Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c99019exv32w1.htm |
EX-10.7 - EXHIBIT 10.7 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c99019exv10w7.htm |
EX-31.2 - EXHIBIT 31.2 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c99019exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c99019exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 814-00725
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
Maryland (State of Incorporation) |
20-4991752 (I.R.S. Employer Identification Number) |
|
717 Texas Avenue, Suite 3100 Houston, Texas (Address of principal executive offices) |
77002 (Zip Code) |
Registrants telephone number, including area code:
(713) 493-2020
(713) 493-2020
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act) Yes o No þ
Indicate the number of shares of outstanding of each of the issuers classes of common stock,
as of the latest practicable date: Common stock, $0.001 par value per share, 10,190,383 shares
outstanding as of April 5, 2010.
TABLE OF CONTENTS
Page | ||||||||
PART I |
||||||||
Item 1. Financial Statements |
||||||||
2 | ||||||||
6 | ||||||||
10 | ||||||||
11 | ||||||||
12 | ||||||||
13 | ||||||||
14 | ||||||||
34 | ||||||||
41 | ||||||||
42 | ||||||||
PART II |
||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
Exhibit 10.7 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
1
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Long-Term Investments 121.4% |
||||||||
Equity Investments(a) 95.8% |
||||||||
United States 95.8% |
||||||||
Private MLP(b)(c) 54.1% |
||||||||
Direct Fuels Partners, L.P. Class A Common Units(d) |
2,500 | $ | 27,500 | |||||
Direct Fuels Partners, L.P. Convertible Preferred Units(d)(e) |
143 | 2,529 | ||||||
Direct Fuels Partners, L.P. Class D Preferred Units(d)(f) |
61 | 1,211 | ||||||
International Resource Partners LP |
1,500 | 36,000 | ||||||
Quest Midstream Partners, L.P.(g) |
361 | 1,803 | ||||||
VantaCore Partners LP(d) |
1,465 | 24,899 | ||||||
93,942 | ||||||||
Publicly Traded MLP and MLP Affiliate(h) 41.7% |
||||||||
Capital Product Partners L.P.(i) |
113 | 985 | ||||||
Copano Energy, L.L.C. |
249 | 5,922 | ||||||
DCP Midstream Partners, LP |
109 | 3,350 | ||||||
Eagle Rock Energy Partners, L.P.(i) |
1,113 | 6,255 | ||||||
Eagle Rock Energy Partners, L.P. (b)(i)(j) |
146 | 823 | ||||||
Enbridge Energy Management, L.L.C.(k) |
35 | 1,730 | ||||||
Enbridge Energy Partners, L.P. |
91 | 4,665 | ||||||
Energy Transfer Equity, L.P. |
77 | 2,474 | ||||||
Energy Transfer Partners, L.P. |
66 | 3,045 | ||||||
Enterprise GP Holdings L.P. |
7 | 280 | ||||||
Enterprise Products Partners L.P. |
193 | 6,333 | ||||||
Exterran Partners, L.P. |
82 | 1,805 | ||||||
Global Partners LP (i) |
142 | 3,522 | ||||||
Holly Energy Partners, L.P. |
11 | 460 | ||||||
Inergy, L.P. |
99 | 3,583 | ||||||
Kinder Morgan Management, LLC(k) |
29 | 1,638 | ||||||
MarkWest Energy Partners, L.P. |
74 | 2,180 | ||||||
Martin Midstream Partners L.P. |
45 | 1,439 | ||||||
Navios Maritime Partners L.P.(i) |
56 | 879 | ||||||
ONEOK Partners, L.P. |
74 | 4,510 | ||||||
Plains All American Pipeline, L.P.(d) |
103 | 5,694 | ||||||
Quicksilver Gas Services LP (i) |
34 | 684 | ||||||
Regency Energy Partners LP |
89 | 1,892 | ||||||
Targa Resources Partners LP |
37 | 923 | ||||||
TC PipeLines, LP |
9 | 341 |
See accompanying notes to financial statements.
2
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Publicly Traded MLP and MLP Affiliate(h) (Continued) |
||||||||
Teekay LNG Partners L.P. |
83 | $ | 2,256 | |||||
Teekay Offshore Partners L.P. |
23 | 434 | ||||||
Teekay Tankers Ltd. |
1 | 12 | ||||||
TransMontaigne Partners L.P.(i) |
46 | 1,272 | ||||||
Western Gas Partners, LP |
54 | 1,159 | ||||||
Williams Partners L.P. |
45 | 1,766 | ||||||
72,311 | ||||||||
Other Private Equity(c) 0.0% |
||||||||
ProPetro Services, Inc. Warrants(b)(l) |
2,905 | | ||||||
Trident Resources Corp. Warrants(m) |
100 | | ||||||
| ||||||||
Total Equity Investments (Cost $175,404) |
166,253 | |||||||
Interest | Maturity | Principal | ||||||||||||||
Rate | Date | Amount | ||||||||||||||
Energy Debt Investments(c) 25.6% |
||||||||||||||||
United States 24.2% |
||||||||||||||||
Upstream 10.5% |
||||||||||||||||
Antero Resources Finance Corp. |
9.375 | % | 12/01/17 | $ | 9,500 | 9,690 | ||||||||||
Hilcorp Energy Company |
7.750 | 11/01/15 | 2,885 | 2,806 | ||||||||||||
Hilcorp Energy Company |
8.000 | 02/15/20 | 1,700 | 1,632 | ||||||||||||
NFR Energy LLC |
9.750 | 02/15/17 | 2,000 | 1,955 | ||||||||||||
Petroleum Development Corporation |
12.000 | 02/15/18 | 2,000 | 2,100 | ||||||||||||
18,183 | ||||||||||||||||
Midstream and Other 9.3% |
||||||||||||||||
Energy Future Holdings Corp.(n) |
10.000 | 01/15/20 | 5,000 | 5,100 | ||||||||||||
Niska Gas Storage US LLC |
8.875 | 03/15/18 | 2,500 | 2,500 | ||||||||||||
North American Energy Alliance LLC |
10.875 | 06/01/16 | 1,000 | 1,060 | ||||||||||||
Texas Competitive Electric Holdings (n) |
(o | ) | 10/10/14 | 9,209 | 7,459 | |||||||||||
16,119 | ||||||||||||||||
Oilfield Services 2.3% |
||||||||||||||||
ProPetro Services, Inc.(b) |
(p | ) | 02/15/13 | 35,000 | 4,000 | |||||||||||
Coal 2.1% |
||||||||||||||||
Drummond Company, Inc. |
7.375 | 02/15/16 | 4,000 | 3,730 | ||||||||||||
Total United States (Cost $70,432) |
42,032 | |||||||||||||||
Canada 1.4% |
||||||||||||||||
Upstream 1.4% |
||||||||||||||||
Athabasca Oil Sands Corp.(q) (Cost $2,434) |
13.000 | 07/30/11 | (r | ) | 2,517 | |||||||||||
Total Energy Debt Investments (Cost $72,866) |
44,549 | |||||||||||||||
Total Long-Term Investments (Cost $248,270) |
210,802 | |||||||||||||||
See accompanying notes to financial statements.
3
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
Interest | Maturity | |||||||||||
Description | Rate | Date | Value | |||||||||
Short-Term Investments 6.5% |
||||||||||||
Repurchase Agreements 6.5% |
||||||||||||
J.P. Morgan
Securities Inc.
(Agreements dated
2/26/2010 to be
repurchased at $11,320),
collateralized by
$11,654 in U.S.
Treasury bonds (Cost
$11,320) |
0.020 | % | 03/01/10 | $ | 11,320 | |||||||
Total Investments 127.9% (Cost $259,590) |
222,122 | |||||||||||
Senior Secured Revolving Credit Facility Borrowings |
(61,000 | ) | ||||||||||
Other Assets in Excess of Total Liabilities |
12,466 | |||||||||||
Net Assets |
$ | 173,588 | ||||||||||
(a) | Unless otherwise noted, equity investments are common units/common shares. |
|
(b) | Fair valued and restricted security. See Notes 2, 4 and 8. |
|
(c) | Unless otherwise noted, security is treated as an eligible portfolio company (EPC) under
the Investment Company Act of 1940, as amended (the 1940 Act). |
|
(d) | The Company believes that it may be an affiliate of Direct Fuels Partners, L.P. (Direct
Fuels) and VantaCore Partners LP and that it is an affiliate of Plains All American Pipeline, L.P. See
Note 6 Agreements and Affiliations. |
|
(e) | The Convertible Preferred Units consist of three classes Class A, B and C. Each series has
a liquidation preference of $20.00 per unit and is convertible into Class A Common Units. See
Note 8 Restricted Securities. |
|
(f) | The Class D Preferred Units are senior to Direct Fuels other series of Preferred Units and
Common Units. The Class D Preferred Units are being issued by Direct Fuels to the holders of
common units and preferred units in lieu of a cash distribution in the Companys fiscal first
quarter. See Note 8 Restricted Securities. |
|
(g) | Security is non-income producing. |
|
(h) | Unless otherwise noted, security is not treated as an EPC under the 1940 Act. As a business
development company, the Company is generally prohibited from acquiring assets other than
qualifying assets unless at least 70% of its total assets (excluding deferred tax assets) are
qualifying assets under the 1940 Act. As of February 28, 2010, the percentage of the Companys
total assets (excluding deferred tax assets) that are qualifying assets was 71.3%. See Note 3
Qualifying Assets Under the 1940 Act. |
|
(i) | All or a portion of the Companys holdings in this security are treated as an EPC under the
1940 Act. See Note 3 Qualifying Assets Under the 1940 Act. |
|
(j) | Unregistered common units which were placed in escrow for a period of 18 months following the
sale of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1,
2010). The valuation of these common units reflects the Companys expected recovery from the
escrow account. |
|
(k) | Distributions are paid-in-kind. |
See accompanying notes to financial statements.
4
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 28, 2010
(amounts in 000s)
(UNAUDITED)
(l) | Warrants relate to the Companys floating rate senior secured second lien term loan facility
with ProPetro Services, Inc. These warrants are non-income producing and expire on February
15, 2017. |
|
(m) | Warrants are non-income producing and expire on November 30, 2013. |
|
(n) | Energy Future Holdings Corp., formerly TXU Corp., is a privately-held energy company with a
portfolio of competitive and regulated energy subsidiaries. Texas Competitive Electric
Holdings is a wholly owned subsidiary of Energy Future Holdings Corp. |
|
(o) | Floating rate senior secured first lien term loan facility. Security pays interest at a rate
of LIBOR + 350 basis points (3.73% as of February 28, 2010). |
|
(p) | Floating rate senior secured second lien term loan facility. Securitys default interest rate
is LIBOR + 1100 basis points, but the Company is not accruing interest income on this
security. See Note 2 Investment Income. |
|
(q) | Security is not treated as an EPC under the 1940 Act. |
|
(r) | Securitys principal amount is 2,500 Canadian dollars. |
See accompanying notes to financial statements.
5
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Long-Term Investments 118.9% |
||||||||
Equity Investments(a) 95.6% |
||||||||
United States 95.6% |
||||||||
Private MLP(b)(c) 56.1% |
||||||||
Direct Fuels Partners, L.P. Class A Common Units(d) |
2,500 | $ | 30,000 | |||||
Direct Fuels Partners, L.P. Class A Convertible Preferred Units(d)(e) |
96 | 1,765 | ||||||
Direct Fuels Partners, L.P. Class B Convertible Preferred Units(d)(f) |
27 | 503 | ||||||
Direct Fuels Partners, L.P. Class C Convertible Preferred Units(d)(g) |
20 | 402 | ||||||
International Resource Partners LP |
1,500 | 34,500 | ||||||
Quest Midstream Partners, L.P.(h) |
361 | 1,713 | ||||||
VantaCore Partners LP(d) |
1,465 | 25,632 | ||||||
94,515 | ||||||||
Publicly Traded MLP and MLP Affiliate(i) 39.5% |
||||||||
Calumet Specialty Products Partners, L.P. |
22 | 398 | ||||||
Capital Product Partners L.P.(j) |
113 | 860 | ||||||
Copano Energy, L.L.C. |
74 | 1,502 | ||||||
Copano Energy, L.L.C. Unregistered, Class D Units(b) |
76 | 1,491 | ||||||
DCP Midstream Partners, LP |
91 | 2,295 | ||||||
Duncan Energy Partners L.P. |
3 | 74 | ||||||
Eagle Rock Energy Partners, L.P.(j)(k) |
1,113 | 5,264 | ||||||
Eagle Rock Energy Partners, L.P. (b)(j)(l) |
148 | 686 | ||||||
Enbridge Energy Management, L.L.C.(m) |
27 | 1,320 | ||||||
Enbridge Energy Partners, L.P. |
91 | 4,489 | ||||||
Energy Transfer Equity, L.P. |
119 | 3,506 | ||||||
Energy Transfer Partners, L.P. |
37 | 1,606 | ||||||
Enterprise Products Partners L.P. |
223 | 6,634 | ||||||
Exterran Partners, L.P. |
82 | 1,590 | ||||||
Global Partners LP (j) |
142 | 3,331 | ||||||
Holly Energy Partners, L.P. |
11 | 396 | ||||||
Inergy, L.P. |
99 | 3,280 | ||||||
Kinder Morgan Management, LLC(m) |
34 | 1,730 | ||||||
K-Sea Transportation Partners L.P. |
8 | 83 | ||||||
Magellan Midstream Holdings, L.P. |
57 | 2,342 | ||||||
MarkWest Energy Partners, L.P. |
108 | 2,768 | ||||||
Martin Midstream Partners L.P. |
49 | 1,283 | ||||||
Navios Maritime Partners L.P.(j) |
56 | 792 | ||||||
ONEOK Partners, L.P. |
18 | 1,077 | ||||||
Plains All American Pipeline, L.P.(d) |
103 | 5,200 | ||||||
Quicksilver Gas Services LP (j) |
20 | 426 | ||||||
Regency Energy Partners LP |
154 | 3,066 | ||||||
Targa Resources Partners LP |
37 | 737 | ||||||
TC PipeLines, LP |
10 | 352 |
See accompanying notes to financial statements.
