UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
or
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-15226
ENCANA CORPORATION
(Exact name of registrant as specified in its charter)
Canada | 98-0355077 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Suite 4400, 500 Centre Street S.E., P.O. Box 2850, Calgary, Alberta, Canada, T2P 2S5
(Address of principal executive offices)
Registrants telephone number, including area code (403) 645-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
[X] |
Accelerated filer |
[ ] | |||||
Non-accelerated filer |
[ ] |
(Do not check if a smaller reporting company) |
Smaller reporting company |
[ ] | ||||
Emerging growth company |
[ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Number of registrants common shares outstanding as of July 19, 2017 |
973,095,555 |
ENCANA CORPORATION
FORM 10-Q
2
DEFINITIONS
Unless the context otherwise indicates, references to us, we, our, ours, Encana and the Company refer to Encana Corporation and its consolidated subsidiaries. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:
AECO means Alberta Energy Company and is the Canadian benchmark price for natural gas.
ASU means Accounting Standards Update.
bbl or bbls means barrel or barrels.
BOE means barrels of oil equivalent.
Btu means British thermal units, a measure of heating value.
DD&A means depreciation, depletion and amortization expenses.
FASB means Financial Accounting Standards Board.
Mbbls/d means thousand barrels per day.
MBOE/d means thousand barrels of oil equivalent per day.
Mcf means thousand cubic feet.
MD&A means Managements Discussion and Analysis of Financial Condition and Results of Operations.
MMBOE means million barrels of oil equivalent.
MMBtu means million Btu.
MMcf/d means million cubic feet per day.
NGL or NGLs means natural gas liquids.
NYMEX means New York Mercantile Exchange.
OPEC means Organization of the Petroleum Exporting Countries.
SEC means United States Securities and Exchange Commission.
U.S., United States or USA means United States of America.
U.S. GAAP means U.S. Generally Accepted Accounting Principles.
WTI means West Texas Intermediate.
CONVERSIONS
In this Quarterly Report on Form 10-Q, a conversion of natural gas volumes to BOE is on the basis of six Mcf to one bbl. BOE is based on a generic energy equivalency conversion method primarily applicable at the burner tip and does not represent economic value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value, particularly if used in isolation.
CONVENTIONS
Unless otherwise specified, all dollar amounts are expressed in U.S. dollars, all references to dollars, $ or US$ are to U.S. dollars and all references to C$ are to Canadian dollars. All amounts are provided on a before tax basis, unless otherwise stated. In addition, all information provided herein is presented on an after royalties basis.
The term liquids is used to represent oil, NGLs and condensate. The term liquids rich is used to represent natural gas streams with associated liquids volumes. The term play is used to describe an area in which hydrocarbon accumulations or prospects of a given type occur. Encanas focus of development is on hydrocarbon accumulations known to exist over a large areal expanse and/or thick vertical section and are developed using hydraulic fracturing. This type of development typically has a lower geological and/or commercial development risk and lower average decline rate, when compared to conventional development.
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The term core asset refers to plays that are the focus of the Companys current capital investment and development plan. The Company continually reviews funding for development of its plays based on strategic fit, profitability and portfolio diversity and, as such, the composition of plays identified as a core asset may change over time.
References to information contained on the Companys website at www.encana.com are not incorporated by reference into, and does not constitute a part of, this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS AND RISK
This Quarterly Report on Form 10-Q contains certain forward-looking statements or information (collectively, forward-looking statements) within the meaning of applicable securities legislation. Forward-looking statements include: composition of the Companys core assets, including the allocation of capital and focus of development plans; growth in long-term shareholder value; statements with respect to the Companys strategic objectives including capital allocation strategy, focus of investment, growth of high margin liquids volumes, operating efficiencies, ability to reduce costs and ability to preserve balance sheet strength; the continued evolution of the Company to drive greater productivity and cost efficiencies; efficiencies resulting from the Companys multi-basin portfolio; balancing commodity portfolio; anticipated commodity prices; ability to accelerate activity levels; ability to optimize well and completion designs; anticipated drilling costs and cycle times; expected proceeds from announced divestitures, adjustments thereto, use of proceeds therefrom, satisfaction of regulatory approvals and closing conditions and timing of closing; anticipated proceeds and future benefits from various joint venture, partnership and other agreements; expected construction of compression and processing capacity; expansion of future midstream services; estimates of reserves and resources; success of and benefits from technical innovation and cube development approach, including enhancements to productivity and recovery; expected production and product types; statements regarding anticipated cash flow and leverage ratios; anticipated cash and cash equivalents; anticipated hedging and outcomes of risk management program; managing risk, including the impact of changes in laws and regulations; level of expenditures and impact of environmental legislation; financial flexibility and discipline; access to cash and cash equivalents and other methods of funding; the ability to meet financial obligations, manage debt and financial ratios, finance growth and compliance with financial covenants; access to the Companys credit facilities; planned annualized dividend and the declaration and payment of future dividends, if any; the adequacy of the Companys provision for taxes and legal claims; successful resolution of certain tax items; the projections and expectation of meeting the targets contained in the Companys corporate guidance, including updates thereto; ability to manage cost inflation and expected cost structures, including expected operating, transportation and processing and administrative expenses; competitiveness and pace of growth of the Companys assets within North America and against its peers; outlook of oil and gas industry generally and impact of geopolitical environment, including potential supply and demand; returns from the Companys core assets; flexibility and source of funding of capital spending plans; expected future interest expense; the Companys commitments and obligations and adjustments thereto; potential future discounts, if any, in connection with the Companys dividend reinvestment program; statements with respect to future ceiling test impairments; and the possible impact and timing of accounting pronouncements, rule changes and standards.
Readers are cautioned against unduly relying on forward-looking statements which, by their nature, involve numerous assumptions, risks and uncertainties that may cause such statements not to occur, or results to differ materially from those expressed or implied. These assumptions include: future commodity prices and differentials; foreign exchange rates; the Companys ability to access its revolving credit facilities and shelf prospectuses; assumptions contained in the Companys corporate guidance and as specified herein; data contained in key modeling statistics; availability of attractive hedges and enforceability of risk management program; effectiveness of the Companys drive to productivity and efficiencies; results from innovations; the expectation that counterparties will fulfill their obligations under the gathering, midstream and marketing agreements; access to transportation and processing facilities where Encana operates; assumed tax, royalty and regulatory regimes; enforceability of transaction agreements; and expectations and projections made in light of, and generally consistent with, Encanas historical experience and its perception of historical trends, including with respect to the pace of technological development, the benefits achieved and general industry expectations.
Risks and uncertainties that may affect these business outcomes include: the ability to generate sufficient cash flow to meet the Companys obligations; risks inherent to completing transactions on a timely basis or at all and adjustments that may impact the expected value to Encana; commodity price volatility; ability to secure adequate product transportation and potential pipeline curtailments; variability and discretion of Encanas board of directors (the Board of Directors) to declare and pay dividends, if any; the timing and costs of well, facilities and pipeline construction; business interruption and casualty losses or unexpected technical difficulties; counterparty and credit risk; risk and effect of a downgrade in credit rating, including below
4
an investment-grade credit rating, and its impact on access to capital markets and other sources of liquidity; fluctuations in currency and interest rates; risks inherent in the Companys corporate guidance; failure to achieve anticipated results from cost and efficiency initiatives; risks inherent in marketing operations; risks associated with technology; changes in or interpretation of royalty, tax, environmental, greenhouse gas, carbon, accounting and other laws or regulations; risks associated with existing and potential future lawsuits and regulatory actions made against the Company; impact to the Company as a result of disputes arising with its partners, including the suspension by its partners of certain of their obligations and the inability to dispose of assets or interests in certain arrangements; the Companys ability to acquire or find additional reserves; imprecision of reserves estimates and estimates of recoverable quantities of natural gas and liquids from plays and other sources not currently classified as proved, probable or possible reserves or economic contingent resources, including future net revenue estimates; risks associated with past and future acquisitions or divestitures of certain assets or other transactions or receipt of amounts contemplated under the transaction agreements (such transactions may include third-party capital investments, farm-outs or partnerships, which Encana may refer to from time to time as partnerships or joint ventures and the funds received in respect thereof which Encana may refer to from time to time as proceeds, deferred purchase price and/or carry capital, regardless of the legal form) as a result of various conditions not being met; and other risks described herein and in Item 1A. Risk Factors of the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (2016 Annual Report on Form 10-K) and risks and uncertainties impacting Encanas business as described from time to time in the Companys other periodic filings with the SEC.
Although the Company believes the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the assumptions, risks and uncertainties referenced above are not exhaustive. Forward-looking statements are made as of the date of this document and, except as required by law, the Company undertakes no obligation to update publicly or revise any forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified by these cautionary statements.
The reader should read carefully the risk factors described herein and in Item 1A. Risk Factors of the 2016 Annual Report on Form 10-K for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements.
