Kayne Anderson Energy Development Company
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER:
814-00725
KAYNE ANDERSON ENERGY
DEVELOPMENT COMPANY
(Exact name of registrant as
specified in its charter)
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Maryland
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20-4991752
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(State of
Incorporation)
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(I.R.S. Employer Identification
Number)
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1100 Louisiana,
Suite 4550
Houston, Texas
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77002
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(Address of principal executive
offices)
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(Zip
Code)
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Registrants telephone number, including area code:
(713) 493-2020
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, par
value
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New York Stock
Exchange
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$0.001 per
share
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act)
Yes o No þ
The aggregate market value of common stock held by
non-affiliates of the Registrant on January 31, 2007 based
on the closing price on that date of $24.30 on the New York
Stock Exchange was $236,499,993. For the purposes of calculating
this amount, only the Registrants investment adviser and
all directors and executive officers of the Registrant and the
Registrants investment adviser have been treated as
affiliates. There were 10,000,060 shares of the
Registrants common stock outstanding as of
January 31, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2007
Annual Meeting of Stockholders to be filed not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K
are incorporated by reference into Part III of this
Form 10-K.
PART I
About
Our Company
Kayne Anderson Energy Development Company and its subsidiaries
(we, us, and our) is a
non-diversified, closed-end management investment company
organized under the laws of the State of Maryland that has
elected to be treated as a business development
company (BDC) under the Investment Company Act
of 1940, as amended (1940 Act). In addition, we
elected to be treated as a regulated investment company
(RIC) for tax purposes under the Internal Revenue
Code of 1986 (Code), as amended.
We invest primarily in energy companies that are not publicly
traded (private). Our primary investment objective
is to generate both current income and capital appreciation
primarily through debt and equity investments. We will seek to
achieve this objective by investing at least 80% of our net
assets together with the proceeds of any borrowings (our
total assets) in securities of Energy Companies,
which include Midstream Energy Companies, Upstream and Other
Energy Companies.
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Midstream Energy Companies. Businesses that
operated assets used to gather, transport, process, treat,
terminal and store natural gas, natural gas liquids, propane,
crude oil or refined petroleum products.
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Upstream Energy Companies. 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.
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Other Energy Companies. Businesses engaged in
the following:
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The ownership, leasing, management, production, processing and
sale of coal and coal reserves;
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The marine transportation of crude oil, refined petroleum
products, liquefied natural gas, as well as other energy-related
natural resources using tank vessels, bulk carriers and very
large gas carriers; and
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The refining, marketing and distribution of refined energy
products, such as motor gasoline and propane to retail customers
and industrial end-users.
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We expect that a key focus area for our investments in the
energy industry will continue to be equity and debt investments
in Midstream Energy Companies structured as limited
partnerships. We also expect to evaluate equity and debt
investments in Other Energy Companies, and debt investments in
Upstream Energy Companies. We refer to these investments as our
Targeted Investments. Under current market
conditions, we expect that our Targeted Investments will
generally range in size from $10 million to
$60 million, although a few investments may be in excess of
this range.
Our common stock began trading on the New York Stock Exchange
(NYSE) on September 21, 2006 through our
initial public offering of 10,000,000 shares of common
stock at $25.00 per share. After deducting underwriting
discounts and offering costs totaling $1.68 per share, our
initial net asset value was $23.32 per share. As of
November 30, 2006, over 44% of our net assets were invested
in public and private securities of Energy Companies.
As of November 30, 2006, equity and fixed income
investments represented $63.9 million or 60.0% and
$42.6 million or 40.0%, respectively, of our long-term
investments.
Recent
Developments
On February 15, 2007, the Company invested approximately
$34 million in a second lien term loan issued by ProPetro
Services, Inc. (ProPetro), a private oilfield
service company that provides a broad range of drilling and
production related services to oil and natural gas exploration
and production companies in Texas, Oklahoma, Utah and Colorado.
