniform Act. So, states like California, New York, Delaware, Texas, these are non-, excuse me, Uniform Act states that create their own sort of special issues. For example, in California, we have a dual-reporting scheme. That can be challenging for many Holders. Currently, there is a ULC effort underway to write a new Uniform Act. This has been going on for the last couple of years, and will likely have a final Act sometime in The goal of the current Act, or the current rewrite effort, is to try to address many of the concerns that have come up over the last couple of years, as States have taken, and particularly auditors, have taken more aggressive approaches towards Unclaimed Property interpretation and enforcement. You're right to say these jurisdictions, these reporting jurisdictions, are all sort of like snowflakes, there's no two alike. Even if the Act has similar models, they probably have different dormancy periods, or different interpretations, things like that. Definitely the leading cause of compliance challenges come from property. So, if we know we have 55 potential reporting jurisdictions that we have to report to, how do we know which jurisdiction's law to apply? That rule, or that standard, was determined in a 1965 US Supreme Court case known as Texas v. New Jersey. It was the culmination of several cases. But what happened in this case in particular, was Sun Oil Company owed $26,000 to 1700 creditors. Now, Sun knew that it owed the money to the creditors, but what it didn't want was to have to be held liable in multiple jurisdictions for those funds. Sun was incorporated in New Jersey. It's principle place of business was in Pennsylvania. The last known address of most of the creditors were in Texas, with a handful in Florida. Texas sued all of the other potential States, and because the Supreme Court has original jurisdictions on suits between the States, they came down with this bright line task. They distinguish Unclaimed Property from the tax line of jurisprudence, and adopted, instead of looking at things like nexis and apportionment, which we are very familiar with in tax context, instead adopted a last known address standard. What they said was that property flows first to the state of last known address of the Owner on the books and records of the Holder. If that it unknown, then Page 6

8 to the State of incorporation of the Holder. And that is why Delaware takes such a significant amount of Unclaimed Property every year, because it is the preferred State of incorporation for many Companies. Now, these jurisdictional rules... One of the hot button topics right now, that has sprung from these jurisdictional rules, is what happens to foreign property? And we kind of have to distinguish here what we call "wholly foreign" and "non- US last known address property." Now, wholly foreign refers to the concept of a transaction between a non-us incorporated entity and a non-us Owner. So, fully outside the scope, generally speaking, of the reach of the Unclaimed Property laws of the United States. And non-us last known address Owner is just that, it's an Owner who's last known address is in a foreign jurisdiction. And Holders have often been put in the position of wondering, "Well, what do we do with these non-us last known address Holders? To which State do they go?" It's very important to note that this was not addressed in Texas v. New Jersey. Now, several States have adopted laws of portions of their laws, that provide for the reporting of foreign address property. But, most, if anyone can believe, the single State where most Companies are incorporated, does not currently have a law on its books authorizing the escheatment of non-us last known address property. That's Delaware. Now, one of the considerations, and another compliance wrinkle that Holders have to take into account, is the fact that many foreign jurisdictions, including three Canadian provinces, currently have Unclaimed Property laws on their books. If we look at Unclaimed Property as trying to foster reunification between Owners and their funds, then it is questionable whether Holders should be looking at some of these foreign laws to try to comply with them. Those three Canadian provinces are Alberta, Quebec, and British Columbia. Now, the Uniform Acts do include the reporting of foreign property to a State of incorporation but they save the logical extension of Texas v. New Jersey. There's no actual case to rely upon for that. There's currently some litigation going on right now, out of Massachusetts, that's taking a critical look at Delaware's escheatment and claims to foreign property. It's definitely one that we're going to be monitoring very closely. Okay. So, let's drill down to some Mineral Interest Unclaimed Property specifics. Obviously, for most Oil & Gas Companies, suspense accounts are the largest source of Unclaimed Property risk. Unpaid Mineral Interest Proceeds payments. These funds are generally held in some sort of suspense account when they are unable to be paid. Owners in suspense accounts are coded, for various reasons, for non-payment. So, some of the more standard ones that we see in practice are Owners who are held in suspense for bad address, or being deceased, for title disputes, ongoing litigation, unsigned division orders. Typically, we see that Page 7

