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RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
 
MARKET RISK
Our earnings, cash flows and other comprehensive income (OCI) are subject to movements in foreign exchange rates, interest rates, commodity prices and our share price (collectively, market risk). Formal risk management policies, processes and systems have been designed to mitigate these risks.
 
The following summarizes the types of market risks to which we are exposed and the risk management instruments used to mitigate them. We use a combination of qualifying and non-qualifying derivative instruments to manage the risks noted below.
 
Foreign Exchange Risk
We generate certain revenues, incur expenses, and hold a number of investments and subsidiaries that
are denominated in currencies other than Canadian dollars. As a result, our earnings, cash flows and OCI
are exposed to fluctuations resulting from foreign exchange rate variability.

We employ financial derivative instruments to hedge foreign currency denominated earnings exposure. A
combination of qualifying and non-qualifying derivative instruments are used to hedge anticipated foreign
currency denominated revenues and expenses, and to manage variability in cash flows. We hedge
certain net investments in United States dollar denominated investments and subsidiaries using foreign
currency derivatives and United States dollar denominated debt.
 
Interest Rate Risk
Our earnings and cash flows are exposed to short-term interest rate variability due to the regular repricing
of our variable rate debt, primarily commercial paper. Pay fixed-receive floating interest rate swaps are
used to hedge against the effect of future interest rate movements. We have implemented a program to
significantly mitigate the impact of short-term interest rate volatility on interest expense via execution of
floating to fixed interest rate swaps with an average swap rate of 2.6%.

As a result of the Merger Transaction, we are exposed to changes in the fair value of fixed rate debt that
arise as a result of the changes in market interest rates. Pay floating-receive fixed interest rate swaps are
used to hedge against future changes to the fair value of fixed rate debt. We have assumed a program
within our subsidiaries to mitigate the impact of fluctuations in the fair value of fixed rate debt via
execution of fixed to floating interest rate swaps with an average swap rate of 2.1%.
 
Our earnings and cash flows are also exposed to variability in longer term interest rates ahead of
anticipated fixed rate term debt issuances. Forward starting interest rate swaps are used to hedge against
the effect of future interest rate movements. We have assumed a program within some of our subsidiaries
to mitigate our exposure to long-term interest rate variability on select forecast term debt issuances via
execution of floating to fixed interest rate swaps with an average swap rate of 3.4%.
 
We also monitor our debt portfolio mix of fixed and variable rate debt instruments to manage a
consolidated portfolio of floating rate debt as a percentage of total debt outstanding. We primarily use qualifying derivative instruments to manage interest rate risk.

Commodity Price Risk
Our earnings and cash flows are exposed to changes in commodity prices as a result of our ownership
interests in certain assets and investments, as well as through the activities of our energy services
subsidiaries. These commodities include natural gas, crude oil, power and NGL. We employ financial and
physical derivative instruments to fix a portion of the variable price exposures that arise from physical
transactions involving these commodities. We use primarily non-qualifying derivative instruments to
manage commodity price risk.

Emission Allowance Price Risk
Emission allowance price risk is the risk of gain or loss due to changes in the market price of emission
allowances that our gas distribution business is required to purchase for itself and most of its customers
to meet greenhouse gas compliance obligations under the Ontario Cap and Trade framework. Similar to the gas supply procurement framework, the Ontario Energy Board's (OEB) framework for emission allowance procurement allows recovery of fluctuations in emission allowance prices in customer rates, subject to OEB approval.
 
Equity Price Risk
Equity price risk is the risk of earnings fluctuations due to changes in our share price. We have exposure
to our own common share price through the issuance of various forms of stock-based compensation,
which affect earnings through revaluation of the outstanding units every period. We use equity derivatives
to manage the earnings volatility derived from one form of stock-based compensation, restricted share
units. We use a combination of qualifying and non-qualifying derivative instruments to manage equity
price risk.
 
TOTAL DERIVATIVE INSTRUMENTS
The following table summarizes the Consolidated Statements of Financial Position location and carrying
value of our derivative instruments.
 
We generally have a policy of entering into individual International Swaps and Derivatives
Association, Inc. agreements, or other similar derivative agreements, with the majority of our financial
derivative counterparties. These agreements provide for the net settlement of derivative instruments
outstanding with specific counterparties in the event of bankruptcy or other significant credit events, and
reduces our credit risk exposure on financial derivative asset positions outstanding with the
counterparties in those circumstances. The following table summarizes the maximum potential settlement
in the event of these specific circumstances. All amounts are presented gross in the Consolidated
Statements of Financial Position.

