Energy Development Company
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KED Quarterly Report
February 29, 2012
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report of Kayne Anderson Energy Development Company (the Company) contains forward-looking statements as defined under the U.S. federal securities laws. Generally, the words believe, expect, intend, estimate, anticipate, project, will and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to materially differ from the Companys historical experience and its present expectations or projections indicated in any forward-looking statements. These risks include, but are not limited to, changes in economic and political conditions; regulatory and legal changes; master limited partnership (MLP) industry risk; leverage risk; valuation risk; interest rate risk; tax risk; and other risks discussed in the Companys filings with the Securities and Exchange Commission (SEC). You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The Company undertakes no obligation to update or revise any forward-looking statements made herein. There is no assurance that the Companys investment objectives will be attained.
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(UNAUDITED)
Company Overview
We are a non-diversified, closed-end management investment company organized under the laws of the State of Maryland. We are a taxable corporation, paying federal and applicable state 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 is equity and debt investments in private and public entities structured as limited partnerships (MLPs). We also expect to continue to evaluate equity and debt investments in Upstream, Midstream and Other Energy Companies. Energy Companies, Midstream Energy Companies, Upstream Energy Companies and Other Energy Companies are each defined in Note 1 Organization.
Our Top Ten Portfolio Investments as of February 29, 2012
Listed below are our top ten portfolio investments by issuer as of February 29, 2012.
Holding |
Public/ Private |
Equity/ Debt |
Sector |
Amount ($ in millions) |
Percent of Long-Term Investments |
|||||||||||
1. |
Direct Fuels Partners, L.P. | Private | Equity | Midstream | $ | 44.5 | 12.9 | % | ||||||||
2. |
ProPetro Services, Inc. | Private | Equity/Debt | Oilfield Services | 31.7 | 9.1 | ||||||||||
3. |
VantaCore Partners LP | Private | Equity | Aggregates | 17.9 | 5.2 | ||||||||||
4. |
Enterprise Products Partners L.P. | Public | Equity | Midstream | 17.7 | 5.1 | ||||||||||
5. |
Energy Transfer Equity, L.P. | Public | Equity | Midstream | 17.5 | 5.1 | ||||||||||
6. |
ONEOK Partners, L.P. | Public | Equity | Midstream | 16.1 | 4.6 | ||||||||||
7. |
Crestwood Holdings Partners, LLC | Private | Debt | Midstream | 12.4 | 3.6 | ||||||||||
8. |
Regency Energy Partners LP | Public | Equity | Midstream | 12.2 | 3.5 | ||||||||||
9. |
Energy Transfer Partners, L.P. | Public | Equity | Midstream | 11.7 | 3.4 | ||||||||||
10. |
Buckeye Partners, L.P. | Public | Equity | Midstream | 11.3 | 3.3 | ||||||||||
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$ | 193.0 | 55.8 | % | |||||||||||||
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Results of Operations For the Three Months Ended February 29, 2012
Investment Income. Investment income totaled $3.3 million and consisted primarily of net dividends and distributions and interest income on our debt investments. We received $4.8 million of cash dividends and distributions, of which $3.0 million was treated as a return of capital during the period. During the quarter, we received $1.5 million of interest income, of which $0.4 million was paid-in-kind interest from ProPetro Services, Inc. (ProPetro). We also received $0.8 million of paid-in-kind dividends, of which $0.6 million was from VantaCore Partners LP (VantaCore). These paid-in-kind dividends are not included in investment income, but are reflected as an unrealized gain.
Operating Expenses. Operating expenses totaled $2.4 million, including $1.5 million of investment management fees, $0.6 million of interest expense and $0.3 million of other operating expenses. Interest expense included $0.1 million of amortization of debt issuance costs. Investment management fees were equal to an annual rate of 1.75% of average total assets.
Net Investment Income. Our net investment income totaled $0.6 million and included a deferred income tax expense of $0.3 million.
Net Realized Gains. We had net realized gains from investments of $1.9 million, after taking into account a deferred income tax expense of $1.1 million.
Net Change in Unrealized Gains. We had a net change in unrealized gains of $17.4 million. The net change consisted of $27.7 million of unrealized gains from investments and a deferred income tax expense of $10.3 million.
1
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(UNAUDITED)
Net Increase in Net Assets Resulting from Operations. We had an increase in net assets resulting from operations of $19.9 million. This increase was composed of net investment income of $0.6 million; net realized gains of $1.9 million; and net unrealized gains of $17.4 million, as noted above.
Distributions to Common Stockholders
We pay quarterly distributions to our common stockholders, funded in part by net distributable income (NDI) generated from our portfolio investments. NDI is the amount of income received by us from our portfolio investments less operating expenses, subject to certain adjustments as described below. NDI is not a financial measure under the accounting principles generally accepted in the United States of America (GAAP). Refer to the Reconciliation of NDI to GAAP section below for a reconciliation of this measure to our results reported under GAAP.
Income from portfolio investments includes (a) cash dividends and distributions, (b) paid-in-kind dividends received (i.e., stock dividends), and (c) interest income from debt securities and commitment fees from private investments in public equity (PIPE investments).
Operating expenses include (a) investment management fees paid to KAFA, (b) other expenses (mostly attributable to fees paid to other service providers) and (c) interest expense.
Net Distributable Income (NDI)
(amounts in millions, except for per share amounts)
Three Months Ended February 29, 2012 |
||||
Distributions and Other Income from Investments |
||||
Dividends and Distributions |
$ | 4.8 | ||
Paid-In-Kind Dividends and Distributions |
0.8 | |||
Interest Income |
1.0 | |||
Paid-In-Kind Interest and Other Income(1) |
0.4 | |||
|
|
|||
Total Distributions and Other Income from Investments |
7.0 | |||
Expenses |
||||
Investment Management Fee |
(1.5 | ) | ||
Other Expenses |
(0.3 | ) | ||
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|
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Total Management Fee and Other Expenses |
(1.8 | ) | ||
Interest Expense |
(0.5 | ) | ||
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|
|||
Net Distributable Income (NDI) |
$ | 4.7 | ||
|
|
|||
Weighted Average Shares Outstanding |
10.3 | |||
NDI per Weighted Average Share Outstanding |
$ | 0.46 | ||
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|
|||
Distributions paid per Common Share(2) |
$ | 0.39 |
(1) | Includes paid-in-kind interest from our senior secured term loan in ProPetro. |
(2) | The distribution of $0.39 per share for the first quarter of fiscal 2012 was paid to common stockholders on April 26, 2012. |
Payment of future distributions is subject to Board of Directors approval, as well as meeting the covenants of our credit facility. In determining our quarterly distribution to common stockholders, our Board of Directors considers a number of factors which include, but are not limited to:
| NDI generated in the current quarter; |
| Expected NDI over the next twelve months; |
2
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)
| The extent to which NDI is comprised of paid-in-kind (PIK) interest and distributions; |
| The impact of potential liquidity events at our portfolio companies; and |
| Realized and unrealized gains generated by the portfolio. |
On March 29, 2012, we declared our quarterly distribution of $0.39 per common share for the fiscal first quarter for a total of $4.0 million. The distribution was paid on April 26, 2012 to common stockholders of record on April 20, 2012.