9 the land or division order groups are working the suspense prior to escheatment. They are doing their best to prioritize the review of certain items, to move them into paid status. Another key consideration to take into account when it comes to suspense accounts, is what happens in an acquisition? We've got a few slides built into the end of the presentation to talk about merger and acquisition considerations specifically, but in this space, particularly in the current environment, with prices the way they are, we anticipate that M & A activity will increase this year and into next. It's very important to know what happens with suspense and the associated Unclaimed Property liabilities in an acquisition or divestor situation. You can get held holding the amounts that are owed to others. Okay. Now, drilling down into some of the basic property types that Oil & Gas Companies face when it comes to Mineral Interest Proceeds. All sorts of royalties are included in this category, Mineral Interest Proceeds. As well as things like bonus payments, and rental payments. Each property type is typically assigned an MI, is assigned a Novice Type II property type code. So, all of these different types of Mineral Interest Proceeds fall under the MI category of codes. Mineral Interest category. So, each of these have an MI property type associated with them. In Texas, you should know, we're going to talk about this in the Texas-specific section, but you should know that Texas has a special MI property code for the reporting of what we call current to paid funds. And if you don't know what those are, we're going to define them here in a little bit. Jared, do you want to run us through other property types that companies may encounter? Jared Gustafson: Yeah. So, other than, when you talk about Oil & Gas, the focus obviously is on Mineral Interest property; however, Oil & Gas Companies and our Companies have to be aware of other property types as well. In the event of an audit, States are reviewing and auditors are reviewing to make sure that Companies are reporting all property types. So, we have on the slide here, just an example of some additional property types. Some unique ones that typically are overlooked, that we find a lot of times with Holders, that I'll highlight, are benefits-related property, for employee benefit plans. You have to make sure that you as the Holder are monitoring the relationships that you have, if you have a third-party administrator administering your benefit plans, to make sure that you understand how payments from those plans are handled and to understand and document who has the responsibility for Unclaimed Property reporting. Page 8

10 Another property type that is often unique is equity or stock. If your Company is a publicly traded corporation, the relationship with your transfer agent should also be understood and you should also make sure that you documented who has the responsibility for reporting. Going into the next slide, we're talking about compliance. So, now that you all know the background about Unclaimed Property, and how the laws came to be, the question is, how do I comply? So, as a Holder, there's a few basic steps that you need to go through. As I think Will mentioned, you know, there are many, each State has Unclaimed Property requirements. Each State requires that a report be filed. For many States, I believe it's 40 or more, most of those reports are due in the fall, I believe in October 31, or by November 1. So, prior to filing that report, you'll see a few bullets here, the Company must go through their internal due diligence and review records. The source documents have to be reviewed, accounts payable, disbursement accounts, review for outstanding checks, for Oil & Gas Companies, the suspense account should be reviewed to identify any past due or dormant royalty payments. After that internal research is completed, then the next step is external due diligence, or contacting the Owners. So, once you identify property that appears to be unclaimed or abandoned, the States each have unique requirements for this due diligence outreach. We'll get into Texas in the next couple of slides, but each State sets a due diligence threshold and a timely requirement for when these letters need to go out. But the letters need to be mailed before the report is filed. Finally, we get to the report and remittance. The report must be filed before the deadline, and for most States, the remittance goes along with the report. However, California, as many of you may know, has a unique process where in the fall you report a preliminary report, without remittance, and then remittance is filed several months later. Finally, after the report is filed, you may think that's it, and you're done. However, you may have Owners following up with you, trying to claim their Unclaimed Property after the deadline passes. You need to work with them, or direct them to the State to get their funds. And then finally, record retention. You always... Our recommendation is to always keep copies of your Unclaimed Property reports indefinitely. States do have certain requirements stating how long those report copies must be kept, as well. I was just going to mention, you know, the due diligence is an incredibly important part of the process. It is one of the ones that seems most straight Page 9

