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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM N-Q

 

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number 811-22435

 

 

Kayne Anderson Energy Development Company

(Exact name of registrant as specified in charter)

 

 

811 Main Street, 14^th Floor

Houston, Texas 77002

(Address of principal executive offices) (Zip code)

 

 

David Shladovsky, Esq.

KA Fund Advisors, LLC

811 Main Street, 14^th Floor

Houston, Texas 77002

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: (713) 493-2020

Date of fiscal year end: November 30, 2016

Date of reporting period: February 29, 2016

 

 

 

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TABLE OF CONTENTS

 

Item 1: Schedule of Investments

Item 2: Controls and Procedures

Item 3: Exhibits

SIGNATURES

EX-99.CERT

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Item 1.    Schedule of Investments.

KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY

SCHEDULE OF INVESTMENTS

FEBRUARY 29, 2016

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

 

Description						No. of Shares/Units				Value
Long-Term Investments — 136.6%
Equity Investments(1) — 136.6%
Midstream MLP(2) — 119.1%
Arc Logistics Partners LP							495			$	6,108
Buckeye Partners, L.P.							117				7,523
Columbia Pipeline Partners LP							145				2,572
Crestwood Equity Partners LP							198				1,792
DCP Midstream Partners, LP							426				8,260
Enbridge Energy Management, L.L.C.(3)							49				822
Energy Transfer Partners, L.P.							766				20,419
EnLink Midstream Partners, LP							225				2,062
Enterprise Products Partners L.P.							1,018				23,798
EQT Midstream Partners, LP							50				3,582
Global Partners LP							58				758
Magellan Midstream Partners, L.P.							55				3,744
Midcoast Energy Partners, L.P.							390				1,651
MPLX LP							373				9,681
ONEOK Partners, L.P.(4)							830				24,385
PBF Logistics LP							30				525
PennTex Midstream Partners, LP							35				352
Phillips 66 Partners LP							20				1,206
Plains All American Pipeline, L.P.(4)							356				7,615
Rose Rock Midstream, L.P.							2				18
Shell Midstream Partners, L.P.							138				4,910
Spectra Energy Partners, LP							37				1,727
Sprague Resources LP							173				3,062
Summit Midstream Partners, LP							216				2,725
Sunoco LP — Unregistered(5)							351				9,789
Sunoco Logistics Partners L.P.							277				6,835
Tallgrass Energy Partners, LP							160				5,610
USD Partners LP							28				193
Western Gas Partners, LP							345				13,539
Williams Partners L.P.(6)							737				14,531
											189,794
Midstream Company — 8.3%
Kinder Morgan, Inc.(7)							385				6,961
Spectra Energy Corp.							72				2,114
Targa Resources Corp.							156				4,184
											13,259
General Partner MLP — 4.9%
Energy Transfer Equity, L.P.(6)							132				925
Plains GP Holdings, L.P.(4)(8)							918				6,977
											7,902
Shipping MLP — 3.7%
Capital Product Partners L.P.							79				264
Capital Product Partners L.P. — Class B Units(5)(9)							606				3,340
Dynagas LNG Partners LP							93				865
Golar LNG Partners LP							94				1,372
											5,841

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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY

SCHEDULE OF INVESTMENTS

FEBRUARY 29, 2016

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

 

Description										No. of Shares/Units				Value
Other — 0.6%
Natural Resource Partners L.P. — held in escrow(5)(10)											20			$	237
SunCoke Energy Partners, L.P.											109				733
															970
Total Long-Term Investments — 136.6% (Cost — $278,554)															217,766
Short-Term Investment — 11.9%
Money Market Fund — 11.9%
JPMorgan 100% U.S. Treasury Securities Money Market Fund — Capital Shares, 0.17%(11) (Cost — $19,000)											19,000				19,000
Total Investments — 148.5% (Cost — $297,554)															236,766
		Strike Price				Expiration Date				No. of Contracts
Liabilities
Call Option Contracts Written(12)
Midstream Company
Kinder Morgan, Inc.		$	18.00				3/18/16				200				(16	)
Kinder Morgan, Inc.			18.50				3/18/16				200				(11	)
Total Call Option Contracts Written (Premium Received — $33)															(27	)
Debt															(70,000	)
Mandatory Redeemable Preferred Stock at Liquidation Value															(25,000	)
Income Tax Receivable															15,243
Deferred Income Tax Asset															39
Other Assets in Excess of Other Liabilities															2,352
Net Assets Applicable to Common Stockholders														$	159,373

 

(1)	Unless otherwise noted, equity investments are common units/common shares.