5
Condensed Consolidated Statement of Earnings (unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||
(US$ millions, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Revenues |
(Note 3) | |||||||||||||||||
Product revenues |
$ | 728 | $ | 578 | $ | 1,466 | $ | 1,097 | ||||||||||
Gains (losses) on risk management, net |
(Note 19) | 129 | (330) | 467 | (207) | |||||||||||||
Market optimization |
204 | 91 | 390 | 178 | ||||||||||||||
Other |
22 | 25 | 49 | 49 | ||||||||||||||
Total Revenues |
1,083 | 364 | 2,372 | 1,117 | ||||||||||||||
Operating Expenses |
(Note 3) | |||||||||||||||||
Production, mineral and other taxes |
24 | 30 | 53 | 53 | ||||||||||||||
Transportation and processing |
(Note 19) | 206 | 244 | 418 | 513 | |||||||||||||
Operating |
113 | 135 | 245 | 301 | ||||||||||||||
Purchased product |
192 | 79 | 363 | 152 | ||||||||||||||
Depreciation, depletion and amortization |
193 | 230 | 380 | 491 | ||||||||||||||
Impairments |
(Note 8) | - | 484 | - | 1,396 | |||||||||||||
Accretion of asset retirement obligation |
(Note 11) | 10 | 13 | 21 | 26 | |||||||||||||
Administrative |
(Note 15) | 24 | 61 | 82 | 140 | |||||||||||||
Total Operating Expenses |
762 | 1,276 | 1,562 | 3,072 | ||||||||||||||
Operating Income (Loss) |
321 | (912) | 810 | (1,955) | ||||||||||||||
Other (Income) Expenses |
||||||||||||||||||
Interest |
(Note 5) | 79 | 107 | 167 | 210 | |||||||||||||
Foreign exchange (gain) loss, net |
(Notes 6, 19) | (58) | 23 | (84) | (356) | |||||||||||||
(Gain) loss on divestitures, net |
- | 2 | 1 | 2 | ||||||||||||||
Other (gains) losses, net |
(Note 9) | (27) | 24 | (35) | (63) | |||||||||||||
Total Other (Income) Expenses |
(6) | 156 | 49 | (207) | ||||||||||||||
Net Earnings (Loss) Before Income Tax |
327 | (1,068) | 761 | (1,748) | ||||||||||||||
Income tax expense (recovery) |
(Note 7) | (4) | (467) | (1) | (768) | |||||||||||||
Net Earnings (Loss) |
$ | 331 | $ | (601) | $ | 762 | $ | (980) | ||||||||||
Net Earnings (Loss) per Common Share |
||||||||||||||||||
Basic & Diluted |
(Note 12) | $ | 0.34 | $ | (0.71) | $ | 0.78 | $ | (1.15) | |||||||||
Dividends Declared per Common Share |
(Note 12) | $ | 0.015 | $ | 0.015 | $ | 0.03 | $ | 0.03 | |||||||||
Weighted Average Common Shares Outstanding (millions) |
||||||||||||||||||
Basic & Diluted |
(Note 12) | 973.0 | 849.9 | 973.0 | 849.9 |
Condensed Consolidated Statement of Comprehensive Income (unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||
(US$ millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Net Earnings (Loss) |
$ | 331 | $ | (601) | $ | 762 | $ | (980) | ||||||||||
Other Comprehensive Income (Loss), Net of Tax |
||||||||||||||||||
Foreign currency translation adjustment |
(Note 13) | (59) | 14 | (75) | (256) | |||||||||||||
Pension and other post-employment benefit plans |
(Notes 13, 17) | - | - | (1) | - | |||||||||||||
Other Comprehensive Income (Loss) |
(59) | 14 | (76) | (256) | ||||||||||||||
Comprehensive Income (Loss) |
$ | 272 | $ | (587) | $ | 686 | $ | (1,236) |
See accompanying Notes to Condensed Consolidated Financial Statements
6
Condensed Consolidated Balance Sheet (unaudited)
(US$ millions) | As at
June 30,
2017 |
As at
December 31,
2016 |
||||||||
Assets |
||||||||||
Current Assets |
||||||||||
Cash and cash equivalents |
$ | 395 | $ | 834 | ||||||
Accounts receivable and accrued revenues |
603 | 663 | ||||||||
Risk management |
(Notes 18, 19) | 145 | - | |||||||
Income tax receivable |
627 | 426 | ||||||||
1,770 | 1,923 | |||||||||
Property, Plant and Equipment, at cost: |
(Note 8) | |||||||||
Oil and natural gas properties, based on full cost accounting |
||||||||||
Proved properties |
41,221 | 39,610 | ||||||||
Unproved properties |
4,796 | 5,198 | ||||||||
Other |
2,243 | 2,194 | ||||||||
Property, plant and equipment |
48,260 | 47,002 | ||||||||
Less: Accumulated depreciation, depletion and amortization |
(39,715) | (38,863) | ||||||||
Property, plant and equipment, net |
(Note 3) | 8,545 | 8,139 | |||||||
Other Assets |
132 | 138 | ||||||||
Risk Management |
(Notes 18, 19) | 135 | 16 | |||||||
Deferred Income Taxes |
1,625 | 1,658 | ||||||||
Goodwill |
(Note 3) | 2,802 | 2,779 | |||||||
(Note 3) | $ | 15,009 | $ | 14,653 | ||||||
Liabilities and Shareholders Equity |
||||||||||
Current Liabilities |
||||||||||
Accounts payable and accrued liabilities |
$ | 1,271 | $ | 1,303 | ||||||
Income tax payable |
5 | 5 | ||||||||
Risk management |
(Notes 18, 19) | 42 | 254 | |||||||
1,318 | 1,562 | |||||||||
Long-Term Debt |
(Note 9) | 4,198 | 4,198 | |||||||
Other Liabilities and Provisions |
(Note 10) | 2,061 | 2,047 | |||||||
Risk Management |
(Notes 18, 19) | 13 | 35 | |||||||
Asset Retirement Obligation |
(Note 11) | 604 | 654 | |||||||
Deferred Income Taxes |
32 | 31 | ||||||||
8,226 | 8,527 | |||||||||
Commitments and Contingencies |
(Note 21) | |||||||||
Shareholders Equity |
||||||||||
Share capital - authorized unlimited common shares 2017 issued and outstanding: 973.0 million shares (2016: 973.0 million shares) |
(Note 12) | 4,756 | 4,756 | |||||||
Paid in surplus |
1,358 | 1,358 | ||||||||
Accumulated deficit |
(465) | (1,198) | ||||||||
Accumulated other comprehensive income |
(Note 13) | 1,134 | 1,210 | |||||||
Total Shareholders Equity |
6,783 | 6,126 | ||||||||
$ | 15,009 | $ | 14,653 |
See accompanying Notes to Condensed Consolidated Financial Statements
7
Condensed Consolidated Statement of Changes in Shareholders Equity (unaudited)
Six Months Ended June 30, 2017 (US$ millions) | Share Capital | Paid in Surplus |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Shareholders Equity |
|||||||||||||||||
Balance, December 31, 2016 |
$ | 4,756 | $ | 1,358 | $ | (1,198) | $ | 1,210 | $ | 6,126 | ||||||||||||
Net Earnings (Loss) |
- | - | 762 | - | 762 | |||||||||||||||||
Dividends on Common Shares |
(Note 12) | - | - | (29) | - | (29) | ||||||||||||||||
Common Shares Issued Under |
(Note 12) | - | - | - | - | - | ||||||||||||||||
Other Comprehensive Income (Loss) |
(Note 13) | - | - | - | (76) | (76) | ||||||||||||||||
Balance, June 30, 2017 |
$ | 4,756 | $ | 1,358 | $ | (465) | $ | 1,134 | $ | 6,783 | ||||||||||||
Six Months Ended June 30, 2016 (US$ millions) | Share Capital | Paid in Surplus |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Shareholders Equity |
|||||||||||||||||
Balance, December 31, 2015 |
$ | 3,621 | $ | 1,358 | $ | (202) | $ | 1,390 | $ | 6,167 | ||||||||||||
Net Earnings (Loss) |
- | - | (980) | - | (980) | |||||||||||||||||
Dividends on Common Shares |
(Note 12) | - | - | (25) | - | (25) | ||||||||||||||||
Common Shares Issued Under |
(Note 12) | 1 | - | - | - | 1 | ||||||||||||||||
Other Comprehensive Income (Loss) |
(Note 13) | - | - | - | (256) | (256) | ||||||||||||||||
Balance, June 30, 2016 |
$ | 3,622 | $ | 1,358 | $ | (1,207) | $ | 1,134 | $ | 4,907 |
See accompanying Notes to Condensed Consolidated Financial Statements
8
Condensed Consolidated Statement of Cash Flows (unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||
(US$ millions) |
2017 |
2016 | 2017 | 2016 | ||||||||||||||
Operating Activities |
||||||||||||||||||
Net earnings (loss) |
$ | 331 | $ | (601) | $ | 762 | $ | (980) | ||||||||||
Depreciation, depletion and amortization |
193 | 230 | 380 | 491 | ||||||||||||||
Impairments |
(Note 8) | - | 484 | - | 1,396 | |||||||||||||
Accretion of asset retirement obligation |
(Note 11) | 10 | 13 | 21 | 26 | |||||||||||||
Deferred income taxes |
(Note 7) | 14 | (455) | 56 | (759) | |||||||||||||
Unrealized (gain) loss on risk management |
(Note 19) | (110) | 451 | (472) | 506 | |||||||||||||
Unrealized foreign exchange (gain) loss |
(Note 6) | (63) | 73 | (99) | (270) | |||||||||||||
Foreign exchange on settlements |
(Note 6) | 7 | (53) | 9 | (85) | |||||||||||||
(Gain) loss on divestitures, net |
- | 2 | 1 | 2 | ||||||||||||||
Other |
(31) | 38 | (29) | (43) | ||||||||||||||
Net change in other assets and liabilities |
(4) | (5) | (16) | (9) | ||||||||||||||
Net change in non-cash working capital |
(Note 20) | (129) | (94) | (289) | (35) | |||||||||||||
Cash From (Used in) Operating Activities |
218 | 83 | 324 | 240 | ||||||||||||||
Investing Activities |
||||||||||||||||||
Capital expenditures |
(Note 3) | (415) | (215) | (814) | (574) | |||||||||||||
Acquisitions |
(Note 4) | (2) | (1) | (48) | (2) | |||||||||||||
Proceeds from divestitures |
(Note 4) | 82 | - | 85 | 6 | |||||||||||||
Net change in investments and other |
24 | (56) | 79 | (44) | ||||||||||||||
Cash From (Used in) Investing Activities |
(311) | (272) | (698) | (614) | ||||||||||||||
Financing Activities |
||||||||||||||||||
Net issuance (repayment) of revolving long-term debt |
- | 288 | - | 843 | ||||||||||||||
Repayment of long-term debt |
(Note 9) | - | - | - | (400) | |||||||||||||
Dividends on common shares |
(Note 12) | (14) | (11) | (29) | (24) | |||||||||||||
Capital lease payments and other financing arrangements |
(Note 10) | (24) | (17) | (40) | (32) | |||||||||||||
Cash From (Used in) Financing Activities |
(38) | 260 | (69) | 387 | ||||||||||||||
Foreign Exchange Gain (Loss) on Cash and Cash |
||||||||||||||||||
Equivalents Held in Foreign Currency |
3 | - | 4 | 9 | ||||||||||||||
Increase (Decrease) in Cash and Cash Equivalents |
(128) | 71 | (439) | 22 | ||||||||||||||
Cash and Cash Equivalents, Beginning of Period |
523 | 222 | 834 | 271 | ||||||||||||||
Cash and Cash Equivalents, End of Period |
$ | 395 | $ | 293 | $ | 395 | $ | 293 | ||||||||||
Cash, End of Period |
$ | 112 | $ | 31 | $ | 112 | $ | 31 | ||||||||||
Cash Equivalents, End of Period |
283 | 262 | 283 | 262 | ||||||||||||||
Cash and Cash Equivalents, End of Period |
$ | 395 | $ | 293 | $ | 395 | $ | 293 |
See accompanying Notes to Condensed Consolidated Financial Statements
9
Encana is in the business of the exploration for, the development of, and the production and marketing of oil, NGLs and natural gas.