March 31, 2018
Derivative
Instruments
Used as
Cash Flow Hedges

Derivative
Instruments
Used as Net
Investment Hedges

Derivative
Instruments
Used as
Fair Value Hedges

Non-
Qualifying
Derivative Instruments

Total Gross
Derivative
Instruments as Presented

Amounts
Available for Offset

Total Net
Derivative Instruments

(millions of Canadian dollars)
 
 
 
 
 
 
 
Accounts receivable and other
 
 
 
 
 
 
 
Foreign exchange contracts
—

3

—

131

134

(70
)
64

Interest rate contracts
27

—

—

—

27

(5
)
22

Commodity contracts
—

—

—

100

100

(34
)
66

 
27

3

—

231

261

(109
)
152

Deferred amounts and other assets
 
 
 
 
 
 
 
Foreign exchange contracts
18

—

—

92

110

(58
)
52

Interest rate contracts
15

—

—

—

15

—

15

Commodity contracts
19

—

—

3

22

(19
)
3

Other contracts
—

—

—

—

—

—

—

 
52

—

—

95

147

(77
)
70

Accounts payable and other
 
 
 
 
 
 
 
Foreign exchange contracts
(5
)
(23
)
—

(327
)
(355
)
70

(285
)
Interest rate contracts
(112
)
—

(9
)
(185
)
(306
)
5

(301
)
Commodity contracts
(2
)
—

—

(244
)
(246
)
34

(212
)
Other contracts
(2
)
—

—

(8
)
(10
)
—

(10
)
 
(121
)
(23
)
(9
)
(764
)
(917
)
109

(808
)
Other long-term liabilities
 
 
 
 
 
 
 
Foreign exchange contracts
—

(10
)
—

(1,650
)
(1,660
)
58

(1,602
)
Interest rate contracts
(20
)
—

(2
)
—

(22
)
—

(22
)
Commodity contracts
—

—

—

(160
)
(160
)
19

(141
)
Other contracts
(5
)
—

—

(3
)
(8
)
—

(8
)
 
(25
)
(10
)
(2
)
(1,813
)
(1,850
)
77

(1,773
)
Total net derivative asset/(liability)
 
 
 
 
 
 
 
Foreign exchange contracts
13

(30
)
—

(1,754
)
(1,771
)
—

(1,771
)
Interest rate contracts
(90
)
—

(11
)
(185
)
(286
)
—

(286
)
Commodity contracts
17

—

—

(301
)
(284
)
—

(284
)
Other contracts
(7
)
—

—

(11
)
(18
)
—

(18
)
 
(67
)
(30
)
(11
)
(2,251
)
(2,359
)
—

(2,359
)
 
December 31, 2017
Derivative
Instruments
Used as
Cash Flow Hedges

Derivative
Instruments
Used as Net
Investment Hedges

Derivative Instruments Used as Fair Value Hedges

Non-
Qualifying
Derivative Instruments

Total Gross
Derivative
Instruments as Presented

Amounts
Available for Offset

Total Net
Derivative Instruments

(millions of Canadian dollars)
 
 
 
 
 
 
 
Accounts receivable and other
 
 
 
 
 
 
 
Foreign exchange contracts
1

4

—

138

143

(83
)
60

Interest rate contracts
6

—

2

—

8

(3
)
5

Commodity contracts
2

—

—

143

145

(64
)
81

 
9

4

2

281

296

(150
)
146

Deferred amounts and other assets
 
 
2

 
 
 
 
Foreign exchange contracts
1

1

—

143

145

(125
)
20

Interest rate contracts
7

—

6

—

13

(2
)
11

Commodity contracts
17

—

—

6

23

(19
)
4

 
25

1

6

149

181

(146
)
35

Accounts payable and other
 
 
 
 
 
 
 
Foreign exchange contracts
(5
)
(42
)
—

(312
)
(359
)
83

(276
)
Interest rate contracts
(140
)
—

(6
)
(183
)
(329
)
3

(326
)
Commodity contracts
—

—

—

(439
)
(439
)
64

(375
)
Other contracts
(1
)
—

—

(2
)
(3
)
—

(3
)
 