In conjunction with its investment in the term loan, the Company
received 2,904,620 warrants to purchase shares in ProPetro,
which represents an 8.4% fully diluted interest in ProPetro.
1
On December 28, 2006, we and other institutional investors
formed Millennium Midstream Partners, LP (the
Partnership), a private limited partnership. The
Partnership was formed to acquire the assets of Millennium
Midstream Energy, LLC and its affiliates, which consist of
gathering, processing and pipeline assets in Texas and
Louisiana. We made an investment of $47.5 million in the
Partnership. Through our investment, we received 2,375,000
Class B common units that represent a 39% limited
partnership interest in Millennium Midstream Partners, LP;
2,375,000 Class A common warrants, and 212 incentive
distribution rights.
Our
Top Ten Portfolio Investments as of November 30,
2006
Listed below are our top ten portfolio investments as of
November 30, 2006 represented as a percentage of our total
assets, totaling $243.6 million as of this date.
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Percent
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Public /
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Amount
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of Total
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Investment
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Private
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Sector
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($ in millions)
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Assets
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1.
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Trident Resources Corp.
(1)
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Private
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Upstream
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$
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16.7
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6.9
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2.
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Kinder Morgan Management, LLC
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Public
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Midstream
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9.8
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4.0
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3.
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Semgroup, L.P.
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Private
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Midstream
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7.6
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3.1
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4.
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Targa Resources, Inc.
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Private
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Midstream
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7.3
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3.0
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5.
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Energy Transfer Equity, L.P.
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Public
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Midstream
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6.4
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2.6
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6.
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CDX Funding, LLC
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Private
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Upstream
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6.4
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2.6
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7.
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Enterprise Products Partners
L.P.
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Public
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Midstream
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5.5
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2.3
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8.
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ONEOK Partners, L.P.
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Public
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Midstream
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5.1
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2.1
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9.
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Calumet Specialty Products
Partners, L.P.
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Public
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Midstream
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4.3
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1.8
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10.
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MarkWest Energy Partners, L.P.
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Public
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Midstream
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3.6
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1.5
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TOTAL
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$
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72.7
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29.9
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%
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(1) |
Our investment in Trident Resources Corp. includes our
investment in Trident Exploration Corp., the wholly-owned,
primary subsidiary of Trident Resources Corp.
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About
Our Investment Adviser
KA Fund Advisors, LLC (KAFA), a subsidiary of
Kayne Anderson Capital Advisors, L.P., (KACALP) and
together with KAFA, (Kayne Anderson), externally
manages and advises us pursuant to our investment management
agreement. KAFA is registered as an investment adviser under the
Investment Advisers Act of 1940. Kayne Anderson is a leading
investor in both public and private energy companies. At
November 30, 2006, Kayne Anderson managed approximately
$7.0 billion including $5.9 billion in securities of
energy companies.
We believe that KAFAs market knowledge, experience and
industry relationships enable KAFA to identify and exploit
investment niches and opportunities which are believed to be
less understood and generally not pursued by the broader
investment community. Further, the senior professionals of KAFA
have developed a strong reputation in the energy sector and have
many long-term relationships with industry executives, which we
believe provides us an important advantage in sourcing and
structuring transactions.
As of January 31, 2007, KAFA serves as the investment
adviser to Kayne Anderson MLP Investment Company (NYSE: KYN) and
Kayne Anderson Energy Total Return Fund, Inc. (NYSE: KYE), which
are two closed-ended investment management investment companies
registered under the 1940 Act. Kayne Anderson MLP Investment
Company is a publicly traded non-diversified fund that invests
primarily in MLPs and other energy companies. Kayne Anderson
Energy Total Return Fund, Inc. is a publicly traded
non-diversified fund that invests primarily in securities of
companies engaged in the energy industry, including MLPs, MLP
affiliates, royalty trusts and other energy companies.