6
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Publicly Traded MLP and MLP Affiliate(i) (Continued) |
||||||||
Teekay LNG Partners L.P. |
102 | $ | 2,485 | |||||
Teekay Offshore Partners L.P. |
23 | 413 | ||||||
TransMontaigne Partners L.P.(j) |
46 | 1,198 | ||||||
Williams Partners L.P. |
139 | 3,923 | ||||||
66,597 | ||||||||
Other Private Equity(c) 0.0% |
||||||||
ProPetro Services, Inc. Warrants(b)(n) |
2,905 | | ||||||
Trident Resources Corp. Warrants(o) |
100 | | ||||||
| ||||||||
Total Equity Investments (Cost $175,611) |
161,112 | |||||||
Interest | Maturity | Principal | ||||||||||||||
Rate | Date | Amount | ||||||||||||||
Energy Debt Investments(c) 23.3% |
||||||||||||||||
United States 21.8% |
||||||||||||||||
Upstream 9.4% |
||||||||||||||||
Antero Resources Finance Corp. |
9.375 | % | 12/01/17 | $ | 7,500 | 7,519 | ||||||||||
Hilcorp Energy Company |
7.750 | 11/01/15 | 6,585 | 6,338 | ||||||||||||
Petroleum Development Corporation |
12.000 | 02/15/18 | 2,000 | 2,020 | ||||||||||||
15,877 | ||||||||||||||||
Midstream & Other 6.0% |
||||||||||||||||
Energy Future Holdings Corp.(p) |
(q | ) | 10/10/14 | 9,209 | 6,861 | |||||||||||
North American Energy Alliance LLC |
10.875 | 06/01/16 | 1,000 | 1,042 | ||||||||||||
Targa Resources, Inc. |
8.500 | 11/01/13 | 2,155 | 2,112 | ||||||||||||
10,015 | ||||||||||||||||
Oilfield Services 4.2% |
||||||||||||||||
Dresser, Inc. |
(r | ) | 05/04/15 | 5,000 | 4,575 | |||||||||||
ProPetro Services, Inc.(b) |
(s | ) | 02/15/13 | 35,000 | 2,500 | |||||||||||
7,075 | ||||||||||||||||
Coal 2.2% |
||||||||||||||||
Drummond Company, Inc. |
7.375 | 02/15/16 | 4,000 | 3,770 | ||||||||||||
Total United States (Cost $67,224) |
36,737 | |||||||||||||||
Canada 1.5% |
||||||||||||||||
Upstream 1.5% |
||||||||||||||||
Athabasca Oil Sands Corp.(t) (Cost $2,434) |
13.000 | 7/30/11 | (u | ) | 2,510 | |||||||||||
Total Energy Debt Investments (Cost $69,658) |
39,247 | |||||||||||||||
Total Long-Term Investments (Cost $245,269) |
200,359 | |||||||||||||||
See accompanying notes to financial statements.
7
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
Interest | Maturity | |||||||||||
Description | Rate | Date | Value | |||||||||
Short-Term Investments 2.8% |
||||||||||||
Repurchase Agreements 2.8% |
||||||||||||
J.P. Morgan
Securities Inc.
(Agreements dated
11/30/2009 to be
repurchased at $4,710),
collateralized by
4,798 in U.S.
Treasury note (Cost
$4,710) |
0.070 | % | 12/01/09 | $ | 4,710 | |||||||
Total Investments 121.7% (Cost $249,979) |
205,069 | |||||||||||
Senior Secured Revolving Credit Facility Borrowings |
(56,000 | ) | ||||||||||
Other Assets in Excess of Total Liabilities |
19,470 | |||||||||||
Net Assets |
$ | 168,539 | ||||||||||
(a) | Unless otherwise noted, equity investments are common units/common shares. |
|
(b) | Fair valued and restricted security. See Notes 2, 4 and 8. |
|
(c) | Unless otherwise noted, security is treated as an eligible portfolio company (EPC) under
the Investment Company Act of 1940, as amended (the 1940 Act). |
|
(d) | The Company believes that it may be an affiliate of Direct Fuels Partners, L.P and VantaCore
Partners LP and that is an affiliate of Plains All American, L.P. See Note 6 Agreements and
Affiliations. |
|
(e) | The Class A Convertible Preferred Units are convertible into Class A Common Units on a
one-for-one basis at a price of $20.00 per unit. |
|
(f) | The Class B Convertible Preferred Units are convertible into Class A Common Units on a
one-for-one basis at a price of $18.50 per unit. |
|
(g) | The Class C Convertible Preferred Units are convertible into Class A Common Units on a
one-for-one basis at a price of $15.50 per unit. |
|
(h) | Security is non-income producing. |
|
(i) | Unless otherwise noted, security is not treated as an EPC under the 1940 Act. As a business
development company, the Company is generally prohibited from acquiring assets other than
qualifying assets unless at least 70% of its total assets (excluding deferred tax assets) are
qualifying assets under the 1940 Act. As of November 30, 2009, the percentage of the Companys
total assets (excluding deferred tax assets) that are qualifying assets was 70.5%. See Note 3
Qualifying Assets Under the 1940 Act. |
|
(j) | All or a portion of the Companys holdings in this security are treated as an EPC under the
1940 Act. See Note 3 Qualifying Assets Under the 1940 Act. |
|
(k) | Common units are unregistered but may be sold pursuant to Rule 144 under the Securities Act
of 1933, as amended (the Securities Act). |
See accompanying notes to financial statements.
8
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2009
(amounts in 000s)
(l) | Unregistered common units which were placed in escrow for a period of 18 months following the
sale of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1,
2010). |
|
(m) | Distributions are paid-in-kind. |
|
(n) | Warrants relate to the Companys floating rate senior secured second lien term loan facility
with ProPetro Services, Inc. These warrants are non-income producing and expire on February
15, 2017. |
|
(o) | Warrants are non-income producing and expire on November 30, 2013. |
|
(p) | Energy Future Holdings Corp., formerly TXU Corp., is a privately-held energy company with a
portfolio of competitive and regulated energy subsidiaries, including TXU Energy, Oncor and
Luminant. |
|
(q) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 350 basis points (3.78% as of November 30, 2009). |
|
(r) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 575 basis points (5.99% as of November 30, 2009). |
|
(s) | Floating rate senior secured second lien term loan facility. Securitys default interest rate
is LIBOR + 1100 basis points, but the Company is not accruing interest income on this
security. See Note 2 Investment Income. |
|
(t) | Security is not treated as an EPC under the 1940 Act. |
|
(u) | Securitys principal amount is 2,500 Canadian dollars. |
See accompanying notes to financial statements.
9
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF ASSETS AND LIABILITIES
(amounts in 000s, except share and per share amounts)
February 28, | ||||||||
2010 | November 30, | |||||||
(Unaudited) | 2009 | |||||||
ASSETS |
||||||||
Investments, at fair value: |
||||||||
Non-affiliated (Cost $176,025 and $172,244) |
$ | 148,969 | $ | 136,857 | ||||
Affiliated (Cost $72,245 and $73,025) |
61,833 | 63,502 | ||||||
Repurchase agreements (Cost $11,320 and $4,710) |
11,320 | 4,710 | ||||||
Total investments (Cost $259,590 and $249,979) |
222,122 | 205,069 | ||||||
Deferred income tax asset |
15,698 | 20,135 | ||||||
Receivable for securities sold |
3,515 | 14 | ||||||
Interest, dividends and distributions receivable, net |
536 | 410 | ||||||
Debt issuance costs, prepaid expenses and other assets |
223 | 392 | ||||||
Total Assets |
242,094 | 226,020 | ||||||
LIABILITIES |
||||||||
Senior secured revolving credit facility |
61,000 | 56,000 | ||||||
Payable for securities purchased |
5,957 | 17 | ||||||
Investment management fee payable |
913 | 858 | ||||||
Accrued directors fees and expenses |
77 | 74 | ||||||
Accrued expenses and other liabilities |
559 | 532 | ||||||
Total Liabilities |
68,506 | 57,481 | ||||||
NET ASSETS |
$ | 173,588 | $ | 168,539 | ||||
NET ASSETS CONSIST OF |
||||||||
Common stock, $0.001 par value (200,000,000 shares authorized at
February 28, 2010 and November 30, 2009; 10,190,383 and 10,163,978
shares issued and outstanding at February 28, 2010 and November 30,
2009, respectively) |
$ | 10 | $ | 10 | ||||
Paid-in capital |
200,906 | 203,576 | ||||||
Accumulated net investment loss, net of income taxes, less distributions |
(3,082 | ) | (2,869 | ) | ||||
Accumulated net realized losses on investments, net of income taxes |
(48 | ) | (3,272 | ) | ||||
Net unrealized losses on investments, net of income taxes |
(24,198 | ) | (28,906 | ) | ||||
NET ASSETS |
$ | 173,588 | $ | 168,539 | ||||
NET ASSET VALUE PER SHARE |
$ | 17.03 | $ | 16.58 | ||||
See accompanying notes to financial statements.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF OPERATIONS
(amounts in 000s)
(UNAUDITED)
Three Months Ended | ||||||||
February 28, | February 28, | |||||||
2010 | 2009 | |||||||
INVESTMENT INCOME |
||||||||
Income |
||||||||
Dividends and Distributions: |
||||||||
Non-affiliated investments |
$ | 1,748 | $ | 2,678 | ||||
Affiliated investments |
791 | 1,949 | ||||||
Total dividends and distributions |
2,539 | 4,627 | ||||||
Return of capital |
(2,063 | ) | (4,124 | ) | ||||
Net dividends and distributions |
476 | 503 | ||||||
Interest and other income |
940 | 730 | ||||||
Total investment income |
1,416 | 1,233 | ||||||
Expenses |
||||||||
Base investment management fees |
913 | 777 | ||||||
Professional fees |
162 | 224 | ||||||
Directors fees and expenses |
75 | 75 | ||||||
Administration fees |
35 | 53 | ||||||
Insurance |
37 | 37 | ||||||
Custodian fees |
16 | 15 | ||||||
Other expenses |
134 | 205 | ||||||
Total Expenses Before Interest Expense |
1,372 | 1,386 | ||||||
Interest expense |
379 | 384 | ||||||
Total Expenses |
1,751 | 1,770 | ||||||
Net Investment Loss Before Income Taxes |
(335 | ) | (537 | ) | ||||
Deferred income tax benefit |
122 | 192 | ||||||
Net Investment Loss |
(213 | ) | (345 | ) | ||||
REALIZED AND UNREALIZED GAINS (LOSSES) |
||||||||
Net Realized Gains (Losses) |
||||||||
Investments |
5,046 | (2,547 | ) | |||||
Foreign currency transactions |
31 | (6 | ) | |||||
Options |
| | ||||||
Deferred income tax benefit (expense) |
(1,853 | ) | 912 | |||||
Net Realized Gains (Losses) |
3,224 | (1,641 | ) | |||||
Net Change in Unrealized Gains (Losses) |
||||||||
Investments |
7,441 | (5,222 | ) | |||||
Foreign currency translations |
(27 | ) | 2 | |||||
Options |
| 17 | ||||||
Deferred income tax benefit (expense) |
(2,706 | ) | 1,860 | |||||
Net Change in Unrealized Gains (Losses) |
4,708 | (3,343 | ) | |||||
Net Realized and Unrealized Gains (Losses) |
7,932 | (4,984 | ) | |||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS |
$ | 7,719 | $ | (5,329 | ) | |||
See accompanying notes to financial statements.
11
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF CHANGES IN NET ASSETS
(amounts in 000s, except share amounts)
Three Months | ||||||||
Ended | For the Year | |||||||
February 28, | Ended | |||||||
2010 | November 30, | |||||||
(Unaudited) | 2009 | |||||||
OPERATIONS |
||||||||
Net investment income (loss) |
$ | (213 | ) | $ | 1,073 | |||
Net realized gains (losses) |
3,224 | (10,736 | ) | |||||
Net change in unrealized gains |
4,708 | 27,892 | ||||||
Net Increase in Net Assets Resulting from Operations |
7,719 | 18,229 | ||||||
DIVIDENDS AND DISTRIBUTIONS |
||||||||
Dividends |
(3,011 | )(1) | | |||||
Distributions return of capital |
(38 | )(1) | (13,143 | )(2) | ||||
Dividends and Distributions |
(3,049 | ) | (13,143 | ) | ||||
CAPITAL STOCK TRANSACTIONS |
||||||||
Issuance of 26,405 and 60,992 shares of common stock from
reinvestment of dividends |
379 | 766 | ||||||
Increase in Net Assets from Capital Stock Transactions |
379 | 766 | ||||||
Total Increase in Net Assets |
5,049 | 5,852 | ||||||
NET ASSETS |
||||||||
Beginning of period |
168,539 | 162,687 | ||||||
End of period |
$ | 173,588 | $ | 168,539 | ||||
(1) | This is an estimate of the characterization of the distributions paid to common stockholders
for the three months ended February 28, 2010 as either a dividend (ordinary income) or
distribution (return of capital). This estimate is based on the Companys operating results
during the period. The actual characterization of the common stock distributions made during
the current year will not be determinable until after the end of the fiscal year when the
Company can determine earnings and profits and, therefore, it may differ from the preliminary
estimates. |
|
(2) | The information presented in each of these items is a characterization of a portion of the
total distributions paid to common stockholders for the fiscal year ended November 30, 2009 as
either dividends (ordinary income) or distributions (return of capital). This characterization
is based on the Companys earnings and profits. |
See accompanying notes to financial statements.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF CASH FLOWS
(amounts in 000s)
(UNAUDITED)
Three Months Ended | ||||||||
February 28, | February 28, | |||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 7,719 | $ | (5,329 | ) | |||
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided (used) by operating activities: |
||||||||
Purchase of long-term investments |
(23,020 | ) | (4,706 | ) | ||||
Proceeds from sale of long-term investments |
23,117 | 8,632 | ||||||
Sale (purchase) of short-term investments, net |
(6,610 | ) | 1,262 | |||||
Realized losses (gains) on investments |
(5,046 | ) | 2,553 | |||||
Return of capital distributions |
2,063 | 4,124 | ||||||
Unrealized losses (gains) on investments |
(7,441 | ) | 5,203 | |||||
Deferred income tax expense (benefit) |
4,437 | (2,964 | ) | |||||
Accretion of bond discount |
(116 | ) | (166 | ) | ||||
Increase in deposits with brokers |
| (18 | ) | |||||
Amortization of debt issuance costs |
130 | 57 | ||||||
Decrease (increase) in receivable for securities sold |
(3,501 | ) | 49 | |||||
Increase in interest, dividends and distributions receivable |
(126 | ) | (178 | ) | ||||
Decrease in prepaid expenses and other assets |
39 | 205 | ||||||
Increase in payable for securities purchased |
5,940 | 442 | ||||||
Increase (decrease) in investment management fee payable |
55 | (295 | ) | |||||
Increase in accrued directors fees and expenses |
3 | | ||||||
Increase in option contracts written |
| 17 | ||||||
Increase (decrease) in accrued expenses and other liabilities |
27 | (352 | ) | |||||
Net Cash Provided by (Used in) Operating Activities |
(2,330 | ) | 8,536 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Borrowings from (repayments of) senior secured revolving credit facility |
5,000 | (5,000 | ) | |||||
Cash distributions to stockholders |
(2,670 | ) | (3,536 | ) | ||||
Net Cash Provided by (Used in) Financing Activities |
2,330 | (8,536 | ) | |||||
NET CHANGE IN CASH |
| | ||||||
CASH BEGINNING OF PERIOD |
| | ||||||
CASH END OF PERIOD |
$ | | $ | | ||||
Supplemental disclosure of cash flow information:
Non-cash financing activities not included herein consist of reinvestment of distributions pursuant
to the Companys dividend reinvestment plan of $379 and $0 for the three months ended February 28,
2010 and February 28, 2009, respectively.
During the three months ended February 28, 2010, there were no state income taxes paid and interest
paid was $237. During the three months ended February 28, 2009, there were no state income taxes
paid and interest paid was $846.
13
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
1. ORGANIZATION
Kayne Anderson Energy Development Company (the Company) was organized as a Maryland
corporation on May 24, 2006. The Company is an externally managed, non-diversified closed-end
management investment company that has elected to be treated as a business development company
(BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). The Company
commenced investment operations on September 21, 2006. The Companys shares of common stock are
listed on the New York Stock Exchange (NYSE) under the symbol KED. For the fiscal year ended
November 30, 2007 and prior periods, the Company was treated as a regulated investment company
(RIC) under the U.S. Internal Revenue Code of 1986, as amended (the Code). Since December 1,
2007, the Company has been taxed as a corporation. See Note 5 Income Taxes.