 

(2)	Includes limited liability companies.

 

(3)	All or a portion of dividends or distributions are paid-in-kind.

 

(4)	The Company believes that it is an affiliate of Plains All American Pipeline, L.P. and Plains GP Holdings, L.P. (“Plains GP”). The Company does not believe that it is an affiliate of ONEOK Partners, L.P.

 

(5)	Fair valued security, restricted from public sale.

 

(6)	On September 28, 2015, Energy Transfer Equity, L.P. (“ETE”) announced an agreement to combine with The Williams Companies, Inc. (“WMB”). WMB is the general partner of Williams Partners L.P.

 

(7)	Security or a portion thereof is segregated as collateral on option contracts written.

 

(8)	The Company holds an interest in Plains AAP, L.P. (“PAA GP”), which controls the general partner of Plains All American, L.P. The Company’s ownership of PAA GP is exchangeable into shares of Plains GP (which trades on the NYSE under the ticker “PAGP”) on a one-for-one basis at the Company’s option.

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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY

SCHEDULE OF INVESTMENTS

FEBRUARY 29, 2016

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

 

(9)

Class B Units are convertible on a one-for-one basis into common units of Capital Product Partners L.P. (“CPLP”) and are senior to the common units in terms of liquidation preference and priority of distributions. The Class B Units pay quarterly cash distributions and are convertible at any time at the option of the holder. The Class B Units paid a distribution of $0.21975 per unit for the first quarter.

 

(10)	The Company’s investment in Natural Resource Partners L.P. (“NRP”) consists of 20 common units (adjusted for a 1-for-10 reverse unit split in February 2016) that are in escrow to cover potential indemnification claims. On April 1, 2016, these common units were released from escrow.

 

(11)	Rate indicated is the current yield as of February 29, 2016.

 

(12)	Security is non-income producing.

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From time to time, certain of the Company’s investments may be restricted as to resale. For instance, private investments that are not registered under the Securities Act of 1933, as amended, cannot be offered for public sale in a non-exempt transaction without first being registered. In other cases, certain of the Company’s investments have restrictions such as lock-up agreements that preclude the Company from offering these securities for public sale.

At February 29, 2016, the Company held the following restricted investments:

 

Investment		Acquisition Date		Type of Restriction		Number of Units (in 000s)				Cost Basis (GAAP)				Fair Value				Fair Value Per Unit				Percent of Net Assets				Percent of Total Assets
Level 2 Investments
Plains GP Holdings, L.P.(1)		(2)		(3)			918			$	2,833			$	6,977			$	7.60				4.4	%			2.7	%
Level 3 Investments(4)
Capital Product Partners L.P.
Class B Units		(2)		(5)			606			$	3,877			$	3,340			$	5.51				2.1	%			1.3	%
Natural Resource Partners L.P.(6)
Common Units — held in escrow		(2)		(5)			20				2,795				237				11.56				0.2				0.1
Sunoco LP
Common Units		12/3/15		(5)			351				9,747				9,789				27.90				6.1				3.8
Total										$	16,419			$	13,366								8.4	%			5.2	%
Total of all restricted securities										$	19,252			$	20,343								12.8	%			7.9	%

 

(1)	The Company values its investment in Plains AAP, L.P. (“PAA GP”) on an “as exchanged” basis based on the public market value of Plains GP Holdings, L.P. (“Plains GP”).

 

(2)	Security was acquired at various dates during prior fiscal years.

 

(3)	The Company’s investment in PAA GP is exchangeable into shares of Plains GP on a one-for-one basis at the Company’s option. Upon exchange, the shares of Plains GP will be free of any restriction.

 

(4)	Securities are valued using inputs reflecting the Company’s own assumptions.

 

(5)	Unregistered or restricted security of a publicly-traded company.

 

(6)	The Company’s investment in NRP includes 20,481 NRP common units (adjusted for a 1-for-10 reverse unit split in February 2016) that are in escrow to cover potential indemnification claims. On April 1, 2016, these common units were released from escrow.

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At February 29, 2016, the cost basis of investments for federal income tax purposes was $238,430. At February 29, 2016, gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

Gross unrealized appreciation		$	33,882
Gross unrealized depreciation			(35,546	)
Net unrealized depreciation		$	(1,664	)

The identified cost basis of federal tax purposes is estimated based on information available from the Company’s portfolio companies. In some cases, this information is very limited. Accordingly, the actual cost basis may prove higher or lower than the estimated cost basis included above.