The interim Condensed Consolidated Financial Statements include the accounts of Encana and entities in which it holds a controlling interest. All intercompany balances and transactions are eliminated on consolidation. Undivided interests in oil and natural gas exploration and production joint ventures and partnerships are consolidated on a proportionate basis. Investments in non-controlled entities over which Encana has the ability to exercise significant influence are accounted for using the equity method.
The interim Condensed Consolidated Financial Statements are prepared in conformity with U.S. GAAP and the rules and regulations of the SEC. Pursuant to these rules and regulations, certain information and disclosures normally required under U.S. GAAP have been condensed or have been disclosed on an annual basis only. Accordingly, the interim Condensed Consolidated Financial Statements should be read in conjunction with the annual audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2016, which are included in Item 8 of Encanas 2016 Annual Report on Form 10-K.
These unaudited interim Condensed Consolidated Financial Statements reflect, in the opinion of Management, all normal and recurring adjustments, with the exception of an out-of-period adjustment as described in Note 6, which are necessary to present fairly the financial position and results of the Company as at and for the periods presented. Interim condensed consolidated financial results are not necessarily indicative of consolidated financial results expected for the fiscal year.
2. Recent Accounting Pronouncements |
New Standards Issued Not Yet Adopted
As of January 1, 2018, Encana will be required to adopt ASU 2014-09, Revenue from Contracts with Customers under Topic 606 and the related subsequent updates and clarifications issued, which will replace Topic 605, Revenue Recognition, and other industry-specific guidance in the Accounting Standards Codification. The new standard is based on the principle that revenue is recognized on the transfer of promised goods or services to customers in an amount that reflects the consideration the company expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Deferral of Effective Date for Revenue from Contracts with Customers, which deferred the effective date of ASU 2014-09. The standard can be applied using either the full retrospective approach or a modified retrospective approach at the date of adoption. Encana has substantially completed evaluating the impact of ASU 2014-09 and currently expects that the standard will not have a material impact on the Companys Consolidated Financial Statements other than enhanced disclosures related to the disaggregation of revenues from contracts with customers, the Companys performance obligations and any significant judgments. Encana intends to adopt the new standard using the modified retrospective method at the date of adoption.
As of January 1, 2018, Encana will be required to adopt ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendment requires the service cost component to be presented with the related employee compensation costs, while the other components of net benefit costs are required to be presented separately from the service cost component and outside the subtotal of income from operations. In addition, the amendment allows only the service cost to be eligible for capitalization. The amendment will be applied retrospectively and provides certain practical expedients for the presentation of net periodic pension costs and net periodic postretirement benefit cost, while the capitalization of the service cost component will be applied prospectively, at the date of adoption. Encana does not expect the amendment to have a material impact on the Companys Consolidated Financial Statements.
10
As of January 1, 2019, Encana will be required to adopt ASU 2016-02, Leases under Topic 842, which will replace Topic 840 Leases. The new standard will require lessees to recognize right-of-use assets and related lease liabilities for all leases, including leases classified as operating leases, on the Consolidated Balance Sheet. The dual classification model was retained for the purpose of subsequent measurement and presentation of leases in the Consolidated Statement of Earnings and Consolidated Statement of Cash Flows. The new standard also expands disclosures related to the amount, timing and uncertainty of cash flows arising from leases. The standard will be applied using a modified retrospective approach and provides for certain practical expedients at the date of adoption. Encana is currently identifying, gathering and analyzing contracts impacted by the adoption of the new standard, as well as evaluating the system requirements for implementation. Although Encana is not able to reasonably estimate the financial impact of ASU 2016-02 at this time, the Company anticipates there will be a material impact on the Companys Consolidated Financial Statements resulting from the recognition of assets and liabilities related to operating lease activities.
As of January 1, 2020, Encana will be required to adopt ASU 2017-04, Simplifying the Test for Goodwill Impairment. The amendment eliminates the second step of the goodwill impairment test which requires the Company to measure the impairment based on the excess amount of the carrying value of the reporting units goodwill over the implied fair value of its goodwill. Under this amendment, the goodwill impairment will be measured based on the excess amount of the reporting units carrying value over its respective fair value. The amendment will be applied prospectively at the date of adoption. Encana is currently in the early stages of reviewing the amendment, but does not expect the amendment to have a material impact on the Companys Consolidated Financial Statements.
3. Segmented Information |
Encanas reportable segments are determined based on the Companys operations and geographic locations as follows:
● | Canadian Operations includes the exploration for, development of, and production of oil, NGLs and natural gas and other related activities within the Canadian cost centre. |
● | USA Operations includes the exploration for, development of, and production of oil, NGLs and natural gas and other related activities within the U.S. cost centre. |
● | Market Optimization is primarily responsible for the sale of the Companys proprietary production. These results are reported in the Canadian and USA Operations. Market optimization activities include third party purchases and sales of product to provide operational flexibility and cost mitigation for transportation commitments, product type, delivery points and customer diversification. These activities are reflected in the Market Optimization segment. Market Optimization sells substantially all of the Companys upstream production to third party customers. Transactions between segments are based on market values and are eliminated on consolidation. |
Corporate and Other mainly includes unrealized gains or losses recorded on derivative financial instruments. Once the instruments are settled, the realized gains and losses are recorded in the reporting segment to which the derivative instruments relate.
11
Results of Operations (For the three months ended June 30)
Segment and Geographic Information
Canadian Operations | USA Operations | Market Optimization | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Product revenues |
$ | 264 | $ | 196 | $ | 464 | $ | 382 | $ | - | $ | - | ||||||||||||
Gains (losses) on risk management, net |
2 | 55 | 17 | 71 | - | 1 | ||||||||||||||||||
Market optimization |
- | - | - | - | 204 | 91 | ||||||||||||||||||
Other |
1 | 1 | 4 | 7 | - | - | ||||||||||||||||||
Total Revenues |
267 | 252 | 485 | 460 | 204 | 92 | ||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Production, mineral and other taxes |
5 | 6 | 19 | 24 | - | - | ||||||||||||||||||
Transportation and processing |
133 | 155 | 51 | 73 | 22 | 22 | ||||||||||||||||||
Operating |
22 | 37 | 84 | 87 | 3 | 6 | ||||||||||||||||||
Purchased product |
- | - | - | - | 192 | 79 | ||||||||||||||||||
Depreciation, depletion and amortization |
53 | 67 | 123 | 143 | - | - | ||||||||||||||||||
Impairments |
- | 226 | - | 258 | - | - | ||||||||||||||||||
Total Operating Expenses |
213 | 491 | 277 | 585 | 217 | 107 | ||||||||||||||||||
Operating Income (Loss) |
$ | 54 | $ | (239) | $ | 208 | $ | (125) | $ | (13) | $ | (15) | ||||||||||||
Corporate & Other | Consolidated | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Product revenues |
$ | - | $ | - | $ | 728 | $ | 578 | ||||||||||||||||
Gains (losses) on risk management, net |
110 | (457) | 129 | (330) | ||||||||||||||||||||
Market optimization |
- | - | 204 | 91 | ||||||||||||||||||||
Other |
17 | 17 | 22 | 25 | ||||||||||||||||||||
Total Revenues |