11 forward, in terms that it is talking... You know, the due diligence requirement is to provide a last ditch effort to notify an Owner that their property is escheating. It seems relatively straight forward, but it is definitely one of the areas that leads to the greatest number of compliance challenges. California requires down to a specific font size, a certain disclaimer that must be included on the due diligence letters. In Ohio, if the value of the property potentially being reported is over $100, that letter must be sent certified, return receipt requested. It's a different dollar threshold, if we're talking about New Jersey Owners. And then, of course, there's all sorts of other requirements between the States. It's definitely one of the more nuanced and difficult parts of the reporting process, I think. Jared Gustafson: Okay, so, talking specifically about Texas, as we promised, that is the big reporting deadline coming up next, July 1. As you see in the first couple of bullets there, Texas has had a reporting requirement change, as Will mentioned. Texas historically was a fall state, where you would have to report by November 1, with a cut off of June 30; however, I believe it was in 2011, legislation was introduced and passed that effectively, in 2013, changed the reporting deadline to July 1, with a March 1 cut off. So, many of you are probably aware of that. It caused quite a few headaches, and everyone had to get used to the new process. But, hopefully by now, after the 2015 report, hopefully, you all are on track and getting ready to get that filed. Touching back on the record retention requirements, you'll see the statute first here, explaining that Texas requires that Holders must maintain records for ten years after the property was reportable. And then there's also some additional details outlined that need to be retained. On the next slide, some more detail about Texas. We mentioned due diligence and the importance of that. Texas has a due diligence minimum threshold of $250. That is higher than many states. Quite a few states have a $50 or $100 due diligence threshold. But, Texas has set theirs at $250. So, that would mean if you've had property that was dormant and reportable that was under $250, technically, the statutorily required letter for Texas would not need to be mailed. However, as Will said, these minimums and outreach to the Owners, are really an important part of the process, because again, the goal is to get the money reunited with the Owners. So, as much outreach as you can do, we always encourage that, even under the $250 if you can, to get that money back to the Owners. Aggregate reporting... Many states do allow aggregate reporting, usually again, around the $50 to $100 mark. Texas does not allow for aggregating of Mineral Interest related property under the $50, so that's important to note. Will did mention, there's a special property code now in Texas, to report current paid property, current paid Mineral Interest Proceeds. Page 10

12 And, I think the last point there, penalty and interests. Many States do have penalties and interest provisions. Speaking specifically about Texas, their interest is a 10% annual rate, and potential penalty is 5% of the value of the property, should the property be reported late, or past due. And with that, I think we're ready for some Oil & Gas specific issues, and I'll turn it over to Will. Thanks, Jared. So, this industry definitely has its own set of unique challenges. One of the reasons why we wanted to put this webinar together today was to go through those issues that are very specific to Oil & Gas Holders. By and large, one of the biggest challenges, if not the single biggest challenge, that Oil & Gas Companies face, are all of the issues that surround their suspense account. These suspense accounts that do create the greatest source of Unclaimed Property liability and risk. The very first question we have to grapple with is trying to understand what suspense, what types of suspense, are escheatable suspense. And, it's common practice in most Oil & Gas firms to quality whether an expense is escheatable or non-escheatable based on the property type codes. Not surprisingly, we don't have a lot of guidance between courts and States about what types of expense specifically are escheatable. I think it's one of the most common questions that Jared and I get, when we're out in the field with Companies, is, "Well, what... Is that an escheatable expense?" There's not a lot of clear guidance on that. We do have one case, out of Oklahoma, that's the Philips Petroleum Co. v. Oklahoma Tax Mission case, that does talk about the fact that an unsigned division order is not a sufficient reason to hold somebody in suspense or not report them to the State. But, again, we're sort of forced to draw analogies between other property types. So, we know, for example, that funds that are properly held for