Reconciliation of NDI to GAAP
The difference between distributions and other income from investments in the NDI calculation and total investment income as reported in our Statement of Operations is reconciled as follows:
| GAAP recognizes that a significant portion of the cash distributions received from MLPs is characterized as a return of capital and therefore excluded from investment income, whereas the NDI calculation includes the return of capital portion of such distributions. |
| NDI includes the value of dividends paid-in-kind, whereas such amounts are not included as investment income for GAAP purposes during the period received, but rather are recorded as unrealized gains upon receipt. |
| NDI includes commitment fees from PIPE investments, whereas such amounts are generally not included in investment income for GAAP purposes, but rather are recorded as a reduction to the cost of the investment. |
| Many of our investments in debt securities were purchased at a discount or premium to the par value of such security. When making such investments, we consider the securitys yield to maturity, which factors in the impact of such discount (or premium). Interest income reported under GAAP includes the non-cash accretion of the discount (or amortization of the premium) based on the effective interest method. When we calculate interest income for purposes of determining NDI, in order to better reflect the yield to maturity, the accretion of the discount (or amortization of the premium) is calculated on a straight-line basis to the earlier of the expected call date or the maturity date of the debt security. |
The treatment of expenses included in NDI also differs from what is reported in the Statement of Operations as follows:
| The non-cash amortization or write-offs of capitalized debt issuance costs related to our debt financings is included in interest expense for GAAP purposes, but is excluded from our calculation of NDI. |
Liquidity and Capital Resources
Our senior secured revolving credit facility (the Credit Facility) has a total commitment amount of $85.0 million and matures on March 30, 2014. Outstanding loan balances under the Credit Facility accrue interest at an 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 that are traded), the interest rate will increase to LIBOR plus 3.00%. We pay a commitment fee of 0.50% per annum on any unused amounts of the Credit Facility.
Our borrowing base, subject to certain limitations, is generally calculated by multiplying the fair value of each of our investments by an advance rate. The total contribution to our borrowing base from private MLPs is limited to no more than 25% of the total borrowing base, and there is a $8.5 million limit of borrowing base contribution from any single issuer.
As of February 29, 2012, we had $77.0 million of borrowings under our Credit Facility (at an interest rate of 2.26%), which represented 54.4% of our borrowing base of $141.4 million (59.6% of our borrowing base of $129.2 million attributable to quoted securities). At February 29, 2012, our asset coverage ratio under the Investment Company Act of 1940, as amended (the 1940 Act), was 430%.
3
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
MANAGEMENT DISCUSSION
(UNAUDITED)
As of April 23, 2012, we had $80.0 million borrowed under our Credit Facility (at an interest rate of 2.25%), and we had $5.9 million of cash. Our borrowings represented 58.8% of our borrowing base of $136.0 million (64.6% of our borrowing base of $123.9 million attributable to quoted securities). The maximum amount that we can borrow under our Credit Facility is limited to the lesser of our commitment amount of $85.0 million and our borrowing base.
4
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
AS OF FEBRUARY 29, 2012
(amounts in 000s)
(UNAUDITED)
Description |
No. of Shares/Units |
Value | ||||||
Long-Term Investments 136.1% |
||||||||
Equity Investments(1) 113.5% |
||||||||
United States 113.5% |
||||||||
Public MLP and Other Equity 78.7% |
||||||||
Alliance Holdings GP, L.P. |
66 | $ | 3,341 | |||||
Boardwalk Pipeline Partners, LP |
26 | 707 | ||||||
Buckeye Partners, L.P. |
101 | 6,037 | ||||||
Buckeye Partners, L.P. Class B Units(2)(3) |
96 | 5,233 | ||||||
Capital Product Partners L.P. |
352 | 2,630 | ||||||
Chesapeake Granite Wash Trust |
18 | 503 | ||||||
Chesapeake Midstream Partners, L.P. |
110 | 3,140 | ||||||
Crestwood Midstream Partners LP |
79 | 2,274 | ||||||
Crosstex Energy, L.P. |
110 | 1,887 | ||||||
DCP Midstream Partners, LP |
211 | 10,263 | ||||||
El Paso Pipeline Partners, L.P. |
216 | 7,923 | ||||||
Enbridge Energy Partners, L.P. |
220 | 7,163 | ||||||
Energy Transfer Equity, L.P. |
403 | 17,508 | ||||||
Energy Transfer Partners, L.P. |
248 | 11,748 | ||||||
Enterprise Products Partners L.P. |
341 | 17,673 | ||||||
Exterran Partners, L.P. |
213 | 5,049 | ||||||
Global Partners LP |
205 | 4,499 | ||||||
Inergy, L.P. |
202 | 3,520 | ||||||
Kinder Morgan Management, LLC(2) |
94 | 7,556 | ||||||
MarkWest Energy Partners, L.P. |
55 | 3,290 | ||||||
Oiltanking Partners, L.P. |
36 | 1,173 | ||||||
ONEOK Partners, L.P. |
276 | 16,088 | ||||||
Penn Virginia Resource Partners, L.P. |
360 | 8,985 | ||||||
Plains All American Pipeline, L.P.(4) |
103 | 8,499 | ||||||
Regency Energy Partners LP |
463 | 12,263 | ||||||
SandRidge Permian Trust |
166 | 4,023 | ||||||
Targa Resources Corp. |
29 | 1,306 | ||||||
Targa Resources Partners LP |
101 | 4,291 | ||||||
Teekay LNG Partners L.P. |
62 | 2,415 | ||||||
Teekay Offshore Partners L.P. |
133 | 3,897 | ||||||
Tesoro Logistics LP |
86 | 3,144 | ||||||
The Williams Companies, Inc. |
145 | 4,342 | ||||||
TransMontaigne Partners L.P. |
20 | 707 | ||||||
VOC Energy Trust |
68 | 1,471 | ||||||
Western Gas Partners, LP |
38 | 1,758 | ||||||
Williams Partners L.P. |
61 | 3,820 | ||||||
|
|
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200,126 | ||||||||
|
|
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Private MLP and Other Private Equity(3)(4) 34.8% |
||||||||
Direct Fuels Partners, L.P. Class A Common Units |
2,500 | 35,000 | ||||||
Direct Fuels Partners, L.P. Convertible Preferred Units(5) |
144 | 2,923 | ||||||
Direct Fuels Partners, L.P. Class D Preferred Units(6) |
324 | 6,545 | ||||||
Plains All American GP LLC |
3 | 6,817 |
See accompanying notes to financial statements.
5
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 29, 2012
(amounts in 000s)
(UNAUDITED)
Description |
No. of Shares/Units |
Value | ||||||
Private MLP and Other Private Equity(3)(4) (continued) |
||||||||
ProPetro Services, Inc.(7) |
150,097 | $ | 19,321 | |||||
VantaCore Partners LP(2) |
1,465 | 12,816 | ||||||
VantaCore Partners LP Class A Preferred Units(2)(8) |
175 | 2,714 | ||||||
VantaCore Partners LP Class B Preferred Units(2)(9) |
133 | 2,335 | ||||||
|
|
|||||||
88,471 | ||||||||
|
|
|||||||
Total Equity Investments (Cost $227,446) |
288,597 | |||||||
|
|
Interest Rate |
Maturity Date |
Principal Amount |
||||||||||||||
Debt Investments 22.6% |
||||||||||||||||
United States 20.3% |
||||||||||||||||
Upstream 7.2% |
||||||||||||||||
Aurora Oil & Gas Limited |
9.875 | % | 2/15/17 | $ | 3,500 | 3,605 | ||||||||||
BreitBurn Energy Partners L.P. |
7.875 | 4/15/22 | 1,250 | 1,316 | ||||||||||||
Carrizo Oil & Gas, Inc. |
8.625 | 10/15/18 | 3,000 | 3,135 | ||||||||||||
CrownRock LP |
10.000 | 8/15/16 | 3,250 | 3,445 | ||||||||||||
Eagle Rock Energy Partners, L.P. |
8.375 | 6/1/19 | 750 | 776 | ||||||||||||
Laredo Petroleum, Inc. |
9.500 | 2/15/19 | 5,500 | 6,091 | ||||||||||||
|
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18,368 | ||||||||||||||||
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|
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Midstream 5.3% |
||||||||||||||||
Crestwood Holdings Partners, LLC |
(10 | ) | 10/1/16 | 6,437 | 6,566 | |||||||||||
Crestwood Holdings Partners, LLC |
(11 | ) | 10/1/16 | 5,750 | 5,865 | |||||||||||
Niska Gas Storage Partners LLC |
8.875 | 3/15/18 | 1,000 | 965 | ||||||||||||
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13,396 | ||||||||||||||||
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Other Energy 7.8% |
||||||||||||||||
Calumet Specialty Products Partners, L.P. |
9.375 | 5/1/19 | 2,000 | 2,095 | ||||||||||||
Foresight Energy LLC |
9.625 | 8/15/17 | 5,000 | 5,350 | ||||||||||||
ProPetro Services, Inc.(3)(4)(12) |
13.000 | 6/30/13 | 12,361 | 12,361 | ||||||||||||
|
|
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19,806 | ||||||||||||||||
|
|
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Total United States (Cost $74,764) |
|
51,570 | ||||||||||||||
|
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Canada 2.3% |
||||||||||||||||
Upstream 2.3% |
||||||||||||||||
PetroBakken Energy Ltd. |
8.625 | 2/1/20 | 3,500 | 3,728 | ||||||||||||
Southern Pacific Resource Corp. |
(13 | ) | 1/7/16 | 1,985 | 2,025 | |||||||||||
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Total Canada (Cost $5,510) |
|
5,753 | ||||||||||||||
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|
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Total Debt Investments (Cost $80,274) |
|
57,323 | ||||||||||||||
|
|
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Total Long-Term Investments (Cost $307,720) |
|
345,920 | ||||||||||||||
|
|
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Senior Secured Revolving Credit Facility Borrowings |
|
(77,000 | ) | |||||||||||||
Other Liabilities in Excess of Other Assets |
|
(14,718 | ) | |||||||||||||
|
|
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Net Assets |
|
$ | 254,202 | |||||||||||||
|
|
(1) | Unless otherwise noted, equity investments are common units/common shares. |
(2) | All or a portion of distributions are paid-in-kind. |
(3) | Fair valued and restricted security. See Notes 2, 3 and 9 in Notes to Financial Statements. |
See accompanying notes to financial statements.