127 | (440) | 1,083 | 364 | ||||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Production, mineral and other taxes |
- | - | 24 | 30 | ||||||||||||||||||||
Transportation and processing |
- | (6) | 206 | 244 | ||||||||||||||||||||
Operating |
4 | 5 | 113 | 135 | ||||||||||||||||||||
Purchased product |
- | - | 192 | 79 | ||||||||||||||||||||
Depreciation, depletion and amortization |
17 | 20 | 193 | 230 | ||||||||||||||||||||
Impairments |
- | - | - | 484 | ||||||||||||||||||||
Accretion of asset retirement obligation |
10 | 13 | 10 | 13 | ||||||||||||||||||||
Administrative |
24 | 61 | 24 | 61 | ||||||||||||||||||||
Total Operating Expenses |
55 | 93 | 762 | 1,276 | ||||||||||||||||||||
Operating Income (Loss) |
$ | 72 | $ | (533) | 321 | (912) | ||||||||||||||||||
Other (Income) Expenses |
||||||||||||||||||||||||
Interest |
79 | 107 | ||||||||||||||||||||||
Foreign exchange (gain) loss, net |
(58) | 23 | ||||||||||||||||||||||
(Gain) loss on divestitures, net |
- | 2 | ||||||||||||||||||||||
Other (gains) losses, net |
(27) | 24 | ||||||||||||||||||||||
Total Other (Income) Expenses |
(6) | 156 | ||||||||||||||||||||||
Net Earnings (Loss) Before Income Tax |
327 | (1,068) | ||||||||||||||||||||||
Income tax expense (recovery) |
(4) | (467) | ||||||||||||||||||||||
Net Earnings (Loss) |
$ | 331 | $ | (601) |
12
Results of Operations (For the six months ended June 30)
Segment and Geographic Information
Canadian Operations | USA Operations | Market Optimization | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Product revenues |
$ | 561 | $ | 420 | $ | 905 | $ | 677 | $ | - | $ | - | ||||||||||||
Gains (losses) on risk management, net |
(19) | 122 | 14 | 181 | - | 1 | ||||||||||||||||||
Market optimization |
- | - | - | - | 390 | 178 | ||||||||||||||||||
Other |
5 | 4 | 10 | 11 | - | - | ||||||||||||||||||
Total Revenues |
547 | 546 | 929 | 869 | 390 | 179 | ||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Production, mineral and other taxes |
10 | 12 | 43 | 41 | - | - | ||||||||||||||||||
Transportation and processing |
265 | 304 | 110 | 171 | 43 | 43 | ||||||||||||||||||
Operating |
53 | 77 | 171 | 200 | 12 | 14 | ||||||||||||||||||
Purchased product |
- | - | - | - | 363 | 152 | ||||||||||||||||||
Depreciation, depletion and amortization |
117 | 149 | 229 | 302 | - | - | ||||||||||||||||||
Impairments |
- | 493 | - | 903 | - | - | ||||||||||||||||||
Total Operating Expenses |
445 | 1,035 | 553 | 1,617 | 418 | 209 | ||||||||||||||||||
Operating Income (Loss) |
$ | 102 | $ | (489) | $ | 376 | $ | (748) | $ | (28) | $ | (30) | ||||||||||||
Corporate & Other | Consolidated | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Product revenues |
$ | - | $ | - | $ | 1,466 | $ | 1,097 | ||||||||||||||||
Gains (losses) on risk management, net |
472 | (511) | 467 | (207) | ||||||||||||||||||||
Market optimization |
- | - | 390 | 178 | ||||||||||||||||||||
Other |
34 | 34 | 49 | 49 | ||||||||||||||||||||
Total Revenues |
506 | (477) | 2,372 | 1,117 | ||||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Production, mineral and other taxes |
- | - | 53 | 53 | ||||||||||||||||||||
Transportation and processing |
- | (5) | 418 | 513 | ||||||||||||||||||||
Operating |
9 | 10 | 245 | 301 | ||||||||||||||||||||
Purchased product |
- | - | 363 | 152 | ||||||||||||||||||||
Depreciation, depletion and amortization |
34 | 40 | 380 | 491 | ||||||||||||||||||||
Impairments |
- | - | - | 1,396 | ||||||||||||||||||||
Accretion of asset retirement obligation |
21 | 26 | 21 | 26 | ||||||||||||||||||||
Administrative |
82 | 140 | 82 | 140 | ||||||||||||||||||||
Total Operating Expenses |
146 | 211 | 1,562 | 3,072 | ||||||||||||||||||||
Operating Income (Loss) |
$ | 360 | $ | (688) | 810 | (1,955) | ||||||||||||||||||
Other (Income) Expenses |
||||||||||||||||||||||||
Interest |
167 | 210 | ||||||||||||||||||||||
Foreign exchange (gain) loss, net |
(84) | (356) | ||||||||||||||||||||||
(Gain) loss on divestitures, net |
1 | 2 | ||||||||||||||||||||||
Other (gains) losses, net |
(35) | (63) | ||||||||||||||||||||||
Total Other (Income) Expenses |
49 | (207) | ||||||||||||||||||||||
Net Earnings (Loss) Before Income Tax |
761 | (1,748) | ||||||||||||||||||||||
Income tax expense (recovery) |
(1) | (768) | ||||||||||||||||||||||
Net Earnings (Loss) |
$ | 762 | $ | (980) |
13
Intersegment Information
Market Optimization | ||||||||||||||||||||||||
Marketing Sales | Upstream Eliminations | Total | ||||||||||||||||||||||
For the three months ended June 30 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Revenues |
$ | 951 | $ | 713 | $ | (747) | $ | (621) | $ | 204 | $ | 92 | ||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Transportation and processing |
61 | 74 | (39) | (52) | 22 | 22 | ||||||||||||||||||
Operating |
3 | 6 | - | - | 3 | 6 | ||||||||||||||||||
Purchased product |
900 | 648 | (708) | (569) | 192 | 79 | ||||||||||||||||||
Operating Income (Loss) |
$ | (13) | $ | (15) | $ | - | $ | - | $ | (13) | $ | (15) | ||||||||||||
Market Optimization | ||||||||||||||||||||||||
Marketing Sales | Upstream Eliminations | Total | ||||||||||||||||||||||
For the six months ended June 30 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Revenues |
$ | 1,907 | $ | 1,402 | $ | (1,517) | $ | (1,223) | $ | 390 | $ | 179 | ||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Transportation and processing |
125 | 154 | (82) | (111) | 43 | 43 | ||||||||||||||||||
Operating |
12 | 14 | - | - | 12 | 14 | ||||||||||||||||||
Purchased product |
1,798 | 1,263 | (1,435) | (1,111) | 363 | 152 | ||||||||||||||||||
Operating Income (Loss) |
$ | (28) | $ | (29) | $ | - | $ | (1) | $ | (28) | $ | (30) | ||||||||||||
Capital Expenditures | ||||||||||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Canadian Operations |
$ | 81 | $ | 54 | $ | 169 | $ | 117 | ||||||||||||||||
USA Operations |
333 | 159 | 644 | 456 | ||||||||||||||||||||
Corporate & Other |
1 | 2 | 1 | 1 | ||||||||||||||||||||
$ | 415 | $ | 215 | $ | 814 | $ | 574 | |||||||||||||||||
Goodwill, Property, Plant and Equipment and Total Assets by Segment
|
| |||||||||||||||||||||||
Goodwill | Property, Plant and Equipment | Total Assets | ||||||||||||||||||||||
As at | As at | As at | ||||||||||||||||||||||
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
|||||||||||||||||||
Canadian Operations |
$ | 673 | $ | 650 | $ | 701 | $ | 602 | $ | 1,661 | $ | 1,542 | ||||||||||||
USA Operations |
2,129 | 2,129 | 6,337 | 6,050 | 9,803 | 9,535 | ||||||||||||||||||
Market Optimization |
- | - | 2 | 2 | 100 | 105 | ||||||||||||||||||
Corporate & Other |
- | - | 1,505 | 1,485 | 3,445 | 3,471 | ||||||||||||||||||
$ | 2,802 | $ | 2,779 | $ | 8,545 | $ | 8,139 | $ | 15,009 | $ | 14,653 |
14
4. Acquisitions and Divestitures |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Acquisitions |
||||||||||||||||
Canadian Operations |
$ | - | $ | - | $ | 31 | $ | - | ||||||||
USA Operations |
2 | 1 | 17 | 2 | ||||||||||||
Total Acquisitions |
2 | 1 | 48 | 2 | ||||||||||||
Divestitures |
||||||||||||||||
Canadian Operations |
(3) | - | (6) | - | ||||||||||||
USA Operations |
(79) | - | (79) | (6) | ||||||||||||
Total Divestitures |
(82) | - | (85) | (6) | ||||||||||||
Net Acquisitions & (Divestitures) |
$ | (80) | $ | 1 | $ | (37) | $ | (4) |
Acquisitions
For the six months ended June 30, 2017, acquisitions in the Canadian Operations and USA Operations were $31 million and $17 million, respectively, which primarily included land purchases with oil and liquids rich potential.
Divestitures
During the three and six months ended June 30, 2017, divestitures in the USA Operations were $79 million, which primarily included the sale of the Tuscaloosa Marine Shale assets in Mississippi and Louisiana. During the six months ended June 30, 2016, divestitures in the USA Operations were $6 million, which primarily included the sale of certain properties that did not complement Encanas existing portfolio of assets.
During the six months ended June 30, 2017, divestitures in the Canadian Operations were $6 million (2016 - nil), which primarily included the sale of certain properties that did not complement Encanas existing portfolio of assets.
Amounts received from divestiture transactions were deducted from the respective Canadian and U.S. full cost pools.
5. Interest |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest Expense on: |
||||||||||||||||
Debt |
$ | 67 | $ | 76 | $ | 133 | $ | 157 | ||||||||
The Bow office building |
15 | 16 | 31 | 31 | ||||||||||||
Capital leases |
5 | 6 | 10 | 12 | ||||||||||||
Other |
(8) | 9 | (7) | 10 | ||||||||||||
$ | 79 | $ | 107 | $ | 167 | $ | 210 |
For the three and six months ended June 30, 2017, other primarily includes an interest recovery due to the successful resolution of certain tax items previously assessed by the tax authorities relating to prior taxation years.
