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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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)
     
717 Texas Avenue, Suite 3100, Houston, Texas   77002
     
(Address of principal executive offices)   (Zip code)
David Shladovsky, Esq.
KA Fund Advisors, LLC, 717 Texas Avenue, Suite 3100, 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, 2011
Date of reporting period: August 31, 2011
 
 

 

TABLE OF CONTENTS

Item 1: Scheduled Investments
Item 2: Controls and Procedures
Item 3: Exhibits
SIGNATURES
EX-99.CERT

Table of Contents

Item 1: Scheduled Investments
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AUGUST 31, 2011
(amounts in 000’s)
(UNAUDITED)
 
                 
    No. of
 		       
Description
  Shares/Units     Value  
 
Long-Term Investments — 131.3%
               
Equity Investments(1) — 108.3%
               
United States — 108.3%
               
Public MLP, MLP Affiliate and Other Public Equity — 77.2%
               
Alliance Holdings GP, L.P. 
    46     $ 2,194  
Boardwalk Pipeline Partners, LP
    36       904  
Buckeye Partners, L.P. 
    111       6,988  
Buckeye Partners, L.P. — Unregistered, Class B Units(2)(3)
    93       5,174  
Capital Product Partners L.P. 
    225       1,529  
Chesapeake Midstream Partners, L.P. 
    37       1,022  
Crestwood Midstream Partners LP
    80       2,054  
Crude Carriers Corp.(4) 
    81       762  
DCP Midstream Partners, LP
    211       8,186  
El Paso Pipeline Partners, L.P. 
    179       6,585  
Enbridge Energy Partners, L.P. 
    270       7,685  
Energy Transfer Equity, L.P. 
    265       10,120  
Energy Transfer Partners, L.P. 
    321       14,462  
Enterprise Products Partners L.P. 
    368       15,518  
Exterran Partners, L.P. 
    213       4,866  
Global Partners LP
    205       4,083  
Inergy, L.P. 
    96       2,717  
Kinder Morgan Management, LLC(2)
    91       5,522  
MarkWest Energy Partners, L.P. 
    55       2,633  
Navios Maritime Partners L.P. 
    26       409  
Oiltanking Partners, L.P.(5)
    60       1,432  
ONEOK Partners, L.P. 
    299       13,006  
Penn Virginia Resource Partners, L.P. 
    348       9,011  
Plains All American Pipeline, L.P.(6)
    103       6,231  
Regency Energy Partners L.P. 
    392       9,357  
SandRidge Permian Trust(5)
    166       3,127  
Spectra Energy Partners, LP
    34       1,000  
Targa Resources Partners LP
    100       3,439  
TC PipeLines, LP
    118       5,140  
Teekay LNG Partners L.P. 
    56       1,879  
Teekay Offshore Partners L.P. 
    23       621  
Teekay Tankers Ltd. 
    78       505  
Tesoro Logistics LP
    189       4,432  
TransMontaigne Partners L.P. 
    59       2,010  
VOC Energy Trust
    97       2,167  
Western Gas Partners, LP
    43       1,576  
Williams Partners L.P. 
    130       7,054  
                 
              175,400  
                 
Private MLP and Other Private Equity(3)(6)— 31.1%
               
Direct Fuels Partners, L.P. — Class A Common Units
    2,500       32,500  
Direct Fuels Partners, L.P. — Convertible Preferred Units(7)
    144       2,911  
Direct Fuels Partners, L.P. — Class D Preferred Units(8)
    324       6,723  
Plains All American GP LLC
    3       5,151  
ProPetro Services, Inc.(4)
    150,097       5,519  
VantaCore Partners LP(2)
    1,465       13,914  
VantaCore Partners LP — Class A Preferred Units(2)(9)
    113       1,750  
VantaCore Partners LP — Class B Preferred Units(2)(10)
    133       2,335  
                 
              70,803  
                 
Total Equity Investments (Cost $233,323)
            246,203  
                 
 
 
 

 

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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AUGUST 31, 2011
(amounts in 000’s)
(UNAUDITED)
                                 
    Interest
 		    Maturity
 		    Principal
 		       
Description
  Rate     Date     Amount     Value  
 
Debt Investments — 23.0%
                               
United States — 22.1%
                               
Midstream — 6.6%
                               
Crestwood Holdings Partners, LLC
    (11)       10/1/16     $ 6,819     $ 6,887  
Crestwood Midstream Partners LP
    7.750 %     4/1/19       8,335       8,002  
                                 
