Kinetik Holdings Inc

2. BUSINESS COMBINATIONS

For acquired businesses, we recognize the identifiable assets acquired and the liabilities assumed at their estimated fair values on the date of acquisition with any excess purchase price over the fair value of net assets acquired recorded to goodwill. Determining the fair value of these items requires management’s judgment and the utilization of an independent valuation specialist, if applicable, and involves the use of significant estimates and assumptions.

Durango Permian LLC Acquisition

On June 24, 2024 (the “Closing Date”), the Company consummated the previously announced transaction contemplated by the Membership Interest Purchase Agreement (the “Durango MIPA”), dated May 9, 2024, by and between the Company, the Partnership, and Durango Midstream LLC, an affiliate of Morgan Stanley Equity Partners (the “Durango Seller”), pursuant to which the Partnership purchased all of the membership interests of Durango Permian, LLC and its wholly owned subsidiaries (“Durango”) from Durango Seller for an adjusted purchase price of approximately $845.2 million (the “Durango Acquisition”), consisting of (i) $358.0 million of cash consideration paid at closing, (ii) approximately 3.8 million shares of Class C Common Stock, par value $0.0001 per share of the Company (“Class C Common Stock”) (and an equivalent number of common units in the Partnership (“OpCo Units”)), valued at $148.2 million, issued at closing and (iii) approximately 7.7 million shares of Class C Common Stock (and an equivalent number of OpCo Units), valued at $275.0 million, to be issued on July 1, 2025. Durango Seller is also entitled to an earn out of up to $75.0 million in cash contingent upon the Kings Landing gas processing complex in Eddy County, New Mexico (the “Kings Landing Project”), which is currently under construction, being placed into service (the “Kings Landing Earnout”). The Kings Landing Earnout is subject to reduction based on actual capital costs associated with the Kings Landing Project. The Durango Acquisition allows the Company to further expand its footprint into New Mexico and across the Northern Delaware Basin.

The Durango Acquisition was accounted for as a business combination in accordance with ASC 805 Business Combination (“ASC 805”). Starting on the Closing Date, our Consolidated Financial Statements reflected Durango as a consolidated subsidiary. The accompanying Condensed Consolidated Financial Statements herein include (i) the combined net assets of the Company carried at historical costs and net assets of Durango carried at fair value as of the Closing Date and (ii) the combined results of operations of the Company with Durango’s results presented within the Condensed Consolidated Financial Statements from the Closing Date going forward.

The preliminary purchase price allocation was based on Durango’s latest financial statements available as of May 31, 2024, and included preliminary adjustments for working capital and fair value of underlying assets acquired and liabilities assumed. Both observable and non-observable market data, thus Level 2 and Level 3 inputs, are used in the assessment of the fair value of the assets acquired and liabilities assumed listed in the below table. The fair value of the processing plants, gathering system and related facilities and equipment is based on market and cost approaches and will be depreciated over an estimated useful life ranging from five tothirty years, which is consistent with the Company’s policy over similar facilities and equipment. The fair value of the intangible assets is based on the market approach for the right-of-way and discounted cash flow approach for customer contracts, which will be amortized over estimated useful lives ranging from seven totwelve years. The assumed liabilities are approximate to fair value at the Closing Date. Acquired net assets from this business combination were included in the Midstream Logistic segment. In addition, the Company recorded a contingent liability related to the Kings Landing Earnout based on project completion probability, see additional information in Note 15—Commitments and Contingencies in the Notes to our Condensed Consolidated Financial Statements set forth in this Form 10-Q.

Since the Closing Date, the Company has made necessary adjustments to the purchase price allocation as information about facts and circumstances that existed at the Closing Date have become available. This included certain working capital adjustments as a result of obtaining Durango’s closing balance sheet as of June 30, 2024. During the three months ended September 30, 2024, the Company identified working capital adjustments of $21.0 million resulting from the final closing balance sheet, and valuation adjustments related to the long-lived assets and intangible assets of $10.6 million, resulting in a decrease in goodwill of $10.4 million. The Company will continue to identify necessary adjustments to finalize the purchase price allocation during the 12-month period following the Closing Date as we obtain the remaining original cost data for our tangible asset valuation, as well as complete our evaluation of the potential liabilities assumed, including certain historical environmental exposures.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed in the Durango Acquisition as of June 24, 2024, in accordance with ASC 805:

(1)Pursuant to ASC 805, the Company evaluated the earn-out consideration classification in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”). The Company determined the earn-out consideration to be classified as a liability based on the settlement provision. Therefore, the Company records the contingent consideration at fair value as of September 30, 2024. Additional discussion in Note 15—Commitments and Contingencies in the Notes to our Condensed Consolidated Financial Statements set forth in this Form 10-Q.

The Company incurred acquisition-related costs of $3.2 million for the nine months ended September 30, 2024, which were included in the “General and administrative expenses” of the Condensed Consolidated Statements of Operations.

The Company’s Condensed Consolidated Statement of Operations included results of operations from Durango starting from the Closing Date through September 30, 2024, which included revenues of $35.8 million and $38.9 million, and net income including noncontrolling interest of $1.4 million and $1.6 million for the three and nine months ended September 30, 2024, respectively.

Supplemental Pro Forma Information

The unaudited supplemental pro forma financial data is for informational purposes only and is not indicative of future results. The results below for the three and nine months ended September 30, 2024 and 2023, respectively, combine the results of the Company and Durango, giving effect to the Durango Acquisition as if it had been completed on January 1, 2023.

Given the assumed pro forma transaction date of January 1, 2023, we removed $3.5 million of acquisition-related expenses for the nine months ended September 30, 2024 and recognized $3.5 million of acquisition-related expenses for the nine months ended September 30, 2023. We also removed $24.0 million of interest expense on Durango’s debt for the nine months ended September 30, 2024, and $3.9 million and $11.1 million for the three and nine months ended September 30, 2023, respectively, as if the business combination had occurred and the debt had been paid off on January 1, 2023.

Midstream Infrastructure Assets

In the first half of 2023, the Partnership closed on a purchase and sale agreement for certain midstream assets for $65.0 million together with a new 20-year midstream service agreement. Midstream assets acquired consisted of water gathering and disposal assets of $61.9 million and intangible right-of-way assets of $3.1 million. In addition, the Partnership entered into an incentive and acceleration agreement related to near term supplemental development activities on acreage dedicated for midstream services to affiliates of the Partnership. Consideration for the incentive and acceleration agreement of $60.0 million was capitalized as a contract asset in accordance with ASC 606, of which $4.7 million was included in “Prepaid and Other Current Assets” and $55.3 million was included in “Deferred Charges and Other Assets” in the Condensed Consolidated Balance Sheet as of the date of acquisition. Acquired net assets from this business combination were included in the Midstream Logistics segment.

Goodwill

The Company had goodwill of $5.1 million recorded in the Midstream Logistic segment related to a past business combination as of September 30, 2024. Goodwill is tested at least annually, or more frequently as events occur or circumstances change that would more-likely-than-not reduce fair value of a reporting unit below its carrying value. Company’s management assessed whether there have been events or circumstances that trigger the fair value of the reporting unit to be lower than its net carrying value since consummation of the respective business combination and concluded that goodwill was not impaired as of September 30, 2024.