21.Fair Value Measurements

The fair values of cash and cash equivalents, accounts receivable and accrued revenues, and accounts payable and accrued liabilities approximate their carrying amounts due to the short-term maturity of those instruments. Fair value information related to pension plan assets is included in Note 20.

Recurring fair value measurements are performed for risk management assets and liabilities and other derivative contracts, as discussed further in Note 22. These items are carried at fair value in the Consolidated Balance Sheet and are classified within the three levels of the fair value hierarchy in the following tables. There have been no significant transfers between the hierarchy levels during the period.

Fair value changes and settlements for amounts related to risk management assets and liabilities are recognized in revenues, transportation and processing expense, and foreign exchange gains and losses according to their purpose.


As at December 31, 2017		Level 1 Quoted Prices in Active Markets		Level 2 Other Observable Inputs		Level 3 Significant Unobservable Inputs		Total Fair Value		Netting (1)		Carrying Amount

Risk Management Assets
Commodity Derivatives:
Current assets	$	-	$	189	$	-	$	189	$	(15)	$	174
Long-term assets		-		248		-		248		(2)		246
Foreign Currency Derivatives:
Current assets		-		31		-		31		-		31

Risk Management Liabilities
Commodity Derivatives:
Current liabilities		3		196		51		250		(15)		235
Long-term liabilities		-		15		-		15		(2)		13
Foreign Currency Derivatives:
Current liabilities		-		1		-		1		-		1

Other Derivative Contracts
Current in accounts payable and accrued liabilities	$	-	$	5	$	-	$	5	$	-	$	5
Long-term in other liabilities and provisions		-		14		-		14		-		14

As at December 31, 2016		Level 1 Quoted Prices in Active Markets		Level 2 Other Observable Inputs		Level 3 Significant Unobservable Inputs		Total Fair Value		Netting (1)		Carrying Amount

Risk Management Assets
Commodity Derivatives
Current assets	$	-	$	11	$	-	$	11	$	(11)	$	-
Long-term assets		-		19		-		19		(3)		16

Risk Management Liabilities
Commodity Derivatives:
Current liabilities		-		228		36		264		(11)		253
Long-term liabilities		-		38		-		38		(3)		35
Foreign Currency Derivatives:
Current liabilities		-		1		-		1		-		1

Other Derivative Contracts
Current in accounts payable and accrued liabilities	$	-	$	5	$	-	$	5	$	-	$	5
Long-term in other liabilities and provisions		-		14		-		14		-		14

(1)Netting to offset derivative assets and liabilities where the legal right and intention to offset exists, or where counterparty master netting arrangements contain provisions for net settlement.

The Company’s Level 1 and Level 2 risk management assets and liabilities consist of commodity fixed price contracts, NYMEX call options, foreign currency swaps and basis swaps with terms to 2023. Level 2 also includes financial guarantee contracts as discussed in Note 22. The fair values of these contracts are based on a market approach and are estimated using inputs which are either directly or indirectly observable at the reporting date, such as exchange and other published prices, broker quotes and observable trading activity.

Level 3 Fair Value Measurements

As at December 31, 2017, the Company’s Level 3 risk management assets and liabilities consist of WTI three-way options and WTI costless collars with terms to 2018. The WTI three-way options are a combination of a sold call, bought put and a sold put. The WTI costless collars are a combination of a sold call and a bought put. These contracts allow the Company to participate in the upside of commodity prices to the ceiling of the call option and provide the Company with complete (collars) or partial (three-way) downside price protection through the put options. The fair values of the WTI three-way options and WTI costless collars are based on the income approach and are modelled using observable and unobservable inputs such as implied volatility. The unobservable inputs are obtained from third parties whenever possible and reviewed by the Company for reasonableness.

A summary of changes in Level 3 fair value measurements is presented below:


		Risk Management
		2017		2016

Balance, Beginning of Year	$	(36)	$	16
Total Gains (Losses)		(21)		(16)
Purchases, Sales, Issuances and Settlements:
Purchases, sales and issuances		-		-
Settlements		6		(26)
Transfers Out of Level 3 (1)		-		(10)
Balance, End of Year	$	(51)	$	(36)

Change in Unrealized Gains (Losses) Related to Assets and Liabilities Held at End of Year	$	(51)	$	(27)

(1)The Company’s policy is to recognize transfers out of Level 3 on the date of the event of change in circumstances that caused the transfer.

Quantitative information about unobservable inputs used in Level 3 fair value measurements is presented below:


As at December 31	Valuation Technique	Unobservable Input	2017	2016

Risk Management - WTI Options	Option Model	Implied Volatility	17% - 76%	18% - 64%

A 10 percent increase or decrease in implied volatility for the WTI options would cause a corresponding $2 million (2016 - $3 million) increase or decrease to net risk management assets and liabilities.