Encana/Ovintiv -- summary under Outbound continuances

Overview

It is proposed that Encana effectively be converted from a CBCA public corporation to a Delaware public corporation. This would occur in three stages (collectively, the “Reorganization”).

• First, there would be a “somersault” Plan of Arrangement under which Encana would distribute common shares, having a nominal value, of a newly-incorporated CBCA corporation (“Ovintiv”) to its shareholders and they then would exchange their Encana shares ("Common Shares") for shares of Ovintiv – except that, in the somewhat unlikely event that the Encana Common Shares had traded up to above U.S.$6.30 a share (presumably corresponding to an estimate of the paid-up capital of the Encana shares), the shareholders would also receive $0.25 per Encana Common Share of an Ovintiv note, so that the exchange would occur on a non-rollover basis unless they elected with Ovintiv under ITA s. 85.
• Second, a U.S. subsidiary of Encana (Alenco) would be distributed out of Encana in consideration for the assumption of debt and as Encana-share redemption proceeds, and Ovintiv would then drop Encana (which previously had been converted into a B.C. ULC) into a new CBCA subsidiary of Ovintiv (HoldCo).
• Third, Ovintiv would be continued to Delaware. The Circular does not anticipate that this would generate tax under ITA s. 128.1(4) or 219.1 except potentially in the unlikely event that quite a number of Encana shareholders elected under s. 85. This continuance (the “U.S. Domestication” from a U.S. perspective) would be an “F” reorg, meaning that it would generally not occur on a rollover basis to U.S. shareholders.

Encana

Encana is a leading North American energy producer trading on the NYSE and TSX and incorporated under the CBCA. On February 13, 2019, Encana completed a business combination with Newfield (a U.S. producer), pursuant to an Agreement and Plan of Merger with Newfield.

Ovintiv

Prior to the completion of the Reorganization, Ovintiv will be formed as a CBCA corporation pursuant to the amalgamation of two wholly-owned subsidiaries of Encana. Following completion of the Reorganization, including the U.S. Domestication, Ovintiv will be a Delaware corporation. The common shares of Ovintiv will be listed on the NYSE and TSX.

Alenco

A wholly-owned Delaware subsidiary of Encana carrying on business in the U.S.

HoldCo

A newly-incorporated CBCA subsidiary of Encana.

Reason for Reorganization

The Encana Board believes the Encana valuation continues to be disconnected from its U.S. peers due, in part, to its inability to access certain pools of capital in the U.S. that are limited in investing in securities of foreign companies.

Plan of Arrangement Steps

1. The Encana Rights Plan and DRIP shall terminate.
2. The Encana Common Shares of Dissenting Shareholders shall be transferred to Encana.
3. The Encana Common Shares shall be consolidated on a 5-for-1 basis.
4. Encana shall declare a dividend and pay it by distributing pro rata to each common shareholder a fraction of an Initial Ovintiv Common Share (being 1,000 Ovintiv common shares in total) such that all the Initial Ovintiv Common Shares are distributed to the Encana Shareholders.
5. Each Encana Common Share shall be transferred to Ovintiv in exchange for (i) if the Trading Price exceeds U.S.$6.30, the issuance by Ovintiv to such Encana Shareholder of a fraction of a common share of Ovintiv and an unsecured, non-interest bearing, demand promissory note of Ovintiv with a principal amount equal to $0.25 and repayable at the option of Ovintiv by issuing a fixed number of common shares of Ovintiv (an “Ovintiv Purchase Note”), or (ii) if the Trading Price is equal to or less than U.S.$6.30, the issuance by Ovintiv to such shareholder only of Ovintiv common shares (the foregoing transactions, collectively “Share Exchange”); and as a result thereof an amount will be added to the stated capital account for the Ovintiv common shares equal to the aggregate fair market value of the consideration received by Ovintiv in exchange therefor.
6. Ovintiv shall assume all of Encana's rights and obligations under the Encana Incentive Plans.
7. Each Encana Incentive Award shall be exchanged for an Ovintiv Incentive Award (with exchanges of stock options meeting the conditions of ITA s. 7(1.4).)

Post-Arrangement Reorganization Transactions

1. Encana will continue from a CBCA corporation to a limited liability corporation under the BCBCA.
2. Encana will convert from a limited liability corporation to an unlimited liability corporation under the BCBCA and will change its name to "Ovintiv Canada ULC";
3. The following matters shall occur concurrently:
   1. Ovintiv shall assume from Encana all of the Encana Debt;
   2. in exchange, Encana shall transfer to Ovintiv all of Encana’s rights to the debt owed by Alenco Inc. (“Alenco”);
   3. also in exchange, Encana shall transfer to Ovintiv the common shares of Alenco having a fair market value equal to the principal amount of the Encana Debt less the fair market value of the Alenco debt.
4. Encana shall concurrently
   1. repurchase Encana Common Shares held by Ovintiv having an aggregate fair market value equal to the aggregate fair market value of the remaining Alenco Shares held by Encana and the fair market value of the Holdco Common Shares held by Encana, and
   2. distribute the remaining Alenco Shares held by Encana and the HoldCo Common Shares held by Encana referenced in (1) above to Ovintiv as full payment therefor.
5. Ovintiv shall assume the Dissenting Shareholder Obligation as a contribution to the capital of the Encana Common Shares.
6. Ovintiv shall contribute the Encana Common Shares to HoldCo in exchange for the issuance by HoldCo to Ovintiv of additional HoldCo Common Shares.
7. Ovintiv shall be continued from a CBCA corporation and shall be domesticated as a Delaware corporation under the Delaware General Corporation Law.