(146
)
(42
)
(6
)
(936
)
(1,130
)
150

(980
)
Other long-term liabilities
 
 
 
 
 
 
 
Foreign exchange contracts
(4
)
(9
)
—

(1,299
)
(1,312
)
125

(1,187
)
Interest rate contracts
(38
)
—

(2
)
—

(40
)
2

(38
)
Commodity contracts
—

—

—

(186
)
(186
)
19

(167
)
Other contracts
(1
)
—

—

—

(1
)
—

(1
)
 
(43
)
(9
)
(2
)
(1,485
)
(1,539
)
146

(1,393
)
Total net derivative asset/(liability)
 
 
-2

 
 
 
 
Foreign exchange contracts
(7
)
(46
)
—

(1,330
)
(1,383
)
—

(1,383
)
Interest rate contracts
(165
)
—

—

(183
)
(348
)
—

(348
)
Commodity contracts
19

—

—

(476
)
(457
)
—

(457
)
Other contracts
(2
)
—

—

(2
)
(4
)
—

(4
)
 
(155
)
(46
)
—

(1,991
)
(2,192
)
—

(2,192
)


The following table summarizes the maturity and notional principal or quantity outstanding related to our derivative instruments.
March 31, 2018
2018

2019

2020

2021

2022

Thereafter1

Foreign exchange contracts - United States dollar forwards - purchase (millions of United States dollars)
544

2

1

—

—

—

Foreign exchange contracts - United States dollar forwards - sell (millions of United States dollars)
3,215

3,247

3,258

1,689

1,676

3,489

Foreign exchange contracts - British pound (GBP) forwards - purchase (millions of GBP)
—

—

—

—

—

—

Foreign exchange contracts - GBP forwards - sell (millions of GBP)
—

89

25

27

28

149

Foreign exchange contracts - Euro forwards - purchase (millions of Euro)
264

375

—

—

—

—

Foreign exchange contracts - Euro forwards - sell (millions of Euro)
—

—

35

169

169

889

Foreign exchange contracts - Japanese yen forwards - purchase (millions of yen)
—

32,662

—

—

20,000

—

Interest rate contracts - short-term pay fixed rate (millions of Canadian dollars)
3,749

2,100

527

109

93

203

Interest rate contracts - long-term receive fixed rate (millions of Canadian dollars)
728

580

553

188

102

—

Interest rate contracts - long-term debt pay fixed rate (millions of Canadian dollars)
2,242

800

447

—

—

—

Equity contracts (millions of Canadian dollars)
40

37

8

—

—

—

Commodity contracts - natural gas (billions of cubic feet)
(16
)
(57
)
(23
)
(2
)
14

2

Commodity contracts - crude oil (millions of barrels)
1

2

—

—

—

—

Commodity contracts - NGL (millions of barrels)
(10
)
(1
)
—

—

—

—

Commodity contracts - power (megawatt per hour) (MW/H))
60

64

66

(3
)
(43
)
(43
)

1 As at March 31, 2018, thereafter includes an average net purchase/(sell) of power of (43) MW/H for 2023 through 2025.

The Effect of Derivative Instruments on the Statements of Earnings and Comprehensive Income
 
The following table presents the effect of cash flow hedges and net investment hedges on our consolidated earnings and consolidated comprehensive income, before the effect of income taxes:
 
Three months ended
March 31,
 
2018

2017

(millions of Canadian dollars)
 
 
Amount of unrealized gain/(loss) recognized in OCI
 
 
Cash flow hedges
 
 
Foreign exchange contracts
21

(2
)
Interest rate contracts
100

(14
)
Commodity contracts
(2
)
21

Other contracts
(14
)
(9
)
Net investment hedges
 
 
Foreign exchange contracts
16

8

 
121

4

Amount of (gain)/loss reclassified from AOCI to earnings (effective portion)
 
 
Foreign exchange contracts1
(1
)
1

Interest rate contracts2
41

48

Commodity contracts3
(1
)
(2
)
Other contracts4
9

9

 
48

56

Amount of (gain)/loss reclassified from AOCI to earnings (ineffective portion and amount excluded from effectiveness testing)
 
 
Interest rate contracts2
(1
)
2

 
(1
)
2

1
Reported within Transportation and other services revenues and Other income/(expense) in the Consolidated Statements of Earnings.
2
Reported within Interest expense in the Consolidated Statements of Earnings.
3
Reported within Transportation and other services revenues, Commodity sales revenues, Commodity costs and Operating and administrative expense in the Consolidated Statements of Earnings.
4
Reported within Operating and administrative expense in the Consolidated Statements of Earnings.