litigation or title reasons are probably not reportable based on some other language discussing other instances of non-payment. But, it's definitely a specific question that has to be hashed out with legal counsel, in order to get your compliance program up and running. The other problem we encounter oftentimes, is once an Owner is put into suspense for a particular code, they tend to not move out of that code for a long period of time. So, while title suspense or pending litigation might be sufficient reasons to not include an Owner in the reportable bucket, if that person is then entitled to legal suspense for 20 years, or 25 years, it becomes questionable as to whether that is still a sufficient reason. Coding an Owner in a particular way is not supposed to be a method to permanently avoid reporting that property to the State. Page 11

13 Now, Texas, because there are so many Oil & Gas Companies in Texas, and Texas has taken such a large amount of Mineral Interest property, Texas has a specific handbook for Mineral Interest reporting, and they have some very good guidance. So, on the next couple of slides, we've pulled out a few quotes to help guide you, to guide or point out some of these issues. But, this is definitely one of them. "Do not report Owners who are in suspense for legal or other reasons if you have had contact with them during the preceding three years." Now, this sounds simple enough, but in practice, can be quite difficult to effectuate. Understanding whether you've had contact in a three year period is going to require pulling information from multiple silos, multiple places. Depending on the State's definition of contact, has the Owner logged in and downloaded their tax forms, or their wall statement? Have they had phone calls with DO groups, somebody in the DO group? And has that phone call been properly recorded? This is a challenge. And it's not a challenge that the Oil & Gas industry faces alone. The Securities industry in particular, broker dealers, they have the same issue as well. But, it's definitely one of the more current issues that we're trying to work through. Now, also we mentioned acquisitions, because of the current environment. We wanted to mention acquisitions and talk about them a little bit. Texas, again, gives some very clear guidance here: "The abandonment period for suspended royalties is calculated from the original payment date of the obligation, not the date that it was received by the acquiring company." So, to sort of paint the picture for the couple of slides we have at the end of today, regarding M & A, you take on the suspense liabilities that you acquire, unless they are pre-negotiated or included in the due diligence process. And that's definitely something that we're advocating more and more, is that Unclaimed Property comes to the surface in the deal making process, because those, as Jared pointed out in his previous slide, penalties and interest can be stiff. And they often do exceed the principle liability. Now, with going back to the contact discussion, one of the biggest challenges we see is the subcategory of suspense, the sub-challenges, I guess you could call it, is the fact that Oil & Gas Companies have typically, the date that's been populated on suspense ledgers and accounts, is typically tied to some sort of sales or production date. The impact of that, is that things tend to look a lot older than they actually are. A lot older than they are, relative to the last time that somebody may have had contact with an Owner. Again, Texas gives us some good guidance here: "The abandonment period for Mineral Proceeds is three years, and commences on the date you were first unable to make payment to the Owner because you had lost contact." Now, just like we discussed, each State has its own due diligence requirement, each State has its own reporting requirement... Also, each State does have its Page 12

14 own definition of what constitutes "contact." And that is one of the things that's being hashed out in the current Uniform law rewrite. But, when we say the first time you were unable to make payment because you lost contact, what does that mean? Does that mean, from the time that a piece of mail was returned from Post Office? Or does that mean three years from your last phone call? Or three years from an transaction? It can definitely become a complicated question to answer. Now, one of the biggest issues we see in this space has to do with a concept known as "current to pay." There are about 30 some odd States that are classified as current to pay states, and again, this is a unique challenge in the Oil & Gas space, which basically says, that once the abandonment period for the first such payment has run, that's due to an Owner, so once an Owner's first payment hits dormancy, all subsequent payments due that Owner are reportable as Unclaimed Property at that time. So, even though subsequent payments may not have actually reached the dormancy period, they are reportable once the first payment has. Thereafter, that first payment is reportable and the subsequent payments are reportable, in the years following that, in current to pay States, Holders are supposed to pay the State