15
6. Foreign Exchange (Gain) Loss, Net |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Unrealized Foreign Exchange (Gain) Loss on: |
||||||||||||||||
Translation of U.S. dollar financing debt issued from Canada |
$ | (45) | $ | 59 | $ | (78) | $ | (277) | ||||||||
Translation of U.S. dollar risk management contracts issued from Canada |
(28) | - | (32) | 6 | ||||||||||||
Translation of intercompany notes |
10 | 14 | 11 | 1 | ||||||||||||
(63) | 73 | (99) | (270) | |||||||||||||
Foreign Exchange on Settlements of: |
||||||||||||||||
U.S. dollar financing debt issued from Canada |
7 | (41) | 7 | (72) | ||||||||||||
U.S. dollar risk management contracts issued from Canada |
2 | - | 1 | - | ||||||||||||
Intercompany notes |
- | (12) | 2 | (13) | ||||||||||||
Other Monetary Revaluations |
(4) | 3 | 5 | (1) | ||||||||||||
$ | (58) | $ | 23 | $ | (84) | $ | (356) |
The unrealized foreign exchange (gain) loss on translation of U.S. dollar financing debt issued from Canada for the three and six months ended June 30, 2017 disclosed in the table above includes an out-of-period adjustment in respect of unrealized losses on a foreign-denominated capital lease obligation since December 2013. The cumulative impact from December 31, 2013 to June 30, 2017 recognized within foreign exchange (gain) loss in the Companys Condensed Consolidated Statement of Earnings for the three and six months ended June 30, 2017 was $68 million, before tax ($47 million, after tax). Encana has determined that the adjustment is not material to the Condensed Consolidated Financial Statements for the period ended June 30, 2017 or any prior periods. Accordingly, comparative periods presented in the Condensed Consolidated Financial Statements have not been restated.
7. Income Taxes |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Current Tax |
||||||||||||||||
Canada |
$ | (20) | $ | (14) | $ | (62) | $ | (13) | ||||||||
United States |
1 | - | 1 | - | ||||||||||||
Other Countries |
1 | 2 | 4 | 4 | ||||||||||||
Total Current Tax Expense (Recovery) |
(18) | (12) | (57) | (9) | ||||||||||||
Deferred Tax |
||||||||||||||||
Canada |
2 | (262) | 20 | (358) | ||||||||||||
United States |
6 | (252) | 21 | (608) | ||||||||||||
Other Countries |
6 | 59 | 15 | 207 | ||||||||||||
Total Deferred Tax Expense (Recovery) |
14 | (455) | 56 | (759) | ||||||||||||
Income Tax Expense (Recovery) |
$ | (4) | $ | (467) | $ | (1) | $ | (768) | ||||||||
Effective Tax Rate |
(1.2%) | 43.7% | (0.1%) | 43.9% |
Encanas interim income tax expense is determined using an estimated annual effective income tax rate applied to year-to-date net earnings before income tax plus the effect of legislative changes and amounts in respect of prior periods. The estimated annual effective income tax rate is impacted by expected annual earnings, income tax related to foreign operations, non-taxable capital gains and losses, tax differences on divestitures and transactions, and partnership tax allocations in excess of funding.
During the three and six months ended June 30, 2017, the current income tax recovery was primarily due to the successful resolution of certain tax items previously assessed by the tax authorities relating to prior taxation years. During the three and six months ended June 30, 2016, the deferred tax recovery was primarily due to the ceiling test impairments recognized in the Canadian and USA Operations as disclosed in Note 8.
16
These items resulted in an effective tax rate of (0.1) percent for the six months ended June 30, 2017, which is lower than the Canadian statutory rate of 27 percent. The effective tax rate for the six months ended June 30, 2016 exceeded the Canadian statutory tax rate of 27 percent primarily due to the impact of the foreign jurisdictional tax rates relative to the Canadian statutory tax rate applied to jurisdictional earnings.
8. Property, Plant and Equipment, Net |
As at June 30, 2017 | As at December 31, 2016 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Cost | DD&A |
Net |
Cost | DD&A | Net | |||||||||||||||||||
Canadian Operations |
||||||||||||||||||||||||
Proved properties |
$ | 13,818 | $ | (13,463 | ) | $ | 355 | $ | 13,159 | $ | (12,896 | ) | $ | 263 | ||||||||||
Unproved properties |
300 | - | 300 | 285 | - | 285 | ||||||||||||||||||
Other |
46 | - | 46 | 54 | - | 54 | ||||||||||||||||||
14,164 | (13,463 | ) | 701 | 13,498 | (12,896 | ) | 602 | |||||||||||||||||
USA Operations |
||||||||||||||||||||||||
Proved properties |
27,342 | (25,533 | ) | 1,809 | 26,393 | (25,300 | ) | 1,093 | ||||||||||||||||
Unproved properties |
4,496 | - | 4,496 | 4,913 | - | 4,913 | ||||||||||||||||||
Other |
32 | - | 32 | 44 | - | 44 | ||||||||||||||||||
31,870 | (25,533 | ) | 6,337 | 31,350 | (25,300 | ) | 6,050 | |||||||||||||||||
Market Optimization |
7 | (5 | ) | 2 | 6 | (4 | ) | 2 | ||||||||||||||||
Corporate & Other |
2,219 | (714 | ) | 1,505 | 2,148 | (663 | ) | 1,485 | ||||||||||||||||
$ | 48,260 | $ | (39,715 | ) | $ | 8,545 | $ | 47,002 | $ | (38,863 | ) | $ | 8,139 |
Canadian Operations and USA Operations property, plant and equipment include internal costs directly related to exploration, development and construction activities of $77 million, which have been capitalized during the six months ended June 30, 2017 (2016 - $72 million). Included in Corporate and Other are $61 million ($58 million as of December 31, 2016) of international property costs, which have been fully impaired.
For the three and six months ended June 30, 2017, the Company did not recognize any ceiling test impairments in the Canadian or U.S. cost centres. For the three months ended June 30, 2016, the Company recognized before-tax ceiling test impairments of $226 million in the Canadian cost centre and $258 million in the U.S. cost centre. For the six months ended June 30, 2016, the Company recognized before-tax ceiling test impairments of $493 million in the Canadian cost centre and $903 million in the U.S. cost centre. The impairments recognized in 2016 are included with accumulated DD&A in the table above and resulted primarily from the decline in the 12-month average trailing prices which reduced proved reserves volumes and values.
17
The 12-month average trailing prices used in the ceiling test calculations were based on the benchmark prices presented below. The benchmark prices were adjusted for basis differentials to determine local reference prices, transportation costs and tariffs, heat content and quality.
Oil & NGLs | Natural Gas | |||||||||||||||
WTI | Edmonton Condensate (2) |
Henry Hub | AECO | |||||||||||||
($/bbl) | (C$/bbl) | ($/MMBtu) | (C$/MMBtu) | |||||||||||||
12-Month Average Trailing Reserves Pricing (1) |
||||||||||||||||
June 30, 2017 |
48.95 | 64.27 | 3.01 | 2.76 | ||||||||||||
December 31, 2016 |
42.75 | 55.39 | 2.49 | 2.17 | ||||||||||||
June 30, 2016 |
43.12 | 55.63 | 2.24 | 2.14 |
(1) | All prices were held constant in all future years when estimating net revenues and reserves. |
(2) | Edmonton Condensate benchmark price has replaced the previously disclosed Edmonton Light Sweet benchmark price. |
Capital Lease Arrangements
The Company has several lease arrangements that are accounted for as capital leases including an office building and an offshore production platform.
As at June 30, 2017, the total carrying value of assets under capital lease was $49 million ($51 million as at December 31, 2016), net of accumulated amortization of $666 million ($648 million as at December 31, 2016). Liabilities for the capital lease arrangements are included in other liabilities and provisions in the Condensed Consolidated Balance Sheet and are disclosed in Note 10.
Other Arrangement
As at June 30, 2017, Corporate and Other property, plant and equipment and total assets include a carrying value of $1,224 million ($1,194 million as at December 31, 2016) related to The Bow office building, which is under a 25-year lease agreement. The Bow asset is being depreciated over the 60-year estimated life of the building. At the conclusion of the 25-year term, the remaining asset and corresponding liability are expected to be derecognized as disclosed in Note 10.
18
9. Long-Term Debt |
As at | As at | |||||||
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
U.S. Dollar Denominated Debt |
||||||||
U.S. Unsecured Notes |
||||||||
6.50% due May 15, 2019 |
$ | 500 | $ | 500 | ||||
3.90% due November 15, 2021 |
600 | 600 | ||||||
8.125% due September 15, 2030 |
300 | 300 | ||||||
7.20% due November 1, 2031 |
350 | 350 | ||||||
7.375% due November 1, 2031 |
500 | 500 | ||||||
6.50% due August 15, 2034 |
750 | 750 | ||||||
6.625% due August 15, 2037 (1) |
462 | 462 | ||||||
6.50% due February 1, 2038 (1) |
505 | 505 | ||||||
5.15% due November 15, 2041 (1) |
244 | 244 | ||||||
Total Principal |
4,211 | 4,211 | ||||||
Increase in Value of Debt Acquired |
26 | 26 | ||||||
Unamortized Debt Discounts and Issuance Costs |
(39) | (39) | ||||||
Current Portion of Long-Term Debt |
- | - | ||||||
$ | 4,198 | $ | 4,198 |
(1) | Notes accepted for purchase in the March 2016 Tender Offers. |
As at June 30, 2017, total long-term debt had a carrying value of $4,198 million and a fair value of $4,752 million (as at December 31, 2016 - carrying value of $4,198 million and a fair value of $4,553 million). The estimated fair value of long-term borrowings is categorized within Level 2 of the fair value hierarchy and has been determined based on market information of long-term debt with similar terms and maturity, or by discounting future payments of interest and principal at interest rates expected to be available to the Company at period end.
On March 16, 2016, Encana announced tender offers (collectively, the Tender Offers) for certain of the Companys outstanding senior notes (collectively, the Notes). The Tender Offers were for an aggregate purchase price of $250 million, excluding accrued and unpaid interest. The consideration for each $1,000 principal amount of Notes validly tendered and accepted for purchase included an early tender premium of $30 per $1,000 principal amount of Notes accepted for purchase, provided the Notes were validly tendered at or prior to the early tender date of March 29, 2016. All Notes validly tendered and accepted for purchase also received accrued and unpaid interest up to the settlement date.