The Companys investment objective is to generate both current income and capital appreciation
primarily through equity and debt investments. The Company seeks to achieve this objective by
investing at least 80% of its total assets in securities of companies that derive the majority of
their revenue from activities in the energy industry (Energy Companies), including: (a) Midstream
Energy Companies, which are businesses that operate assets used to gather, transport, process,
treat, terminal and store natural gas, natural gas liquids, propane, crude oil or refined petroleum
products; (b) Upstream Energy Companies, which are businesses engaged in the exploration,
extraction and production of natural resources, including natural gas, natural gas liquids and
crude oil, from onshore and offshore geological reservoirs; and (c) Other Energy Companies, which
are businesses engaged in owning, leasing, managing, producing, processing and selling of coal and
coal reserves; the marine transportation of crude oil, refined petroleum products, liquefied
natural gas, as well as other energy-related natural resources using tank vessels and bulk
carriers; and refining, marketing and distributing refined energy products, such as motor gasoline
and propane, to retail customers and industrial end-users.
2. SIGNIFICANT ACCOUNTING POLICIES
A. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management to make
estimates and assumptions that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period. Actual results could differ materially from
those estimates.
B. Reclassifications Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the current years presentation.
C. Calculation of Net Asset Value The Company determines its net asset value as of the close
of regular session trading on the NYSE no less frequently than the last business day of each
quarter. Net asset value is computed by dividing the value of the Companys assets (including
accrued interest and distributions), less all of its liabilities (including accrued expenses,
distributions payable and any borrowings) by the total number of common shares outstanding.
D. Investment Valuation Readily marketable portfolio securities listed on any exchange other
than the NASDAQ Stock Market, Inc. (NASDAQ) are valued, except as indicated below, at the last
sale price on the business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid and asked prices on
such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing
price. Portfolio securities traded on more than one securities exchange are valued at the last sale
price on the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
Equity securities traded in the over-the-counter market, but excluding securities admitted to
trading on the NASDAQ, are valued at the closing bid prices. Energy debt securities that are
considered corporate bonds are valued by using the mean of the bid and ask prices provided by an
independent pricing service. For energy debt securities that are considered corporate bank loans,
the fair market value is determined by using the mean of the bid and ask prices provided by the
syndicate bank or principal market maker. When price quotes are not available, fair market value
will be based on prices of comparable securities. In certain cases, the Company may not be able to
purchase or sell energy debt securities at the quoted prices due to the lack of liquidity for these
securities.
Exchange-traded options and futures contracts are valued at the last sale price at the close
of trading in the market where such contracts are principally traded or, if there was no sale on
the applicable exchange on such day, at the mean between the quoted bid and ask price as of the
close of trading on such exchange.
The Companys portfolio includes securities that are privately issued or illiquid. For these
securities, as well as any other portfolio security held by the Company for which reliable market
quotations are not readily available, valuations are determined in good faith by the board of
directors of the Company under a valuation policy and a consistently applied valuation process.
Unless otherwise determined by the board of directors, the following valuation process, approved by
the board of directors, is used for such securities:
| Investment Team Valuation. The applicable investments are valued by senior
professionals of KA Fund Advisors, LLC (KAFA) responsible for the portfolio
investments. |
| Investment Team Valuation Documentation. Preliminary valuation conclusions are
documented and discussed with senior management of KAFA. Such valuations are submitted to
the Valuation Committee (a committee of the board of directors) on a quarterly basis. |
| Valuation Committee. The Valuation Committee meets each quarter to consider new
valuations presented by KAFA, if any, which were made in accordance with the Valuation
Procedures in such quarter. The Valuation Committees valuation determinations are
subject to ratification by the board. |
| Valuation Firm. No less frequently than quarterly, a third-party valuation firm
engaged by the board of directors reviews the valuation methodologies and calculations
employed for these securities. The independent valuation firm provides third-party
valuation consulting services to the board of directors which consist of certain limited
procedures that the Company identified and requested them to perform. For the three
months ended February 28, 2010, the independent valuation firm provided limited
procedures on investments in six portfolio companies, comprising approximately 44.5% of
the total investments as of February 28, 2010. Upon completion of the limited procedures,
the independent valuation firm concluded that the fair value of those investments
subjected to the limited procedures did not appear to be unreasonable. |
| Board of Directors Determination. The board of directors considers the valuations
provided by KAFA and the Valuation Committee and ratifies valuations for the applicable
securities at each quarterly board meeting. The board of directors considers the reports
provided by the third-party valuation firm in reviewing and determining in good faith the
fair value of the applicable portfolio securities. |
15
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
During the course of such valuation process, whenever possible, privately-issued equity and
debt investments are valued using comparisons of valuation ratios of the portfolio companies that
issued such equity and debt securities to any peer companies that are publicly traded. The value
derived from this analysis is then discounted to reflect the illiquid nature of the investment. The
Company also utilizes comparative information such as acquisition transactions, public offerings or
subsequent equity sales to corroborate its valuations. Due to the inherent uncertainty of
determining the fair value of investments that do not have a readily available market value, the
fair value of the Companys investments in privately-issued securities may differ significantly
from the values that would have been used had a ready market existed for such investments, and the
differences could be material.
Factors that the Company may take into account in fair value pricing its investments include,
as relevant, the portfolio companys ability to make payments and its earnings and discounted cash
flow, the markets in which the portfolio company does business, comparison to publicly traded
securities, the nature and realizable value of any collateral and other relevant factors.
Unless otherwise determined by the board of directors, securities that are convertible into or
otherwise will become publicly traded (e.g., through subsequent registration or expiration of a
restriction on trading) will be valued through the process described above, using a valuation based
on the market value of the publicly traded security less a discount. The discount will initially be
equal in amount to the discount negotiated at the time of purchase. To the extent that such
securities are convertible or otherwise become publicly traded within a time frame that may be
reasonably determined, KAFA will determine an applicable discount in accordance with a methodology
approved by the Valuation Committee.
At February 28, 2010, the Company held 56.9% of its net assets applicable to common
stockholders (40.8% of total assets) in securities that were fair valued pursuant to the procedures
adopted by the board of directors. The aggregate fair value of these securities at February 28,
2010 was $98,765. See Note 8 Restricted Securities.
At November 30, 2009, the Company held 58.9% of its net assets applicable to common
stockholders (43.9% of total assets) in securities that were fair valued pursuant to the procedures
adopted by the board of directors. The aggregate fair value of these securities at November 30,
2009 was $99,192. Note 8 Restricted Securities.
E. Repurchase Agreements The Company has agreed to purchase securities from financial
institutions subject to the sellers agreement to repurchase them at an agreed-upon time and price
(repurchase agreements). The financial institutions with whom the Company enters into repurchase
agreements are banks and broker/dealers which KAFA considers creditworthy. The seller under a
repurchase agreement is required to maintain the value of the securities as collateral, subject to
the agreement, at not less than the repurchase price plus accrued interest. KAFA monitors daily the
mark-to-market of the value of the collateral, and, if necessary, requires the seller to maintain
additional securities, so that the value of the collateral is not less than the repurchase price.
Default by or bankruptcy of the seller would, however, expose the Company to possible loss because
of adverse market action or delays in connection with the disposition of the underlying securities.
F. Security Transactions Security transactions are accounted for on the date the securities
are purchased or sold (trade date). Realized gains and losses are reported on an identified cost
basis.
G. Derivative Financial Instruments The Company may utilize derivative financial instruments
in its operations.
16
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
Interest rate swap contracts. The Company may use interest rate swap contracts to hedge
against increasing interest expense on its leverage resulting from increases in short term interest
rates. The Company does not hedge any interest rate risk associated with portfolio holdings.
Interest rate transactions the Company may use for hedging purposes may expose it to certain risks
that differ from the risks associated with its portfolio holdings. A
decline in interest rates may result in a decline in the value of the swap contracts, which,
everything else being held constant, would result in a decline in the net assets of the Company. In
addition, if the counterparty to an interest rate swap or cap defaults, the Company would not be
able to use the anticipated net receipts under the interest rate swap or cap to offset its cost of
financial leverage.
Interest rate swap contracts are recorded at fair value with changes in value during the
reporting period, and amounts accrued under the agreements, included as unrealized gains or losses
in the Statement of Operations. Monthly cash settlements under the terms of interest rate swap
agreements are recorded as realized gains or losses in the Statement of Operations. The Company
generally values interest rate swap contracts based on dealer quotations, if available, or by
discounting the future cash flows from the stated terms of the interest rate swap agreement by
using interest rates currently available in the market.
Option contracts. The Company is exposed to financial market risks including changes in the
valuations of its investment portfolio. The Company may purchase or write (sell) call options. A
call option on a security is a contract that gives the holder of the option, in return for a
premium, the right to buy from the writer of the option the security underlying the option at a
specified exercise price at any time during the term of the option.
The Company would normally purchase call options in anticipation of an increase in the market
value of securities of the type in which it may invest. The Company would ordinarily realize a
gain on a purchased call option if, during the option period, the value of such securities exceeded
the sum of the exercise price, the premium paid and transaction costs; otherwise the Company would
realize either no gain or a loss on the purchased call option. The Company may also purchase put
option contracts. If a purchased put option is exercised, the premium paid increases the cost basis
of the securities sold by the Company.
The Company may also write (sell) call options with the purpose of generating income or
reducing its ownership of certain securities. The writer of an option on a security has the
obligation upon exercise of the option to deliver the underlying security upon payment of the
exercise price.
When the Company writes a call option, an amount equal to the premium received by the Company
is recorded as a liability and is subsequently adjusted to the current fair value of the option
written. Premiums received from writing options that expire unexercised are treated by the Company
on the expiration date as realized gains from investments. If the Company repurchases a written
call option prior to its exercise, the difference between the premium received and the amount paid
to repurchase the option is treated as a realized gain or loss. If a call option is exercised, the
premium is added to the proceeds from the sale of the underlying security in determining whether
the Company has realized a gain or loss. The Company, as the writer of an option, bears the market
risk of an unfavorable change in the price of the security underlying the written option.
H. Return of Capital Estimates Distributions received from the Companys investments in
master limited partnerships (MLPs) generally are comprised of income and return of capital. The
Company records investment income and return of capital based on estimates made at the time such
distributions are received. Such estimates are based on historical information available from MLPs
and other industry sources. These estimates may subsequently be revised based on information
received from MLPs after their tax reporting periods are concluded.
17
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
The following table sets forth the Companys estimated return of capital for distributions
received from its public and private MLPs, both as a percentage of total distributions and in
thousands of dollars. The return of capital portion of the distributions is a reduction to
investment income and results in an equivalent reduction in the cost basis of the associated
investments and increases Net Realized Gains and Net Change in Unrealized Gains in each of the
comparative periods.
Three Months Ended | ||||||||
February 28, | February 28, | |||||||
2010 | 2009 | |||||||
Distributions received, return of capital portion |
81 | % | 89 | % | ||||
Return of capital attributable to Net Realized Gains |
$ | 872 | $ | 569 | ||||
Return of capital attributable to Net Change in Unrealized Gains |
1,191 | 3,555 | ||||||
Total return of capital |
$ | 2,063 | $ | 4,124 | ||||
I. Investment Income The Company records dividends and distributions on the ex-dividend
date. Interest income is recognized on the accrual basis, including amortization of premiums and
accretion of discounts to the extent that such amounts are expected to be collected. When investing
in securities with payment in-kind interest, the Company will accrue interest income during the
life of the security even though it will not be receiving cash as the interest is accrued. To the
extent that interest income to be received is not expected to be realized, a reserve against income
is established.
Many of the Companys debt securities were purchased at a discount or premium to the par value
of the security. The non-cash accretion of a discount to par value increases interest income while
the non-cash amortization of a premium to par value decreases interest income. The amount of these
non-cash adjustments can be found in the Companys Statement of Cash Flows. The non-cash accretion
of a discount increases the cost basis of the debt security, which results in an offsetting
unrealized loss. The non-cash amortization of a premium decreases the cost basis of the debt
security which results in an offsetting unrealized gain. To the extent that par value is not
expected to be realized, the Company discontinues accruing the non-cash accretion of the discount
to par value of the debt security.
During the quarter ended February 28, 2010, the Company recognized no interest income related
to its investment in ProPetro Services, Inc. (ProPetro). During the quarter, the Company
discontinued the non-cash accretion of the discount to par value of the debt security based on its
expectation that it will not realize par value on its investment. During the quarter ended
February 28, 2009, the Company recognized interest income of $102 related to its debt investment in
ProPetro. This interest income is the result of the non-cash accretion of the discount to par
value of this debt security. The Company also recognized an equal and offsetting unrealized loss
related to the original discount on the Companys investment in ProPetro.
The Companys stock dividends and distributions consist of additional units of Enbridge Energy
Management, L.L.C., Kinder Morgan Management, LLC., and Direct Fuels Partners, L.P. The additional
units are not reflected in investment income during the period received but are recorded as
unrealized gains upon receipt. During each of the fiscal periods set forth below, the Company
received the following stock dividends in total from Enbridge Energy Management, L.L.C., Kinder
Morgan Management, LLC and Direct Fuels Partners, L.P.
Three Months Ended | ||||||||
February 28, | ||||||||
2010 | 2009 | |||||||
Enbridge Energy Management, L.L.C. |
$ | 27 | $ | 24 | ||||
Kinder Morgan Management, LLC |
36 | 36 | ||||||
Direct Fuels Partners L.P. |
1,211 | | ||||||
Total stock dividends |
$ | 1,274 | $ | 60 | ||||
J. Distributions to Stockholders Distributions to common stockholders are recorded on the
ex-dividend date. The estimated characterization of the distributions paid to common stockholders
will be either a dividend (ordinary income) or distribution (return of capital). This estimate is
based on the Companys operating results during the period. The actual characterization of the
common stock distributions made for the current year will not be determinable until after the end
of the fiscal year when the Company can determine earnings and profits and, therefore, it may
differ from the preliminary estimates.
18
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
K. Income Taxes The Company is taxed as a corporation and pays
federal and applicable state corporate taxes on its taxable income. The Company invests its assets
primarily in MLPs, which generally are treated as partnerships for federal income tax purposes. As
a limited partner in the MLPs, the Company includes its allocable share of the MLPs taxable income
in computing its own taxable income. Deferred income taxes reflect (i) taxes on unrealized
gains/(losses), which are attributable to the temporary difference between fair market value and
tax basis, (ii) the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes and
(iii) the net tax benefit of accumulated net operating and capital losses. To the extent the
Company has a deferred tax asset, consideration is given as to whether or not a valuation allowance
is required. The need to establish a valuation allowance for deferred tax assets is assessed
periodically by the Company based on the Income Tax Topic of the FASB Accounting Standards
Codification that it is more likely than not that some portion or all of the deferred tax asset
will not be realized. In the assessment for a valuation allowance, consideration is given to all
positive and negative evidence related to the realization of the deferred tax asset. This
assessment considers, among other matters, the nature, frequency and severity of current and
cumulative losses, forecasts of future profitability (which are highly dependent on future cash
distributions from the Companys MLP holdings), the duration of statutory carryforward periods and
the associated risk that operating and capital loss carryforwards may expire unused.
The Company may rely to some extent on information provided by the MLPs, which may not
necessarily be timely, to estimate taxable income allocable to the MLP units held in the portfolio
and to estimate the associated deferred tax liability. Such estimates are made in good faith. From
time to time, as new information becomes available, the Company modifies its estimates or
assumptions regarding the deferred tax liability (asset).
The Companys policy is to classify interest and penalties associated with underpayment of
federal and state income taxes, if any, as income tax expense on its Statement of Operations. As of
February 28, 2010, the Company does not have any interest or penalties associated with the
underpayment of any income taxes. All tax years since inception remain open and subject to
examination by tax jurisdictions.
