NOTE 4—REVENUE RECOGNITION

Effect of ASC Topic 606 Adoption

The cumulative effect of adopting ASC 606 due to our change in method of measuring project progress toward completion, as discussed in Note 2, Basis of Presentation and Significant Accounting Policies, is as follows:

	Impact of ASC 606 adoption
	Recognition under previous guidance			Adjustment			Recognition under ASC 606
	(In millions)
Consolidated Statement of Operations for nine months ended September 30, 2018
Revenues	$	4,873		$	(241	)	$	4,632
Cost of operations		4,148			(200	)		3,948
Income tax benefit		(18	)		(1	)		(19	)
Net income		124			(40	)		84

Consolidated Balance Sheet as of September 30, 2018
Assets
Current assets:
Contracts in progress		737			(14	)		723

Liabilities and equity
Current liabilities:
Advance billings on contracts		1,733			-			1,733
Income taxes payable		144			(1	)		143

Stockholders' equity⁽¹⁾
Retained earnings		69			(13	)		56

⁽¹⁾

Includes $20 million of cumulative catch-up adjustment to Retained earnings (Accumulated deficit) on January 1, 2018, upon adoption of ASC 606.

Remaining Performance Obligations (“RPOs”)

Our RPOs by segment were as follows:

	September 30, 2018				December 31, 2017
	(In approximate millions)
NCSA	$	6,519	57	%	$	437	11	%
EARC		1,502	13	%		732	19	%
MENA		2,164	19	%		2,249	58	%
APAC		713	6	%		483	12	%
Technology		614	5	%		-	-
Total	$	11,512	100	%	$	3,901	100	%

Of the September 30, 2018 RPOs, we expect to recognize revenues as follows:

	2018		2019		Thereafter
	(In approximate millions)
Total RPOs	$	2,288	$	6,158	$	3,066

Revenue Disaggregation

Our revenue by product offering, contract types and revenue recognition methodology was as follows:

	Three months ended September 30, ⁽²⁾				Nine months ended September 30, ⁽²⁾
	2018		2017		2018		2017
	(In millions)
Revenue by product offerings:
Offshore and subsea	$	548	$	959	$	1,809	$	2,267
LNG		553		-		935		-
Downstream ⁽¹⁾		860		-		1,356		-
Power		328		-		532		-
	$	2,289	$	959	$	4,632	$	2,267

Contract types:
Fixed priced	$	1,797	$	947	$	3,693		2,209
Reimbursable		411		-		680		-
Hybrid		10		-		134		-
Unit-basis and other		71		12		125		58
	$	2,289	$	959	$	4,632	$	2,267

Revenue recognition methodology
Over time	$	2,249	$	959	$	4,564	$	2,267
At a point in time		40		-		68		-
	$	2,289	$	959	$	4,632	$	2,267

⁽¹⁾

Includes the results of our Technology operating group.

⁽²⁾

Intercompany amounts have been eliminated in consolidation.

Unapproved Change Orders, Claims and Incentives

Unapproved Change Orders, Claims and Incentives—At September 30, 2018 we had unapproved change orders and claims included in transaction prices aggregating to approximately $563 million, of which approximately $153 million were included in our RPO balance. At December 31, 2017, we had unapproved change orders and claims included in transaction prices aggregating to approximately $117 million, of which approximately $8 million were included in our RPO balance.

At September 30, 2018 and December 31, 2017, we did not have any material incentives included in transaction prices for our projects.

The amounts described above recorded in contract prices and recognized as revenues reflect our best estimates of recovery; however, the ultimate resolution and amounts received could differ from these estimates and could have a material adverse effect on our results of operations, financial position and cash flow.