On March 30, 2016, Encana announced an increase in the aggregate purchase price of the Tender Offers to $400 million, excluding accrued and unpaid interest, and accepted for purchase: i) $156 million aggregate principal amount of 5.15 percent notes due 2041; ii) $295 million aggregate principal amount of 6.50 percent notes due 2038; and iii) $38 million aggregate principal amount of 6.625 percent notes due 2037. The Company paid an aggregate amount of $406 million, including accrued and unpaid interest of $6 million and an early tender premium of $14 million, for Notes accepted for purchase. The Company used cash on hand and borrowings under its revolving credit facility to fund the Tender Offers.
Encana also recognized a gain on the early debt retirement of $103 million, before tax, representing the difference between the carrying amount of the Notes accepted for purchase and the consideration paid. The gain on the early debt retirement net of the early tender premium totaled $89 million, which is included in other (gains) losses in the Condensed Consolidated Statement of Earnings.
19
10. Other Liabilities and Provisions |
As at | As at | |||||||
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
The Bow Office Building |
$ | 1,305 | $ | 1,266 | ||||
Capital Lease Obligations |
335 | 304 | ||||||
Unrecognized Tax Benefits |
187 | 193 | ||||||
Pensions and Other Post-Employment Benefits |
123 | 124 | ||||||
Long-Term Incentive Costs (See Note 16) |
78 | 120 | ||||||
Other Derivative Contracts (See Notes 18, 19) |
11 | 14 | ||||||
Other |
22 | 26 | ||||||
$ | 2,061 | $ | 2,047 |
The Bow Office Building
As described in Note 8, Encana has recognized the accumulated costs for The Bow office building, which is under a 25-year lease agreement. At the conclusion of the lease term, the remaining asset and corresponding liability are expected to be derecognized. Encana has also subleased approximately 50 percent of The Bow office space under the lease agreement. The total expected future principal and interest payments related to the 25-year lease agreement and the total undiscounted future amounts expected to be recovered from the sublease are outlined below.
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
Expected Future Lease Payments |
$ | 37 | $ | 73 | $ | 74 | $ | 75 | $ | 75 | $ | 1,327 | $ | 1,661 | ||||||||||||||
Less: Amounts Representing Interest |
32 | 62 | 62 | 62 | 61 | 834 | 1,113 | |||||||||||||||||||||
Present Value of Expected Future |
||||||||||||||||||||||||||||
Lease Payments |
$ | 5 | $ | 11 | $ | 12 | $ | 13 | $ | 14 | $ | 493 | $ | 548 | ||||||||||||||
Sublease Recoveries (undiscounted) |
$ | (18) | $ | (36 | ) | $ | (36 | ) | $ | (37 | ) | $ | (37 | ) | $ | (653 | ) | $ | (817 | ) | ||||||||
Capital Lease Obligations
As described in Note 8, the Company has several lease arrangements that are accounted for as capital leases including an office building and the Deep Panuke offshore Production Field Centre (PFC). Variable interests related to the PFC are described in Note 14.
The total expected future lease payments related to the Companys capital lease obligations are outlined below.
|
| |||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
Expected Future Lease Payments |
$ | 49 | $ | 99 | $ | 99 | $ | 99 | $ | 87 | $ | 46 | $ | 479 | ||||||||||||||
Less: Amounts Representing Interest |
11 | 20 | 15 | 10 | 4 | 7 | 67 | |||||||||||||||||||||
Present Value of Expected Future Lease Payments |
$ | 38 | $ | 79 | $ | 84 | $ | 89 | $ | 83 | $ | 39 | $ | 412 |
20
11. Asset Retirement Obligation |
As at | As at | |||||
June 30, | December 31, | |||||
2017 | 2016 | |||||
Asset Retirement Obligation, Beginning of Year |
$ | 687 | $ 814 | |||
Liabilities Incurred and Acquired |
6 | 18 | ||||
Liabilities Settled and Divested |
(75) | (107) | ||||
Change in Estimated Future Cash Outflows |
- | (99) | ||||
Accretion Expense |
21 | 51 | ||||
Foreign Currency Translation |
11 | 10 | ||||
Asset Retirement Obligation, End of Period |
$ | 650 | $ 687 | |||
Current Portion |
$ | 46 | $ 33 | |||
Long-Term Portion |
604 | 654 | ||||
$ | 650 | $ 687 |
12. Share Capital |
Authorized
The Company is authorized to issue an unlimited number of no par value common shares and Class A Preferred Shares limited to a number equal to not more than 20 percent of the issued and outstanding number of common shares at the time of issuance. No Class A Preferred Shares are outstanding.
Issued and Outstanding
As at June 30, 2017 |
As at December 31, 2016 |
|||||||||||||||
Number (millions) |
Amount | Number (millions) |
Amount | |||||||||||||
Common Shares Outstanding, Beginning of Year |
973.0 | $ | 4,756 | 849.8 | $ | 3,621 | ||||||||||
Common Shares Issued |
- | - | 123.1 | 1,134 | ||||||||||||
Common Shares Issued Under Dividend Reinvestment Plan |
- | - | 0.1 | 1 | ||||||||||||
Common Shares Outstanding, End of Period |
973.0 | $ | 4,756 | 973.0 | $ | 4,756 |
During the six months ended June 30, 2017, Encana issued 30,671 common shares totaling $0.3 million under the Companys dividend reinvestment plan (DRIP). During the twelve months ended December 31, 2016, Encana issued 121,249 common shares totaling $1 million under the DRIP.
Dividends
During the three months ended June 30, 2017, Encana paid dividends of $0.015 per common share totaling $14 million (2016 - $0.015 per common share totaling $12 million). During the six months ended June 30, 2017, Encana paid dividends of $0.03 per common share totaling $29 million (2016 - $0.03 per common share totaling $25 million).
For the three and six months ended June 30, 2017, the dividends paid included $0.1 million and $0.3 million, respectively, in common shares issued in lieu of cash dividends under the DRIP (for the three and six months ended June 30, 2016 - $0.3 million and $0.6 million, respectively).
On July 20, 2017, the Board of Directors declared a dividend of $0.015 per common share payable on September 29, 2017 to common shareholders of record as of September 15, 2017.
21
Earnings Per Common Share
The following table presents the computation of net earnings per common share:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(US$ millions, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net Earnings (Loss) |
$ | 331 | $ | (601) | $ | 762 | $ | (980) | ||||||||
Number of Common Shares: |
||||||||||||||||
Weighted average common shares outstanding - Basic |
973.0 | 849.9 | 973.0 | 849.9 | ||||||||||||
Effect of dilutive securities |
- | - | - | - | ||||||||||||
Weighted average common shares outstanding - Diluted |
973.0 | 849.9 | 973.0 | 849.9 | ||||||||||||
Net Earnings (Loss) per Common Share |
||||||||||||||||
Basic & Diluted |
$ | 0.34 | $ | (0.71) | $ | 0.78 | $ | (1.15) |
Encana Stock Option Plan
Encana has share-based compensation plans that allow employees to purchase common shares of the Company. Option exercise prices are not less than the market value of the common shares on the date the options are granted. All options outstanding as at June 30, 2017 have associated Tandem Stock Appreciation Rights (TSARs) attached. In lieu of exercising the option, the associated TSARs give the option holder the right to receive a cash payment equal to the excess of the market price of Encanas common shares at the time of the exercise over the original grant price.
In addition, certain stock options granted are performance-based whereby vesting is also subject to Encana attaining prescribed performance relative to predetermined key measures. Historically, most holders of options with TSARs have elected to exercise their stock options as a Stock Appreciation Right (SAR) in exchange for a cash payment. As a result, outstanding TSARs are not considered potentially dilutive securities.
Encana Restricted Share Units (RSUs)
Encana has a share-based compensation plan whereby eligible employees are granted RSUs. An RSU is a conditional grant to receive an Encana common share, or the cash equivalent, as determined by Encana, upon vesting of the RSUs and in accordance with the terms of the RSU Plan and Grant Agreement. The Company intends to settle vested RSUs in cash on the vesting date. As a result, RSUs are not considered potentially dilutive securities.
22
13. Accumulated Other Comprehensive Income |
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Foreign Currency Translation Adjustment |
||||||||||||||||
Balance, Beginning of Period |
$ | 1,184 | $ | 1,113 | $ | 1,200 | $ | 1,383 | ||||||||
Change in Foreign Currency Translation Adjustment |
(59) | 14 | (75) | (256) | ||||||||||||
Balance, End of Period |
$ | 1,125 | $ | 1,127 | $ | 1,125 | $ | 1,127 | ||||||||
Pension and Other Post-Employment Benefit Plans |
||||||||||||||||
Balance, Beginning of Period |
$ | 9 | $ | 7 | $ | 10 | $ | 7 | ||||||||
Reclassification of Net Actuarial (Gains) and Losses to Net Earnings (See Note 17) |
- | - | (1) | - | ||||||||||||
Income Taxes |
- | - | - | - | ||||||||||||
Balance, End of Period |
$ | 9 | $ | 7 | $ | 9 | $ | 7 | ||||||||
Total Accumulated Other Comprehensive Income |
$ | 1,134 | $ | 1,134 | $ | 1,134 | $ | 1,134 |
14. Variable Interest Entities |
Production Field Centre
In 2008, Encana entered into a contract for the design, construction and operation of the PFC at its Deep Panuke facility. Upon commencement of operations in December 2013, Encana recognized the PFC as a capital lease asset. Under the lease contract, Encana has a purchase option and the option to extend the lease for 12 one-year terms at fixed prices after the initial lease term expires in 2021.
As a result of the purchase option and fixed price renewal options, Encana has determined it holds variable interests and that the related leasing entity qualifies as a variable interest entity (VIE). Encana is not the primary beneficiary of the VIE as the Company does not have the power to direct the activities that most significantly impact the VIEs economic performance. Encana is not required to provide any financial support or guarantees to the leasing entity or its affiliates, other than the contractual payments under the lease and operating agreements. Encanas maximum exposure is the expected lease payments over the initial contract term. As at June 30, 2017, Encana had a capital lease obligation of $350 million ($299 million as at December 31, 2016) related to the PFC.