L. Indemnifications Under the Companys organizational documents, its officers and directors
are indemnified against certain liabilities arising out of the performance of their duties to the
Company. In addition, in the normal course of business, the Company enters into contracts that
provide general indemnification to other parties. The Companys maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made against the Company
that have not yet occurred, and may not occur. However, the Company has not had prior claims or
losses pursuant to these contracts and expects the risk of loss to be remote.
M. Foreign Currency Translations The books and records of the Company are maintained in U.S.
dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i)
market value of investment securities, assets and liabilities at the rate of exchange as of the
valuation date; and (ii) purchases and sales of investment securities, income and expenses at the
relevant rates of exchange prevailing on the respective dates of such transactions.
The Company does not isolate that portion of gains and losses on investments in equity and
debt securities which is due to changes in the foreign exchange rates from that which is due to
changes in market prices of equity securities. Accordingly, realized and unrealized foreign
currency gains and losses with respect to such securities are included in the reported net realized
and unrealized gains and losses on investment transactions balances.
Net realized foreign exchange gains or losses represent gains and losses from transactions in
foreign currencies and foreign currency contracts, foreign exchange gains or losses realized
between the trade date and settlement date on security transactions, and the difference between the amounts of interest
and dividends recorded on the Companys books and the U.S. dollar equivalent of such amounts on the
payment date.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
Net unrealized foreign exchange gains or losses represent the difference between the cost of
assets and liabilities (other than investments) recorded on the Companys books from the value of
the assets and liabilities (other than investments) on the valuation date.
3. QUALIFYING ASSETS UNDER THE 1940 ACT
As a BDC under the 1940 Act, the Company is generally prohibited from acquiring assets other
than qualifying assets unless at least 70% of its total assets, excluding deferred taxes, are
qualifying assets under the 1940 Act. The Company makes investments in eligible portfolio
companies (EPC) and other qualifying assets. EPCs generally include various domestic private
companies and related investments, but also include certain public companies with outstanding
common equity with a total market value of less than $250 million.
As of February 28, 2010 and November 30, 2009, the percentages of the Companys EPCs and other
qualifying assets compared to total assets (excluding deferred taxes) are set forth below.
February 28, | ||||||||
2010 | November 30, | |||||||
(Unaudited) | 2009 | |||||||
Qualifying assets: |
||||||||
Private MLPs and other private equity |
$ | 93,942 | $ | 94,515 | ||||
Publicly traded MLP and MLP Affiliate investments: |
||||||||
Capital Products Partners L.P.(1) |
636 | 555 | ||||||
Eagle Rock Energy Partners, L.P. (2) |
7,078 | 5,950 | ||||||
Global Partners LP(1) |
414 | 392 | ||||||
Navios Maritime Partners L.P. (1) |
879 | 792 | ||||||
Quicksilver Gas Services LP(1) |
271 | 281 | ||||||
TransMontaigne Partners L.P. (1) |
1,272 | 1,198 | ||||||
$ | 10,550 | $ | 9,168 | |||||
Energy debt investments |
42,032 | 36,737 | ||||||
Repurchase agreement and deposits with brokers |
11,320 | 4,710 | ||||||
Receivable for securities sold |
3,515 | 14 | ||||||
Qualifying assets |
$ | 161,359 | $ | 145,144 | ||||
Total assets: |
||||||||
Total assets |
$ | 242,094 | $ | 226,020 | ||||
Less: deferred income tax asset |
(15,698 | ) | (20,135 | ) | ||||
Total assets, net |
$ | 226,396 | $ | 205,885 | ||||
Qualifying assets as a percentage of total assets |
71.3 | % | 70.5 | % |
(1) | Securities of publicly traded MLPs were designated as EPCs since their total market
capitalization was less than $250 million within the 60 day period prior to their purchase. |
|
(2) | Represents units received as partial consideration related to the sale of Millennium
Midstream Partners, L.P. (Millennium was a Private MLP investment) to Eagle Rock Energy
Partners, L.P. on October 1, 2008. BDC rules consider securities received as consideration
from the sale of an EPC to be an EPC. |
20
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
4. FAIR VALUE
As required by the Fair Value Measurement and Disclosures of the FASB Accounting Standards
Codification, the Company has performed an analysis of all assets and liabilities measured at fair
value to determine the significance and character of all inputs to their fair value determination.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair
value into the following three broad categories:
| Level 1 Quoted unadjusted prices for identical instruments in active markets to
which the Company has access at the date of measurement. |
| Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable
in active markets. Level 2 inputs are those in markets for which there are few
transactions, the prices are not current, little public information exists or instances
where prices vary substantially over time or among brokered market makers. |
| Level 3 Model derived valuations in which one or more significant inputs or
significant value drivers are unobservable. Unobservable inputs are those inputs that
reflect the Companys own assumptions that market participants would use to price the
asset or liability based on the best available information. |
Note that the valuation levels below are not necessarily an indication of the risk or
liquidity associated with the underlying investment. For instance, the Companys repurchase
agreements, which are collateralized by U.S. Treasury notes, are generally high quality and liquid;
however, the Company reflects these repurchase agreements as Level 2 because the inputs used to
determine fair value may not always be quoted prices in an active market.
The following table presents our assets measured at fair value on a recurring basis at
February 28, 2010.
Quoted Prices in | Prices with Other | One or More | ||||||||||||||
Active Markets | Observable Inputs | Unobservable Inputs | ||||||||||||||
Assets at Fair Value | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Equity investments |
$ | 166,253 | $ | 71,488 | $ | | $ | 94,765 | ||||||||
Energy debt investments |
44,549 | | 40,549 | 4,000 | ||||||||||||
Repurchase agreement |
11,320 | | 11,320 | | ||||||||||||
Total assets at fair value |
$ | 222,122 | $ | 71,488 | $ | 51,869 | $ | 98,765 | ||||||||
The following table presents our assets measured at fair value on a recurring basis at
November 30, 2009.
Quoted Prices in | Prices with Other | One or More | ||||||||||||||
Active Markets | Observable Inputs | Unobservable Inputs | ||||||||||||||
Assets at Fair Value | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Equity investments |
$ | 161,112 | $ | 64,420 | $ | | $ | 96,692 | ||||||||
Energy debt investments |
39,247 | | 36,747 | 2,500 | ||||||||||||
Repurchase agreement |
4,710 | | 4,710 | | ||||||||||||
Total assets at fair value |
$ | 205,069 | $ | 64,420 | $ | 41,457 | $ | 99,192 | ||||||||
The Company did not have any liabilities that were measured at fair value on a recurring basis
at February 28, 2010 or November 30, 2009.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
In January 2010, the FASB Accounting Standards Board issued Accounting Standards Update
(ASU) No. 2010-06 Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends FASB
Accounting Standards Codification Topic, Fair Value Measurements and Disclosures, to require additional
disclosures regarding fair value measurements. Certain disclosures required by ASU No. 2010-06 are
effective for interim and annual reporting periods beginning after December 15, 2009, and other
required disclosures are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. Management is currently evaluating the impact ASU No.
2010-06 will have on its financial statement disclosures.
The following table presents our assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the three months ended February 28, 2010.
Equity | Energy Debt | Total | ||||||||||
Balance November 30, 2009 |
$ | 96,692 | $ | 2,500 | $ | 99,192 | ||||||
Transfers out of Level 3 |
(1,500 | ) | | (1,500 | ) | |||||||
Realized gains (losses) |
| | | |||||||||
Unrealized gains (losses), net |
(1,638 | ) | 1,500 | (138 | ) | |||||||
Purchases, issuances or settlements |
1,211 | | 1,211 | |||||||||
Balance February 28, 2010 |
$ | 94,765 | $ | 4,000 | $ | 98,765 | ||||||
The $138 of unrealized losses, net, presented in the table above relates to investments that
are still held at February 28, 2010, and the Company presents these unrealized losses on the
Consolidated Statement of Operations Net Change in Unrealized Gains (Losses).
The following table presents our assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the three months ended February 28, 2009.
Equity | Energy Debt | Total | ||||||||||
Balance November 30, 2008 |
$ | 104,708 | $ | 10,000 | $ | 114,708 | ||||||
Transfers out of Level 3 |
(454 | ) | | (454 | ) | |||||||
Realized gains (losses) |
| | | |||||||||
Unrealized losses, net |
(5,259 | ) | (5,500 | ) | (10,759 | ) | ||||||
Purchases, issuances or settlements |
| | | |||||||||
Balance February 28, 2009 |
$ | 98,995 | $ | 4,500 | $ | 103,495 | ||||||
The $10,759 of unrealized losses, net, presented in the table above relates to investments
that were still held at November 30, 2009, and the Company presents these unrealized losses on the
Consolidated Statement of Operations Net Change in Unrealized Gains (Losses).
The Company did not have any liabilities that were measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) at February 28, 2010, November 30, 2009 or February
28, 2009.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
5. INCOME TAXES
Deferred income taxes reflect (i) taxes on unrealized gains/(losses), which are attributable
to the difference between fair market value and tax basis, (ii) the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and (iii) the net tax benefit of accumulated net
operating losses. Components of the Companys deferred tax assets and liabilities are as follows:
February 28, | ||||||||
2010 | November 30, | |||||||
(Unaudited) | 2009 | |||||||
Deferred tax assets: |
||||||||
Organizational costs |
$ | 17 | $ | 18 | ||||
Net operating loss carryforwards |
2,279 | 2,442 | ||||||
Net capital loss carryforwards |
6,129 | 7,333 | ||||||
Net unrealized losses on investment securities |
9,119 | 11,703 | ||||||
Deferred tax liabilities: |
||||||||
Basis reductions resulting from estimated return of capital |
(1,846 | ) | (1,361 | ) | ||||
Total net deferred tax asset |
$ | 15,698 | $ | 20,135 | ||||
At February 28, 2010 the Company had a federal net operating loss carryforward of $6,363
(deferred tax asset of $2,179). Realization of the deferred tax assets and net operating loss
carryforwards are dependent, in part, on generating sufficient taxable income prior to expiration
of the loss carryforwards. If not utilized, $6,363 of the net operating loss carryforward will
expire in 2028. In addition, the Company has state net operating losses which total approximately
$4,350 (deferred tax asset of $100). These state net operating losses expire in 2014 through 2028.
At February 28, 2010, the Company had a capital loss carryforward of $16,775 (deferred tax
asset of $6,129). Realization of the capital loss carryforwards are dependent on generating
sufficient capital gains prior to the expiration of the capital loss carryforward in 2014.
The Company periodically reviews the recoverability of its deferred tax asset based on the
weight of objective evidence and criteria of whether it is more likely than not that the asset
would be utilized under the FASB Accounting for Income Tax Codification. The Companys analysis of
the need for a valuation allowance considers the occurrence of a cumulative loss over the three
year period ended November 30, 2009 and through first quarter 2010. A significant portion of the
Companys net pre-tax losses related to unrealized depreciation of investments that occurred during
fourth quarter 2008 as a result of the unprecedented decline in the overall financial, commodity
and MLP markets.
When assessing the recoverability of its deferred tax asset, significant weight was given to
the Companys forecast of future taxable income, which is based principally on the expected
continuation of cash distributions from the Companys MLP holdings and interest income from its
energy debt holdings at or near current levels. Consideration was also given to the effects of
potential additional future realized and unrealized losses on investments and the period over which
these deferred tax assets can be realized, as the expiration date for the federal tax loss
carryforwards is 18 years.
Based on the Companys assessment, it has determined that it is more likely than not that the
net deferred tax asset will be realized through future taxable income of the appropriate character.
Accordingly, no valuation allowance has been established for the Companys net deferred tax asset.
The Company will continue to assess the need for a valuation allowance in the future. The
Company will review its financial forecasts in relation to actual results and expected trends on an
ongoing basis. Unexpected significant decreases in cash distributions from the Companys MLP
holdings or significant declines in the fair value of its portfolio of investments may change the
Companys assessment regarding the recoverability of its deferred tax asset and would likely result
in a valuation allowance. If a valuation allowance is required to reduce the deferred tax asset in
the future, it could have a material impact on the Companys net asset value and results of
operations in the period it is recorded.
23
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
As of February 28, 2010 and November 30, 2009, the identified cost of investments for federal
income tax purposes was $246,329 and $236,370, respectively. The cost basis of investments includes
a $13,262 and $13,608 reduction in basis attributable to the Companys portion of the allocated
losses from its MLP investments at February 28, 2010 and November 30, 2009, respectively. Gross
unrealized appreciation and depreciation of investments for federal income tax purposes were as
follows:
February 28, | ||||||||
2010 | November 30, | |||||||
(Unaudited) | 2009 | |||||||
Gross unrealized appreciation of investments |
$ | 27,689 | $ | 22,300 | ||||
Gross unrealized depreciation of investments |
(51,896 | ) | (53,601 | ) | ||||
Net unrealized depreciation before tax |
$ | (24,207 | ) | $ | (31,301 | ) | ||
Components of the Companys income tax benefit (expense) for the following comparative periods
were as follows:
Three Months Ended | ||||||||
February 28, | February 28, | |||||||
2010 | 2009 | |||||||
Deferred income tax benefit net investment loss |
$ | 122 | 192 | |||||
Deferred income tax benefit (expense) realized losses (gains) |
(1,853 | ) | 912 | |||||
Deferred income tax benefit (expense) unrealized losses (gains) |
(2,706 | ) | 1,860 | |||||
Income tax benefit (expense) |
$ | (4,437 | ) | $ | 2,964 | |||
For the three months ended February 28, 2010 and 2009, the effective tax rate was 36.5% and
35.8%, respectively.
The Companys policy is to classify interest and penalties associated with underpayment of
federal and state income taxes, if any, as income tax expense on its Statement of Operations. As of
February 28, 2010, the Company does not have any interest or penalties associated with the
underpayment of any income taxes. All tax years since inception remain open and subject to
examination by tax jurisdictions.
6. AGREEMENTS AND AFFILIATIONS
A. Administration Agreement The Company has entered into an Administration Agreement (the
Administration Agreement) with Ultimus Fund Solutions, LLC (Ultimus). Pursuant to the
Administration Agreement, Ultimus will provide certain administrative services for the Company. The
Administration Agreement has automatic one-year renewals unless earlier terminated by either party
as provided under the terms of the Administration Agreement.
B. Investment Management Agreement The Company has entered into an investment management
agreement with KAFA under which the Company has material future rights and commitments. Pursuant to
the investment management agreement, KAFA has agreed to serve as investment adviser and provide
significant managerial assistance to portfolio companies to which the Company is required to
provide such assistance. Payments under the investment management agreement include (1) a base
management fee, (2) an incentive fee, and (3) reimbursement of certain expenses.
Base Investment Management Fee. The Company pays an amount equal on an annual basis to 1.75%
of average total assets to KAFA as compensation for services rendered. This amount is payable each
quarter after the end of the quarter. For purposes of calculating the base management fee, the
average total assets for each quarterly period are determined by averaging the total assets at
the last day of that quarter with the total assets at the last day of the prior quarter. Total
assets (excluding deferred taxes) shall equal gross asset value (which includes assets attributable
to or proceeds from the use of Leverage Instruments), minus the sum of accrued and unpaid dividends
on common stock and accrued and unpaid dividends on preferred stock and accrued liabilities (other
than liabilities associated with leverage and deferred taxes). Liabilities associated with leverage
include the principal amount of any borrowings, commercial paper or notes that the Company may
issue, the liquidation preference of outstanding preferred stock, and other liabilities from other forms of leverage such as short positions
and put or call options held or written by the Company.