Our portfolio is managed by two of KAFAs Senior Managing
Directors, Kevin S. McCarthy, our Chief Executive Officer who
focuses on private investments, and J. C. Frey, who focuses on
investments in publicly traded securities of MLPs and other
Energy Companies. Messrs. McCarthy and Frey draw on the
research and analytical
2
support of David LaBonte, a Senior Managing Director of KACALP;
Richard Kayne, KACALPs Chief Executive Officer; and Robert
V. Sinnott, one of our directors and KACALPs President and
Chief Investment Officer. Mr. Sinnott has been principally
responsible for executing Kayne Andersons energy industry
investments in general, and Messrs. Kayne and Sinnott have
approximately 70 years of combined investment experience.
About
the Characteristics of Energy Companies in Which We
Invest
We believe that we have a competitive advantage through the
relationship with KAFA whose market knowledge, experience and
industry relationships contribute to our ability to seek
investments in public and non-traded companies that possess the
following characteristics to create an attractive investment
portfolio.
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Stable Cash Flows. Specifically, our
investments in Midstream Energy Companies generate stable cash
flows, as companies in this sector have a substantial portion of
their assets in fee-based businesses with limited commodity
price risk and exposure. Tariffs charged by these companies to
their customers are often regulated at the federal or state
level and subject to escalation based in part on the rate of
inflation. Our investments in Upstream Energy Companies focus on
lower-risk assets such as exploitation and development
opportunities and assets with long-lived production. We seek
investments in Other Energy Companies, such as coal and marine
transportation, which are often characterized by long-term
contracts that provide stable earnings and cash flows.
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Consistent and Predictable Demand. The Energy
Information Administration, a statistical agency of the
U.S. Department of Energy, expects energy consumption to
grow at a rate of 1.1% per annum until 2030. We believe
that Upstream Energy Companies will continue to produce oil and
gas at the maximum practicable rate for their oil and gas wells
and that production will be relatively predictable. Midstream
Energy Companies will continue to benefit from related increases
in demand for gathering, processing and transporting products.
Other Energy Companies, such as marine transportation companies
and refining, marketing and distribution companies, are also
expected to benefit as the end-use products are transported and
sold to industrial and retail users.
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Increased Cash Flows for Internal
Growth. Midstream Energy Companies generate
revenues based in part on the volumes of products handed or
transported, and volume increases have a significant impact on
earnings and cash flow growth, since midstream assets generally
have a high percentage of fixed costs and low percentage of
variable costs. Annual fees and tariffs increases tied to an
index, such as the Producer Price Index, may also positively
impact the cash flow stream of companies in which we invest.
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Substantial Growth for New Projects. Increased
drilling activity in basins that were previously thought to be
uneconomic in a lower commodity price environment is a result of
the substantial increase in oil and gas prices over the past two
years. This increased activity has created the need for
additional midstream infrastructure to move new production to
market, and many of our investments include expansion of
existing infrastructure or investments in new projects to meet
these production needs.
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Limited Commodity Price Risk. We target
investments in which the direct and indirect commodity price
risk is limited. Some of our investments may have more
substantial commodity price risk, but these companies use
appropriate financial risk management products, such as
commodity swaps, to mitigate exposure to commodity price
fluctuations.
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Proven Management Teams. We intend to make
investments in companies with management teams that have a
proven track record of success, but who have limited access to
capital markets or who seek to raise capital through private
sources. In general, these management teams will often have
substantial knowledge and focus in a particular geographic area
or with respect to certain types of assets. We expect that the
extensive experience and network of business relationships of
KAFA throughout the energy industry will allow us to identify
management teams that meet these criteria.
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Structures
of our Targeted Investments
Our Targeted Investments will be made in the entities or
securities described below, and certain of these investments
will be made directly or indirectly through our wholly-owned
subsidiaries.
3
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Private MLPs. We intend to continue to invest
in private Midstream and Other Energy Companies structured as
limited partnerships (Private MLPs). These
partnerships will generally be formed by external management
teams of such Midstream or Other Energy Companies for the
purpose of acquiring and operating assets in anticipation of an
initial public offering as an MLP. In general, we will purchase
common units, subordinated debt and warrants in such Private
MLPs, with management receiving subordinated and general partner
(GP) units. In general, as compensation for
structuring and providing financing, we will receive a portion
of the incentive cash distribution rights (IDRs),
which receive a disproportionate share of the cash distributions
above stated levels.
