22.Financial Instruments and Risk Management

FINANCIAL INSTRUMENTS

Encana’s financial assets and liabilities are recognized in cash and cash equivalents, accounts receivable and accrued revenues, accounts payable and accrued liabilities, risk management assets and liabilities, other liabilities and provisions and long-term debt.

B)RISK MANAGEMENT ACTIVITIES

Encana uses derivative financial instruments to manage its exposure to cash flow variability from commodity prices and fluctuating foreign currency exchange rates. The Company does not apply hedge accounting to any of its derivative financial instruments. As a result, gains and losses from changes in the fair value are recognized in net earnings.

COMMODITY PRICE RISK

Commodity price risk arises from the effect that fluctuations in future commodity prices may have on future cash flows. To partially mitigate exposure to commodity price risk, the Company has entered into various derivative financial instruments. The use of these derivative instruments is governed under formal policies and is subject to limits established by the Board of Directors. The Company’s policy is to not use derivative financial instruments for speculative purposes.

Crude Oil and NGLs - To partially mitigate crude oil and NGL commodity price risk, the Company uses WTI-based contracts such as fixed price contracts, options and costless collars. Encana has also entered into basis swaps to manage against widening price differentials between various production areas and benchmark price points.

Natural Gas - To partially mitigate natural gas commodity price risk, the Company uses NYMEX-based contracts such as fixed price contracts, options and costless collars. Encana has also entered into basis swaps to manage against widening price differentials between various production areas and benchmark price points.

FOREIGN EXCHANGE RISK

Foreign exchange risk arises from changes in foreign currency exchange rates that may affect the fair value or future cash flows of the Company’s financial assets or liabilities. To partially mitigate the effect of foreign exchange fluctuations on future commodity revenues and expenses, the Company may enter into foreign currency derivative contracts. As at December 31, 2017, Encana has entered into $650 million notional U.S. dollar denominated currency swaps at an average exchange rate of US$0.7597 to C$1, which mature monthly throughout 2018.

RISK MANAGEMENT POSITIONS AS AT DECEMBER 31, 2017



	Notional Volumes		Term	Average Price						Fair Value

Crude Oil and NGL Contracts						US$/bbl

Fixed Price Contracts
WTI Fixed Price	71.2	Mbbls/d	2018			53.28			$	(152)

WTI Three-Way Options
Sold call / bought put / sold put	16.0	Mbbls/d	2018	54.49	/	47.17	/	36.88		(35)

WTI Costless Collars
Sold call / bought put	10.0	Mbbls/d	2018	57.08	/	45.00				(16)

Basis Contracts (1)			2018 - 2020							(41)

Crude Oil and NGLs Fair Value Position										(244)

Natural Gas Contracts						US$/Mcf

Fixed Price Contracts
NYMEX Fixed Price	673	MMcf/d	2018			3.07				59

NYMEX Call Options
Sold call price	230	MMcf/d	2018			3.75				(3)
Sold call price	230	MMcf/d	2019			3.75				(6)

Basis Contracts (2)			2018							118
			2019							107
			2020							83
			2021 - 2023							58


Natural Gas Fair Value Position										416

Other Derivative Contracts
Fair Value Position										(19)

Foreign Currency Contracts
Fair Value Position (3)			2018							30
Total Fair Value Position									$	183

(1)

Encana has entered into swaps to protect against widening Midland, Magellan East Houston, Louisiana Light Sweet and Edmonton Condensate differentials to WTI.

(2)

Encana has entered into swaps to protect against widening AECO, Dawn, Malin and Waha basis to NYMEX.

(3)

Encana has entered into U.S. dollar denominated fixed-for-floating average currency swaps to protect against fluctuations between the Canadian and U.S. dollars.

EARNINGS IMPACT OF REALIZED AND UNREALIZED GAINS (LOSSES) ON RISK MANAGEMENT POSITIONS



For the years ended December 31		2017		2016		2015

Realized Gains (Losses) on Risk Management
Commodity and Other Derivatives:
Revenues (1)	$	40	$	361	$	917
Transportation and processing		(4)		(8)		(16)
Foreign Currency Derivatives:
Foreign exchange		15		-		-
	$	51	$	353	$	901

Unrealized Gains (Losses) on Risk Management
Commodity and Other Derivatives:
Revenues (2)	$	442	$	(636)	$	(325)
Transportation and processing		-	$	22		(6)
Foreign Currency Derivatives:
Foreign exchange		32		(1)		-
	$	474	$	(615)	$	(331)

Total Realized and Unrealized Gains (Losses) on Risk Management, net
Commodity and Other Derivatives:
Revenues (1) (2)	$	482	$	(275)	$	592
Transportation and processing		(4)		14		(22)
Foreign Currency Derivatives:
Foreign exchange		47		(1)		-
	$	525	$	(262)	$	570

(1)

Includes a realized gain of $7 million for the year ended December 31, 2017 (2016 - gain of $6 million; 2015 - gain of $1 million) related to other derivative contracts.