6
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF FEBRUARY 29, 2012
(amounts in 000s)
(UNAUDITED)
(4) | The Company believes that it is an affiliate of Direct Fuels Partners, L.P. (Direct Fuels), Plains All American GP LLC, Plains All American Pipeline, L.P., ProPetro Services, Inc. (ProPetro) and VantaCore Partners LP (VantaCore). See Note 6 Agreements and Affiliations. |
(5) | The Convertible Preferred Units consist of three classes Class A, B and C. Each class has a liquidation preference of $20.00 per unit and is convertible into Class A Common Units. See Note 9 Restricted Securities. |
(6) | The Class D Preferred Units are senior to Direct Fuels Convertible Preferred Units and Class A Common Units. The Class D Preferred Units have a liquidation preference of $20.00 per unit. See Note 9 Restricted Securities. |
(7) | Security is non-income producing. |
(8) | The Class A Preferred Units have a liquidation preference of $17.50 per unit and were issued by VantaCore to holders of the Common and Class A Preferred Units to the extent that such units did not receive full cash distributions. The Class A Preferred Units have a minimum quarterly distribution of $0.475 per unit and are senior to VantaCores Common Units in liquidation preference. See Note 9 Restricted Securities. |
(9) | The Class B Preferred Units have a liquidation preference of $17.50 per unit and were issued on August 3, 2011 in connection with VantaCores acquisition of a quarry owned by a third-party. One year after issuance, the holders of Class B Preferred Units will receive 0.25 common units of VantaCore for each Class B Preferred Unit held. The Class B Preferred Units have a minimum quarterly distribution of $0.3825 per unit and are senior to all other equity classes of VantaCore in liquidation preference. See Note 9 Restricted Securities. |
(10) | Floating rate first lien senior secured term loan. Security pays interest at a rate of LIBOR + 850 basis points, with a 2% LIBOR floor (10.50% as of February 29, 2012). |
(11) | Floating rate first lien senior secured term loan. Security pays interest at a rate of LIBOR + 800 basis points with a 1.5% LIBOR floor (9.50% as of February 29, 2012). |
(12) | Fixed rate first lien term loan. Effective February 1, 2012, security pays interest in-kind that is added to the outstanding principal of the term loan at a rate of 13.00%. Prior to February 1, 2012, the security paid interest in-kind at a rate of 15.00%. See Note 2 Investment Income. |
(13) | Floating rate second lien secured term loan. Security pays interest at base rate + 750 basis points (10.75% as of February 29, 2012). |
See accompanying notes to financial statements.
7
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 2012
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
ASSETS |
| |||
Investments, at fair value: |
||||
Non-affiliated (Cost $195,413) |
$ | 236,589 | ||
Affiliated (Cost $112,307) |
109,331 | |||
|
|
|||
Total investments (Cost $307,720) |
345,920 | |||
Cash |
3,189 | |||
Income tax receivable |
332 | |||
Receivable for securities sold |
1,339 | |||
Interest, dividends and distributions receivable |
733 | |||
Other receivable |
5,030 | |||
Debt issuance costs, prepaid expenses and other assets |
1,185 | |||
|
|
|||
Total Assets |
357,728 | |||
|
|
|||
LIABILITIES |
||||
Senior secured revolving credit facility |
77,000 | |||
Deferred income tax liability |
24,304 | |||
Payable for securities purchased |
108 | |||
Investment management fee payable |
1,489 | |||
Accrued directors fees and expenses |
70 | |||
Accrued expenses and other liabilities |
555 | |||
|
|
|||
Total Liabilities |
103,526 | |||
|
|
|||
NET ASSETS |
$ | 254,202 | ||
|
|
|||
NET ASSETS CONSIST OF |
||||
Common stock, $0.001 par value (200,000,000 shares authorized; 10,358,335 shares issued and outstanding) |
$ | 10 | ||
Paid-in capital |
199,786 | |||
Accumulated net investment loss, net of income taxes, less dividends |
(24,850 | ) | ||
Accumulated net realized gains on investments, net of income taxes |
55,543 | |||
Net unrealized gains on investments, net of income taxes |
23,713 | |||
|
|
|||
NET ASSETS |
$ | 254,202 | ||
|
|
|||
NET ASSET VALUE PER SHARE |
$ | 24.54 | ||
|
|
See accompanying notes to financial statements.
8
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2012
(amounts in 000s)
(UNAUDITED)
INVESTMENT INCOME |
||||
Income |
||||
Dividends and Distributions: |
||||
Non-affiliated investments |
$ | 2,901 | ||
Affiliated investments |
1,929 | |||
|
|
|||
Total dividends and distributions |
4,830 | |||
Return of capital |
(2,977 | ) | ||
|
|
|||
Net dividends and distributions |
1,853 | |||
Interest and other income non-affiliated investments |
1,015 | |||
Interest affiliated investments |
438 | |||
|
|
|||
Total investment income |
3,306 | |||
|
|
|||
Expenses |
||||
Investment management fees |
1,489 | |||
Professional fees |
136 | |||
Directors fees and expenses |
76 | |||
Insurance |
27 | |||
Administration fees |
25 | |||
Custodian fees |
14 | |||
Other expenses |
93 | |||
|
|
|||
Total expenses before interest expense |
1,860 | |||
Interest expense |
569 | |||
|
|
|||
Total expenses |
2,429 | |||
|
|
|||
Net Investment Income Before Income Taxes |
877 | |||
Deferred income tax expense |
(324 | ) | ||
|
|
|||
Net Investment Income |
553 | |||
|
|
|||
REALIZED AND UNREALIZED GAINS (LOSSES) |
||||
Net Realized Gains |
||||
Investments non-affiliated |
2,948 | |||
Investments affiliated |
| |||
Deferred income tax expense |
(1,091 | ) | ||
|
|
|||
Net Realized Gains |
1,857 | |||
|
|
|||
Net Change in Unrealized Gains (Losses) |
||||
Investments non-affiliated |
20,609 | |||
Investments affiliated |
7,093 | |||
Deferred income tax expense |
(10,247 | ) | ||
|
|
|||
Net Change in Unrealized Gains |
17,455 | |||
|
|
|||
Net Realized and Unrealized Gains |
19,312 | |||
|
|
|||
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 19,865 | ||
|
|
See accompanying notes to financial statements.