We estimate that a loss of $22 million of AOCI related to cash flow hedges will be reclassified to earnings in the next 12 months. Actual amounts reclassified to earnings depend on the foreign exchange rates, interest rates and commodity prices in effect when derivative contracts that are currently outstanding mature. For all forecasted transactions, the maximum term over which we are hedging exposures to the variability of cash flows is 33 months as at March 31, 2018.
 
Fair Value Derivatives
For interest rate derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is included in Interest expense in the Consolidated Statements of Earnings. During the three months ended March 31, 2018 and 2017, we recognized an unrealized loss of $8 million and $2 million, respectively, on the derivative and an unrealized gain of $8 million and $2 million, respectively, on the hedged item in earnings. During the three months ended March 31, 2018 and 2017, we recognized a realized loss of $3 million and nil, respectively, on the derivative and a realized gain of $3 million and nil, respectively, on the hedged item in earnings. The difference in the amounts, if any, represents hedge ineffectiveness.

Non-Qualifying Derivatives
The following table presents the unrealized gains and losses associated with changes in the fair value of
our non-qualifying derivatives:
 
Three months ended
March 31,
 
2018

2017

(millions of Canadian dollars)
 
 
Foreign exchange contracts1
(424
)
273

Interest rate contracts2
(2
)
(18
)
Commodity contracts3
175

163

Other contracts4
(9
)
—

Total unrealized derivative fair value gain/(loss), net
(260
)
418

1
For the respective three months ended periods, reported within Transportation and other services revenues (2018 - $297 million loss; 2017 - $159 million gain) and Other income/(expense) (2018 - $127 million loss; 2017 - $114 million gain) in the Consolidated Statements of Earnings.
2
Reported as an (increase)/decrease within Interest expense in the Consolidated Statements of Earnings.
3
For the respective three months ended periods, reported within Transportation and other services revenues (2018 - $1 million loss; 2017 - $22 million loss), Commodity sales (2018 - $82 million gain; 2017 - $187 million gain), Commodity costs (2018 - $84 million gain; 2017 - $5 million gain) and Operating and administrative expense (2018 - $10 million gain; 2017 - $7 million loss) in the Consolidated Statements of Earnings.
4
Reported within Operating and administrative expense in the Consolidated Statements of Earnings.
 
LIQUIDITY RISK
 
Liquidity risk is the risk that we will not be able to meet our financial obligations, including commitments
and guarantees, as they become due. In order to mitigate this risk, we forecast cash requirements over a
12 month rolling time period to determine whether sufficient funds will be available and maintain
substantial capacity under our committed bank lines of credit to address any contingencies. Our primary
sources of liquidity and capital resources are funds generated from operations, the issuance of
commercial paper and draws under committed credit facilities and long-term debt, which includes
debentures and medium-term notes. We also maintain current shelf prospectuses with securities
regulators which enables, subject to market conditions, ready access to either the Canadian or United
States public capital markets. In addition, we maintain sufficient liquidity through committed credit facilities
with a diversified group of banks and institutions which, if necessary, enables us to fund all anticipated
requirements for approximately one year without accessing the capital markets. We are in compliance
with all the terms and conditions of our committed credit facility agreements and term debt indentures as
at March 31, 2018. As a result, all credit facilities are available to us and the banks are obligated to
fund and have been funding us under the terms of the facilities.
 
CREDIT RISK
 
Entering into derivative instruments may result in exposure to credit risk from the possibility that a
counterparty will default on its contractual obligations. In order to mitigate this risk, we enter into risk
management transactions primarily with institutions that possess investment grade credit ratings. Credit
risk relating to derivative counterparties is mitigated by credit exposure limits and contractual
requirements, netting arrangements, and ongoing monitoring of counterparty credit exposure using
external credit rating services and other analytical tools.