Veresen Midstream Limited Partnership
Veresen Midstream Limited Partnership (VMLP) provides gathering, compression and processing services under various agreements related to the Companys development of liquids and natural gas production in the Montney play. As at June 30, 2017, VMLP provides approximately 623 MMcf/d of natural gas gathering and compression and 304 MMcf/d of natural gas processing under long-term service agreements with remaining terms ranging from up to 15 to 28 years and have various renewal terms providing up to a potential maximum of 10 years.
Encana has determined that VMLP is a VIE and that Encana holds variable interests in VMLP. Encana is not the primary beneficiary as the Company does not have the power to direct the activities that most significantly impact VMLPs economic performance. These key activities relate to the construction, operation, maintenance and marketing of the assets owned by VMLP. The variable interests arise from certain terms under the various long-term service agreements and include: i) a take or pay for volumes in certain agreements; ii) an operating fee of which a portion can be converted into a fixed fee once VMLP assumes operatorship of certain assets; and iii) a potential payout of minimum costs in certain agreements. The potential payout of minimum costs will be assessed in the eighth year of the assets service period and is based on whether there is an overall shortfall of total system cash flows from natural gas gathered and compressed under certain agreements. The potential payout amount can be reduced in the event VMLP markets unutilized capacity to third party users. Encana is not required to provide any financial support or guarantees to VMLP.
23
As a result of Encanas involvement with VMLP, the maximum total exposure, which represents the potential exposure to Encana in the event the assets under the agreements are deemed worthless, is estimated to be $1,988 million as at June 30, 2017. The estimate comprises the take or pay volume commitments and the potential payout of minimum costs. The take or pay volume commitments associated with certain gathering and processing assets are included in Note 21 under Transportation and Processing. The potential payout requirement is highly uncertain as the amount is contingent on future production estimates, pace of development and the amount of capacity contracted to third parties. As at June 30, 2017, accounts payable and accrued liabilities included $0.3 million related to the take or pay commitment.
15. Restructuring Charges |
In February 2016, Encana announced workforce reductions to better align staffing levels and the organizational structure with the Companys reduced capital spending program. During 2016, Encana incurred total restructuring charges of $34 million, before tax, primarily related to severance costs, of which $1 million remains accrued as at June 30, 2017 and is expected to be paid in 2017.
Restructuring charges are included in administrative expense presented in the Corporate & Other segment in the Condensed Consolidated Statement of Earnings.
As at June 30, 2017 |
As at December 31, 2016 |
|||||||
Outstanding Restructuring Accrual, Beginning of Year |
$ | 7 | $ | 13 | ||||
Current Period Restructuring Expenses Incurred |
- | 34 | ||||||
Restructuring Costs Paid |
(6) | (40) | ||||||
Outstanding Restructuring Accrual, End of Period |
$ | 1 | $ | 7 |
16. Compensation Plans |
Encana has a number of compensation arrangements under which the Company awards various types of long-term incentive grants to eligible employees. They include TSARs, Performance TSARs, SARs, Performance Share Units (PSUs), Deferred Share Units (DSUs) and RSUs. These compensation arrangements are share-based.
Encana accounts for TSARs, Performance TSARs, SARs, PSUs and RSUs held by employees as cash-settled share-based payment transactions and, accordingly, accrues compensation costs over the vesting period based on the fair value of the rights determined using the Black-Scholes-Merton and other fair value models.
The following weighted average assumptions were used to determine the fair value of the share units held by employees:
As at June 30, 2017 | As at June 30, 2016 | |||||||||||||||
US$ Share Units |
C$ Share Units |
US$ Share Units |
C$ Share Units |
|||||||||||||
Risk Free Interest Rate |
1.09% | 1.09% | 0.54% | 0.54% | ||||||||||||
Dividend Yield |
0.68% | 0.70% | 0.77% | 0.79% | ||||||||||||
Expected Volatility Rate (1) |
59.17% | 54.94% | 53.96% | 50.39% | ||||||||||||
Expected Term |
1.9 yrs | 1.9 yrs | 1.7 yrs | 2.0 yrs | ||||||||||||
Market Share Price |
US$8.80 | C$11.41 | US$7.79 | C$10.05 |
(1) | Volatility was estimated using historical rates. |
24
The Company has recognized the following share-based compensation costs:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Total Compensation Costs of Transactions Classified as Cash-Settled |
$ (41) | $ 38 | $ (7) | $ 46 | ||||||||||||
Less: Total Share-Based Compensation Costs Capitalized |
11 | (9) | - | (10) | ||||||||||||
Total Share-Based Compensation Expense (Recovery) |
$ (30) | $ 29 | $ (7) | $ 36 | ||||||||||||
Recognized on the Condensed Consolidated Statement of Earnings in: |
||||||||||||||||
Operating |
$ (8) | $ 11 | $ - | $ 13 | ||||||||||||
Administrative |
(22) | 18 | (7) | 23 | ||||||||||||
$ (30) | $ 29 | $ (7) | $ 36 |
As at June 30, 2017, the liability for share-based payment transactions totaled $155 million ($208 million as at December 31, 2016), of which $77 million ($88 million as at December 31, 2016) is recognized in accounts payable and accrued liabilities and $78 million ($120 million as at December 31, 2016) is recognized in other liabilities and provisions in the Condensed Consolidated Balance Sheet.
As at June 30, 2017 |
As at December 31, 2016 |
|||||||
Liability for Cash-Settled Share-Based Payment Transactions: |
||||||||
Unvested |
$ | 128 | $ | 171 | ||||
Vested |
27 | 37 | ||||||
$ | 155 | $ | 208 |
The following units were granted primarily in conjunction with the Companys February annual long-term incentive award. The TSARs and SARs were granted at the volume-weighted average trading price of Encanas common shares for the five days prior to the grant date.
Six Months Ended June 30, 2017 (thousands of units) |
||||
TSARs |
850 | |||
SARs |
349 | |||
PSUs |
1,964 | |||
DSUs |
140 | |||
RSUs |
4,751 | |||
17. Pension and Other Post-Employment Benefits |
The Company has recognized total benefit plans expense which includes pension benefits and other post-employment benefits (OPEB) for the six months ended June 30 as follows:
Pension Benefits | OPEB | Total | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Net Defined Periodic Benefit Cost |
$ | (1) | $ | (1) | $ | 5 | $ | 7 | $ | 4 | $ | 6 | ||||||||||||
Defined Contribution Plan Expense |
12 | 14 | - | - | 12 | 14 | ||||||||||||||||||
Total Benefit Plans Expense |
$ | 11 | $ | 13 | $ | 5 | $ | 7 | $ | 16 | $ | 20 |
Of the total benefit plans expense, $12 million (2016 - $16 million) was included in operating expense and $4 million (2016 - $4 million) was included in administrative expense.
25
The net defined periodic benefit cost for the six months ended June 30 are as follows:
Defined Benefits | OPEB | Total | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Service Cost |
$ | - | $ | 1 | $ | 4 | $ | 5 | $ | 4 | $ | 6 | ||||||||||||
Interest Cost |
4 | 4 | 2 | 2 | 6 | 6 | ||||||||||||||||||
Expected Return on Plan Assets |
(5) | (6) | - | - | (5) | (6) | ||||||||||||||||||
Amounts Reclassified from Accumulated Other Comprehensive Income: |
||||||||||||||||||||||||
Amortization of net actuarial (gains) and losses (1) |
- | - | (1) | - | (1) | - | ||||||||||||||||||
Total Net Defined Periodic Benefit Cost |
$ | (1) | $ | (1) | $ | 5 | $ | 7 | $ | 4 | $ | 6 |
(1) | Included in operating expense in the Condensed Consolidated Statement of Earnings. |
18. 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.
Recurring fair value measurements are performed for risk management assets and liabilities and other derivative contracts, as discussed further in Note 19. These items are carried at fair value in the Condensed 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 June 30, 2017 | Level 1 Quoted Prices in Active Markets |
Level 2 Other |
Level 3 Significant Unobservable Inputs |
Total Fair Value |
Netting (1) | Carrying Amount |
||||||||||||||||||
Risk Management Assets |
||||||||||||||||||||||||
Commodity Derivatives: |
||||||||||||||||||||||||
Current assets |
$ | - | $ | 128 | $ | 31 | $ | 159 | $ | (30) | $ | 129 | ||||||||||||
Long-term assets |
- | 141 | - | 141 | (15) | 126 | ||||||||||||||||||
Foreign Currency Derivatives: |
||||||||||||||||||||||||
Current assets |
- | 16 | - | 16 | - | 16 | ||||||||||||||||||
Long-term assets |
- | 9 | - | 9 | - | 9 | ||||||||||||||||||
Risk Management Liabilities |
||||||||||||||||||||||||
Commodity Derivatives: |
||||||||||||||||||||||||
Current liabilities |
$ | - | $ | 72 | $ | - | $ | 72 | $ | (30) | $ | 42 | ||||||||||||
Long-term liabilities |
- | 28 | - | 28 | (15) | 13 | ||||||||||||||||||
Other Derivative Contracts |
||||||||||||||||||||||||
Current in accounts payable and accrued liabilities |
$ | - | $ | 5 | $ | - | $ | 5 | $ | - | $ | 5 | ||||||||||||
Long-term in other liabilities and provisions |
- | 11 | - | 11 | - | 11 |
(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. |
26
As at December 31, 2016 | Level 1 Quoted Prices in Active Markets |
Level 2 Other |
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 Companys Level 1 and Level 2 risk management assets and liabilities consist of commodity fixed price contracts, NYMEX three-way options, NYMEX costless collars, NYMEX call options, foreign currency swaps and basis swaps with terms to 2023. Level 2 also includes financial guarantee contracts as discussed in Note 19. 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 June 30, 2017, the Companys Level 3 risk management assets and liabilities consist of WTI three-way options and WTI costless collars with terms to 2017. 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 for the six months ended June 30 is presented below:
Risk Management | ||||||||
2017 | 2016 | |||||||
Balance, Beginning of Year |
$ | (36) | $ | 16 | ||||
Total Gains (Losses) |
64 | (4) | ||||||
Purchases, Sales, Issuances and Settlements: |
||||||||
Settlements |
3 | (3) | ||||||
Transfers Out of Level 3 (1) |
- | (10) | ||||||
Balance, End of Period |
$ | 31 | $ | (1) | ||||
Change in Unrealized Gains (Losses) Related to Assets and Liabilities Held at End of Period |
$ | 59 | $ | (7) |
(1) | The Companys policy is to recognize transfers out of Level 3 on the date of the event of change in circumstances that caused the transfer. |
27
Quantitative information about unobservable inputs used in Level 3 fair value measurements is presented below:
Valuation Technique | Unobservable Input | As at June 30, 2017 |
As at December 31, 2016 |
|||||||||||||
Risk Management - WTI Options |
Option Model | Implied Volatility | 17% - 48% | 18% - 64% |
A 10 percent increase or decrease in implied volatility for the WTI options would cause a corresponding $1 million ($3 million as at December 31, 2016) increase or decrease to net risk management assets and liabilities.