9
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF CHANGES IN NET ASSETS
(amounts in 000s, except share amounts)
For the Three Months Ended February 29, 2012 (Unaudited) |
For the Year Ended November 30, 2011 |
|||||||
OPERATIONS |
||||||||
Net investment income |
$ | 553 | $ | 2,564 | ||||
Net realized gains |
1,857 | 49,389 | ||||||
Net change in unrealized gains (losses) |
17,455 | (12,284 | ) | |||||
|
|
|
|
|||||
Net Increase in Net Assets Resulting from Operations |
19,865 | 39,669 | ||||||
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|
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DIVIDENDS AND DISTRIBUTIONS |
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Dividends |
(4,034 | )(1) | (14,107 | )(2) | ||||
Distributions return of capital |
| | (2) | |||||
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|
|
|
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Dividends and Distributions |
(4,034 | ) | (14,107 | ) | ||||
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|
|
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CAPITAL STOCK TRANSACTIONS |
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Issuance of 15,605 and 76,070 shares of common stock from reinvestment of dividends and distributions |
341 | 1,427 | ||||||
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|
|
|||||
Total Increase in Net Assets |
16,172 | 26,989 | ||||||
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|
|
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NET ASSETS |
||||||||
Beginning of period |
238,030 | 211,041 | ||||||
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|
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End of period |
$ | 254,202 | $ | 238,030 | ||||
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|
(1) | This is an estimate of the characterization of the distributions paid to common stockholders for the three months ended February 29, 2012 as either a dividend (qualified dividend income) or distribution (return of capital). This estimate is based solely on the Companys operating results during the period and does not reflect the expected result during the fiscal year. 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. Therefore, the characterization may differ from the preliminary estimates. |
(2) | The information presented in each of these items is a characterization of a portion of the total dividends and distributions paid to common stockholders for the fiscal year ended November 30, 2011 as either dividends (qualified dividend income) or distributions (return of capital). This characterization is based on the Companys earnings and profits. |
See accompanying notes to financial statements.
10
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2012
(amounts in 000s)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES |
||||
Net increase in net assets resulting from operations |
$ | 19,865 | ||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: |
||||
Purchase of long-term investments |
(33,113 | ) | ||
Proceeds from sale of long-term investments |
34,724 | |||
Net realized gains on investments |
(2,948 | ) | ||
Return of capital distributions |
2,977 | |||
Net unrealized gains on investments |
(27,702 | ) | ||
Accretion of bond discount, net |
(16 | ) | ||
Increase in receivable for securities sold |
(140 | ) | ||
Decrease in interest, dividends and distributions receivable |
281 | |||
Amortization of deferred debt issuance costs |
109 | |||
Decrease in prepaid expenses and other assets |
7 | |||
Increase in deferred income tax liability |
11,662 | |||
Decrease in payable for securities purchased |
(310 | ) | ||
Increase in investment management fee payable |
103 | |||
Decrease in accrued directors fees and expenses |
(3 | ) | ||
Decrease in accrued expenses and other liabilities |
(131 | ) | ||
|
|
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Net Cash Provided by Operating Activities |
5,365 | |||
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Cash distributions paid to stockholders |
(3,693 | ) | ||
|
|
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Net Cash Used in Financing Activities |
(3,693 | ) | ||
|
|
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NET CHANGE IN CASH |
1,672 | |||
CASH BEGINNING OF PERIOD |
1,517 | |||
|
|
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CASH END OF PERIOD |
$ | 3,189 | ||
|
|
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 $341 for the three months ended February 29, 2012.
During the three months ended February 29, 2012, there were no federal or state income taxes paid. Interest paid was $455.
During the three months ended February 29, 2012, the Company received $756 of paid-in-kind dividends and distributions and $438 of paid-in-kind interest. See Note 2 Investment Income.
See accompanying notes to financial statements.
11
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(amounts in 000s, except share and per share amounts)
For the Three Months Ended February 29, 2012 (Unaudited) |
For the Year
Ended November 30, |
For
the Period September 21, 2006 through November 30, 2006 |
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2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||
Per Share of Common Stock(1) |
||||||||||||||||||||||||||||
Net asset value, beginning of period |
$ | 23.01 | $ | 20.56 | $ | 16.58 | $ | 16.10 | $ | 23.95 | $ | 24.03 | $ | 23.32 | ||||||||||||||
Net investment income (loss) |
0.05 | 0.25 | (0.18 | ) | 0.10 | 0.09 | 0.08 | (0.07 | ) | |||||||||||||||||||
Net realized and unrealized gain (loss) on investments |
1.87 | 3.60 | 5.39 | 1.68 | (5.89 | ) | 1.18 | 0.78 | ||||||||||||||||||||
Net change in unrealized losses conversion to taxable corporation |
| | | | (0.38 | ) | | | ||||||||||||||||||||
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Total income (loss) from investment operations |
1.92 | 3.85 | 5.21 | 1.78 | (6.18 | ) | 1.26 | 0.71 | ||||||||||||||||||||
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|
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Dividends(2) |
(0.39 | ) | (1.37 | ) | (0.51 | ) | | | (0.95 | ) | | |||||||||||||||||
Distributions from net realized long-term capital gains(2)(3) |
| | | | | (0.15 | ) | | ||||||||||||||||||||
Distributions return of capital(2) |
| | (0.69 | ) | (1.30 | ) | (1.67 | ) | (0.24 | ) | | |||||||||||||||||
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|
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Total Dividends and Distributions |
(0.39 | ) | (1.37 | ) | (1.20 | ) | (1.30 | ) | (1.67 | ) | (1.34 | ) | | |||||||||||||||
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Effect of shares issued in reinvestment of dividends |
| (0.03 | ) | (0.03 | ) | | | | | |||||||||||||||||||
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Net asset value, end of period |
$ | 24.54 | $ | 23.01 | $ | 20.56 | $ | 16.58 | $ | 16.10 | $ | 23.95 | $ | 24.03 | ||||||||||||||
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Market value per share, end of period |
$ | 23.56 | $ | 20.21 | $ | 18.21 | $ | 13.53 | $ | 9.63 | $ | 23.14 | $ | 22.32 | ||||||||||||||
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|||||||||||||||
Total investment return based on market value(4) |
18.7 | % | 19.3 | % | 45.8 | % | 56.0 | % | (54.8 | )% | 9.3 | % | (10.7 | )% |
See accompanying notes to financial statements.