We have credit concentrations and credit exposure, with respect to derivative instruments, in the following counterparty segments:
 
March 31,
2018

December 31,
2017

(millions of Canadian dollars)
 
 
Canadian financial institutions
49

82

United States financial institutions
29

19

European financial institutions
143

145

Asian financial institutions
15

2

Other1
72

137

 
308

385

 
1
Other is comprised of commodity clearing house and physical natural gas and crude oil counterparties.
 
As at March 31, 2018, we provided letters of credit totaling nil in lieu of providing cash collateral to our counterparties pursuant to the terms of the relevant ISDA agreements. We held no cash collateral on derivative asset exposures as at March 31, 2018 and December 31, 2017.
 
Gross derivative balances have been presented without the effects of collateral posted. Derivative assets
are adjusted for non-performance risk of our counterparties using their credit default swap spread rates,
and are reflected at fair value. For derivative liabilities, our non-performance risk is considered in the
valuation.

Credit risk also arises from trade and other long-term receivables, and is mitigated through credit exposure limits and contractual requirements, assessment of credit ratings and netting arrangements. Within EGD and Union Gas, credit risk is mitigated by the utilities' large and diversified customer base and the ability to recover an estimate for doubtful accounts through the ratemaking process. We actively monitor the financial strength of large industrial customers and, in select cases, have obtained additional security to minimize the risk of default on receivables. Generally, we classify and provide for receivables older than 30 days as past due. The maximum exposure to credit risk related to non-derivative financial assets is their carrying value.
 
FAIR VALUE MEASUREMENTS
Our financial assets and liabilities measured at fair value on a recurring basis include derivative
instruments. We also disclose the fair value of other financial instruments not measured at fair value. The
fair value of financial instruments reflects our best estimates of market value based on generally accepted
valuation techniques or models and is supported by observable market prices and rates. When such
values are not available, we use discounted cash flow analysis from applicable yield curves based on
observable market inputs to estimate fair value.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
We categorize our derivative instruments measured at fair value into one of three different levels
depending on the observability of the inputs employed in the measurement.

Level 1
Level 1 includes derivatives measured at fair value based on unadjusted quoted prices for identical
assets and liabilities in active markets that are accessible at the measurement date. An active market for
a derivative is considered to be a market where transactions occur with sufficient frequency and volume
to provide pricing information on an ongoing basis. Our Level 1 instruments consist primarily of exchange-traded derivatives used to mitigate the risk of crude oil price fluctuations.



Level 2
Level 2 includes derivative valuations determined using directly or indirectly observable inputs other than
quoted prices included within Level 1. Derivatives in this category are valued using models or other
industry standard valuation techniques derived from observable market data. Such valuation techniques
include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be
observed or corroborated in the market for the entire duration of the derivative. Derivatives valued using
Level 2 inputs include non-exchange traded derivatives such as over-the-counter foreign exchange
forward and cross currency swap contracts, interest rate swaps, physical forward commodity contracts, as
well as commodity swaps and options for which observable inputs can be obtained.

We have also categorized the fair value of our held to maturity preferred share investment and long-term
debt as Level 2. The fair value of our held to maturity preferred share investment is primarily based on the
yield of certain Government of Canada bonds. The fair value of our long-term debt is based on quoted
market prices for instruments of similar yield, credit risk and tenor.

Level 3
Level 3 includes derivative valuations based on inputs which are less observable, unavailable or where
the observable data does not support a significant portion of the derivatives’ fair value. Generally, Level 3
derivatives are longer dated transactions, occur in less active markets, occur at locations where pricing
information is not available or have no binding broker quote to support Level 2 classification. We have
developed methodologies, benchmarked against industry standards, to determine fair value for these
derivatives based on extrapolation of observable future prices and rates. Derivatives valued using Level 3
inputs primarily include long-dated derivative power contracts and NGL and natural gas contracts, basis
swaps, commodity swaps, power and energy swaps, as well as options. We do not have any other
financial instruments categorized in Level 3.

We use the most observable inputs available to estimate the fair value of our derivatives. When possible,
we estimate the fair value of our derivatives based on quoted market prices. If quoted market prices are
not available, we use estimates from third party brokers. For non-exchange traded derivatives classified
in Levels 2 and 3, we use standard valuation techniques to calculate the estimated fair value. These
methods include discounted cash flows for forwards and swaps and Black-Scholes-Merton pricing models
for options. Depending on the type of derivative and nature of the underlying risk, we use observable
market prices (interest, foreign exchange, commodity and share price) and volatility as primary inputs to
these valuation techniques. Finally, we consider our own credit default swap spread as well as the credit
default swap spreads associated with our counterparties in our estimation of fair value.