                              14,889  
                                 
Upstream — 6.1%
                               
Carrizo Oil & Gas, Inc. 
    8.625       10/15/18       3,000       3,075  
CrownRock LP
    10.000       8/15/16       3,250       3,024  
Eagle Rock Energy Partners, L.P. 
    8.375       6/1/19       1,000       984  
Laredo Petroleum, Inc. 
    9.500       2/15/19       6,500       6,906  
                                 
                              13,989  
                                 
Other Energy — 9.4%
                               
Calumet Specialty Products Partners, L.P. 
    9.375       5/1/19       2,000       1,940  
Foresight Energy LLC
    9.625       8/15/17       5,000       5,050  
Penn Virginia Resource Partners, L.P. 
    8.250       4/15/18       2,925       2,852  
ProPetro Services, Inc.(3)(6)
    (12)       2/15/12       11,487       11,487  
                                 
                              21,329  
                                 
Total United States (Cost $75,446)
    50,207  
         
Canada — 0.9%
                               
Upstream — 0.9%
                               
Southern Pacific Resources Corp. (Cost $2,042)
    (13)       1/15/16       1,995       2,005  
                                 
Total Debt Investments (Cost $77,488)
    52,212  
         
Total Long-Term Investments (Cost $310,811)
    298,415  
         
                                 
Repurchase Agreement — 1.5%
                               
J.P. Morgan Securities Inc. (Agreement dated 8/31/2011 to be repurchased at $3,332), collateralized by $3,352 in U.S. Treasury securities (Cost $3,332)
    —       9/1/11               3,332  
                                 
Total Investments — 132.8% (Cost $314,143)
    301,747  
         
Senior Secured Credit Facility Borrowings
    (70,000 )
Other Liabilities in Excess of Other Assets
    (4,471 )
         
Net Assets
  $ 227,276  
         

 

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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AUGUST 31, 2011
(amounts in 000’s)
(UNAUDITED)
 
 
(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.
 
(4) Security is non-income producing.
 
(5) Security is not currently paying cash distributions, but is expected to pay cash distributions within the next 12 months.
 
(6) Kayne Anderson Energy Development Company (the “Company”) believes that it may be an affiliate of Direct Fuels Partners, L.P. (“Direct Fuels”) and that it is an affiliate of Plains All American GP LLC, Plains All American Pipeline, L.P., ProPetro Services, Inc. (“ProPetro”) and VantaCore Partners LP (“VantaCore”).
 
(7) 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.
 
(8) 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.
 
(9) 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 are senior to VantaCore’s Common Units in liquidation preference.
 
(10) The Class B Preferred Units have a liquidation preference of $17.50 per unit and were issued on August 3, 2011 in connection with VantaCore’s 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.
 
(11) 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 August 31, 2011).
 
(12) Floating rate first lien term loan. Effective January 28, 2011, security pays interest in-kind that is added to the outstanding principal of the term loan at a rate of LIBOR + 1,000 basis points, with a 5% LIBOR floor (15.00% as of August 31, 2011).
 
(13) Floating rate second lien secured term loan. Security pays interest at a rate of LIBOR + 850 basis points, with a 2% LIBOR floor (10.50% as of August 31, 2011).

 

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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 August 31, 2011, the Company held the following restricted investments.
 
                                                             
                Number of
 		                               
                Units,
 		                               
                Warrants, or
 		                Fair Value
 		    Percent
 		    Percent
 		 
        Acquisition
 		  Type of
 		  Principal ($)
 		    Cost
 		    Fair
 		    per Unit/
 		    of Net
 		    of Total
 		 
Investment   Security   Date   Restriction   (in 000s)     Basis     Value     Warrant     Assets     Assets  
 
Level 3 Investments(1)
                                                           