Canadian tax consequences

Taxable, or s. 85 rollover, where both Ovintiv Purchase Note and Ovintiv shares received on exchange

An Encana Shareholder who (i) is a resident of Canada, (ii) is not exempt from Canadian income tax, (iii) receives both a fraction of an Ovintiv common share and an Ovintiv Purchase Note in exchange for each Encana Common Share, and (iv) would otherwise realize a capital gain on the disposition of the Encana Common Shares, will be entitled to become an "Electing Shareholder." Any issuance of Ovintiv Purchase Notes should cause the Share Exchange to be a taxable transaction to a Canadian Holder unless such shareholder become an Electing Shareholder by making and filing a valid joint s. 85 election with Ovintiv to have the exchange occur on a partially or fully tax-deferred basis. A Canadian Holder can choose to be an Electing Shareholder by completing the appropriate election form to be located on Ovintiv’s website under the heading “Investors” at www.ovintiv.com and sending such completed election form to the address specified on the website. The completed form must be received within 60 days following the Effective Date of the Reorganization in accordance with the procedures to be noted on Ovintiv’s website for an Encana Shareholder to be an Electing Shareholder. Thereafter, subject to the form(s) complying with the provisions of the Canadian Tax Act (and any provincial tax legislation, as applicable), Ovintiv will sign the form(s) and return them to the Electing Shareholder. It will be the responsibility of the Electing Shareholder to ultimately file the form(s) with the CRA (and any provincial tax authorities, as applicable).

S. 85.1 rollover if no Ovintiv Purchase Note

Generally, an Encana Shareholder who (i) is, or is deemed to be, resident in Canada, (ii) deals at arm’s length with Encana and Ovintiv, (iii) is not affiliated with Encana or Ovintiv, (iv) is not connected with Encana or Ovintiv, (v) holds the Encana Common Shares as capital property, and (vi) sells such shares to Ovintiv under the Reorganization in exchange for only shares of Common Stock of Ovintiv (or fractions thereof) should be entitled to an automatic rollover under s. 85.1(1).

Deemed dispositions under ss. 128.1(4)

As a consequence of the U.S. Domestication, Ovintiv will cease to be resident in Canada and will be deemed to have a taxation year end for Canadian federal income tax purposes immediately before the U.S. Domestication. Ovintiv also will be deemed to have disposed of each of its properties immediately before the deemed taxation year end for proceeds of disposition equal to the fair market value of such properties and to have reacquired such properties immediately thereafter at a cost amount equal to their fair market value.

S. 219.1 exit tax

Ovintiv also will be subject to an additional “emigration tax” on the amount, if any, by which the fair market value, immediately before its deemed taxation year end resulting from the U.S. Domestication, of all the property owned by Ovintiv, exceeds the total of certain of its liabilities and the paid-up capital of all Ovintiv common shares immediately before the deemed taxation year end.

Potential exit tax to Ovintiv

If a sufficient number of Encana shareholders make valid s. 85 elections, the adjusted cost base to Ovintiv of its properties and the aggregate paid-up capital of its shares and its liabilities could be such as to result in a material tax liability to it. Furthermore, CRA could challenge Ovintiv’s estimate of the fair market value of its asserts.

US tax consequences

Share Consolidation

The Share Consolidation is intended to qualify as a “recapitalization” under Code s. 368(a)(1)(E) and/or a tax deferred exchange under Code s. 1036(a), so that a U.S. Holder generally should not recognize resulting gain or loss.

Share Exchange

The Share Exchange, together with the conversion of Encana to an unlimited liability corporation pursuant to the Reorganization, should qualify as a Tax Reorganization so that a U.S. Holder should not recognize resulting gain or loss.

U.S. Domestication

Pursuant to the U.S. Domestication, Ovintiv will change its jurisdiction of incorporation from the CBCA to Delaware. The U.S. Domestication should qualify as an F Reorganization, so that the tax treatment of a U.S. Holder in that regard should be as follows:

U.S. Holders that own shares of Common Stock of Ovintiv with a fair market value of less than $50,000 at the time of the U.S. Domestication should not recognize gain or loss.

A U.S. Holder that owns shares of Common Stock of Ovintiv with a fair market value of $50,000 or more (but who is not a 10% U.S. Holder) at the time of the U.S. Domestication should, unless such holder validly makes the “all earnings and profits” election described below, be required to recognize gain, but not a loss, with respect to their shares of Common Stock of Ovintiv in connection with the U.S. Domestication. In lieu of recognizing such taxable gain, a U.S. Holder that validly makes the “all earnings and profits” election will be required to include in income, as a deemed dividend, the “all earnings and profits amount” (as defined under applicable Treasury Regulations) that is attributable, under U.S. tax principles, to such holder’s shares of Common Stock of Ovintiv. In general, the “all earnings and profits amount” attributable to shares of Common Stock of Ovintiv held by a U.S. Holder should depend on Encana’s accumulated earnings and profits (as determined under U.S. federal income tax principles) from the date that Encana Common Shares were acquired by such U.S. Holder through the Effective Date. A U.S. Holder that wishes to make an “all earnings and profits” election must comply with strict conditions for making this election under applicable Treasury Regulations. Ovintiv is preparing an estimate of such earnings amount and will post it on its website.

Tax consequences to Ovintiv

The Reorganization is not expected to give rise to material corporate-level federal income tax to Encana or Ovintiv. However, Ovintiv could be subject to such tax in the event that at the time of the U.S. Domestication, the aggregate fair market value of its common shares exceeded the US tax basis in its assets.

PFIC rules

Encana believes that the Encana Common Shares should not currently be, and it does not believe that they should have ever been treated as, stock of a PFIC for U.S. federal income tax purpose.