12
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(amounts in 000s, except share and per share amounts)
For the Three Months Ended February 29, 2012 (Unaudited) |
For the Year
Ended November 30, |
For
the Period September 21, 2006 through November 30, 2006 |
||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||
Supplemental Data and Ratios(5) |
||||||||||||||||||||||||||||
Net assets, end of period |
$ | 254,202 | $ | 238,030 | $ | 211,041 | $ | 168,539 | $ | 162,687 | $ | 240,758 | $ | 240,349 | ||||||||||||||
Ratio of expenses to average net assets: |
||||||||||||||||||||||||||||
Management fees |
2.4 | % | 2.4 | % | 2.1 | % | 2.0 | % | 0.4 | % | 3.1 | % | 2.4 | % | ||||||||||||||
Other expenses |
0.6 | 0.7 | 1.0 | 1.3 | 1.1 | 0.9 | 1.3 | |||||||||||||||||||||
|
|
|
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|
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|
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|
|
|||||||||||||||
Subtotal |
3.0 | 3.1 | 3.1 | 3.3 | 1.5 | 4.0 | 3.7 | |||||||||||||||||||||
Interest expense |
0.9 | 0.8 | 0.9 | 0.8 | 2.0 | 1.0 | | |||||||||||||||||||||
Management fee waivers |
| | | | | (0.4 | ) | (0.5 | ) | |||||||||||||||||||
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|
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Expenses (excluding tax expense) |
3.9 | 3.9 | 4.0 | 4.1 | 3.5 | 4.6 | 3.2 | |||||||||||||||||||||
Tax expense |
19.1 | 10.0 | 16.3 | 6.9 | | (6) | 0.8 | | ||||||||||||||||||||
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|
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Total expenses(7) |
23.0 | % | 13.9 | % | 20.3 | % | 11.0 | % | 3.5 | % | 5.4 | % | 3.2 | % | ||||||||||||||
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Ratio of net investment income (loss) to average net assets |
0.9 | % | 1.1 | % | (1.0 | )% | 0.7 | % | 0.4 | % | 0.3 | % | (0.3 | )% | ||||||||||||||
Net increase (decrease) in net assets resulting from operations to average net assets |
8.1 | %(8) | 17.1 | % | 28.3 | % | 11.3 | % | (29.5 | )% | 5.1 | % | 3.0 | %(8) | ||||||||||||||
Portfolio turnover rate |
9.9 | %(8) | 68.1 | % | 33.4 | % | 20.9 | % | 27.0 | % | 28.8 | % | 5.6 | %(8) | ||||||||||||||
Average net assets |
$ | 246,116 | $ | 231,455 | $ | 188,307 | $ | 160,847 | $ | 211,531 | $ | 246,468 | $ | 234,537 | ||||||||||||||
Average shares of common stock outstanding |
10,347,189 | 10,301,878 | 10,212,289 | 10,116,071 | 10,073,398 | 10,014,496 | 10,000,060 | |||||||||||||||||||||
Average amount of borrowings outstanding under the Credit Facilities |
$ | 77,967 | $ | 62,559 | $ | 54,956 | $ | 53,422 | $ | 75,563 | $ | 32,584 | | |||||||||||||||
Asset coverage of total debt(9) |
430.1 | % | 409.1 | % | 470.2 | % | n/a | n/a | n/a | n/a | ||||||||||||||||||
Average amount of borrowings outstanding per share of common stock during the period |
$ | 7.54 | $ | 6.07 | $ | 5.38 | $ | 5.28 | $ | 7.50 | $ | 3.25 | |
See accompanying notes to financial statements.
13
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
FINANCIAL HIGHLIGHTS
(amounts in 000s, except share and per share amounts)
(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 29, 2012 is an estimate of the characterization of the distribution paid and is based on the Companys operating results during the period. The information presented in 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 (long-term capital gains or return of capital) and is based on the Companys earnings and profits. |
(3) | 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. Since December 1, 2007, the Company has been taxed as a corporation, and, as a result, the categorization of distributions from net realized long-term capital gains is no longer applicable. |
(4) | 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. |
(5) | Unless otherwise noted, ratios are annualized. |
(6) | For the year ended November 30, 2008, the Company accrued deferred income tax benefits of $33,264 (15.5% of average net assets) primarily related to unrealized losses on investments. Realization of a deferred tax benefit is dependent on whether there will be sufficient taxable income of the appropriate character within the carryforward periods to realize a portion or all of the deferred tax benefit. Because it could not have been predicted whether the Company would incur a benefit in the future, a deferred income tax expense of 0% was assumed. |
(7) | 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. |
(8) | Not annualized. |
(9) | Calculated pursuant to section 18(a)(1)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by senior securities representing indebtedness divided by senior securities representing indebtedness. Under the 1940 Act, the Company may not declare or make any distribution on its common stock nor can it incur additional indebtedness if at the time of such declaration or incurrence its asset coverage with respect to senior securities representing indebtedness would be less than 300%. For purposes of this test, the revolving credit facility is considered a senior security representing indebtedness. Prior to July 7, 2010, the Company was a business development company (BDC) under the 1940 Act and not subject to the requirements of section 18(a)(1)(A) for the asset coverage of total debt disclosure. |
See accompanying notes to financial statements.
14
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(amounts in 000s, except share and 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. 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. Prior to November 30, 2007, 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 4 Income Taxes.
From inception through July 6, 2010, the Company had elected to be treated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). On June 30, 2010, the Companys stockholders approved the withdrawal of its election to be treated as a BDC under the 1940 Act, and on July 7, 2010, the Company filed the withdrawal with the SEC, which was effective upon receipt. The Company is also no longer subject to the requirement that 70% of its portfolio must be comprised of qualifying assets, which generally include domestic private companies.
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. Cash and Cash Equivalents Cash and cash equivalents include short-term, liquid investments with an original maturity of three months or less and include money market fund accounts.
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, current and deferred accrued income taxes, 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
15
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
valued at the mean of the most recent bid and ask 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. Debt securities that are considered bonds are valued by using the mean of the bid and ask prices provided by an independent pricing service. For debt securities that are considered bank loans, the fair market value is determined by using the mean of the bid and ask prices provided by the agent or 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 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 Company holds securities that are privately issued or otherwise restricted as to resale. 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 a manner that most fairly reflects fair value of the security on the valuation date. Unless otherwise determined by the Board of Directors, the following valuation process is used for such securities:
| Investment Team Valuation. The applicable investments are valued by senior professionals of KA Fund Advisors, LLC (KAFA or the Adviser) who are responsible for the portfolio investments. |
| Investment Team Valuation Documentation. Preliminary valuation conclusions will be determined by senior management of KAFA. Such valuations are submitted to the Valuation Committee (a committee of the Companys Board of Directors) on a quarterly basis and stand for intervening periods of time. |
| Valuation Committee. The Valuation Committee meets each quarter to consider valuations presented by KAFA, if any, which were made in accordance with valuation procedures adopted by the Board of Directors in such quarter. The Valuation Committees valuation determinations are subject to ratification by the Board of Directors at its next regular meeting. |
| Valuation Firm. No less 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 29, 2012, the independent valuation firm performed limited procedures on investments in five portfolio companies and a receivable associated with the sale of its investment in International Resource Partners LP (IRP), comprising approximately 31.1% of the total assets as of February 29, 2012. 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 meets quarterly to consider the valuations provided by KAFA and the Valuation Committee, if applicable, and ratify valuations for the applicable securities. The Board of Directors considers the report provided by the third-party valuation firm in reviewing and determining in good faith the fair value of the applicable portfolio securities. |
16
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
During the course of such valuation process, where appropriate, privately-issued equity and debt investments are valued using comparisons of financial 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. 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) are valued through the process described above, using a valuation based on the fair value of the publicly-traded security less a discount. The discount is initially equal in amount to the discount negotiated at the time the purchase price is agreed to. To the extent that such securities are convertible or otherwise become publicly traded within a time frame that may be reasonably determined, this discount will be amortized on a straight line basis over such estimated time frame.
On April 18, 2011, the Company completed its sale of IRP. A portion of the total consideration was placed in escrow with the balance being paid in cash. Proceeds will be released from the escrow upon satisfaction of certain post-closing obligations or the expiration of certain time periods. The other receivable represents the Companys estimated fair value of its portion of the escrow ($5,030).
At February 29, 2012, the Company held 43.7% of its net assets applicable to common stockholders (31.1% of total assets) in securities and an other receivable that were fair valued pursuant to the procedures adopted by the Board of Directors. The aggregate fair value of these securities ($106,065) and the other receivable ($5,030) at February 29, 2012 was $111,095. See Note 9 Restricted Securities.
E. Repurchase Agreements The Company has agreed, from time to time, 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. As of February 29, 2012, the Company did not have any repurchase agreements.
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.
Interest rate swap contracts. The Company may use hedging techniques such as interest rate swaps to mitigate potential interest rate risk on a portion of the Companys leverage. Such interest rate swaps would
17
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
principally be used to protect the Company against higher costs 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 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. If the Company writes a call option on a security, the Company has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price. The Company will only write call options on securities that the Company holds in its portfolio (i.e., covered calls).
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 Dividends and distributions received from the Companys investments are comprised of income and return of capital. The payments made by MLPs are categorized as distributions and payments made by corporations are categorized as dividends. At the time such dividends and distributions are received the Company estimates the amount of such payment that is considered investment income and the amount that is considered a return of capital. Such estimates are based on historical information available from each investment and other industry sources. These estimates may subsequently be revised based on information received from investments after their tax reporting periods are concluded.
