(2) REVENUE RECOGNITION

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no material adjustment was required as a result of adopting ASC 606. Results for reporting periods beginning on January 1, 2018 are presented under the new revenue standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company performed an analysis of the impact of adopting ASC 606 across all revenue streams and did not identify any changes to its revenue recognition policies that would result in a material impact to its consolidated financial statements.

Revenues from Contracts with Customers

Natural gas and liquids. Natural gas, crude oil and natural gas liquid (“NGL”) sales are recognized when control of the product is transferred to the customer at a designated delivery point. The pricing provisions of the Company’s contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, quality of the product and prevailing supply and demand conditions in the geographic areas in which the Company operates. Under the Company’s sales contracts, the delivery of each unit of natural gas, crude oil and NGLs represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled. There is no significant financing component to the Company’s revenues as payment terms are typically within 30 to 60 days of control transfer. Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.

The Company records revenue from its natural gas and liquids production in the amount of its net revenue interest in sales from its properties. Accordingly, natural gas and liquid sales are not recognized for deliveries in excess of the Company’s net revenue interest, while natural gas and liquid sales are recognized for any under-delivered volumes. Production imbalances are recorded as receivables and payables and not contract assets or contract liabilities as the imbalances are between the Company and other working interest owners, not the end customer.

Marketing. The Company, through its marketing affiliate, generally markets natural gas, crude oil and NGLs for its affiliated E&P companies as well as other joint interest owners who choose to market with Southwestern. In addition, the Company markets some products purchased from third parties. Marketing revenues for natural gas, crude oil and NGL sales are recognized when control of the product is transferred to the customer at a designated delivery point. The pricing provisions of the Company’s contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, quality of the product and prevailing supply and demand conditions. Under the Company’s marketing contracts, the delivery of each unit of natural gas, crude oil and NGLs represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled. Customers are invoiced and revenues are recorded each month as natural gas, crude oil and NGLs are delivered, and payment terms are typically within 30 to 60 days of control transfer. Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.

Gas gathering. In certain areas, the Company, through its gathering affiliate, gathers natural gas pursuant to a variety of contracts with customers, including affiliated E&P companies. The performance obligations for gas gathering services include delivery of each unit of natural gas to the designated delivery point, which may include treating of certain natural gas units to meet interstate pipeline specifications. Revenue is recognized at the point in time when performance obligations are fulfilled. Under the Company’s gathering contracts, customers are invoiced and revenue is recognized each month based on the volume of natural gas transported and treated at a contractually agreed upon price per unit. Payment terms are typically within 30 to 60 days of completion of the performance obligations. Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations. Any imbalances are settled on a monthly basis by cashing-out with the respective shipper. Accordingly, there are no contract assets or contract liabilities related to the Company’s gas gathering revenues.

Disaggregation of Revenues

The Company presents a disaggregation of E&P revenues by product on the condensed consolidated statements of operations net of intersegment revenues. The following table reconciles operating revenues as presented on the unaudited condensed consolidated statements of operations to the operating revenues by segment:


						Intersegment
(in millions)		E&P		Midstream		Revenues		Total
Three months ended March 31, 2018
Gas sales	$	535	$	–	$	5	$	540
Oil sales		34		–		1		35
NGL sales		65		–		–		65
Marketing		–		829		(576)		253
Gas gathering		–		67		(43)		24
Other (1)		3		–		–		3
Total	$	637	$	896	$	(613)	$	920

Three months ended March 31, 2017
Gas sales	$	500	$	–	$	3	$	503
Oil sales		23		–		–		23
NGL sales		40		–		–		40
Marketing		–		777		(524)		253
Gas gathering		–		81		(54)		27
Other		–		–		–		–
Total	$	563	$	858	$	(575)	$	846

(1)

Other E&P revenues consists primarily of water sales to third-party operators.

Associated E&P revenues are also disaggregated for analysis on a geographic basis by the core areas in which the Company operates, which are in Pennsylvania, West Virginia and Arkansas. Operations in northeast Pennsylvania are referred to as “Northeast Appalachia,” operations in West Virginia and southwest Pennsylvania are referred to as “Southwest Appalachia” and operations in Arkansas are referred to as the “Fayetteville Shale.”


	For the three months ended March 31,
(in millions)		2018		2017
Northeast Appalachia	$	327	$	253
Southwest Appalachia		156		104
Fayetteville Shale		152		205
Other		2		1
Total	$	637	$	563

Receivables from Contracts with Customers

The following table reconciles the Company’s receivables from contracts with customers to consolidated accounts receivable as presented on the unaudited condensed consolidated balance sheet:



(in millions)		March 31, 2018		December 31, 2017
Receivables from contracts with customers	$	273	$	322
Other accounts receivable		109		106
Total accounts receivable	$	382	$	428

Amounts recognized against the Company’s allowance for doubtful accounts related to receivables arising from contracts with customers were immaterial for the three months ended March 31, 2018 and 2017. The Company has no contract assets or contract liabilities associated with its revenues from contracts with customers.