24
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
Incentive Fee. The incentive fee consists of two parts. The first part of the incentive fee
(the Net Investment Income Fee), which is calculated and payable quarterly in arrears, equals 20%
of the excess, if any, of Adjusted Net Investment Income for the quarter over a quarterly hurdle
rate equal to 1.875% (7.50% annualized) of average net assets for the quarter. Average net assets
is calculated by averaging net assets at the last day of the quarter and at the last day of such
prior quarter or commencement of operations (net assets is defined as total assets less total
liabilities (including liabilities associated with Leverage Instruments) determined in accordance
with GAAP.
For this purpose, Adjusted Net Investment Income means interest income (including accrued
interest that the Company has not yet received in cash), dividend and distribution income from
equity investments (but excluding that portion of cash distributions that are treated as a return
of capital) and any other income, including any other fees, such as commitment, origination,
syndication, structuring, diligence, monitoring and consulting fees or other fees that the Company
receives from portfolio companies (other than fees for providing significant managerial assistance
to portfolio companies) accrued during the fiscal quarter, minus operating expenses for the quarter
(including the base management fee, any interest expense, dividends paid on issued and outstanding
preferred stock, if any, and any accrued income taxes related to net investment income, but
excluding the incentive fee). Adjusted Net Investment Income does not include any realized capital
gains, realized capital losses or unrealized capital gains or losses. Accordingly, the Company pays
an incentive fee based partly on accrued interest, the collection of which is uncertain or
deferred. Adjusted Net Investment Income includes, in the case of investments with a deferred
interest feature (such as original issue discount, debt instruments with payment-in-kind interest
and zero coupon securities), accrued income that the Company has not yet received in cash. For
example, accrued interest, if any, on investments in zero coupon bonds (if any) would be included
in the calculation of the incentive fee, even though the Company would not receive any cash
interest payments in respect of payment on the bond until its maturity date. Thus, if the Company
does not have sufficient liquid assets to pay this incentive fee or distributions to stockholders,
the Company may be required to liquidate assets.
The second part of the incentive fee (the Capital Gains Fee) is determined and payable in
arrears as of the end of each fiscal year (or upon termination of the investment management
agreement, as of the termination date), and equals (1) 20% of (a) net realized capital gains
(aggregate realized capital gains less aggregate realized capital losses) on a cumulative basis
from the closing date of the initial offering to the end of such fiscal year, less (b) any
unrealized capital losses at the end of such fiscal year based on the valuation of each investment
on the applicable calculation date compared to its adjusted cost basis (such difference, Adjusted
Realized Capital Gains), less (2) the aggregate amount of all Capital Gains Fees paid to KAFA in
prior fiscal years. The calculation of the Capital Gains Fee includes any capital gains that result
from the cash distributions that are treated as a return of capital. In that regard, any such
return of capital is treated as a decrease in the cost basis of an investment for purposes of
calculating the Capital Gains Fee.
Realized capital gains on an investment are calculated as the excess of the net amount
realized from the sale or other disposition of such security over the adjusted cost basis for the
security. Realized capital losses on a security are calculated as the amount by which the net
amount realized from the sale or other disposition of such security is less than the adjusted cost
basis of such security. Unrealized capital loss on a security is calculated as the amount by which
the adjusted cost basis of such security exceeds the fair value of such security at the end of a
fiscal year.
Components of the Companys management fees for the comparative financial periods are as
follows:
Three Months Ended | ||||||||
February 28, | February 28, | |||||||
2010 | 2009 | |||||||
Base investment management fees |
$ | 913 | $ | 777 | ||||
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
C. Portfolio Companies From time to time, the Company may control or may be an
affiliate of one or more portfolio companies, each as defined in the 1940 Act. In general, under
the 1940 Act, the Company would control a portfolio company if the Company owned 25% or more of
its outstanding voting securities and would be an affiliate of a portfolio company if the Company owned 5% or more of its outstanding
voting securities. The 1940 Act contains prohibitions and restrictions relating to transactions
between investment companies and their affiliates (including the Companys investment adviser),
principal underwriters and affiliates of those affiliates or underwriters.
The Company believes that there is significant ambiguity in the application of existing SEC
staff interpretations of the term voting security to complex structures such as limited
partnership interests of the kind in which the Company invests. As a result, it is possible that
the SEC staff may consider that certain securities investments in limited partnerships are voting
securities under the staffs prevailing interpretations of this term. If such determination is
made, the Company may be regarded as a person affiliated with and controlling the issuer(s) of
those securities for purposes of Section 17 of the 1940 Act.
In light of the ambiguity of the definition of voting securities, the Company does not intend
to treat any class of limited partnership interests that it holds as voting securities unless the
security holders of such class currently have the ability, under the partnership agreement, to
remove the general partner (assuming a sufficient vote of such securities, other than securities
held by the general partner, in favor of such removal) or the Company has an economic interest of
sufficient size that otherwise gives it the de facto power to exercise a controlling influence over
the partnership. The Company believes this treatment is appropriate given that the general partner
controls the partnership, and without the ability to remove the general partner or the power to
otherwise exercise a controlling influence over the partnership due to the size of an economic
interest, the security holders have no control over the partnership.
Affiliated Investments.
Direct Fuels Partners, L.P. At February 28, 2010, the Company held a 39.0% limited
partnership interest in Direct Fuels Partners, L.P. (Direct Fuels). The Company believes that the
limited partnership interests of Direct Fuels should not be considered voting securities for
purposes of the 1940 Act because of the limited scope and character of the rights of such
securities. The Companys President and Chief Executive Officer serves as a director on the board
of the general partner for Direct Fuels. Although the Company does not own any interest in the
general partner of Direct Fuels, it believes that it may be an affiliate of Direct Fuels under the
1940 Act by virtue of its participation on the board of the general partner.
Plains All American Pipeline, L.P. Robert V. Sinnott is a member of the Companys board of directors
and a senior executive of Kayne Anderson Capital Advisors, L.P. (KACALP), the managing member of
KAFA. Mr. Sinnott also serves as a director on the board of Plains All American GP LLC, the general
partner of Plains All American Pipeline, L.P. Members of senior management of KACALP and KAFA and
various affiliated funds managed by KACALP own units of Plains All American GP LLC. Various
advisory clients of KACALP and KAFA, including the Company, own units in Plains All American
Pipeline, L.P. The Company believes that it is an affiliate of Plains All American Pipeline, L.P. under the
1940 Act by virtue of the ownership interests in the general partner by the Companys affiliates.
VantaCore Partners LP At February 28, 2010, the Company held a 39.0% limited partnership
interest in VantaCore Partners LP (VantaCore). The Company believes that the limited partnership
interests of VantaCore should not be considered voting securities for purposes of the 1940 Act
because of the limited scope and character of the rights of such securities. One of the Companys
Senior Vice Presidents serves as a director on the board of the general partner for VantaCore.
Although the Company does not own any interest in the general partner of VantaCore, it believes
that it may be an affiliate of VantaCore under the 1940 Act by virtue of its participation on the
board of the general partner.
26
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
Non-Affiliated Investments.
International Resource Partners LP At February 28, 2010, the Company held a 23.6% limited
partnership interest in International Resource Partners LP (IRP). The Company believes that the
limited partnership interests of IRP should not be considered voting securities for purposes of the
1940 Act because of the limited scope and character of the rights of such securities. The Company
does not have a member of its management team serving as a director on the board of the general partner for IRP, but does have observation rights with
respect to IRPs board meetings. The Company believes that the Company does not have the power to
exercise a controlling influence over the management or policies of this partnership or the general
partner of IRP. Accordingly, the Company believes that it is not an affiliate of IRP under the 1940
Act.
Quest Midstream Partners, L.P. At February 28, 2010, the Company held a 2.6% limited
partnership interest in Quest Midstream Partners, L.P. (Quest). The Company believes that the
limited partnership interests of Quest should not be considered voting securities for purposes of
the 1940 Act because of the limited scope and character of the rights of such securities. One of
the Companys Executive Vice Presidents served as a director on the board of the general partner
for Quest from November 2008 until June 2009. As of February 28, 2010, the Company believes that
the Company does not have the power to exercise a controlling influence over the management or
policies of this partnership or the general partner of Quest. Accordingly, the Company believes
that it was not an affiliate of Quest under the 1940 Act.
On March 5, 2010, Quest and its two affiliated companies announced completion of a
recombination transaction. As a result of the recombination, the Quest entities merged to form
PostRock Energy Corporation (PostRock). The Company does not have a member of management that
serves as a director of PostRock and does not consider PostRock an affiliate under the 1940 Act.
7. INVESTMENT TRANSACTIONS
For the three months ended February 28, 2010, the Company purchased and sold securities in the
amount of $23,020 and $23,117 (excluding short-term investments). For the three months ended
February 28, 2009, the Company purchased and sold securities in the amount of $4,706 and $8,632
(excluding short-term investments).
8. RESTRICTED SECURITIES
From time to time, certain of the Companys investments may be restricted as to resale. For
instance, private investments that are not registered under the Securities Act, and cannot be
offered for public sale in a non-exempt transaction without first being registered. In other cases,
certain of the Companys investments have restrictions such as lock-up agreements that preclude the
Company from offering these securities for public sale.
27
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
At February 28, 2010, the Company held the following restricted securities.
Number of | ||||||||||||||||||||||||||||||
Units, | ||||||||||||||||||||||||||||||
Warrants, or | Fair Value | Percent | Percent | |||||||||||||||||||||||||||
Acquisition | Type of | Principal ($) | Cost | Fair | per Unit/ | of Net | of Total | |||||||||||||||||||||||
Investment | Security | Date | Restriction | (in 000s) | Basis | Value | Warrant | Assets | Assets | |||||||||||||||||||||
Direct Fuels Partners, L.P (1) |
Class A Common Units | 6/11/07 | (2) | 2,500 | $ | 41,817 | $ | 27,500 | $ | 11.00 | 15.8 | % | 11.4 | % | ||||||||||||||||
Direct Fuels Partners, L.P. |
Class A Convertible Preferred Units(3) | 5/14/09 | (2) | 96 | 1,952 | 1,669 | 17.30 | 1.0 | 0.7 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class B Convertible Preferred Units(3) | 8/25/09 | (2) | 27 | 538 | 477 | 17.75 | 0.3 | 0.2 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class C Convertible Preferred Units(3) | 11/20/09 | (2) | 20 | 408 | 383 | 18.85 | 0.2 | 0.2 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class D Preferred Units | (4) | (2) | 61 | | 1,211 | 20.00 | 0.7 | 0.5 | |||||||||||||||||||||
Eagle Rock Energy Partners, L.P. |
Common Units | 10/01/08 | (5) | 146 | 1,543 | 823 | 5.60 | 0.5 | 0.3 | |||||||||||||||||||||
International Resource Partners
LP(6) |
Class A Units | 6/12/07 | (2) | 1,500 | 27,893 | 36,000 | 24.00 | 20.7 | 14.9 | |||||||||||||||||||||
ProPetro Services, Inc. |
Warrants | 2/15/07 | (2) | 2,905 | 2,469 | | | | | |||||||||||||||||||||
ProPetro Services, Inc. |
Secured Term Loan | 2/15/07 | (2) | $ | 35,000 | 33,320 | 4,000 | n/a | 2.3 | 1.6 | ||||||||||||||||||||
Quest Midstream Partners, L.P. |
Common Units | 10/30/07 | (2) | 361 | 6,584 | 1,803 | 5.00 | 1.0 | 0.7 | |||||||||||||||||||||
VantaCore Partners LP (7) |
Class A Common Units | 5/21/07, | (2) | |||||||||||||||||||||||||||
8/04/08 | 1,465 | 23,835 | 24,899 | 17.00 | 14.4 | 10.3 | ||||||||||||||||||||||||
Total of securities
valued in accordance
with procedures
established by the
board of directors(8) |
$ | 140,359 | $ | 98,765 | 56.9 | % | 40.8 | % | ||||||||||||||||||||||
Antero Resources Finance Corp. |
Senior Notes | (9) | (2) | $ | 9,500 | $ | 9,604 | $ | 9,690 | n/a | 5.6 | % | 4.0 | % | ||||||||||||||||
Athabasca Oil Sands Corp. |
Senior Notes | (9) | (2) | $ | 2,500 | 2,434 | 2,517 | n/a | 1.5 | 1.0 | ||||||||||||||||||||
Energy Future Holdings Corp. |
Senior Notes | (9) | (2) | $ | 5,000 | 5,185 | 5,100 | n/a | 2.9 | 2.1 | ||||||||||||||||||||
Hilcorp Energy Company |
Senior Notes | (9) | (2) | $ | 2,885 | 2,767 | 2,806 | n/a | 1.6 | 1.2 | ||||||||||||||||||||
Hilcorp Energy Company |
Senior Notes | (9) | (2) | $ | 1,700 | 1,671 | 1,632 | n/a | 0.9 | 0.7 | ||||||||||||||||||||
NFR Energy LLC |
Senior Notes | (9) | (2) | $ | 2,000 | 1,975 | 1,955 | n/a | 1.1 | 0.8 | ||||||||||||||||||||
Niska Gas Storage US, LLC |
Senior Notes | (9) | (2) | $ | 2,500 | 2,511 | 2,500 | n/a | 1.5 | 1.0 | ||||||||||||||||||||
North American Energy Alliance LLC |
Senior Notes | (9) | (2) | $ | 1,000 | 978 | 1,060 | n/a | 0.6 | 0.4 | ||||||||||||||||||||
Texas Competitive Electric Holdings |
Secured Term Loan | (9) | (2) | $ | 9,209 | 7,056 | 7,459 | n/a | 4.3 | 3.1 | ||||||||||||||||||||
Trident Resources Corp. |
Warrants | (9) | (2) | 100 | 411 | | | | | |||||||||||||||||||||
Total of securities
valued by prices
provided by market
maker or independent
pricing service |
$ | 34,592 | $ | 34,719 | 20.0 | % | 14.3 | % | ||||||||||||||||||||||
Total of all restricted securities |
$ | 174,951 | $ | 133,484 | 76.9 | % | 55.1 | % | ||||||||||||||||||||||
(1) | The Companys investment in Direct Fuels Partners, L.P. includes 200 incentive distribution
rights (20% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(2) | Unregistered security. |
|
(3) | The Direct Fuels Convertible Preferred Units consist of three classes Class A, B and C.
Each series has a liquidation preference of $20.00 per unit and is convertible into Class A
Common Units. The Class A Preferred Units are convertible into Class A Common Units at a
price of $20.00 per unit. The Class B Preferred Units are convertible into Class A Common
Units at a price of $18.50 per unit. The Class C Preferred Units are convertible into Class A
Common Units at a price of $15.50 per unit. |
|
(4) | The Direct Fuels Class D Preferred Units are senior to Direct Fuels other series of
Preferred Units and Common Units. The Class D Preferred Units are being issued by Direct
Fuels to the holders of common units and preferred units in lieu of a cash distribution in the
Companys fiscal first quarter. See Note 8 Restricted Securities. |
|
(5) | Unregistered Common Units were placed in escrow for a period of 18 months following the sale
of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1, 2010).
The valuation of these common units reflects the Companys expected recovery from the escrow
account. |
28
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
(6) | The Companys investment in International Resource Partners LP includes 10 incentive
distribution rights (10% of total outstanding incentive distribution rights) for which the
Company does not assign a value. |
|
(7) | The Companys investment in VantaCore Partners LP includes 1,823 incentive distribution
rights (18% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(8) | Restricted securities that represent Level 3 categorization where reliable market quotes are
not readily available. Securities are valued in accordance with the procedures established by
the board of directors. See Note 2 Significant Accounting Policies. |
|
(9) | Restricted securities that represent Level 2 categorization. These securities were acquired
at various dates throughout the three months ended February 28, 2010 and in prior years.
