Edgar Filing: ENCANA CORP

10-Q

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

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-15226

LOGO

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)

Registrant’s 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 registrant’s common shares outstanding as of July 19, 2017		973,095,555

ENCANA CORPORATION

FORM 10-Q

TABLE OF CONTENTS


PART I

Item 1. Financial Statements			6
Condensed Consolidated Statement of Earnings			6
Condensed Consolidated Statement of Comprehensive Income			6
Condensed Consolidated Balance Sheet			7
Condensed Consolidated Statement of Changes in Shareholders’ Equity			8
Condensed Consolidated Statement of Cash Flows			9
Notes to Condensed Consolidated Financial Statements			10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3. Quantitative and Qualitative Disclosures about Market Risk			56
Item 4. Controls and Procedures			57

PART II

Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 3. Defaults Upon Senior Securities			58
Item 4. Mine Safety Disclosures			58
Item 5. Other Information			58
Item 6. Exhibits			58
Signatures			59

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 Management’s 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. Encana’s 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.

The term “core asset” refers to plays that are the focus of the Company’s 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 Company’s 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 Company’s core assets, including the allocation of capital and focus of development plans; growth in long-term shareholder value; statements with respect to the Company’s 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 Company’s 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 Company’s credit facilities; planned annualized dividend and the declaration and payment of future dividends, if any; the adequacy of the Company’s provision for taxes and legal claims; successful resolution of certain tax items; the projections and expectation of meeting the targets contained in the Company’s 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 Company’s 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 Company’s core assets; flexibility and source of funding of capital spending plans; expected future interest expense; the Company’s commitments and obligations and adjustments thereto; potential future discounts, if any, in connection with the Company’s 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 Company’s ability to access its revolving credit facilities and shelf prospectuses; assumptions contained in the Company’s 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 Company’s 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, Encana’s 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 Company’s 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 Encana’s 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

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 Company’s 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 Company’s 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 Encana’s business as described from time to time in the Company’s 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.

PART I

Item 1. Financial Statements

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

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

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 Dividend Reinvestment Plan	(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 Dividend Reinvestment Plan	(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

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

1. Basis of Presentation and Principles of Consolidation

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 Encana’s 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 Company’s Consolidated Financial Statements other than enhanced disclosures related to the disaggregation of revenues from contracts with customers, the Company’s 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 Company’s Consolidated Financial Statements.

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 Company’s 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 unit’s 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 unit’s 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 Company’s Consolidated Financial Statements.

3. Segmented Information

Encana’s reportable segments are determined based on the Company’s 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 Company’s 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 Company’s 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.

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)

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)

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

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 Encana’s 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 Encana’s 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.

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 Company’s 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%

Encana’s 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.

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.

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.

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 Company’s 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.

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 Company’s 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

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 Company’s 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.

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 Encana’s 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.

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 VIE’s 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. Encana’s 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 Company’s 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 VMLP’s 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.

As a result of Encana’s 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 Company’s 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%

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

1.7 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.

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 Company’s February annual long-term incentive award. The TSARs and SARs were granted at the volume-weighted average trading price of Encana’s 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.

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 Observable Inputs		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.


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

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

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

Other Derivative Contracts
Current in accounts payable and accrued liabilities	$	-	$	5	$	-	$	5	$	-	$	5

Long-term in other liabilities and provisions		-		14		-		14		-		14

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

The Company’s Level 1 and Level 2 risk management assets and liabilities consist of commodity fixed price contracts, NYMEX 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 Company’s 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 Company’s policy is to recognize transfers out of Level 3 on the date of the event of change in circumstances that caused the transfer.

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

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

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

B) Risk Management Activities

Encana uses derivative financial instruments to manage its exposure to cash flow variability from commodity prices, 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 Company’s policy is to not use derivative financial instruments for speculative purposes.

Crude Oil and NGLs - To partially mitigate crude oil and NGL commodity price risk, the Company uses WTI-based 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 Company’s financial assets or liabilities. To partially mitigate the effect of foreign exchange fluctuations on future commodity revenues and expenses, the Company may enter into foreign currency derivative contracts. As at 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.

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

WTI Fixed Price

31.3 Mbbls/d

2018

55.45 US$/bbl

Butane Fixed Price

2.5 Mbbls/d

2017

36.12 US$/bbl

WTI Three-Way Options

25.0 Mbbls/d

2017

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

Sold call price

56.05 US$/bbl

Bought put price

46.22 US$/bbl

Basis Contracts ⁽¹⁾

2017 - 2020

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

NYMEX Fixed Price

650 MMcf/d

2018

3.07 US$/Mcf

NYMEX Three-Way Options

300 MMcf/d

2017

)

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

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

Natural Gas Fair Value Position

Other Derivative Contracts

Fair Value Position

(16

)

Foreign Currency Contracts

Fair Value Position ⁽³⁾

2017-2018

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.

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 and Contracts Entered into During the Period		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.

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 Company’s credit portfolio including credit practices that limit transactions according to counterparties’ credit quality. Mitigation strategies may include master netting arrangements, requesting collateral and/or transacting credit derivatives. The Company executes commodity derivative financial instruments under master agreements that have netting provisions that provide for offsetting payables against receivables. As 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 Company’s 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 Encana’s 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.

20. Supplementary Information

Supplemental disclosures to the Condensed Consolidated Statement of Cash Flows are presented below:

A) Net Change in Non-Cash Working Capital

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