We have categorized our derivative assets and liabilities measured at fair value as follows:
March 31, 2018
Level 1

Level 2

Level 3

Total Gross
Derivative
Instruments

(millions of Canadian dollars)
 

 

 

 

Financial assets
 

 

 

 

Current derivative assets
 

 

 

 

Foreign exchange contracts
—

134

—

134

Interest rate contracts
—

27

—

27

Commodity contracts
—

18

82

100

 
—

179

82

261

Long-term derivative assets
 

 

 

 

Foreign exchange contracts
—

110

—

110

Interest rate contracts
—

15

—

15

Commodity contracts
—

1

21

22

Other contracts
—

—

—

—

 
—

126

21

147

Financial liabilities
 

 

 

 

Current derivative liabilities
 

 

 

 

Foreign exchange contracts
—

(355
)
—

(355
)
Interest rate contracts
—

(306
)
—

(306
)
Commodity contracts
(6
)
(88
)
(152
)
(246
)
Other contracts
—

(10
)
—

(10
)
 
(6
)
(759
)
(152
)
(917
)
Long-term derivative liabilities
 

 

 

 

Foreign exchange contracts
—

(1,660
)
—

(1,660
)
Interest rate contracts
—

(22
)
—

(22
)
Commodity contracts
—

(4
)
(156
)
(160
)
Other contracts
—

(8
)
—

(8
)
 
—

(1,694
)
(156
)
(1,850
)
Total net financial liabilities
 

 

 

 

Foreign exchange contracts
—

(1,771
)
—

(1,771
)
Interest rate contracts
—

(286
)
—

(286
)
Commodity contracts
(6
)
(73
)
(205
)
(284
)
Other contracts
—

(18
)
—

(18
)
 
(6
)
(2,148
)
(205
)
(2,359
)
December 31, 2017
Level 1

Level 2

Level 3

Total Gross
Derivative
Instruments

(millions of Canadian dollars)
 

 

 

 

Financial assets
 

 

 

 

Current derivative assets
 

 

 

 

Foreign exchange contracts
—

143

—

143

Interest rate contracts
—

8

—

8

Commodity contracts
1

30

114

145

 
1

181

114

296

Long-term derivative assets
 

 

 

 

Foreign exchange contracts
—

145

—

145

Interest rate contracts
—

13

—

13

Commodity contracts
—

2

21

23

 
—

160

21

181

Financial liabilities
 

 

 

 

Current derivative liabilities
 

 

 

 

Foreign exchange contracts
—

(359
)
—

(359
)
Interest rate contracts
—

(329
)
—

(329
)
Commodity contracts
(13
)
(87
)
(339
)
(439
)
Other contracts
—

(3
)
—

(3
)
 
(13
)
(778
)
(339
)
(1,130
)
Long-term derivative liabilities
 

 

 

 

Foreign exchange contracts
—

(1,312
)
—

(1,312
)
Interest rate contracts
—

(40
)
—

(40
)
Commodity contracts
—

(3
)
(183
)
(186
)
Other contracts
—

(1
)
—

(1
)
 
—

(1,356
)
(183
)
(1,539
)
Total net financial liabilities
 

 

 

 

Foreign exchange contracts
—

(1,383
)
—

(1,383
)
Interest rate contracts
—

(348
)
—

(348
)
Commodity contracts
(12
)
(58
)
(387
)
(457
)
Other contracts
—

(4
)
—

(4
)
 
(12
)
(1,793
)
(387
)
(2,192
)

 
The significant unobservable inputs used in the fair value measurement of Level 3 derivative instruments were as follows:
March 31, 2018
Fair
Value

Unobservable
Input
Minimum
Price/Volatility

Maximum
Price/Volatility

Weighted
Average Price

Unit of
Measurement
(fair value in millions of Canadian dollars)
 
 
 
 
 
 
Commodity contracts - financial1
 
 
 
 
 
 
Natural gas
9

Forward gas price
2.49

4.25

3.20

$/mmbtu3
Crude
(4
)
Forward crude price
48.92

63.73

53.07

$/barrel
NGL
(4
)
Forward NGL price
0.34

1.83

1.29

$/gallon
Power
(100
)
Forward power price
14.30

76.27

52.00

$/MW/H
Commodity contracts - physical1
 
 
 
 
 