Securities are valued using prices provided by a principal market maker, syndicate bank or an
independent pricing service. See Note 2 Significant Accounting Policies. |
At November 30, 2009, the Company held the following restricted securities.
Number of | ||||||||||||||||||||||||||||||
Units, | ||||||||||||||||||||||||||||||
Warrants, or | Fair Value | Percent | Percent | |||||||||||||||||||||||||||
Acquisition | Type of | Principal ($) | Cost | Fair | per Unit/ | of Net | of Total | |||||||||||||||||||||||
Investment | Security | Date | Restriction | (in 000s) | Basis | Value | Warrant | Assets | Assets | |||||||||||||||||||||
Copano Energy, L.L.C. |
Class D Units | 3/14/08 | (1) | 76 | $ | 2,000 | $ | 1,491 | $ | 19.62 | 0.9 | % | 0.6 | % | ||||||||||||||||
Direct Fuels Partners, L.P (2) |
Class A Common Units | 6/11/07 | (3) | 2,500 | 41,817 | 30,000 | 12.00 | 17.8 | 13.3 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class A Convertible Preferred Units | 5/14/09 | (3) | 96 | 1,952 | 1,765 | 18.39 | 1.1 | 0.8 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class B Convertible Preferred Units | 8/25/09 | (3) | 27 | 538 | 503 | 18.63 | 0.3 | 0.2 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class C Convertible Preferred Units | 11/20/09 | (3) | 20 | 406 | 402 | 20.10 | 0.2 | 0.2 | |||||||||||||||||||||
Eagle Rock Energy Partners, L.P. |
Common Units | 10/01/08 | (4) | 148 | 1,563 | 686 | 4.64 | 0.4 | 0.3 | |||||||||||||||||||||
International Resource Partners
LP(5) |
Class A Units | 6/12/07 | (3) | 1,500 | 28,193 | 34,500 | 23.00 | 20.5 | 15.3 | |||||||||||||||||||||
ProPetro Services, Inc. |
Warrants | 2/15/07 | (3) | 2,905 | 2,469 | | | | | |||||||||||||||||||||
ProPetro Services, Inc. |
Secured Term Loan | 2/15/07 | (3) | $ | 35,000 | 33,320 | 2,500 | n/a | 1.5 | 1.1 | ||||||||||||||||||||
Quest Midstream Partners, L.P. |
Common Units | 10/30/07 | (3) | 361 | 6,584 | 1,713 | 4.75 | 1.0 | 0.8 | |||||||||||||||||||||
VantaCore Partners LP (6) |
Class A Common Units | 5/21/07, | (3) | |||||||||||||||||||||||||||
8/04/08 | 1,465 | 24,530 | 25,632 | 17.50 | 15.2 | 11.3 | ||||||||||||||||||||||||
Total of securities
valued in accordance
with procedures
established by the
board of directors(7) |
$ | 143,372 | $ | 99,192 | 58.9 | % | 43.9 | % | ||||||||||||||||||||||
Antero Resources Finance Corp. |
Senior Notes | (8) | (3) | $ | 7,500 | $ | 7,527 | $ | 7,519 | n/a | 4.5 | % | 3.3 | % | ||||||||||||||||
Athabasca Oil Sands Corp. |
Senior Notes | (8) | (3) | $ | 2,500 | 2,434 | 2,510 | n/a | 1.5 | 1.1 | ||||||||||||||||||||
Dresser, Inc. |
Secured Term Loan | (8) | (3) | $ | 5,000 | 4,834 | 4,575 | n/a | 2.7 | 2.0 | ||||||||||||||||||||
Drummond Company, Inc. |
Senior Notes | (8) | (3) | $ | 4,000 | 3,500 | 3,770 | n/a | 2.2 | 1.7 | ||||||||||||||||||||
Energy Future Holdings Corp. |
Secured Term Loan | (8) | (3) | $ | 9,209 | 6,968 | 6,861 | n/a | 4.1 | 3.0 | ||||||||||||||||||||
Hilcorp Energy Company |
Senior Notes | (8) | (3) | $ | 6,585 | 6,065 | 6,338 | n/a | 3.8 | 2.8 | ||||||||||||||||||||
North American Energy Alliance LLC |
Senior Notes | (8) | (3) | $ | 1,000 | 977 | 1,042 | n/a | 0.6 | 0.5 | ||||||||||||||||||||
Trident Resources Corp. |
Warrants | (8) | (3) | 100 | 411 | | | | | |||||||||||||||||||||
Total of securities
valued by prices provided
by market maker or
independent pricing service |
$ | 32,716 | $ | 32,615 | 19.4 | % | 14.4 | % | ||||||||||||||||||||||
Total of all restricted securities |
$ | 176,088 | $ | 131,807 | 78.3 | % | 58.3 | % | ||||||||||||||||||||||
(1) | Unregistered security of a publicly traded company for which there is currently no
established market. The Class D Units of Copano Energy, L.L.C. are expected to convert to
public units in February 2010. |
|
(2) | The Companys investment in Direct Fuels Partners, L.P. includes 200 incentive distribution
rights (20% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(3) | Unregistered security. |
|
(4) | Unregistered Common Units were placed in escrow for a period of 18 months following the sale
of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1, 2010). |
29
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
(5) | The Companys investment in International Resource Partners LP includes 10 incentive
distribution rights (10% of total outstanding incentive distribution rights) for which the
Company does not assign a value. |
|
(6) | The Companys investment in VantaCore Partners LP includes 1,823 incentive distribution
rights (18% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(7) | Restricted securities that represent Level 3 categorization where reliable market quotes are
not readily available. Securities are valued in accordance with the procedures established by
the board of directors. See Note 2 Significant Accounting Policies. |
|
(8) | Restricted securities that represent Level 2 categorization. These securities were acquired
at various dates throughout the year ended November 30, 2009 and in prior years. Securities
are valued using prices provided by a principal market maker, syndicate bank or an independent
pricing service. See Note 2 Significant Accounting Policies. |
9. SENIOR SECURED REVOLVING CREDIT FACILITY
On June 4, 2007, the Company established a senior secured revolving credit facility (the
Existing Credit Facility) with availability of $100,000. Interest on the Existing Credit Facility
was charged at LIBOR plus 1.25%. The Existing Credit Facility was scheduled to mature on June 4,
2010, but was replaced by an amended and restated senior secured revolving credit facility (the New Credit
Facility) on March 30, 2010.
The New Credit Facility has availability of $70,000 and a three year commitment maturing on
March 30, 2013. Outstanding loan balances accrue interest daily at a rate equal to LIBOR plus
2.00% based on current borrowings and the current borrowing base. If borrowings exceed the
borrowing base attributable to quoted securities (generally defined as equity investments in
public MLPs and investments in bank debt and high yield bonds which are traded), the interest rate
will increase to LIBOR plus 3.00%. The Company paid an upfront fee of 0.50% on the New Credit
Facility size and will pay a commitment fee of 0.50% per annum on any unused amounts of the New
Credit Facility.
The obligations under the New Credit Facility are collateralized by substantially all of the
Companys assets, and are guaranteed by any of the Companys future subsidiaries, other than
special purpose subsidiaries. The New Credit Facility contains affirmative and reporting covenants
and certain financial ratio and restrictive covenants, including: (a) maintaining a ratio, on a
consolidated basis, of total assets (excluding deferred tax assets) less liabilities (other than
indebtedness and deferred tax liabilities) to aggregate indebtedness of the Company of not less
than 2.50:1.0, (b) maintaining the value of the portion of the Companys portfolio that can be
converted into cash within specified time periods and valuations at no less than 10% of the
principal amount outstanding under the New Credit Facility during any period when adjusted
outstanding principal amounts exceed a specified threshold percentage of the Companys adjusted
borrowing base, (c) maintaining consolidated net assets at each fiscal quarter end of not less than
the greater of: 40% of the consolidated total assets of the Company and its subsidiaries, and
$70,000 plus 25% of the net proceeds from any sales of equity securities by the Company and its
subsidiaries subsequent to the closing of the Credit Facility, (d) limitations on additional
indebtedness, (e) limitations on liens, (f) limitations on mergers and other fundamental changes,
(g) limitations on dividends and other specified restricted payments, (h) limitations on
disposition of assets, (i) limitations on transactions with affiliates, (j) limitations on
agreements that prohibit liens on properties of the Company and its subsidiaries, (k) limitations
on sale and leaseback transactions, (l) limitations on specified hedging transactions, (m)
limitations on changes in accounting treatment and reporting practices, (n) limitations on
specified amendments to the Companys investment management agreement during the continuance of a
default, (o) limitations on the aggregate amount of unfunded commitments, and (p) limitations on
establishing deposit, securities or similar accounts not subject to control agreements in favor of
the lenders. The New Credit Facility also contains customary representations and warranties and
events of default.
30
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
Under the terms of the New Credit Facility, if an investment becomes non-performing, it will
reduce the Companys borrowing base and could cause the Company to be in default under the terms of
its loans under the New Credit Facility. Debt investments are generally characterized as
non-performing if such investments are in default of any payment obligations and private MLP equity
investments are generally characterized as non-performing if such investments fail to pay
distributions, in their most recent fiscal quarter, that are greater than 80% of their minimum
quarterly distribution amount.
Under the terms of the New Credit Facility, if borrowings exceed 90% of borrowing base, the
Company is restricted in paying distributions to stockholders to no more than the amount of
Distributable Cash Flow for the current and prior three quarters.
As of February 28, 2010, the Company had $61,000 borrowed under its Existing Credit Facility
(at an interest rate of 1.48%), which represented 71.2% of its borrowing base of $85,726. As of
November 30, 2009, the Company had $56,000 borrowed under its Existing Credit Facility (at an
interest rate of 1.48%), which represented 65.9% of its borrowing base of $85,033.
The maximum amount that the Company can borrow under its New Credit Facility is limited to the
lesser of the commitment amount of $70,000 and its borrowing base.
As of February 28, 2010 and November 30, 2009, the Company was in compliance with all
financial and operational covenants required by the Existing Credit Facility.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
10. FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the three months ended February 28,
2010, the years ended November 30, 2009, 2008, 2007 and the period September 21, 2006 (inception)
to November 30, 2006.
February 28, | ||||||||||||||||||||
2010 | November 30 | |||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Per Share of Common Stock(1) |
||||||||||||||||||||
Net asset value, beginning of period |
$ | 16.58 | $ | 16.10 | $ | 24.39 | $ | 24.19 | $ | 23.32 | ||||||||||
Net investment income (loss) |
(0.02 | ) | 0.10 | (0.35 | ) | 0.36 | 0.09 | |||||||||||||
Net realized and unrealized gain (loss) on investments |
0.77 | 1.68 | (5.89 | ) | 1.18 | 0.78 | ||||||||||||||
Net change in unrealized losses conversion to taxable corporation |
| | (0.38 | ) | | | ||||||||||||||
Total income (loss) from investment operations |
0.75 | 1.78 | (6.62 | ) | 1.54 | 0.87 | ||||||||||||||
Dividends(2) |
(0.30 | ) | | | (0.95 | ) | | |||||||||||||
Distributions from net realized long-term capital gains(2) |
| | | (0.15 | ) | | ||||||||||||||
Distributions return of capital(2) |
| (1.30 | ) | (1.67 | ) | (0.24 | ) | | ||||||||||||
Total Dividends and Distributions |
(0.30 | ) | (1.30 | ) | (1.67 | ) | (1.34 | ) | | |||||||||||
Net asset value, end of period |
$ | 17.03 | $ | 16.58 | $ | 16.10 | $ | 24.39 | $ | 24.19 | ||||||||||
Market value per share, end of period |
$ | 15.07 | $ | 13.53 | $ | 9.63 | $ | 23.14 | $ | 22.32 | ||||||||||
Total investment return based on market value(3) |
13.7 | % | 56.0 | % | (54.8 | )% | 9.3 | % | (10.7 | )% | ||||||||||
Supplemental Data and Ratios(4) |
||||||||||||||||||||
Net assets, end of period |
$ | 173,588 | $ | 168,539 | $ | 162,687 | $ | 245,133 | $ | 241,914 | ||||||||||
Ratio of expenses to average net assets:(5) |
||||||||||||||||||||
Management fees |
2.2 | % | 2.0 | % | 2.4 | % | 2.0 | % | 1.7 | % | ||||||||||
Other expenses |
1.1 | % | 1.3 | % | 1.1 | % | 0.8 | % | 1.4 | % | ||||||||||
Subtotal |
3.3 | % | 3.3 | % | 3.5 | % | 2.8 | % | 3.1 | % | ||||||||||
Interest expense |
0.9 | % | 0.8 | % | 2.0 | % | 1.0 | % | | |||||||||||
Management fee waivers |
| | | (0.4 | )% | (0.5 | )% | |||||||||||||
Tax expense (benefit) |
10.5 | % | 6.9 | % | (15.5 | )% | 0.8 | % | | |||||||||||
Total expenses(6) |
14.7 | % | 11.0 | % | (10.0 | )% | 4.2 | % | 2.6 | % | ||||||||||
Ratio of net investment income (loss) to average net assets |
(0.5 | )% | 0.7 | % | (1.6 | )% | 1.5 | % | 1.9 | % | ||||||||||
Net increase (decrease) in net assets resulting from operations to
average net assets |
4.5 | %(7) | 11.3 | % | (31.1 | )% | 6.2 | % | 3.7 | %(7) | ||||||||||
Portfolio turnover rate |
11.2 | %(7) | 20.9 | % | 27.0 | % | 28.8 | % | 5.6 | %(7) | ||||||||||
Average net assets |
$ | 171,064 | $ | 160,847 | $ | 214,818 | $ | 248,734 | $ | 235,199 | ||||||||||
Average shares of common stock outstanding |
10,173,073 | 10,116,071 | 10,073,398 | 10,014,496 | 10,000,060 | |||||||||||||||
Average amount of borrowings outstanding under the Credit
Facilities |
$ | 58,011 | $ | 53,422 | $ | 75,563 | $ | 32,584 | | |||||||||||
Average amount of borrowings outstanding per share of common stock
during the period |
$ | 5.70 | $ | 5.28 | $ | 7.50 | $ | 3.25 | |
(1) | Based on average shares of common stock outstanding for each of the periods ended. |
|
(2) | The information presented for the three months ended February 28, 2010 is a current estimate
of the characterization of a portion of the total distributions paid to common stockholders.