on a regular basis. In some States, that basis is the same basis as when you would have paid the Owner themselves. So, whether it's monthly, or when they reach minimum suspense amounts. In Texas, that payment is actually made on the annual report. So, you hold the year's worth of aggregation into one account, and then you report that at one time as MI 10 property. That's currently a property code that's unique only to Texas. It's so administratively burdensome in Texas for them to open up those checks, for a couple of cents, every month, that they preferred going this MI 10 route. Which does make it more convenient for Holders. Another thing, last year, is forced pooling. So, if you have funds that are held as a result of a forced pooling order, in Oklahoma, those funds are reported to the Corporations Commission, not the State Treasurer. We have a growing number of County Trust in Escrow schemes that are popping up across the country, that are trying... Where funds that are unpaid to Owners, they tie them to place of production. There's a great potential for a conflict for Texas v. New Jersey in these schemes. There's an article coming up in the next edition of Keynote, many of you all are subscribers, and if not, you can follow up after this webinar, that's going to discuss these County in Escrow schemes in much more detail. And as Jared had mentioned in his Drilling Down on Texas section, if the State allows the aggregation of small dollar values, that's generally not allowed on Mineral Interest property specifically. Page 13

15 So, if suspense is our greatest risk, how do we manage that risk? What steps can be taken to mitigate it? So, one of the things we've advocated for in some of the projects that we're undertaking with Companies right now, is to manage that step, to proactively take a look at those Owners, and try to update their code. Find out if someone who's been entitled to suspense for several years should actually be marked as deceased, and if that property is properly reportable. If we have Owners that are in suspense for bad address, can we go out and try to find those Owners and update the address and move them into paid status? If we have deceased Owners, can we try to find a beneficiary or next of kin or an heir, and move those individuals into paid status? A lot of Companies, because of the Unclaimed Property risk that Jared is about to talk about when it comes to Unclaimed Property audits, a lot of companies are starting to take a much more proactive stance towards Owner location. And then a lot of this has been fed by, something that has happened in the last several years in life insurance space, which is where a group of auditors came in and created a standard for that industry that changed the trigger for escheatment. They used a tool called the Death Master File, or Social Security DMF. This is a very key tool that Oil & Gas Companies can avail themselves of in the update or systems update process. And again, all of these, bringing it back to our current environment, these types of tools can also be utilized on the M & A side as part of the due diligence process. So, if you are going to be bringing on past due suspense, what can be done to clean that suspense up when you bring it on? So, running some DMF searches, or locating beneficiaries, heirs, or updating addresses, doing the outreach campaign, this is all an important process to manage and mitigate that suspense risk. Okay, Jared, you want to talk to the fun topic of audit? Jared Gustafson: Yes, thanks so much. So now you know about Unclaimed Property, you know some Mineral Interest specific issues, here comes the question, how do States enforce their Unclaimed Property laws? Of course, the answer is, through audit. Companies typically are used to audits by the State, or sales tax, or income tax, but Unclaimed Property audits are really very unique and should not be taken lightly. There are different types of audits, usually two different types really, either a State-conducted audit, or a third-party audit firm. Either the State has their own auditor that they send out into the field, that would be auditing just for that State. For example, I know California recently has been pretty active with their own State auditors. So they go out to the Holder community and audit for California property. Page 14

16 On the other side of that, is many States are signing on to third-party audits, and we've listed a number of some of the notorious ones here. And, in that case, the state would sign on with a third-party auditor and that third-party auditor would be paid, typically on a contingency fee basis. Those third-party auditors usually sign on multiple States onto the audit. So, rather than having State auditors come in and audit a company for one state, usually the third-party auditors are coming in and auditing on behalf of multiple states. An important concept to remember is that they are usually paid on a contingency fee basis. So a lot of times, that does drive the process and usually a contingency fee third-party audit is very strenuous. The next slide, the risk of audit. Why should you be concerned? Why should you be worried about an audit? In the audit, typically