As required by the Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 820”), the Company has performed an analysis of all assets and liabilities (other than deferred taxes) measured at fair value to determine the significance and character of all inputs to their fair value determination.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.

 

•

Level 1 — Valuations based on 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 — Valuations based on 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 Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at February 29, 2016, and the Company presents these assets and liabilities by security type and description on its Schedule of Investments. Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the underlying investment.

 

		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		$	217,766			$	197,423			$	6,977	(1)		$	13,366
Short-term investments			19,000				19,000				—				—
Total assets at fair value		$	236,766			$	216,423			$	6,977			$	13,366
Liabilities at Fair Value
Call option contracts written		$	27			$	—			$	27			$	—

 

 

(1)

The Company’s investment in Plains AAP, L.P. (“PAA GP”) is exchangeable into shares of Plains GP Holdings, L.P. (“Plains GP”) on a one-for-one basis at the Company’s option. Plains GP trades on the NYSE under the ticker “PAGP”. The Company values its investment in PAA GP on an “as exchanged” basis based on the public market value of Plains GP and categorizes its investment as a Level 2 security for fair value reporting purposes.

For the three months ended February 29, 2016, there were no transfers between Level 1 and Level 2.

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The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended February 29, 2016.

 

		Equity Investments
Balance — November 30, 2015		$	4,699
Purchases			10,000
Issuances			—
Transfers out to Level 1 and 2			—
Realized gains (losses)			—
Unrealized gains (losses), net			(1,333	)
Balance — February 29, 2016		$	13,366

The purchase of $10,000 relates to the Company’s investment in Sunoco LP that was made in December 2015. The Company utilizes the beginning of reporting period method for determining transfers between levels.

The $1,333 of unrealized losses relate to investments that are still held at the end of the reporting period.

As required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification (ASC 815), the following are the derivative instruments and hedging activities of the Company.

The following table sets forth the fair value of the Company’s derivative instruments:

 

Derivatives Not Accounted for as Hedging Instruments		Statement of Assets and Liabilities Location		Fair Value as of February 29, 2016
Call options written		Call option contracts written		$	(27)

The following table sets forth the effect of the Company’s derivative instruments:

 

				For the Three  Months Ended February 29, 2016
Derivatives Not Accounted for as Hedging Instruments		Location of Gains/(Losses) on Derivatives Recognized in Income		Net Realized Gains/(Losses) on Derivatives Recognized in Income				Net Change in Unrealized Gains/(Losses) on Derivatives Recognized  in Income
Call options written		Options		$	—			$	6

The Company’s investments are concentrated in the energy sector. The focus of the Company’s portfolio within the energy sector may present more risks than if the Company’s portfolio were broadly diversified across numerous sectors of the economy. A downturn in the energy sector would have a larger impact on the Company than on an investment company that does not focus on the energy sector. The performance of securities in the energy sector may lag the performance of other industries or the broader market as a whole. Additionally, to the extent that the Company invests a relatively high percentage of its assets in the securities of a limited number of issuers, the Company may be more susceptible than a more widely diversified investment company to any single economic, political or regulatory occurrence. At February 29, 2016, the Company had the following investment concentrations.

 

Category		Percent of Long-Term Investments
Securities of energy companies			99.7%
Equity securities			100.0%
Securities of MLPs (1)			91.2%
Largest single issuer			11.2%
Restricted securities			9.3%

 

(1)	Securities of MLPs consist of preferred and common units of private entities structured as limited partnerships and publicly traded energy-related master limited partnerships and limited liability companies that are treated as partnerships for federal income tax purposes and their affiliates.

Securities valuation policies and other investment related disclosures are hereby incorporated by reference to the Company’s annual report previously filed with the Securities and Exchange Commission on form N-CSR on January 29, 2016 with a file number 811-22435.

Other information regarding the Company is available in the Company’s most recent annual report. This information is also available on the Company’s website at www.kaynefunds.com; or on the website of the Securities and Exchange Commission, www.sec.gov.

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Item 2.    Controls and Procedures.

(a) As of a date within 90 days of the filing date of this report, the principal executive officer and the principal financial officer concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) were effective based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) or 15d-15(b) under the Securities and Exchange Act of 1934, as amended.

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3.    Exhibits.

The certifications for the principal executive officer and the principal financial officer of the registrant as required by Rule  30a-2(a) under the 1940 Act are filed as exhibits to this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.