NOTE 12 REVENUE RECOGNITION

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method, which was applied to all contracts that were not completed as of that date. Prior period results were not adjusted and continue to be reported under the accounting standards in effect for the prior period. The new standard did not affect the timing of our revenue recognition and did not impact net income; accordingly, we did not record an adjustment to the opening balance of retained earnings.

We derive substantially all of our revenue from sales of oil, natural gas and natural gas liquids (NGLs), with the remaining revenue generated from sales of electricity and marketing activities related to storage and managing excess pipeline capacity.

The following is a description of our principal activities from which we generate revenue. Revenues are recognized when control of promised goods is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods.

Commodity Sales Contracts

We recognize revenue from the sale of our oil, natural gas and NGL production when delivery has occurred and control passes to the customer. Our commodity contracts are short term, typically less than a year. We consider our performance obligations to be satisfied upon transfer of control of the commodity. In certain instances, transportation and processing fees are incurred by us prior to control being transferred to customers. These costs were previously offset against oil and gas sales. Upon adoption of ASC 606, we are recording these costs as a component of other expenses, net on our condensed consolidated statements of operations.

Our commodity sales contracts are indexed to a market price or an average index price. We recognize revenue in the amount that we have a right to invoice once we are able to adequately estimate the consideration (i.e., when market prices are known). Our contracts with customers typically require payment within 30 days following invoicing.

Electricity

The electrical output of the Elk Hills power plant that is not used in our operations is sold to the wholesale power market and to a utility under a power purchase and sales agreement, which includes a capacity payment. Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs upon delivery of the electricity. We report electricity sales as other revenue on our condensed consolidated statements of operations. Revenue is measured as the amount of consideration we expect to receive based on average index pricing with payment due the month following delivery. Capacity payments are based on a fixed annual amount per kilowatt hour and monthly rates vary based on seasonality, which is consistent with how we earn the capacity payment. Capacity payments are settled monthly. We consider our performance obligations to be satisfied upon delivery of electricity or as the contracted amount of energy is made available to the customer in the case of capacity payments.

Marketing, Trading and Other

Marketing, trading and other revenue primarily includes our activities associated with storing, transporting and marketing our production as well as third-party volumes.

To transport our natural gas as well as third-party volumes, we have entered into firm pipeline commitments. Depending on market conditions, we may have excess capacity, in which case we may enter into natural gas purchase and sale agreements with third parties. We consider our performance obligations to be satisfied upon transfer of control of the commodity. We have not incurred any significant fees or penalties related to excess capacity on these commitments.

We report our marketing and trading activities on a gross basis with purchases and costs reported in other expenses, net and sales recorded in other revenue on our condensed consolidated statements of operations.

Disaggregation of Revenue

The following table provides disaggregated revenue for the three and nine months ended September 30, 2018 (in millions):


	Three months ended		Nine months ended
	September 30, 2018		September 30, 2018
Oil and gas sales:
Oil	$	568	$	1,587
NGLs		71		195
Natural gas		61		150
		700		1,932
Other revenue:
Electricity		42		87
Marketing, trading and other		140		225
Interest income		—		1
		182		313
Net derivative loss from commodity contracts		(54)		(259)
Total revenues and other	$	828	$	1,986

The impact of the adoption of ASC 606 on our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 was as follows (in millions):


	Three months ended						Nine months ended
	September 30, 2018						September 30, 2018
	As						As
	Reported		Previous				Reported		Previous
	ASC 606		GAAP		Change		ASC 606		GAAP		Change
REVENUES AND OTHER
Oil and gas sales	$	700	$	695	$	5	$	1,932	$	1,915	$	17
Net derivative loss from commodity contracts		(54)		(54)		—		(259)		(259)		—
Other revenue		182		177		5		313		242		71
Total revenues and other		828		818		10		1,986		1,898		88

COSTS AND OTHER
Production costs		236		236		—		679		679		—
General and administrative expenses		81		81		—		234		234		—
Depreciation, depletion and amortization		128		128		—		372		372		—
Taxes other than on income		45		45		—		120		120		—
Exploration expenses		4		4		—		18		18		—
Other expenses, net		149		139		10		259		171		88
Total costs and other		643		633		10		1,682		1,594		88
OPERATING INCOME		185		185		—		304		304		—

NON-OPERATING (LOSS) INCOME
Interest and debt expense, net		(95)		(95)		—		(281)		(281)		—
Net gain on early extinguishment of debt		2		2		—		26		26		—
Gain on asset divestitures		3		3		—		4		4		—
Other non-operating expenses		(4)		(4)		—		(16)		(16)		—
INCOME BEFORE INCOME TAXES		91		91		—		37		37		—
Income tax		—		—		—		—		—		—
NET INCOME		91		91		—		37		37		—
Net income attributable to noncontrolling interests		(25)		(25)		—		(55)		(55)		—
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK	$	66	$	66	$	—	$	(18)	$	(18)	$	—

The adoption of ASC 606 did not have an impact on our condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017.