19. Financial Instruments and Risk Management |
A) Financial Instruments
Encanas 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, electricity costs 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 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 Companys 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 and Mont Belvieu-based contracts such as fixed price contracts, options and costless collars. Encana also enters 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 also enters into basis swaps to manage against widening price differentials between various production areas and benchmark price points.
Power - The Company has entered into Canadian dollar denominated derivative contracts to manage its electricity consumption costs.
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 Companys 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 June 30, 2017, Encana had $620 million notional U.S. dollar denominated currency swaps at an average exchange rate of US$0.7421 to C$1. The notional contracts mature monthly throughout 2017 and 2018.
28
Risk Management Positions as at June 30, 2017
Notional Volumes | Term | Average Price | Fair Value | |||||||||||||
Crude Oil and NGL Contracts |
||||||||||||||||
Fixed Price Contracts |
||||||||||||||||
WTI Fixed Price |
33.0 Mbbls/d | 2017 | 52.27 US$/bbl | $ | 33 | |||||||||||
WTI Fixed Price |
31.3 Mbbls/d | 2018 | 55.45 US$/bbl | 80 | ||||||||||||
Butane Fixed Price |
2.5 Mbbls/d | 2017 | 36.12 US$/bbl | 2 | ||||||||||||
WTI Three-Way Options |
25.0 Mbbls/d | 2017 | 18 | |||||||||||||
Sold call price |
61.40 US$/bbl | |||||||||||||||
Bought put price |
49.95 US$/bbl | |||||||||||||||
Sold put price |
39.40 US$/bbl | |||||||||||||||
WTI Costless Collars |
30.0 Mbbls/d | Q3 -Q4 2017 | 13 | |||||||||||||
Sold call price |
56.05 US$/bbl | |||||||||||||||
Bought put price |
46.22 US$/bbl | |||||||||||||||
Basis Contracts (1) |
2017 - 2020 | 9 | ||||||||||||||
Crude Oil and NGLs Fair Value Position |
155 | |||||||||||||||
Natural Gas Contracts |
||||||||||||||||
Fixed Price Contracts |
||||||||||||||||
NYMEX Fixed Price |
405 MMcf/d | 2017 | 3.13 US$/Mcf | 3 | ||||||||||||
NYMEX Fixed Price |
650 MMcf/d | 2018 | 3.07 US$/Mcf | 19 | ||||||||||||
NYMEX Three-Way Options |
300 MMcf/d | 2017 | (8 | ) | ||||||||||||
Sold call price |
3.07 US$/Mcf | |||||||||||||||
Bought put price |
2.75 US$/Mcf | |||||||||||||||
Sold put price |
2.27 US$/Mcf | |||||||||||||||
NYMEX Costless Collars |
160 MMcf/d | 2017 | 2 | |||||||||||||
Sold call price |
3.57 US$/Mcf | |||||||||||||||
Bought put price |
2.96 US$/Mcf | |||||||||||||||
NYMEX Call Options |
||||||||||||||||
Sold call price |
230 MMcf/d | 2018 | 3.75 US$/Mcf | (10 | ) | |||||||||||
Sold call price |
230 MMcf/d | 2019 | 3.75 US$/Mcf | (11 | ) | |||||||||||
Basis Contracts (2) |
2017 - 2023 | 50 | ||||||||||||||
Natural Gas Fair Value Position |
45 | |||||||||||||||
Other Derivative Contracts |
||||||||||||||||
Fair Value Position |
(16 | ) | ||||||||||||||
Foreign Currency Contracts |
||||||||||||||||
Fair Value Position (3) |
2017-2018 | 25 | ||||||||||||||
Total Fair Value Position |
$ | 209 |
(1) | Encana has entered into swaps to protect against widening Midland and Edmonton Condensate differentials to WTI. |
(2) | Encana has entered into swaps to protect against widening natural gas price differentials between benchmark and regional sales prices. |
(3) | Encana has entered into U.S. dollar denominated fixed-for-floating average currency swaps to protect against widening fluctuations between the Canadian and U.S. dollars. |
29
Earnings Impact of Realized and Unrealized Gains (Losses) on Risk Management Positions
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Realized Gains (Losses) on Risk Management |
||||||||||||||||
Commodity and Other Derivatives: |
||||||||||||||||
Revenues (1) |
$ | 19 | $ | 127 | $ | (5) | $ | 304 | ||||||||
Transportation and processing |
- | 2 | (4) | (4) | ||||||||||||
Foreign Currency Derivatives: |
||||||||||||||||
Foreign exchange |
(2) | - | (1) | - | ||||||||||||
$ | 17 | $ | 129 | $ | (10) | $ | 300 | |||||||||
Unrealized Gains (Losses) on Risk Management |
||||||||||||||||
Commodity and Other Derivatives: |
||||||||||||||||
Revenues (2) |
$ | 110 | $ | (457) | $ | 472 | $ | (511) | ||||||||
Transportation and processing |
- | 6 | - | 5 | ||||||||||||
Foreign Currency Derivatives: |
||||||||||||||||
Foreign exchange |
24 | - | 26 | - | ||||||||||||
$ | 134 | $ | (451) | $ | 498 | $ | (506) | |||||||||
Total Realized and Unrealized Gains (Losses) on Risk Management, net |
||||||||||||||||
Commodity and Other Derivatives: |
||||||||||||||||
Revenues (1) (2) |
$ | 129 | $ | (330) | $ | 467 | $ | (207) | ||||||||
Transportation and processing |
- | 8 | (4) | 1 | ||||||||||||
Foreign Currency Derivatives: |
||||||||||||||||
Foreign exchange |
22 | - | 25 | - | ||||||||||||
$ | 151 | $ | (322) | $ | 488 | $ | (206) |
(1) | Includes realized gains of $1 million and $3 million for the three and six months ended June 30, 2017, respectively, (2016 - gains of $2 million and $3 million, respectively) related to other derivative contracts. |
(2) | Includes unrealized losses of $1 million for the three and six months ended June 30, 2017 (2016 nil and nil, respectively) related to other derivative contracts. |
Reconciliation of Unrealized Risk Management Positions from January 1 to June 30
2017 | 2016 | |||||||||||
Fair Value | 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 |
488 | $ | 488 | $ | (206) | |||||||
Settlement of Other Derivative Contracts | 3 | |||||||||||
Fair Value of Contracts Realized During the Period | 10 | 10 | (300) | |||||||||
Fair Value of Contracts, End of Period | $ | 209 | $ | 498 | $ | (506) |
Risk management assets and liabilities arise from the use of derivative financial instruments and are measured at fair value. See Note 18 for a discussion of fair value measurements.
30
Unrealized Risk Management Positions
As at | As at | |||||||
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Risk Management Assets |
||||||||
Current |
$ | 145 | $ | - | ||||
Long-term |
135 | 16 | ||||||
280 | 16 | |||||||
Risk Management Liabilities |
||||||||
Current |
42 | 254 | ||||||
Long-term |
13 | 35 | ||||||
55 | 289 | |||||||
Other Derivative Contracts |
||||||||
Current in accounts payable and accrued liabilities |
5 | 5 | ||||||
Long-term in other liabilities and provisions |
11 | 14 | ||||||
Net Risk Management Assets (Liabilities) and Other Derivative Contracts |
$ | 209 | $ | (292 | ) |
C) 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 Companys 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 at June 30, 2017, the Company had no significant credit derivatives in place and held no collateral.
As at June 30, 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 Companys accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks. As at June 30, 2017, approximately 92 percent (90 percent as at December 31, 2016) of Encanas accounts receivable and financial derivative credit exposures were with investment grade counterparties.
As at June 30, 2017, Encana had four 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 June 30, 2017, these counterparties accounted for 16 percent, 13 percent, 12 percent and 10 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, 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 purchaser. The circumstances that would require Encana to perform under the agreement include events where the purchaser fails to make payment to the guaranteed party and/or the purchaser is subject to an insolvency event. The agreements have remaining terms from four to seven years with a fair value recognized of $16 million as at June 30, 2017 ($19 million as at December 31, 2016). The maximum potential amount of undiscounted future payments is $315 million as at June 30, 2017, and is considered unlikely.
31
20. Supplementary Information |
Supplemental disclosures to the Condensed Consolidated Statement of Cash Flows are presented below:
A) Net Change in Non-Cash Working Capital