 
Natural gas
(81
)
Forward gas price
0.78

4.91

2.57

$/mmbtu3
Crude
(29
)
Forward crude price
38.01

91.27

75.29

$/barrel
NGL
5

Forward NGL price
0.34

1.88

0.86

$/gallon
Commodity options2
 
 
 
 
 
 
Crude
(1
)
Option volatility
22
%
24
%
23
%
 
NGL
—

Option volatility
—
%
—
%
—
%
 
Power
—

Option volatility
23
%
26
%
24
%
 
 
(205
)
 
 
 
 
 
1
Financial and physical forward commodity contracts are valued using a market approach valuation technique.
2
Commodity options contracts are valued using an option model valuation technique.
3
One million British thermal units (mmbtu).
 

If adjusted, the significant unobservable inputs disclosed in the table above would have a direct impact on
the fair value of our Level 3 derivative instruments. The significant unobservable inputs used in the fair
value measurement of Level 3 derivative instruments include forward commodity prices and, for option
contracts, price volatility. Changes in forward commodity prices could result in significantly different fair
values for our Level 3 derivatives. Changes in price volatility would change the value of the option
contracts. Generally, a change in the estimate of forward commodity prices is unrelated to a change in the
estimate of price volatility.

Changes in net fair value of derivative assets and liabilities classified as Level 3 in the fair value hierarchy were as follows:
 
Three months ended
March 31,
 
2018

2017

(millions of Canadian dollars)
 

 

Level 3 net derivative liability at beginning of period
(387
)
(295
)
Total gain/(loss)
 

 

Included in earnings1
31

83

Included in OCI
(3
)
19

Settlements
154

70

Level 3 net derivative liability at end of period
(205
)
(123
)
1
Reported within Transportation and other services revenues, Commodity costs and Operating and administrative expense in the Consolidated Statements of Earnings.
 
Our policy is to recognize transfers as at the last day of the reporting period. There were no transfers between levels as at March 31, 2018 or 2017.
 
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
Our other long-term investments in other entities with no actively quoted prices are classified as Fair Value Measurement Alternative (FMVA) investments and are recorded at cost less impairment. The carrying value of FMVA other long-term investments totaled $100 million and $99 million as at March 31, 2018 and December 31, 2017, respectively.
 
We have Restricted long-term investments held in trust totaling $280 million and $267 million as at March 31, 2018 and December 31, 2017, respectively, which are recognized at fair value.
 
We have a held to maturity preferred share investment carried at its amortized cost of $382 million and $371 million as at March 31, 2018 and December 31, 2017, respectively. These preferred shares are entitled to a cumulative preferred dividend based on the yield of 10-year Government of Canada bonds plus a margin of 4.50%. As at March 31, 2018 and December 31, 2017, the fair value of this preferred share investment approximates its face value of $580 million.
 
As at March 31, 2018 and December 31, 2017, our long-term debt had a carrying value of $65.6 billion and $64.0 billion, respectively, before debt issuance costs and a fair value of $68.0 billion and $67.4 billion, respectively. We also have noncurrent notes receivable carried at book value recorded in Deferred amounts and other assets in the Consolidated Statements of Financial Position. As at March 31, 2018 and December 31, 2017, the noncurrent notes receivable has a carrying value of $92 million and $89 million, respectively, and a fair value of $92 million and $89 million, respectively.

The fair value of other financial assets and liabilities other than derivative instruments, other long-term investments, Restricted long-term investments and long-term debt approximate their cost due to the short period to maturity.
 
NET INVESTMENT HEDGES
We have designated a portion of our United States dollar denominated debt, as well as a portfolio of
foreign exchange forward contracts, as a hedge of our net investment in United States dollar
denominated investments and subsidiaries.
 
During the three months ended March 31, 2018 and 2017, we recognized an unrealized foreign exchange
loss of $194 million on the translation of United States dollar denominated debt and a gain of $20 million, respectively, and an unrealized gain on the change in fair value of our outstanding foreign exchange forward contracts of $15 million and $9 million, respectively, in OCI. During the three months ended March 31, 2018 and 2017, we recognized a realized loss of $23 million and gain of $1 million, respectively, in OCI associated with the settlement of foreign exchange forward contracts and recognized a realized loss of $11 million and gain of $20 million, respectively, in OCI associated with the settlement of United States dollar denominated debt that had matured during the period. There was no ineffectiveness during the three months ended March 31, 2018 and 2017.