5. Financial and derivative instruments (continued)
c. Level 3
Level 3 inputs are unobservable for the particular assets and liabilities as at the reporting date. The Corporation did not classify any of its fair value measurements within Level 3.
Notional values are an approximation of future undiscounted net cash flows. For physical natural gas contracts, the notional value is based on the contract price. For natural gas price swaps, the notional value is the difference between the contract price and the market price. Where contract prices are referenced to an index price that has not yet been fixed, the market price is used to estimate the contract price. As at September 30, 2017 natural gas derivative instruments had the following fair values, notional values, and maturities:
(millions)
2018
2019
2020
2021
2022
Total
Physical natural gas contracts Fair value
$
(22) (47)
$
(7)
$
1 6
$
-
$
- -
$
(28) (55)
Notional value
(15)
1
Natural gas price swaps Fair value
(1) (1)
- -
- -
- -
- -
(1) (1)
Notional value
Total Fair value
$
(23)
$
(7)
$
1
$
-
$
-
$
(29)
Notional value
$
(48)
$
(15)
$
6
$
1
$
-
$
(56)
Fair value - increase (decrease) in net income Notional value - estimated undiscounted net cash inflow (outflow)
6. Property, plant and equipment
The Corporation has two cash generating units that are adversely impacted by market conditions, its non-core gas storage facilities that support the Corporations gas marketing activities and a gas processing plant. At September 30, 2017, as a result of a decline in natural gas prices, the Corporation has recorded a cumulative impairment on its non-core gas storage facilities of $9 million. During the second quarter of 2017-18, a $15 million impairment reversal was recorded. This relates to a storage field asset, which due to a change in corporate strategy is moving from the non-core gas storage facility cash generating unit, into a larger pool of core storage assets, where it will be used to provide storage service and transmission avoidance to customers within a regulatory framework. The remaining non-core gas storage facilities are fully impaired. The impairments on the remaining storage assets were recognized as the carrying value of the assets exceeded the recoverable amounts. The recoverable amount was the value in use determined using cash flows attributed to probable production and adjusted for future market prices, discounted at 6.9%. The impairment losses have been recognized within other gains losses, with the full amount recognized in prior periods. The corporation does not anticipate recovery of the impairment unless there is a significant change in current and forward natural gas prices. At September 30, 2017, also as a result of a decline in natural gas and natural gas liquid prices, the Corporation has recorded a cumulative impairment on one of its treatment and compression facilities of $12 million. The impairments were recognized as the carrying value of the assets exceeded the recoverable amounts of $7 million for its gas processing plant and gathering facilities. The recoverable amount was the value in use determined using cash flows attributed to probable production and adjusted for future market prices, discounted at 6.8%. The impairment losses have been recognized within other losses, with $1 million recognized in the current period and $11 million recognized in prior periods. At September 30, 2017, as a result of lower than expected economic performance, the Corporation has recorded a cumulative impairment of $6 million on its energy services assets which are categorized within the Corporation’s distribution assets. The impairment was recognized as the carrying value of the assets exceeded the recoverable amount. The recoverable amount was the value in use determined using cash flows attributed to probable production and adjusted for future market prices, discounted at 6.9% (2016 – 6.1%). The impairment losses have been recognized within other gains and losses, with the full $6 million recognized in the prior period. The Corporation does not expect recovery of these impairments. Future natural gas prices are the main source of estimation uncertainty in determining the recoverable amount of the Corporation's assets. As at September 30, 2017, a five per cent increase in future natural gas and natural gas liquid prices would have increased the recoverable amount and reduced the impairment loss by $3 million. In future periods, any
22
2017-18 SECOND QUARTER REPORT
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