18
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
The following table sets forth (1) the components of total dividends and distributions from the Companys private and public investments, (2) the percentage of return of capital attributable to each category and (3) the estimated total return of capital portion of the dividends and distributions received from investments and the amounts that are attributable to net realized gains (losses) and net change in unrealized gains (losses). The return of capital portion of the dividends and distributions received is a reduction to investment income, results in an equivalent reduction in the cost basis of the associated investments, and increases net realized gains (losses) and net change in unrealized gains (losses).
Three Months Ended February 29, 2012 |
||||
Distributions from private MLPs |
$ | 1,824 | ||
Distributions from public MLPs and dividends from other public equity investments |
3,006 | |||
|
|
|||
Total dividends and distributions from investments |
$ | 4,830 | ||
|
|
|||
Distributions from private MLPs % return of capital |
19 | % | ||
Distributions from public MLPs and dividends |
88 | % | ||
Total dividends and distributions % return of capital |
62 | % | ||
Return of capital attributable to net realized gains (losses) |
$ | 701 | ||
Return of capital attributable to net change in unrealized gains (losses) |
2,276 | |||
|
|
|||
Total return of capital |
$ | 2,977 | ||
|
|
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. During the three months ended February 29, 2012, the Company did not have a reserve against interest income, since all interest income accrued is expected to be received.
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.
The Company accrued paid-in-kind interest on its first lien debt investment in ProPetro Services, Inc. (ProPetro). As a result of the debt restructurings that were completed on January 28, 2011 and February 1, 2012 and substantially improved operating results, the Company now expects to be repaid the full face value plus accrued interest when the notes mature on June 30, 2013. During the three months ended February 29, 2012, the Company recognized $438 of paid-in-kind interest, which increased the outstanding principal of the Companys investment in the ProPetro debt investment.
19
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
The Company receives dividends in the form of additional units from its investments in Buckeye Partners, L.P. (Class B Units), Kinder Morgan Management, LLC and VantaCore Partners LP. The additional units are not reflected in investment income during the period received but are recorded as unrealized gains upon receipt. During the three months ended February 29, 2012, the Company received the following paid-in-kind dividends.
Three Months Ended February 29, 2012 |
||||
Buckeye Partners, L.P. (Class B Units) |
$ | 98 | ||
Kinder Morgan Management, LLC |
108 | |||
VantaCore Partners LP |
550 | |||
|
|
|||
Total stock dividends |
$ | 756 | ||
|
|
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 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, the characterization may differ from the preliminary estimates.
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. Current income taxes reflect the amount of income taxes that the Company expects to be payable as of a measurement date applying the provisions of the enacted tax laws. 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 Financial Accounting Standards Board (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 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 current or 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 current or deferred tax liability.
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. For the three months ended February 29, 2012, the Company did not have any interest or penalties associated with the underpayment of any income taxes. Tax years from 2008 to the present 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
20
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
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.
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. | Fair Value |
As required by the Fair Value Measurement Topic 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. Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the underlying investment.
| Level 1 Quoted unadjusted prices for identical instruments in active markets traded on a national exchange 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. |
21
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
The following table presents the Companys assets measured at fair value on a recurring basis at February 29, 2012, and the Company presents these assets by security type and description on its Schedule of Investments.
Total | Quoted Prices in Active Markets (Level 1) |
Prices with Other Observable Inputs (Level 2) |
One or More Unobservable Inputs (Level 3) |
|||||||||||||
Assets at Fair Value |
||||||||||||||||
Equity investments |
$ | 288,597 | $ | 194,893 | $ | | $ | 93,704 | ||||||||
Debt investments |
57,323 | | 44,962 | 12,361 | ||||||||||||
Other receivable(1) |
5,030 | | | 5,030 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 350,950 | $ | 194,893 | $ | 44,962 | $ | 111,095 | ||||||||
|
|
|
|
|
|
|
|
(1) | On April 18, 2011, the Company completed its sale of IRP. A portion of the total consideration was placed in escrow with the balance being paid in cash. Proceeds will be released from the escrow upon satisfaction of certain post-closing obligations or the expiration of certain time periods. The other receivable represents the Companys estimated fair value of its portion of the escrow ($5,030). |
The Company did not have any liabilities that were measured at fair value on a recurring basis at February 29, 2012. For the three months ended February 29, 2012, there were no transfers between Level 1 and Level 2.
In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs which amends ASC Topic 820, Fair Value Measurement. The amended guidance clarifies the wording used to describe many requirements in accounting literature for fair value measurement and disclosure to establish consistency between U.S. GAAP and International Financial Reporting Standards (IFRSs). ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company will adopt ASU No. 2011-04 in the fiscal second quarter of 2012, which is the Companys first reportable period for which adoption is required. Management is currently evaluating this guidance and does not believe that the adoption of this guidance will have a material impact on the Companys financial statements and disclosures.
The following table presents the Companys assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended February 29, 2012.
Total | Other Receivable(2) |
Debt | Equity | |||||||||||||
Balance November 30, 2011 |
$ | 108,709 | $ | 5,030 | $ | 11,923 | $ | 91,756 | ||||||||
Sales |
| | | | ||||||||||||
Realized gains (losses) |
| | | | ||||||||||||
Unrealized gains (losses), net(1) |
4,452 | | 438 | 4,014 | ||||||||||||
Purchases |
| | | | ||||||||||||
Issuances |
648 | | | 648 | ||||||||||||
Transfer out |
(2,714 | ) | | | (2,714 | ) | ||||||||||
Settlements |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance February 29, 2012 |
$ | 111,095 | $ | 5,030 | $ | 12,361 | $ | 93,704 | ||||||||
|
|
|
|
|
|
|
|
(1) | The $4,452 of unrealized gains relate to investments that are still held at February 29, 2012, and the Company includes these unrealized gains in the Statement of Operations Net Change in Unrealized Gains (Losses). |
(2) | The amount reflects the fair value of the receivable, held in escrow, that the Company expects to receive in connection with the sale of IRP. |
22
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
The issuances of $648 for the three months ended February 29, 2012 relate to the Class A Preferred Units of VantaCore and the Class B Units of Buckeye Partners, L.P. The Companys investment in the common units of Teekay Offshore Partners L.P., which is noted as a transfer out of Level 3 in the table above, became readily marketable during the three months ended February 29, 2012.
4. | Income Taxes |
The Companys taxes include current and deferred income taxes. Current income taxes reflect the estimated income tax liability of the Company as of a measurement date. 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 and capital losses, if any. At February 29, 2012, the Company had an income tax receivable of $332. The receivable is the result of the Companys estimated income tax payments being greater than its tax liability at February 29, 2012. The Company intends to file for refunds with the respective jurisdictions and expects to receive the amount of the receivable in the second half of 2012. Components of the Companys current and deferred tax assets and liabilities are as follows:
As of February 29, 2012 |
||||
Income tax receivable |
$ | 332 | ||
Deferred tax asset: |
||||
Organizational costs |
$ | 15 | ||
Net operating loss carryforward Federal |
335 | |||
Net operating loss carryforward State |
28 | |||
Deferred tax liabilities: |
||||
Net unrealized gains on investment securities |
(21,003 | ) | ||
Basis reductions resulting from estimated return of capital |
(3,679 | ) | ||
|
|
|||
Total net deferred tax liability |
$ | (24,304 | ) | |
|
|
At February 29, 2012 the Company has an estimated federal net operating loss carryforward of $985 (deferred tax asset of $335). 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, the $985 of net operating loss carryforwards will expire in 2033. In addition, the Company has an estimated state net operating loss which totals approximately $985 (deferred tax asset of $28). The majority of the state net operating loss expires in 2033.