Buckeye Partners, L.P. 
  Class B Units   6/10/11   (2)     93     $ 5,002     $ 5,174     $ 55.85       2.3 %     1.7 %
Direct Fuels Partners, L.P.(3)
  Class A Common Units   6/11/07   (4)     2,500       41,359       32,500       13.00       14.3       10.5  
Direct Fuels Partners, L.P. 
  Class A Convertible Preferred Units(5)   5/14/09   (4)     96       1,952       1,939       20.10       0.8       0.6  
Direct Fuels Partners, L.P. 
  Class B Convertible Preferred Units(5)   8/25/09   (4)     27       538       546       20.30       0.2       0.2  
Direct Fuels Partners, L.P. 
  Class C Convertible Preferred Units(5)   11/20/09   (4)     20       408       426       21.00       0.2       0.1  
Direct Fuels Partners, L.P. 
  Class D Preferred Units   (6)   (4)     324       6       6,723       20.75       3.0       2.2  
Plains All American GP LLC
  Common Units   (7)   (4)     3       4,885       5,151       1,478       2.3       1.7  
ProPetro Services, Inc. 
  Common Shares   2/15/07   (4)     150,097       13       5,519       0.04       2.4       1.8  
ProPetro Services, Inc. 
  Secured Term Loan   2/15/07   (4)   $ 11,487       36,776       11,487       n/a       5.1       3.7  
VantaCore Partners LP(8)
  Class A Common Units   (7)   (4)     1,465       21,425       13,914       9.50       6.1       4.4  
VantaCore Partners LP
  Class A Preferred Units   (9)   (4)     113       —       1,750       15.50       0.8       0.6  
VantaCore Partners LP(10)
  Class B Preferred Units   8/3/11   (4)     133       1,868       2,335       17.50       1.0       0.7  
                                                             
Total
  $ 114,232     $ 87,464               38.5 %     28.2 %
                                         
Level 2 Investments(11)
                                                           
Calumet Specialty Products Partners, L.P. 
  Senior Notes   4/15/11   (2)   $ 2,000     $ 2,000     $ 1,940       n/a       0.9 %     0.6 %
Crestwood Holdings Partners, LLC
  Secured Term Loan   (7)   (4)   $ 6,819       6,726       6,887       n/a       3.0       2.2  
Crestwood Midstream Partners LP
  Senior Notes   (7)   (2)   $ 8,335       8,353       8,002       n/a       3.5       2.6  
CrownRock LP
  Senior Notes   8/12/11   (4)   $ 3,250       3,012       3,024       n/a       1.3       1.0  
Eagle Rock Energy Partners, L.P. 
  Senior Notes   5/24/11   (2)   $ 1,000       993       984       n/a       0.5       0.3  
Foresight Energy LLC
  Senior Notes   8/6/10   (4)   $ 5,000       4,972       5,050       n/a       2.2       1.6  
Laredo Petroleum, Inc. 
  Senior Notes   (7)   (4)   $ 6,500       6,729       6,906       n/a       3.0       2.2  
Southern Pacific Resources Corp. 
  Secured Term Loan   5/5/11   (4)   $ 1,995       2,042       2,005       n/a       0.9       0.7  
                                                             
Total
  $ 34,827     $ 34,798               15.3 %     11.2 %
                                         
Total of all restricted securities
  $ 149,059     $ 122,262               53.8 %     39.4 %
                                         
 
 
(1) Securities are valued using inputs reflecting the Company’s own assumptions.
 
(2) Unregistered security of a public company.
 
(3) The Company’s 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. During the three months ended February 28, 2011, the Company received Class D Preferred Units in lieu of cash distributions.
 
(7) These securities were acquired at various dates throughout the nine months ended August 31, 2011 and/or in prior years.

 

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(8) The Company’s 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.
 
(9) 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.
 
(10) The Class B Preferred Units have a liquidation preference of $17.50 per unit and were issued on August 3, 2011 in connection with VantaCore’s 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.
 
(11) 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. These securities have limited trading volume and are not listed on a national exchange.
At August 31, 2011, the cost basis of investments for federal income tax purposes was $300,555. At August 31, 2011, gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
         
Gross unrealized appreciation of investments
   $ 39,499  
Gross unrealized depreciation of investments
     (38,307 )
 
      
Net unrealized appreciation
   $ 1,192  
 
      
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 in this footnote.
As required by the Fair Value Measurement and Disclosures of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, the Company has performed an analysis of all assets and liabilities measured at fair value to determine the significance and character of all inputs to their fair value determination.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:
  •   Level 1 — Quoted unadjusted prices for identical instruments in active markets 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 Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.
Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the underlying investment. For instance, the Company’s repurchase agreements, which are collateralized by U.S. Treasury notes, are generally high quality and liquid; however, the Company reflects these repurchase agreements as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market.
The following table presents the Company’s assets measured at fair value on a recurring basis at August 31, 2011, and the Company presents these assets by security type and description on its Schedule of Investments.
                                 