there is an estimation, as we've talked about a few times, the State of incorporation has a right to estimate because they're dealing, when you're creating an estimate, so there's no name or address tied to that. So, you don't have a State to report that property to, so it goes to the State of incorporation. Many Companies are incorporated in Delaware, so Delaware is known for its third-party audits of many large corporations in the country, and often times the liability estimates in those audits are very large. Multi-million dollars is not unheard of. Why else should you be concerned? Again, we mentioned the contingency fee and the multi-state, so not only is it one State you have to worry about, in a third-party audit, you might be dealing with several different States throughout the audit. The last point here, again, penalties and interest. So, as a result of the audit, based on the audit findings, if the auditor finds past due property that was not reported, there is definitely the potential for the State to assess a penalty and interest on that property. In the next two slides, we talk about some audit triggers. A lot of times, the question we get from Holders is, "What can I do to avoid an audit?" Or more often, what we get is, "Why did I get this audit notice? What did our Company do to get on the State radar to initiate the audit?" There are some bullet points here that you have for reference. Some key ones, and I think the biggest one, is the State of incorporation. As I said, many Companies are incorporated in Delaware. Delaware has been very active recently in the audit space. Another key trigger that could trigger an audit could be mergers and acquisitions. In the Oil & Gas industry, there is definitely a large amount of merger and acquisition activity; oftentimes, that is in the news, it's Page 15

17 public, it's promoted. The States obviously watch the news as well, so when those types of events are in the news, that may lead to an Unclaimed Property audit. The last point that I'd like to touch on there would be filing an incomplete report. Many Holders will have one of the partners within the Company, maybe payroll, or AP, or Mineral Interest, maybe the Company is reporting royalties only. Then the States get those reports, and they only see one property type. If they only see royalties being recorded, oftentimes, the question is, "Well, why isn't this Company reporting any payroll checks? Or why aren't they reporting accounts receivable credits? Or why aren't they reporting employee benefit plans property?" So, just because a report is being filed doesn't mean that you are certainly going to avoid an audit. In fact, if you file a report that is incomplete, that itself may lead to the audit. On the next slide, some more bullet points with audit triggers. Again, talking about reporting, so not only filing incomplete reports, but also if a report is filed late, or if maybe you have a compliance initiative for one year, you get everybody on board and you file the reports, and you're up to compliance, but then it's the next year, or the next two or three years, and no report is filed, if they see reports coming in and all of the sudden the reports stop, that can be a red flag for the State. Also, time between audits. Just because you have been audited in the past, or if your Company has been audited in the past, doesn't mean that it won't happen again in the future. If it's been five, or ten, or fifteen years since that audit has taken place, that's starting to get into the time period that property has aged enough that you could be audited again. Next slide, we have a fun... Well, not a fun quote, but an interesting quote here, talking about the scope of audits and how time intensive they can be. Once Companies receive an audit notice, oftentimes the auditor is asking for a few basic records requests, what's your organizational chart, can you see a trial balance, it seems pretty straight forward. But, we have seen audits drag into years, three or five years, are detailed, hundreds of records requests that can be very extensive. And then lastly, on audits, the last slide here... Here's a chronology of an audit. So, it's start with the Notice from the State. You'd be notified saying either their auditors are coming to audit you or the third-party auditor is coming. Then an opening conference would be scheduled. Then you would start receiving those records requests. Like I said, they start out pretty basic, but then over the next six months to a year or more, they effective requests just keep coming. Once the auditor has enough records to prepare populations of Unclaimed Property to research, if the populations are large enough, sometimes they will use Page 16