As of February 29, 2012, the identified cost of investments for federal income tax purposes was $294,326. The cost basis of investments includes a $13,394 reduction in basis attributable to the Companys portion of the
23
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
allocated losses from its MLP investments at February 29, 2012. Gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
As of February 29, 2012 |
||||
Gross unrealized appreciation of investments |
$ | 84,158 | ||
Gross unrealized depreciation of investments |
(32,564 | ) | ||
|
|
|||
Net unrealized appreciation of investments |
$ | 51,594 | ||
|
|
For the three months ended February 29, 2012, the Companys effective tax rate was 37.0%. Components of the Companys income tax benefit (expense) were as follows:
For the Three Months Ended February 29, 2012 |
||||
Deferred income tax expense net investment income |
$ | (324 | ) | |
Deferred income tax expense realized gains |
(1,091 | ) | ||
Deferred income tax expense unrealized gains |
(10,247 | ) | ||
|
|
|||
Income tax expense |
$ | (11,662 | ) | |
|
|
Total income taxes were different from the amount computed by applying the federal statutory income tax rate of 35% to the net investment loss and realized and unrealized gains (losses) on investments before taxes for the three months ended February 29, 2012, as follows:
For the Three Months Ended February 29, 2012 |
||||
Computed federal income tax at 35% |
$ | (11,035 | ) | |
State income tax, net of federal tax |
(588 | ) | ||
Other, net |
(39 | ) | ||
|
|
|||
Total income tax benefit (expense) |
$ | (11,662 | ) | |
|
|
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 29, 2012, the Company did not have any interest or penalties associated with the underpayment of any income taxes. Tax years from 2008 to the present remain open and subject to examination by tax jurisdictions.
5. | Concentration of Risk |
The Companys investment objective is to generate both current income and capital appreciation primarily through equity and debt investments. Under normal circumstances, the Company intends to invest at least 80% of total assets in securities of Energy Companies. A key focus area for the Companys investments in the energy industry is equity and debt investments in Midstream Energy Companies structured as limited partnerships. The Company also invests in equity and debt securities of Other Energy Companies and debt securities in Upstream Energy Companies. A substantial portion of the cash flow received by the Company is derived from investments in equity securities of MLPs. The amount of cash that an MLP has available for distributions and the tax character of such distributions are dependent upon the amount of cash generated by the MLPs operations. The Company may, for defensive purposes, temporarily invest all or
24
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
a significant portion of its assets in investment grade securities, short-term debt securities and cash or cash equivalents. To the extent the Company uses this strategy, it may not achieve its investment objectives.
6. | Agreements and Affiliations |
A. Administration Agreement The Company has entered into an Administration Agreement (the Administration Agreement) with Ultimus Fund Solutions, LLC (Ultimus), which may be amended from time to time. 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 Adviser, subject to the overall supervision of the Companys Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Adviser receives a management fee from the Company. In October 2011, the Company renewed its agreement with the Adviser for a period of one year. The agreement may be renewed annually upon the approval of the Companys Board of Directors and a majority of the Companys Directors who are not interested persons of the Company, as such term is defined in the 1940 Act.
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 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 distributions on common and 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.
The Companys management fees for the three months ended February 29, 2012 were $1,489.
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
25
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
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 29, 2012, the Company held a 39.9% 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 is an affiliate of Direct Fuels under the 1940 Act by virtue of its participation on the board of the general partner.
Plains All American GP LLC and 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 (Plains GP), 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 GP. 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 GP and Plains All American, L.P. under the 1940 Act by virtue of (i) the ownership interests in the general partner by the Company and other affiliated Kayne Anderson funds and (ii) Mr. Sinnotts participation on the board of Plains GP.
ProPetro Services, Inc. At February 29, 2012, the Company held 19.1% of ProPetro Services, Inc. (ProPetro) outstanding common stock. The Companys President and Chief Executive Officer and one of its Executive Vice Presidents serve as directors on ProPetros board of directors. The Company believes that it is an affiliate of ProPetro by virtue of its common stock ownership and its participation on its board of directors.
VantaCore Partners LP At February 29, 2012, the Company held a 31.1% 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 Chairman of the board of directors of the general partner for VantaCore. Although the Company does not own any interest in the general partner of VantaCore, it believes it is an affiliate of VantaCore under the 1940 Act by virtue of its participation on the board of the general partner.
7. | Derivative Financial Instruments |
As of February 29, 2012, the Company held no derivative instruments, and during the three months ended February 29, 2012, the Company did not have any activity involving derivative instruments. See Note 2 Significant Accounting Policies.
8. | Investment Transactions |
For the three months ended February 29, 2012, the Company purchased and sold securities in the amount of $33,113 and $34,724 (excluding short-term investments), respectively.
9. | Restricted Securities |
From time to time, certain of the Companys investments may be restricted as to resale. For instance, private investments that are not registered under the Securities Act, as amended, cannot be offered for public sale in a non-exempt transaction without first being registered. In other cases, certain of the Companys investments have restrictions such as lock-up agreements that preclude the Company from offering these securities for public sale.
26
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
At February 29, 2012, the Company held the following restricted investments:
Investment |
Security |
Acquisition Date |
Type of Restriction |
Number of Units or Principal ($) (in 000s) |
Cost Basis |
Fair Value |
Fair Value Per Unit |
Percent of Net Assets |
Percent of Total Assets |
|||||||||||||||||||||||
Level 3 Investments(1) |
||||||||||||||||||||||||||||||||
Buckeye Partners, L.P. |
Class B Units |
6/10/11 | (2 | ) | 96 | $ | 5,002 | $ | 5,233 | $ | 54.45 | 2.0 | % | 1.5 | % | |||||||||||||||||
Direct Fuels Partners, L.P. (3) |
Class A Common Units |
6/11/07 | (4 | ) | 2,500 | 41,359 | 35,000 | 14.00 | 13.8 | 9.8 | ||||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class A Convertible Preferred Units(5) |
5/14/09 | (4 | ) | 96 | 1,952 | 1,948 | 20.20 | 0.8 | 0.5 | ||||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class B Convertible Preferred Units(5) |
8/25/09 | (4 | ) | 27 | 538 | 548 | 20.40 | 0.2 | 0.1 | ||||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class C Convertible Preferred Units(5) |
11/20/09 | (4 | ) | 20 | 408 | 427 | 21.00 | 0.2 | 0.1 | ||||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class D Preferred Units |
(6) | (4 | ) | 324 | 6 | 6,545 | 20.20 | 2.5 | 1.8 | ||||||||||||||||||||||
Plains All American GP LLC (7) |
Common Units |
(8) | (4 | ) | 3 | 4,738 | 6,817 | 1,957 | 2.7 | 1.9 | ||||||||||||||||||||||
ProPetro Services, Inc. |
Common Shares |
2/15/07 | (4 | ) | 150,097 | 13 | 19,321 | 0.13 | 7.6 | 5.4 | ||||||||||||||||||||||
ProPetro Services, Inc. |
Secured Term Loan |
2/15/07 | (4 | ) | $ | 12,361 | 37,650 | 12,361 | n/a | 4.9 | 3.5 | |||||||||||||||||||||
VantaCore Partners LP (9) |
Class A Common Units |
(8) | (4 | ) | 1,465 | 20,845 | 12,816 | 8.75 | 5.0 | 3.6 | ||||||||||||||||||||||
VantaCore Partners LP (10) |
Class A Preferred Units |
(8) | (4 | ) | 175 | | 2,714 | 15.50 | 1.1 | 0.8 | ||||||||||||||||||||||
VantaCore Partners LP (11) |
Class B Preferred Units |
8/3/11 | (4 | ) | 133 | 1,833 | 2,335 | 17.50 | 0.9 | 0.7 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
|
$ | 114,344 | $ | 106,065 | 41.7 | % | 29.7 | % | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Level 2 Investments(12) |
||||||||||||||||||||||||||||||||