Loss Projects

Based on our assessment at September 30, 2018, included in the preliminary purchase price allocation for the Combination (see Note 3, Business Combination) were four projects determined to be in substantial loss positions, which included the Cameron LNG, Freeport LNG Trains 1 & 2, Calpine and the now-completed IPL gas power projects. Based on our assessment at June 30, 2018, our Freeport LNG Trains 1 & 2 project was not estimated to be in a loss position; however, as a result of changes in estimates during the third quarter of 2018, the project is now estimated to be in a loss position at completion. Our Freeport LNG Train 3 project is not anticipated to be in a loss position. Changes since our initial preliminary assessments during the second quarter of 2018 reflect unfavorable changes in estimates of $482 million on the Cameron LNG project, $194 million on the Freeport LNG Trains 1 & 2 and Train 3 projects and $68 million on the Calpine project. These changes in estimates did not have a significant direct impact on our net income for the three or nine months ended September 30, 2018, as the impact of the changes in estimates were included as adjustments to the fair values reflected in the acquired balance sheet.

Our accrual of provisions for estimated losses on active uncompleted contracts at September 30, 2018 was $215 million and primarily related to the Cameron LNG, Freeport LNG Trains 1 & 2 and Calpine loss projects. Our accrual of provisions for estimated losses on active uncompleted contracts at December 31, 2017 was not material.

Summary information for our significant ongoing loss projects as of September 30, 2018 is as follows:

Cameron LNG―At September 30, 2018, our U.S. LNG export facility project in Hackberry, Louisiana for Cameron LNG (within our NCSA operating group) was in a loss position. As of September 30, 2018, the project was approximately 37% complete on a post-Combination basis (approximately 83% on a pre-Combination basis) and had an accrued provision for estimated losses of approximately $127 million.

The increase in our cost estimates recorded as adjustments to the fair value of the acquired balance sheet during the third quarter of 2018 were primarily due to changes in estimates resulting from a detailed reassessment of schedule and underlying cost base. The schedule analysis included a reassessment of the work to go, including re-work for which we may not be fully compensated, and took into account revisions to the estimation of productivity based on historical efforts and the quality and availability of labor resources throughout the revised project schedule. The revised schedule also results in loss of incentive revenue (approximately $40 million) and the application of contractual liquidated damages (approximately $17 million). These changes in estimates were reflected as adjustments to the fair values of various assets and liabilities reflected in the acquired balance sheet, as they resulted from refinements of estimates of conditions that existed as of the Combination Date, and primarily impacted Advance billings on contracts.

Freeport LNG―At September 30, 2018, Trains 1 & 2 of our U.S. LNG export facility project in Freeport, Texas for Freeport LNG (within our NCSA operating group) was in a loss position. As of September 30, 2018, the project was approximately 43% complete on a post-Combination basis (approximately 86% on a pre-Combination basis) and had an accrued provision for estimated losses of approximately $28 million.

The increase in the cost estimates recorded as adjustments to the fair value of the acquired balance sheet during the third quarter of 2018 were primarily due to changes in estimates resulting from a detailed reassessment of schedule and underlying cost base. The schedule analysis included a reassessment of the work to go, including re-work for which we may not be fully compensated, and took into account revisions to the estimation of productivity based on historical efforts and the quality and availability of labor resources throughout the revised project schedule. Our changes in estimates for the project also reflect our decision, reached in conjunction with ongoing customer discussions, to include liquidated damages (approximately $53 million) associated with the pre-Hurricane Harvey schedule. These changes in estimates were reflected as adjustments to the fair values of various assets and liabilities reflected in the acquired balance sheet, as they resulted from refinements of estimates of conditions that existed as of the Combination Date, and primarily impacted Advance billings on contracts.

Calpine Power Project―At September 30, 2018, our U.S. gas turbine power project in the Northeast for Calpine (within our NCSA operating group) was in a loss position. As of September 30, 2018, the project was approximately 53% complete on a post-Combination basis (approximately 91% on a pre-Combination basis) and had an accrued provision for estimated losses of approximately $43 million. The increase in the cost estimates recorded as adjustments to the fair value of the acquired balance sheet during the third quarter of 2018 were primarily associated with revisions to the estimation of productivity based on historical performance. These changes in estimates were reflected as adjustments to the fair values of various assets and liabilities reflected in the acquired balance sheet, as they resulted from refinements of estimates of conditions that existed as of the Combination Date, and primarily impacted Advance billings on contracts.