The information presented for each of the other periods is a characterization of a portion of
the total distributions paid to common stockholders as either dividends (ordinary income) or
distributions (return of capital). This characterization is based on the Companys earnings
and profits. |
32
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except per share amounts)
(UNAUDITED)
(3) | Not annualized for the three months ended February 28, 2010 and for the period September 21,
2006 through November 30, 2006. Total investment return is calculated assuming a purchase of
common stock at the market price on the first day and a sale at the current market price on
the last day of the period reported. The calculation also assumes reinvestment of
distributions, if any, at actual prices pursuant to the Companys dividend reinvestment plan. |
|
(4) | Unless otherwise noted, ratios are annualized. |
|
(5) | The following table sets forth the components of the ratio of expenses to average total
assets for each period in the Companys Financial Highlights. |
Three Months Ended | ||||||||||||||||||||
February 28, 2010 | Year Ended November 30, | |||||||||||||||||||
(Unaudited) | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Management fees |
1.6 | % | 1.5 | % | 1.7 | % | 1.7 | % | 1.6 | % | ||||||||||
Other expenses |
0.8 | 1.0 | 0.8 | 0.7 | 1.3 | |||||||||||||||
Subtotal |
2.4 | % | 2.5 | % | 2.5 | % | 2.4 | % | 2.9 | % | ||||||||||
Interest expense |
0.6 | 0.6 | 1.4 | 0.9 | | |||||||||||||||
Management fee waivers |
| | | (0.4 | ) | (0.4 | ) | |||||||||||||
Tax expense (benefit) |
7.7 | 5.1 | (11.1 | ) | 0.7 | | ||||||||||||||
Total expenses(6) |
10.7 | % | 8.2 | % | (7.2 | )% | 3.6 | % | 2.5 | % | ||||||||||
Average total assets |
$ | 234,057 | $ | 216,705 | $ | 302,007 | $ | 290,922 | $ | 246,802 |
(6) | For the year ended November 30, 2008, total expenses exclude 0.4% relating to bad debt
expense for the ratio of expenses to average net assets and 0.3% for the ratio of expenses to
average total assets. |
|
(7) | Not annualized. |
11. COMMON STOCK
The Company has 200,000,000 shares of common stock authorized. Transactions in common shares
for the three months ended February 28, 2010 were as follows:
Shares outstanding at November 30, 2009 |
10,163,978 | |||
Shares issued through reinvestment of dividends and distributions |
26,405 | |||
Shares outstanding at February 28, 2010 |
10,190,383 | |||
12. SUBSEQUENT EVENTS
On April 1, 2010, the Company declared its quarterly distribution of $0.30 per common share
for the period December 1, 2009 through February 28, 2010 for a total of $3,057. The distribution
is payable on April 29, 2010 to stockholders of record on April 16, 2010.
On March 30, 2010, the Company entered into the New Credit Facility with a syndicate of
lenders. See Note 9 Senior Secured Revolving Credit Facility.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussions should be read together with the unaudited financial
statements and the notes thereto included in this report and with the audited
financial statements and notes thereto included in our Annual Report on Form 10-K.
Forward-Looking Statements
This Form 10-Q includes statements reflecting assumptions, expectations, projections,
intentions or beliefs about future events that are intended as forward-looking statements. All
statements included or incorporated by reference in this annual report, other than statements of
historical fact, that address activities, events, developments that we expect, believe or
anticipate will or may occur in the future are forward-looking statements. These statements
represent our reasonable judgment on the future based on various factors and using numerous
assumptions and are subject to known and unknown risks, uncertainties, and other factors that could
cause our actual results to differ materially from those contemplated by the statements. You can
identify these statements by the fact that they do not relate strictly to historical or current
facts. They use words such as anticipate, estimate, project, forecast, plan, may,
will, should, expect and other words of similar meaning. In particular, these include, but
are not limited to, statements relating to the following:
| Our future operating results; |
| Our business prospects and the prospects of our portfolio companies and their
ability to achieve their objectives; |
| Our ability to make investments consistent with our investment objective; |
| The impact of investments that we hold or expect to make; |
| Our contractual arrangements and relationships with third parties; |
| The dependence of our future success on the general economy and its impact on the
energy industry; |
| Our debt and equity financings and investments; |
| The adequacy of our cash resources and working capital; and |
| The timing of cash flows, if any, from the operations of our portfolio companies. |
| We undertake no obligation to update or revise any forward-looking statements made
herein. |
Overview
We are a non-diversified, closed-end management investment company organized under the laws of
the State of Maryland that has elected to be treated as a BDC under the 1940 Act. Since December 1,
2007, we have been and continue to be taxed as a corporation, paying federal and applicable state
corporate taxes on our taxable income. Our operations are externally managed and advised by our
investment adviser, KA Fund Advisors, LLC (KAFA), pursuant to an investment management agreement.
Our investment objective is to generate both current income and capital appreciation primarily
through equity and debt investments. We will seek to achieve this objective by investing at least
80% of our total assets in securities of Energy Companies. A key focus area for our investments in
the energy industry is and will continue to be equity and debt investments in Midstream Energy
Companies structured as limited partnerships. We also expect to continue to evaluate equity and
debt investments in Upstream and Other Energy Companies.
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Portfolio and Investment Activity
Our investments as of February 28, 2010 were comprised of equity securities of $166.3 million
and debt investments of $44.5 million.
During the three months ended February 28, 2010, our overall portfolio mix did not experience
any significant changes. During the period, the market value of our publicly traded MLPs increased
substantially and our debt investments also experienced appreciation.
During the quarter we accrued a $1.2 million distribution from Direct Fuels Partners, L.P.
(Direct Fuels). Such distribution is being paid in the form of new Class D Preferred Units.
Direct Fuels is issuing the Class D Preferred Units to holders of its common units and preferred
units in lieu of a cash distribution. We anticipate Direct Fuels will resume cash distributions
during our fiscal third or fourth quarter. The reinstatement of the cash distribution is dependent
on operating performance in line with our current expectations.
Our portfolio allocations as of February 28, 2010 and November 30, 2009 are set forth below.
Number of Portfolio Companies at | Percent of Long-Term Investments at | |||||||||||||||
February 28, | November 30, | February 28, | November 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Private MLP |
4 | 4 | 44.6 | % | 47.2 | % | ||||||||||
Publicly Traded MLP and MLP Affiliate |
30 | 31 | 34.3 | 33.2 | ||||||||||||
Other Private Equity |
1 | 1 | 0.0 | 0.0 | ||||||||||||
Energy Debt Investments |
11 | 10 | 21.1 | 19.6 | ||||||||||||
46 | 46 | 100.0 | % | 100.0 | % | |||||||||||
Certain of our debt securities accrue interest at variable rates determined on a basis of
a benchmark, such as the London Interbank Offered Rate (LIBOR), or the prime rate, with stated
maturities at origination that typically range from 5 to 10 years. Other debt investments accrue
interest at fixed rates. As of February 28, 2010, 18.4%, or $7.4 million, of our interest-bearing
portfolio (excluding our ProPetro investment) is floating rate debt and 81.6%, or $33.1 million, is
fixed rate debt.
Our Top Ten Portfolio Investments as of February 28, 2010
Listed below are our top ten portfolio investments as of February 28, 2010, represented as a
percentage of our total assets.
Amount | ||||||||||||||||||
Public/ | Equity/ | ($ in | Percent of | |||||||||||||||
Investment | Private | Debt | Sector | millions) | Total Assets(1) | |||||||||||||
1. | International Resource Partners
LP(2) |
Private | Equity | Coal | $ | 36.0 | 14.9 | % | ||||||||||
2. | Direct Fuels Partners, L.P.(3) |
Private | Equity | Midstream | 31.2 | 12.9 | ||||||||||||
3. | VantaCore Partners LP(4) |
Private | Equity | Aggregates | 24.9 | 10.3 | ||||||||||||
4. | Antero Resources Finance Corp. |
Private | Debt | Upstream | 9.7 | 4.0 | ||||||||||||
5. | Texas Competitive Electric Holdings |
Private | Debt | Utility | 7.5 | 3.1 | ||||||||||||
6. | Eagle Rock Energy Partners, L.P.(5) |
Public | Equity | Midstream/Upstream | 7.1 | 2.9 | ||||||||||||
7. | Enterprise Products Partners L.P. |
Public | Equity | Midstream | 6.3 | 2.7 | ||||||||||||
8. | Copano Energy, L.L.C |
Public | Equity | Midstream | 5.9 | 2.5 | ||||||||||||
9. | Plains All American Pipeline, L.P. |
Public | Equity | Midstream | 5.7 | 2.3 | ||||||||||||
10. | Energy Future Holdings Corp. |
Private | Debt | Utility | 5.1 | 2.1 | ||||||||||||
$ | 139.4 | 57.7 | % | |||||||||||||||
(1) | Total assets were $242.1 million as of February 28, 2010. |
|
(2) | Our investment in International Resource Partners LP includes 1,500,000 Class A Units, which
represents a 23.6% limited partnership interest, and 10 incentive distribution rights (10% of
total outstanding incentive distribution rights). |
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(3) | Our investment in Direct Fuels Partners, L.P. includes 2,500,000 Class A Common Units; 96,448
Class A Convertible Preferred Units; 26,884 Class B Convertible Preferred Units; 20,315 Class
C Convertible Preferred Units and 60,552 Class D Preferred Units, which represents a 39.0%
limited partnership interest, and 200 incentive distribution rights (20% of total outstanding
incentive distribution rights). |
|
(4) | Our investment in VantaCore Partners LP includes 1,464,673 Common Units, which represents a
39.0% limited partnership interest, and 1,823 incentive distribution rights (18% of total
outstanding incentive distribution rights). |
|
(5) | Our investment in Eagle Rock Energy Partners, L.P. includes 1,112,944 common units and
146,439 unregistered common units in escrow. |
Results of Operations For the three months ended February 28, 2010
Set forth below is an explanation of our results of operations for the three months ended
February 28, 2010.
Investment Income. Investment income totaled $1.4 million and consisted primarily of
dividends from our MLP investments and interest income on our energy debt investments. We received
$2.5 million of cash dividends and distributions, of which $2.1 million was treated as a return of
capital during the period.
The amount of investment income that we received during our fiscal first quarter is lower than
previous quarters because we did not receive a cash distribution from our common and preferred
investments in Direct Fuels. In lieu of a cash distribution on our common and preferred units,
Direct Fuels is paying a distribution to such unitholders in additional preferred units. The
preferred units being issued are a new series that are senior to the existing preferred units. The
$1.2 million preferred unit distribution that we accrued during the quarter is not included in
investment income, but is reflected as an unrealized gain.
Operating Expenses. Operating expenses totaled $1.7 million, including $0.9 million of base
investment management fees; $0.4 million for interest expense and $0.4 million for other operating
expenses. Base investment management fees were equal to an annual rate of 1.75% of average total
assets (excluding deferred tax assets).
Net Investment Loss. Our net investment loss totaled $0.2 million and included a deferred
income tax benefit of $0.1 million.
Net Realized Gains. We had net realized gains from our investments of $3.2 million, net of
$1.9 million of deferred tax expense. During the quarter, we monetized several of our investments
in publicly traded MLPs in an effort to generate realized gains. We engaged in this strategy in an
effort to utilize our capital loss carryforwards.
Net Change in Unrealized Gains. We had a net change in unrealized gains of $4.7 million This
net change in unrealized gains consisted of $7.4 million of unrealized gains from investments that
were partially offset by a deferred tax expense of $2.7 million. The majority of these gains are
attributable to our publicly traded MLPs, our investment in debt securities and the preferred unit
distribution from Direct Fuels.
Net Increase in Net Assets Resulting from Operations. We had an increase in net assets
resulting from operations of $7.7 million. This increase is composed of the net unrealized gains of
$4.7 million; net realized gains of $3.2 million and a net investment loss of $0.2 million as noted
above.
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Results of Operations For the three months ended February 28, 2009
Set forth below is an explanation of our results of operations for the three months ended
February 28, 2009.
Investment Income. Investment income totaled $1.2 million and consisted primarily of
dividends from our MLP investments and interest income on our energy debt investments. We received
$4.6 million of cash dividends and distributions, of which $4.1 million was treated as a return of
capital during the period.
Operating Expenses. Operating expenses totaled $1.8 million, including $0.8 million of base
investment management fees; $0.4 million for interest expense and $0.6 million for other operating
expenses. Base investment management fees were equal to an annual rate of 1.75% of average total
assets (excluding deferred tax assets).
Net Investment Loss. Our net investment loss totaled $0.3 million and included a deferred
income tax benefit of $0.2 million.
Net Realized Losses. We had net realized losses from our investments of $1.6 million, net of
$0.9 million of deferred tax benefit.
Net Change in Unrealized Losses. We had a net change in unrealized losses of $3.4 million.
This net change in unrealized losses consisted of $5.2 million of unrealized losses from
investments that were partially offset by a deferred tax benefit of $1.8 million
Net Decrease in Net Assets Resulting from Operations. We had a decrease in net assets
resulting from operations of $5.3 million. This decrease is composed of the net unrealized losses
of $3.4 million, net realized losses of $1.6 million and net investment losses of $0.3 million as
noted above.
Liquidity and Capital Resources
As of February 28, 2010, we had approximately $11.3 million invested in short-term repurchase
agreements. As of April 5, 2010, we had approximately $4.5 million in repurchase agreements. Our
repurchase agreements are collateralized by U.S. Treasury bonds, and our counterparty is J.P.
Morgan Securities Inc.
On March 30, 2010, we refinanced our existing senior secured revolving credit facility (the
Existing Credit Facility) with a new senior secured revolving credit facility (the New Credit
Facility) with a syndicate of lenders. SunTrust Robinson Humphrey, Inc. was lead arranger of the
New Credit Facility and Citibank, NA; UBS Investment Bank; JPMorgan Chase Bank, N.A. and Stifel
Bank & Trust participated in the syndication.
The New Credit Facility has a $70 million commitment, a three year term (maturing on March 30,
2013), and outstanding loan balances accrue interest at a annual rate equal to LIBOR plus 2.00%
based on the current borrowings and the current borrowing base. If borrowings exceed the borrowing
base attributable to quoted securities (generally defined as equity investments in public MLPs
and investments in bank debt and high yield bonds which are traded), the interest rate will
increase to LIBOR plus 3.00%. We paid an upfront fee of 0.50% on $70 million commitment at closing
and will pay a commitment fee of 0.50% per annum on any unused amounts of the New Credit Facility.
A copy of the New Credit Facility can be found on our website, http://www.kaynefunds.com/.
Our borrowing base, subject to certain limitation, is generally calculated by multiplying the
fair value of each of our investments by an advance rate. The advance rates in the New Credit
Facility are substantially the same as the Existing Credit Facility with the exception of the
advance rate on our private MLPs. The advance rate on private MLPs was reduced from 40% to 20% and
the lenders have the ability to adjust the borrowing base values of our private MLPs using their
reasonable discretion. The total contribution to our borrowing base from private MLPs is also
limited to no more than 25% of the total borrowing base and there is a limit of $7 million of
borrowing base contribution from any single issuer.
We do not anticipate the changes to our New Credit Facility will have a material impact on our
distributable cash flow.
As of February 28, 2010, we had $61.0 million of borrowings under our Existing Credit Facility
(at an interest rate of 1.48%), which represented 71.2% of our borrowing base of $85.7 million. As
of April 5, 2010, we had $55.0 million of borrowings under our New Credit Facility (at an interest
rate of 2.25%), which represented 72.8% of the borrowing base of $75.6 million. The maximum amount that we can borrow under our
New Credit Facility is limited to the lesser of our commitment amount of $70.0 million and our
borrowing base.
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Contractual Obligations
Investment Management Agreement. We have entered into an investment management agreement with
KAFA under which we have material future rights and commitments. Pursuant to the investment
management agreement, KAFA has agreed to serve as our investment adviser and provide on our behalf
significant managerial assistance to our portfolio companies to which we are required to provide
such assistance. Payments under the investment management agreement may include (1) a base
management fee, (2) an incentive fee, and (3) reimbursement of certain expenses. For the three
months ended February 28, 2010, we accrued and paid $0.9 million in base management fees and did
not accrue or pay any incentive fees. We do not pay management fees on deferred taxes.