          Quoted
Prices in
 		    Prices
with Other
 		    One or
More
 		 
          Active
Markets
 		    Observable
Inputs
 		    Unobservable
Inputs
 		 
Assets at Fair Value     Total     (Level 1)     (Level 2)     (Level 3)  
 
Equity investments
  $ 246,203     $ 170,226     $ —     $ 75,977  
Debt investments
    52,212       —       40,725       11,487  
Short-term investments
    3,332       —       3,332       —  
Other receivables(1)
    5,040       —       —       5,040  
                                 
Total assets at fair value
  $  306,787     $   170,226     $   44,057     $   92,504  
                                 
 
 
(1) On April 18, 2011, the Company completed its sale of International Resource Partners (“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 Company’s estimated fair value of its portion of the escrow ($5,040). On July 13, 2011, the Company received proceeds totaling $2,035 for certain post-closing adjustments relating to the sale of IRP.

 

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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 nine months ended August 31, 2011.
                         
    Nine Months Ended August 31, 2011  
    Total     Debt     Equity  
 
Balance — November 30, 2010
  $ 143,811     $ 4,500     $ 139,311  
Sale(1)
    (102,045 )     —       (102,045 )
Realized gains (losses)
    73,898       —       73,898  
Unrealized gains (losses), net(2)
    (43,214 )     6,987       (50,201 )
Purchases
    16,918       —       16,918  
Issuances
    3,146       —       3,146  
Transfer out
    (5,050 )     —       (5,050 )
Settlements(3)
    5,040       —       5,040  
                         
Balance — August 31, 2011
  $ 92,504     $ 11,487     $ 81,017  
                         
 
 
(1) Relates to the sale of the Company’s investment in IRP.
 
(2) Of the $43,214 of net unrealized losses presented above, $59,614 of the unrealized loss results from the reversal of the unrealized gain attributable to IRP that was realized upon the sale of the Company’s investment during the fiscal second quarter 2011. The remaining unrealized gains of $16,400 relate to investments that are still held at August 31, 2011.
 
(3) 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.
 
The purchases of $16,918 for the nine months ended August 31, 2011 relate to the Company’s purchase of Class B Preferred Units of VantaCore, a private investment in public equity (“PIPE investment”) in Regency Energy Partners L.P., the investment in Plains All American GP LLC and the Class B Units of Buckeye Partners, L.P. The issuances of $3,146 for the nine months ended August 31, 2011 relate to the issuance of Class D Preferred Units of Direct Fuels and the issuance of Class A Preferred Units of VantaCore. The Company’s investment in the common units of Regency Energy Partners L.P., which is noted as a transfer out of Level 3 in the table above, became readily marketable during the nine months ended August 31, 2011.
The Company did not have any liabilities that were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at August 31, 2011.
Securities valuation policies and other investment related disclosures are hereby incorporated by reference to the Company’s semi-annual report previously filed with the Securities and Exchange Commission on form N-CSR on July 22, 2011 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 from the filing date of this report, the principal executive officer and 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 (the “Act”)), were effective based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities and Exchange Act of 1934.
     (b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 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
  1.   The certifications of the registrant as required by Rule 30a-2(a) under the Act are 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.
             
    KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY    
 
            
    /s/ Kevin S. McCarthy    
         
 
  Name:   Kevin S. McCarthy    
 
  Title:   Chairman of the Board of Directors,    
 
      President and Chief Executive Officer    
 
  Date:   October 21, 2011    
     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.
             
    /s/ Kevin S. McCarthy    
         
 
  Name:   Kevin S. McCarthy    
 
  Title:   Chairman of the Board of Directors, President and Chief Executive Officer    
 
  Date:   October 21, 2011    
 
            
    /s/ Terry A. Hart    
         
 
  Name:   Terry A. Hart    
 
  Title:   Chief Financial Officer and Treasurer    
 
  Date:   October 21, 2011