(2)

Includes an unrealized loss of $2 million for the year ended December 31, 2017 (2016 - gain of $5 million; 2015 - nil) related to other derivative contracts.

RECONCILIATION OF UNREALIZED RISK MANAGEMENT POSITIONS FROM JANUARY 1 TO DECEMBER 31


		2017				2016		2015
		Fair Value		Total Unrealized Gain (Loss)		Total Unrealized Gain (Loss)		Total Unrealized Gain (Loss)

Fair Value of Contracts, Beginning of Year	$	(292)
Change in Fair Value of Contracts in Place at Beginning of Year
and Contracts Entered into During the Year		525	$	525	$	(262)	$	570
Settlement of Other Derivative Contracts		7
Fair Value of Other Derivative Contracts Entered into During the Year		(6)
Fair Value of Contracts Realized During the Year		(51)		(51)		(353)		(901)
Fair Value of Contracts, End of Year	$	183	$	474	$	(615)	$	(331)

Risk management assets and liabilities arise from the use of derivative financial instruments and are measured at fair value. See Note 21 for a discussion of fair value measurements.

UNREALIZED RISK MANAGEMENT POSITIONS


As at December 31		2017		2016

Risk Management Assets
Current	$	205	$	-
Long-term		246		16
		451		16

Risk Management Liabilities
Current		236		254
Long-term		13		35
		249		289

Other Derivative Contracts
Current in accounts payable and accrued liabilities		5		5
Long-term in other liabilities and provisions		14		14
Net Risk Management Assets (Liabilities) and Other Derivative Contracts	$	183	$	(292)

SUMMARY OF UNREALIZED RISK MANAGEMENT POSITIONS


As at December 31	2017							2016
	Risk Management						Risk Management
		Asset		Liability		Net		Asset		Liability		Net

Commodity Price Positions
Crude oil and NGLs	$	-	$	244	$	(244)	$	2	$	100	$	(98)
Natural gas		420		4		416		14		188		(174)
Other Positions
Other derivative contracts		-		19		(19)		-		19		(19)
Foreign currency contracts		31		1		30		-		1		(1)
Total Fair Value Position	$	451	$	268	$	183	$	16	$	308	$	(292)

CREDIT RISK

Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. While exchange-traded contracts are subject to nominal credit risk due to the financial safeguards established by the New York Stock Exchange and Toronto Stock Exchange, over-the-counter traded contracts expose Encana to counterparty credit risk. This credit risk exposure is mitigated through the use of credit policies approved by the Board of Directors governing the Company’s credit portfolio including credit practices that limit transactions according to counterparties’ credit quality. Mitigation strategies may include master netting arrangements, requesting collateral and/or transacting credit derivatives. The Company executes commodity derivative financial instruments under master agreements that have netting provisions that provide for offsetting payables against receivables. As a result of netting provisions, the Company’s maximum exposure to loss under derivative financial instruments due to credit risk is limited to the net amounts due from the counterparties under the derivative contracts, as disclosed in Note 21. As at December 31, 2017, the Company had no significant credit derivatives in place and held no collateral.

As at December 31, 2017, cash equivalents include high-grade, short-term securities, placed primarily with financial institutions and companies with strong investment grade ratings. Any foreign currency agreements entered into are with major financial institutions that have investment grade credit ratings.

A substantial portion of the Company’s accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks. As at December 31, 2017, approximately 92 percent (2016 - 90 percent) of Encana’s accounts receivable and financial derivative credit exposures were with investment grade counterparties.

As at December 31, 2017, Encana had three counterparties whose net settlement position individually accounted for more than 10 percent of the fair value of the outstanding in-the-money net risk management contracts by counterparty. As at December 31, 2017, these counterparties accounted for 56 percent, 11 percent and 11 percent of the fair value of the outstanding in-the-money net risk management contracts. As at December 31, 2016, Encana had one counterparty whose net settlement position accounted for 84 percent of the fair value of the outstanding in-the-money net risk management contracts.

During 2015 and 2017, Encana entered into agreements resulting from divestitures, which may require Encana to fulfill certain payment obligations on the take or pay volume commitments assumed by the purchasers. The circumstances that would require Encana to perform under the agreements include events where a purchaser fails to make payment to the guaranteed party and/or a purchaser is subject to an insolvency event. The agreements have remaining terms from four to seven years with a fair value recognized of $19 million as at December 31, 2017 (2016 - $19 million). The maximum potential amount of undiscounted future payments is $347 million as at December 31, 2017, and is considered unlikely.