18 sampling. And then, of course, the extrapolation for prior periods, as I mentioned before. So, once you go through getting the auditor all the records, going through the detailed review, then, at the end of the day, which may be several years later, you would get a findings report from the auditor, after which you could negotiate with the State and then file a final report. Should the final report be filed and not be agreed, if you didn't agree with the final report, many States do have an appeals process. So, next I think Will is ready to talk a little bit about mergers and acquisitions. Yeah, thanks, Jared. That was a great overview of audits, definitely a scary topic in this space. So, I'm going to put on my lawyer hat, and I'm going to talk very fast here, because I don't want to keep anybody too far from holiday weekend, and keep you too, too long. So, obviously, we know that M & A activity is likely to increase this year and into next due to the environment. And so, what are the Unclaimed Property impacts of that? When companies merge or when walls or properties are acquired, generally the expended funds are flowing to the purchaser, and that means that the purchaser is stuck with the liability of those records or any past due amounts associated with them. Now, we've seen more and more as Unclaimed Property sneaks into the deal and due diligence process, Companies refusing to take suspense, or take past due suspense, or seeking credit for the P & S, penalties and interest involved. But, definitely want to make sure you are able to build in Unclaimed Property into the due diligence process, also in regards to what records are coming over, and whether the agency has been under audit that you are acquiring will trump. Now, there is the possibility, in several States, that if you are acquiring new properties that have tax and liabilities associated with them, there is always the possibility in some States, of going through a voluntary disclosure program. These are either formal or informal in nature, and generally allow a Holder to bring this property into compliance in the State with the mitigation or elimination of penalty and interest. But again, much like the Unclaimed Property laws, every State's DBA program is unique to that State. We wanted to give you some legislative updates, some new things that have been going on, and just a handful. Just to put it out there, what we're monitoring on the compliance front. We've seen some dormancy period reductions happen, in both Arkansas and Pennsylvania, and both of these reductions apply to Mineral Interest property, as well as other property types. Page 17

19 Audits have been in the forefront due to the aggressive things that some... Techniques of some auditors and Holder outcry. We've seen Michigan and Delaware recently pass laws that are attempting to mitigate Holder concerns about the audit process and auditors in particular. And then, when it comes to Mineral Interest reporting, we're seeing States start to include, and this is adding a layer to the compliance challenge here, States starting to require Holders and Oil & Gas Companies to make special forms for Mineral Interest property. So, in Texas, there's currently a Bill pending that would require a special form to be submitted, in addition to the Unclaimed Property report, that gave information related to well and parcel numbers and lease numbers. In Arkansas, that was actually part of the provision that passed, that also reduced the dormancy period. There was a troubling component to this Arkansas Bill that could make things difficult for Holders, which actually allows attorneys to petition in the County where minerals are extracted from, to have the Unclaimed Mineral proceeds related to production in those Counties reported to the County, rather than the State. We are still seeking some interpretation from Arkansas on what exactly the impact of that could be, but it definitely, if taken at face value, means that now a Holder may potentially have not only 55 State reporting jurisdictions, but some Counties in Arkansas to worry about as well. And, then last, we want to leave you on a positive note. There is... This is litigation that is currently pending in Delaware, that is challenging the estimation methodology undertaken by Kelmar in Delaware, Kelmar being one of the third-party auditing firms. And we actually had a small but substantial victory in the Temple-Inland case in the last couple of weeks, where in fact, the Holder, who is challenging the estimation and audit methodology based on some due process claims, actually survived a Motion to Dismiss that was brought by the State. So, as of today, it looks like we may actually hear some of the Constitutional challenges to the Unclaimed Property audit methodology heard in Delaware. That's something we're very much looking forward to, and we're very optimistic about. So, we also wanted to leave you with some best practices from the compliance side. And, again, because Unclaimed Property arises in so many different factions of a company, it's good to take a team-based approach, and it's also good to take a proactive approach, to pull together representatives from all of the various areas where a Company can create Unclaimed Property liabilities, and put them into a team to make sure that a compliance program is in place, and that it's adequate. We've also included in here some bullet points for written policies and procedures, particularly in this space. We oftentimes see where one person or two people have listened in on these webinars and taken it upon themselves to build a compliance program, and then that person retires. Page 18