Aurora Oil & Gas Limited |
Senior Notes |
2/1/12 | (2 | ) | $ | 3,500 | $ | 3,449 | $ | 3,605 | n/a | 1.4 | % | 1.0 | % | |||||||||||||||||
BreitBurn Energy Partners L.P. |
Senior Notes |
2/1/12 | (2 | ) | 1,250 | 1,239 | 1,316 | n/a | 0.5 | 0.4 | ||||||||||||||||||||||
Crestwood Holdings Partners, LLC |
Secured Term Loan |
(8) | (4 | ) | 6,437 | 6,356 | 6,566 | n/a | 2.6 | 1.8 | ||||||||||||||||||||||
Crestwood Holdings Partners, LLC |
Secured Term Loan |
2/1/12 | (4 | ) | 5,750 | 5,722 | 5,865 | n/a | 2.3 | 1.6 | ||||||||||||||||||||||
CrownRock LP |
Senior Notes |
8/12/11 | (4 | ) | 3,250 | 3,030 | 3,445 | n/a | 1.4 | 1.0 | ||||||||||||||||||||||
Foresight Energy LLC |
Senior Notes |
8/6/10 | (4 | ) | 5,000 | 4,974 | 5,350 | n/a | 2.1 | 1.5 | ||||||||||||||||||||||
PetroBakken Energy Ltd. |
Senior Notes |
1/25/12 | (2 | ) | 3,500 | 3,482 | 3,728 | n/a | 1.5 | 1.0 | ||||||||||||||||||||||
Southern Pacific Resource Corp. |
Secured Term Loan |
5/5/11 | (2 | ) | 1,985 | 2,028 | 2,025 | n/a | 0.8 | 0.6 | ||||||||||||||||||||||
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Total |
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$ | 30,280 | $ | 31,900 | 12.6 | % | 8.9 | % | |||||||||||||||||||||||
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Total of all restricted securities |
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$ | 144,624 | $ | 137,965 | 54.3 | % | 38.6 | % | |||||||||||||||||||||||
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(1) | Securities are valued using inputs reflecting the Companys own assumptions as more fully described in Note 2 Significant Accounting Policies. |
(2) | Unregistered or restricted security of a publicly traded company. |
(3) | The Companys investment in Direct Fuels includes 200 incentive distribution rights (20% of total outstanding incentive distribution rights) for which the Company assigns a value of zero. |
(4) | Unregistered security of a private company. |
(5) | The Direct Fuels Convertible Preferred Units consist of three classes Class A, B and C. Each class 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. |
(6) | The Direct Fuels Class D Preferred Units are senior to Direct Fuels Convertible Preferred Units and Class A Common Units. |
27
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
(7) | In determining the fair value for Plains All American GP LLC (PAA GP), the Companys valuation is based on publicly available information. Robert V. Sinnott, the CEO of KACALP, sits on PAA GPs board of directors (see Note 6 Agreements and Affiliations for more detail). Certain private investment funds managed by KACALP may value their investment in PAA GP based on non-public information, and, as a result, such valuation may be different than the Companys valuation. |
(8) | Security was acquired at various dates during the three months ended February 29, 2012 and/or in prior years. |
(9) | The Companys investment in VantaCore includes 1,823 incentive distribution rights (18% of total outstanding incentive distribution rights) for which the Company assigns a value of zero. |
(10) | The VantaCore Class A Preferred Units are senior to the VantaCore Common Units in liquidation preference. The Class A Preferred Units have a liquidation preference of $17.50 per unit and were issued by VantaCore to holders of the common and preferred units to the extent that such units did not receive full cash distributions. |
(11) | The Class B Preferred Units have a liquidation preference of $17.50 per unit and were issued on August 3, 2011 in connection with VantaCores acquisition of a quarry owned by a third-party. After one year of issuance, the holders of Class B Preferred Units will receive 0.25 common units of VantaCore for each Class B Preferred Unit held. The Class B Preferred Units have a minimum quarterly distribution of $0.3825 per unit and are senior to all other equity classes of VantaCore in liquidation preference. |
(12) | These securities have a fair market value determined by the mean of the bid and ask prices provided by an agent or syndicate bank, principal market maker or an independent pricing service as more fully described in Note 2 Significant Accounting Policies. These securities have limited trading volume and are not listed on a national exchange. |
10. | Senior Secured Revolving Credit Facility |
As of February 29, 2012, the Companys amended and restated senior secured revolving credit facility (the Credit Facility) has a total commitment amount of $85,000 and a maturity date of March 30, 2014 with a syndicate of lenders. 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 pays a commitment fee of 0.50% per annum on any unused amounts of the Credit Facility.
The obligations under the 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 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 3.0:1.0, (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 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 $85,000 plus 25% of the net proceeds from any issuance 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
28
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
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 Credit Facility also contains customary representations and warranties and events of default.
Under the terms of the 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 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 cash distributions, in their most recent fiscal quarter, that are greater than 80% of their minimum quarterly distribution amount.
Under the terms of the Credit Facility, if borrowings exceed 90% of borrowing base, the Credit Facility restricts the Company in the amount of distributions the Company may pay to stockholders to no more than the amount of Distributable Cash Flow for the current and prior three quarters. As of February 29, 2012, the Company had $77,000 borrowed under its Credit Facility (at an interest rate of 2.26%), which represented 54.4% and 59.6% of its borrowing base and quoted borrowing base of $141,449 and $129,230, respectively. The maximum amount that the Company can borrow under its Credit Facility is limited to the lesser of the commitment amount of $85,000 and its borrowing base.
As of February 29, 2012, the Company was in compliance with all financial and operational covenants required by the Credit Facility.
11. | Common Stock |
The Company has 200,000,000 shares of common stock authorized. Transactions in common shares for the three months ended February 29, 2012 were as follows:
Shares outstanding at November 30, 2011 |
10,342,730 | |||
Shares issued through reinvestment of dividends and distributions |
15,605 | |||
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Shares outstanding at February 29, 2012 |
10,358,335 | |||
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12. | Subsequent Event |
On March 29, 2012, the Company declared its quarterly distribution of $0.39 per common share for the fiscal first quarter for a total of $4,040. The distribution was paid on April 26, 2012 to stockholders of record on April 20, 2012. Of this total, pursuant to the Companys dividend reinvestment plan, $332 was reinvested into the Company through the issuance of 14,085 shares of common stock.
29
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(UNAUDITED)
Notice is hereby given in accordance with Section 23(c) of the 1940 Act, that the Company may from time to time purchase shares of its common stock in the open market.
30
Directors and Corporate Officers | ||
Kevin S. McCarthy | Chairman of the Board of Directors, President and Chief Executive Officer | |
William R. Cordes | Director | |
Barry R. Pearl | Director | |
Albert L. Richey | Director | |
Robert V. Sinnott | Director | |
William L. Thacker | Director | |
Terry A. Hart | Chief Financial Officer and Treasurer | |
David J. Shladovsky | Chief Compliance Officer and Secretary | |
J.C. Frey | Executive Vice President, Assistant Secretary and Assistant Treasurer | |
James C. Baker | Executive Vice President | |
Ron M. Logan, Jr. | Senior Vice President | |
Jody C. Meraz | Vice President | |
Investment Adviser KA Fund Advisors, LLC 717 Texas Avenue, Suite 3100 Houston, TX 77002 |
Administrator Ultimus Fund Solutions, LLC 350 Jericho Turnpike, Suite 206 Jericho, NY 11753 | |
1800 Avenue of the Stars, Third Floor Los Angeles, CA 90067 |
Stock Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 | |
Custodian JPMorgan Chase Bank, N.A. 14201 North Dallas Parkway, Second Floor Dallas, TX 75254 |
Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 350 South Grand Avenue Los Angeles, CA 90071 | |
Legal Counsel Paul Hastings LLP 55 Second Street, 24th Floor San Francisco, CA 94105 |
Please visit us on the web at http://www.kaynefunds.com or call us toll-free at 1-877-657-3863.
This report, including the financial statements herein, is made available to stockholders of the Company for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Company or of any securities mentioned in this report.