As of February 28, 2010, we did not have, or have not entered into, any long-term debt
obligations, long-term liabilities, capital or operating lease obligations or purchase obligations
that require minimum payments or any other contractual obligation at the present, within the next
five years or beyond other than the borrowings outstanding under our Existing Credit Facility
described above under Liquidity and Capital Resources.
The following table summarizes our obligations as of February 28, 2010 over the following
periods for the Existing Credit Facility.
Payments by Period ($ in Millions) | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Existing Credit Facility(1) |
$ | 61.0 | $ | 61.0 | | | |
(1) | The maximum amount that we can borrow under our Existing Credit Facility is limited to the
lesser of the commitment amount and our borrowing base. As of February 28, 2010, we had a
borrowing base of $85.7 million. |
Distributions
Payment of future distributions is subject to board approval, as well as meeting the covenants
of our New Credit Facility. During the three months ended February 28, 2010, we paid distributions
totaling $3.0 million ($0.30 per common share).
On April 1, 2010, the Company declared its quarterly distribution of $0.30 per common share
for the period December 1, 2009 through February 28, 2010 for a total of $3.1 million. The
distribution is payable on April 29, 2010 to stockholders of record on April 16, 2010.
The component of our distribution that comes from our current or accumulated earnings and
profits will be taxable to a stockholder as dividend income. This income will be treated as
qualified dividends for Federal income tax purposes at a rate of 15%. The special tax treatment for
qualified dividends is scheduled to expire on December 31, 2010. Distributions that exceed our
current or accumulated earnings and profits will be treated as a tax-deferred return of capital to
the extent of a stockholders basis.
Off-Balance Sheet Arrangements
At February 28, 2010, we did not have any off-balance sheet liabilities or other contractual
obligations that are reasonably likely to have a current or future material effect on our financial
condition.
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Critical Accounting Policies
Our most significant accounting policies in accordance with accounting principles generally
accepted in the United States of America (GAAP) are described below. The preparation of our
financial statements in conformity with GAAP requires management to make estimates and judgments
that affect our reported amounts of assets, liabilities, revenues and expenses. Estimates and
judgments are based on information available at the time such estimates and judgments are made, and
adjustments made to these estimates and judgments often relate to information not previously
available. Changes in the economic environment, financial markets and any other parameters used in
determining such estimates could cause actual results to differ. Estimates and judgments are used
in, among other things, the development of fair value assumptions, the assessment of future tax
exposure and the realization of tax assets.
We have identified the following four critical accounting policies that require a significant
amount of estimation and judgment and are considered to be important to the portrayal of our
assets, liabilities, revenues and expenses:
| Investment Valuation |
| Security Transactions and Investment Income Recognition |
| Income Taxes |
| Return of Capital Estimates |
Investment Valuation. Readily marketable portfolio securities listed on any exchange other
than the NASDAQ Stock Market, Inc. (NASDAQ) are valued, except as indicated below, at the last
sale price on the business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid and asked prices on
such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing
price. Portfolio securities traded on more than one securities exchange are valued at the last sale
price on the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities.
Equity securities traded in the over-the-counter market, but excluding securities admitted to
trading on the NASDAQ, are valued at the closing bid prices. Energy debt securities that are
considered corporate bonds are valued by using the mean of the bid and ask prices provided by an
independent pricing service. For energy debt securities that are considered corporate bank loans,
the fair market value is determined by using the mean of the bid and ask prices provided by the
syndicate bank or principal market maker. When price quotes are not available, fair market value
will be based on prices of comparable securities. In certain cases, we may not be able to purchase
or sell energy debt securities at the quoted prices due to the lack of liquidity for these
securities.
Exchange-traded options and futures contracts are valued at the last sale price at the close
of trading in the market where such contracts are principally traded or, if there was no sale on
the applicable exchange on such day, at the mean between the quoted bid and ask price as of the
close of trading on such exchange.
Our portfolio includes securities that are privately issued or illiquid. For these securities,
as well as any other portfolio security held by us for which reliable market quotations are not
readily available, valuations are determined in good faith by the board of directors under a
valuation policy and a consistently applied valuation process. Unless otherwise determined by the
board of directors, the following valuation process, approved by the board of directors, is used
for such securities:
| Investment Team Valuation. The applicable investments are valued by senior
professionals of KAFA responsible for the portfolio investments. |
| Investment Team Valuation Documentation. Preliminary valuation conclusions are
documented and discussed with senior management of KAFA. Such valuations are submitted to
the Valuation Committee (a committee of the board of directors) on a quarterly basis. |
| Valuation Committee. The Valuation Committee meets each quarter to consider new
valuations presented by KAFA, if any, which were made in accordance with the Valuation
Procedures in such quarter. The Valuation Committees valuation determinations are
subject to ratification by the board. |
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| Valuation Firm. No less frequently than quarterly, a third-party valuation firm
engaged by the board of directors reviews the valuation methodologies and calculations
employed for these securities. The independent valuation firm provides third-party
valuation consulting services to the board of directors which consist of certain limited
procedures that we identify and request them to perform. |
| Board of Directors Determination. The board of directors considers the valuations
provided by KAFA and the Valuation Committee and ratifies valuations for the applicable
securities at each quarterly board meeting. The board of directors considers the reports
provided by the third-party valuation firm in reviewing and determining in good faith the
fair value of the applicable portfolio securities. |
During the course of such valuation process, whenever possible, privately-issued equity and
debt investments are valued using comparisons of valuation ratios of the portfolio companies that
issued such equity and debt securities to any peer companies that are publicly traded. The value
derived from this analysis is then discounted to reflect the illiquid nature of the investment. We
also utilize comparative information such as acquisition transactions, public offerings or
subsequent equity sales to corroborate its valuations. Due to the inherent uncertainty of
determining the fair value of investments that do not have a readily available market value, the
fair value of the our investments in privately-issued securities may differ significantly from the
values that would have been used had a ready market existed for such investments, and the
differences could be material.
Factors that we may take into account in fair value pricing its investments include, as
relevant, the portfolio companys ability to make payments and its earnings and discounted cash
flow, the markets in which the portfolio company does business, comparison to publicly traded
securities, the nature and realizable value of any collateral and other relevant factors.
Unless otherwise determined by the board of directors, securities that are convertible into or
otherwise will become publicly traded (e.g., through subsequent registration or expiration of a
restriction on trading) will be valued through the process described above, using a valuation based
on the market value of the publicly traded security less a discount. The discount will initially be
equal in amount to the discount negotiated at the time of purchase. To the extent that such
securities are convertible or otherwise become publicly traded within a time frame that may be
reasonably determined, KAFA will determine an applicable discount in accordance with a methodology
approved by the Valuation Committee.
Security Transactions and Investment Income Recognition. Security transactions are accounted
for on the date these securities are purchased or sold (trade date). Realized gains and losses are
reported on an identified cost basis. We record dividends and distributions on the ex-dividend
date. Interest income is recognized on the accrual basis, including amortization of premiums and
accretion of discounts, to the extent that such amounts are expected to be collected. When
investing in securities with payment in-kind interest, we will accrue interest income during the
life of the security even though we will not be receiving cash as the interest is accrued. To the
extent that interest income to be received is not expected to be realized, a reserve against income
is established.
Federal and State Income Taxation. As a corporation, we are obligated to pay federal and state
income tax on our taxable income. We invest our assets primarily in MLPs, which generally are
treated as partnerships for federal income tax purposes. As a limited partner in the MLPs, we
include our allocable share of the MLPs taxable income in computing our own taxable income.
Deferred income taxes reflect (i) the tax liability (asset) on unrealized gains (losses), which are
attributable to the temporary difference between fair market value and tax basis of our
investments, (ii) the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes and (iii) the net tax benefit of accumulated net operating and capital losses.
To the extent that we have a deferred tax asset, consideration is given as to whether or not a
valuation allowance is required. The need to establish a valuation allowance for deferred tax
assets is assessed periodically by us based on the criterion established by the Accounting for
Income Tax topic of the FASB Accounting Standards Codification, that it is more likely than not
that some portion or all of the deferred tax asset will not be realized. In the assessment for a
valuation allowance, consideration is given to all positive and negative evidence related to the
realization of the deferred tax asset. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts of future profitability (which
are highly dependent on future MLP cash distributions), the duration of statutory carryforward periods and the associated
risk that operating and capital loss carryforwards may expire unused.
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We rely, to some extent, on information provided by MLPs, which may not necessarily be timely,
to estimate our state income tax provision and taxable income allocable to us. Such estimates are
made in good faith. From time to time, as new information becomes available, we modify our
estimates or assumptions regarding our income tax provision and related deferred tax liability
(asset).
The Accounting for Uncertainty in Income Taxes Topic of the FASB Accounting Standards
Codification defines the threshold for recognizing the benefits of tax-return positions in the
financial statements as more-likely-than-not to be sustained by the taxing authority and requires
measurement of a tax position meeting the more-likely-than-not criterion, based on the largest
benefit that is more than 50% likely to be realized.
Our policy is to classify interest and penalties associated with underpayment of federal and
state income taxes, if any, as income tax expense on its Statement of Operations.
Return of Capital Estimates. Distributions received from our investments in MLPs generally are
comprised of income and return of capital. The return of capital portion of the distributions is a
reduction to investment income in our Statement of Operations and results in an equivalent
reduction to the cost basis of the associated investments. The reduction to the cost basis results
in an increase to either net realized gains or the net change in unrealized gains from investments.
We record investment income and return of capital based on estimates made at the time when we
receive such distributions. We base these estimates on historical information available from our
MLP investments and other industry sources. We may subsequently revise these estimates based on
information received from our MLP investments after their tax reporting periods are concluded. Any
changes to these estimates may be material.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are subject to financial market risks, including changes in interest rates and in the
valuations of our investment portfolio.
Interest Rate Risk. Interest rate risk primarily results from variable rate debt securities in
which we invest and from borrowings under our Existing Credit Facility. Debt investments in our
portfolio are based on floating and fixed rates. Debt investments bearing a floating interest rate
are usually based on a LIBOR and a spread consisting of additional basis points. The interest rates
for these debt instruments typically have one to six-month durations and reset at the current
market interest rates. As of February 28, 2010, the fair value of our floating rate investments,
excluding our ProPetro investment on which we are not accruing interest, totaled approximately $7.4
million, or 18.4% of our total debt investments of $40.5 million (excluding ProPetro). Based on
sensitivity analysis of the floating rate debt investment portfolio at February 28, 2010 ($9.2
million par value), we estimate that a one percentage point interest rate movement in the average
market interest rates (either higher or lower) over the 12 months ended February 28, 2011 would
either decrease or increase net investment income before income taxes by approximately $0.1
million.
As of February 28, 2010, we had $61.0 million of borrowings under our Existing Credit Facility
at an interest rate of 1.48%. This interest rate is based on LIBOR. Based on sensitivity analysis
of the Existing Credit Facility at February 28, 2010, we estimate that a one percentage point
interest rate movement in the average market interest rates (either higher or lower) over the 12
months ended February 28, 2011 would either decrease or increase net investment income before
income taxes by approximately $0.2 million.
We may hedge against interest rate fluctuations for these floating rate instruments using
standard hedging instruments such as futures, swaps, options and forward contracts, subject to the
requirements of the 1940 Act. Hedging activities may mitigate our exposure to adverse changes in
interest rates.
Impact of Market Prices on Portfolio Investment Valuation. We carry our investments at fair
value, as determined by our board of directors. Investments for which market quotations are readily
available are valued at such market quotations and are subject to daily changes in the market
prices of these securities.
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Energy debt and equity securities that are not publicly traded or whose market price is not
readily available are valued at fair value as determined in good faith by our board of directors.
The types of factors that we may take into account in fair value pricing of our investments
include, as relevant, the nature and realizable value of any collateral, the portfolio companys
ability to make payments and its earnings and discounted cash flow, the markets in which the
portfolio company does business, comparison to publicly traded securities and other relevant
factors. Our investments that are not publicly traded may be indirectly impacted (positively or
negatively) by public market prices of securities that are comparable to these private investments.
Changes in market prices related to purchase transactions, public offerings and secondary offerings
can also impact the valuations of our investments that are not publicly traded.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Controls and Procedures.
The Companys officers, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) of the 1934 Act) as of the end of the period covered in
this report. Based upon such evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective and provided
reasonable assurance that information required to be disclosed in the reports that we file or
submit under the 1934 Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. However, in designing and
evaluating our disclosures controls and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls and procedures also is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions.
Change in Internal Control Over Financial Reporting
Management has not identified any change in the Companys internal control over financial
reporting that occurred during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II
ITEM 1. | LEGAL PROCEEDINGS. |
We are not a party in any material pending legal proceeding, and no such material proceedings
are known by us to be contemplated by governmental authorities.
ITEM 1A. | RISK FACTORS. |
There have been no material changes from the risk factors as previously disclosed in our Form
10-K for the year ended November 30, 2009.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
Not applicable.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
Not applicable.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
ITEM 5. | OTHER INFORMATION. |
Not applicable.
ITEM 6. | EXHIBITS |
The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:
Exhibit | ||||
Number | Description | |||
3.1 | Charter Form of Articles of Amendment and Restatement* |
|||
3.2 | Amended and Restated Bylaws.* |
|||
4.1 | Form of Common Stock Certificate.* |
|||
10.1 | Form of Investment Management Agreement between Registrant and KA Fund Advisors, LLC.* |
|||
10.2 | Form of Administration Agreement between Registrant and Ultimus Fund Solutions, LLC.** |
|||
10.3 | Form of Custody Agreement between Registrant and The Custodial Trust Company.* |
|||
10.4 | Form of Amended Dividend Reinvestment Plan.*** |
|||
10.5 | Form of Transfer Agency Agreement between Registrant and American Stock Transfer & Trust
Company.* |
|||
10.6 | Form of Accounting Services Agreement between Registrant and Ultimus Fund Solutions, LLC.* |
|||
10.7 | Amended and Restated Senior Secured Revolving Credit Agreement between Registrant, the
lenders party thereto, SunTrust Bank, as administrative agent for the lenders, and
Citibank, N.A. as syndication agent, dated March 31, 2010 filed herewith. |
43
Table of Contents
Exhibit | ||||
Number | Description | |||
31.1 | Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
|||
31.2 | Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
|||
32.1 | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- furnished herewith. |
* | Previously filed as an exhibit to Registrants Pre-Effective Amendment No. 5 to its
Registration Statement on Form N-2 (File No. 333-134829), as filed with the Securities and
Exchange Commission on September 18, 2006 and incorporated by reference herein. |
|
** | Previously filed as an exhibit to Registrants Current Report on Form 8-K (File No.
814-00725), as filed with the Securities and Exchange Commission on March 6, 2009 and
incorporated by reference herein. |
|
*** | Previously filed as an exhibit to Registrants Quarterly Report on Form 10-Q (File No.
814-00725), as filed with the Securities and Exchange Commission on April 9, 2009 and
incorporated by reference herein. |
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY |
||||
Date: April 9, 2010 | By: | /s/ Kevin S. McCarthy | ||
Kevin S. McCarthy | ||||
Chairman of the Board of Directors, President and Chief Executive Officer |
||||
Date: April 9, 2010 | By: | /s/ Terry A. Hart | ||
Terry A. Hart | ||||
Chief Financial Officer and Treasurer | ||||
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
10.7 | Amended and Restated Senior Secured Revolving Credit Agreement between Registrant, the
lenders party thereto, SunTrust Bank, as administrative agent for the lenders, and
Citibank, N.A. as syndication agent, dated March 31, 2010 filed herewith. |
|||
31.1 | Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
|||
31.2 | Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
|||
32.1 | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 furnished herewith. |