3. REVENUE RECOGNITION

Adoption of Topic 606

Effective January 1, 2018, the Partnership adopted the new Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all the related amendments (collectively referred to as “Topic 606”) to all open contracts using the modified retrospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

For contracts that have a contract term of one year or less, we elected to utilize the practical expedient permitted under the rules of adoption whereby a Company is not required to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

Adoption of this guidance resulted in financial statement presentation changes whereby revenue from the Gathering Agreement (defined in Note 13 “Related Party Transactions”) and revenue from the Seco Pipeline Transportation Agreement (defined in Note 13 “Related Party Transactions”) are shown as separate line items within our condensed consolidated statement of operations. There was no cumulative adjustment to retained earnings or any other changes to our January 1, 2018 condensed consolidated balance sheet.

Revenue from Contracts with Customers

Beginning in 2018, we account for revenue from contracts with customers in accordance with Topic 606. The unit of account in Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. Topic 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.

Disaggregation of Revenue

We disaggregate revenue based on type of revenue and product type. In selecting the disaggregation categories, we considered a number of factors, including disclosures presented outside the financial statements, such as in our earnings release and investor presentations, information reviewed internally for evaluating performance, and other factors used by the Partnership or the users of its financial statements to evaluate performance or allocate resources. As such, we have concluded that disaggregating revenue by type of revenue and product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

Production Segment

Our oil, natural gas, and NGL revenue is marketed and sold on our behalf by the respective asset operators. We are not party to the contracts with the third-party customers and as such, this revenue is not accounted for under Topic 606. We are alternatively party to joint operating agreements, which we account for under ASC 808, and revenue for these arrangements is recognized based on the information provided to us by the operators.

We additionally recognize and present changes in the fair value of our commodity derivative instruments within natural gas sales and oil sales in the condensed consolidated statements of operations. As this income is accounted for under ASC 815, Derivatives and Hedging, it is not subject to Topic 606.

Midstream Segment

The Seco Pipeline Transportation Agreement is our only contract that we account for under Topic 606. The Catarina Midstream Gathering Agreement was classified as an operating lease at inception, and as such, the contract is accounted for under ASC 840, Leases, and is depicted as Gathering and transportation lease revenue in our condensed consolidated statement of operations. Both of these contracts are further discussed in Note 13, “Related Party Transactions.”

We additionally recognize income associated with our joint ventures with Targa Resources Corp. (NYSE: TRGP) (“Targa”), Carnero Gathering (defined in Note 11 “Investments”), and Carnero Processing (defined in Note 11 “Investments”). We account for these as unconsolidated equity method investments that are not in the scope of Topic 606, and our share of earnings is reported as earnings from equity investments in our condensed consolidated statements of operations. Earnings from these equity method investments are classified within the midstream operating segment in Note 17 “Reporting Segments”, and are further discussed in Note 11 “Investments.”

We recognized revenue of $18.5 million for three months ended March 31, 2018. The following table displays revenue disaggregated by type of revenue and product type (in thousands):


	For the Three Months Ended March 31, 2018
	Production		Midstream		Total
Revenues:
Natural gas sales	$	473	$	—	$	473
Oil sales		3,462		—		3,462
Natural gas liquid sales		595		—		595
Gathering and transportation sales		—		1,688		1,688
Gathering and transportation lease revenues		—		12,318		12,318
Total revenues	$	4,530	$	14,006	$	18,536

Performance Obligations

Under the Transportation Agreement, we agreed to provide transportation services of certain quantities of natural gas from the receipt point to the delivery point. Each MMBtu of natural gas transported is distinct and the transportation services performed on each distinct molecule of product is substantially the same in nature. As such, we applied the series guidance and treat these services as a single performance obligation satisfied over time using volumes delivered as the measure of progress. The Transportation Agreement requires payment within 30 days following the calendar month of delivery.

The Transportation Agreement contains variable consideration in the form of volume variability. As the distinct goods or services (rather than the series) are considered for the purpose of allocating variable consideration, we have taken the optional exception under ASC 606-10-50-14A(b) which is available only for wholly unsatisfied performance obligations for which the criteria in ASC 606-10-32-40 have been met. Under this exception, neither estimation of variable consideration nor disclosure of the transaction price allocated to the remaining performance obligations is required. Revenue is alternatively recognized in the period that control is transferred to the customer and the respective variable component of the total transaction price is resolved.

For forms of variable consideration that are not associated with a specific volume (such as late payment fees) and thus do not meet allocation exception, estimation is required. These fees, however, are immaterial to our consolidated financial statements and have a low probability of occurrence. As significant reversals of revenue due to this variability are not probable, no estimation is required.

Contract Balances

Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under Topic 606. At January 1, 2018 and March 31, 2018, our receivables from contracts with customers were $1.1 million and $0.6 million, respectively, and are presented within Accounts receivable – related entities in the condensed consolidated balance sheets.

Reconciliation of Statement of Operations

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated statement of operations is as follows (in thousands):


	For the Three Months Ended March 31, 2018
	As reported		Balances without Adoption Topic 606		Effect of change Higher/(Lower)
Statement of Operations
Gathering and transportation sales	$	1,688	$	14,006	$	(12,318)
Gathering and transportation lease revenues		12,318		—		12,318
Net earnings	$	14,006	$	14,006	$	—

We expect the impact of the adoption of the new standard to be immaterial to our net income (loss) on an ongoing basis.