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Joint Venture MLPs. We intend to invest in
other private limited partnerships that are partially owned and
controlled by Upstream and Other Energy Companies (Joint
Venture MLPs). We seek to work with both private and
public Energy Companies to identify midstream assets within
their existing businesses that are better suited for a separate
limited partnership. These assets are likely to include
gathering systems connected to the companys producing
properties and, to a lesser extent, related processing and
storage assets. In general, we intend to purchase common units
and warrants in such an entity, with the Energy Company
retaining common, subordinated and GP units, including
substantially all of the IDRs. We may also purchase subordinated
debt of a wholly-owned taxable subsidiary of ours whose assets
are common units of a Joint Venture MLP.
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Private GPs. We intend to invest in private
limited partnerships or limited liability companies that own the
common, subordinated, GP interests and IDRs in the related MLP
(Private GPs). Like MLPs, the Private GPs will make
cash distributions to their equity investors in an amount equal
to the entitys distributable cash flow. In general, we
will purchase common units, subordinated debt and warrants in
such an entity, with the GP sponsor receiving common and GP
units.
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Subordinated debt or redeemable preferred stock with equity
features. We intend to continue to invest in
subordinated debt or preferred stock with warrants or other
equity features of private Energy Companies (Mezzanine
Investments). We will seek to work with existing private
Midstream Energy Companies, including those that are controlled
by private equity firms, to finance the acquisition or
construction of additional midstream assets or to fund a
redemption of, or dividend on, the existing equity. These
Mezzanine Investments typically will have a stated interest rate
or preferred dividend, payable in cash, and may have warrants or
other equity features that will allow us to participate in the
potential increase in equity value of such entities.
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Greenfield Ventures. We intend to invest in
preferred equity interests and subordinated debt of private
joint ventures formed to construct or build energy-related
projects with limited or no operating history (Greenfield
Ventures). We will seek to work with existing MLPs or
their GPs to form joint ventures to construct greenfield
projects. Greenfield projects may include construction of a new
pipeline, processing plant or storage facility or some other
asset that is integrated with the MLPs existing assets. We
anticipate that our equity investments in these joint ventures
will generally have a preferred return over the sponsors
interest. Our investment may be structured as
pay-in-kind
securities with minimal or no cash interest or dividends until
the construction period is completed, at which time interest
payments or dividends would be paid in cash or the securities
would be redeemed.
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Second lien bank loans. We intend to continue
to invest in second lien and other bank loans for private
Upstream and Midstream Energy Companies. These investments
typically are floating-rate senior secured securities or loans
that may be subordinated to a first lien term loan or other
senior debt in right of payment and are secured by second
priority liens.
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Publicly Traded MLPs. We intend to continue to
invest up to 30% of our total assets in publicly traded equity
and debt securities of MLPs and their affiliates. We anticipate
reducing exposure to these investments over time as our
portfolio becomes more fully invested and smaller qualified
investment opportunities become available.
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4
On-Going
Relationships with and Monitoring of Portfolio
Companies
We closely monitor each investment we make, and for many of our
private investments, we maintain regular dialogue with both the
management team and other stakeholders and seek specifically
tailored financial reporting from these private investments. In
addition, our senior management investment personnel may often
seek board seats for the private companies in which we invest.
In addition to covenants and other contractual rights, following
our investment, we seek to exert significant influence of our
private investments through board participation, when
appropriate, and by actively working with management on
strategic initiatives.
Managerial
Assistance
As a BDC, we offer, and must provide upon request, managerial
assistance to our private portfolio companies. This assistance
could involve, among other things, monitoring the operations of
our private portfolio companies, participating in board and
management meetings, consulting with and advising officers of
private portfolio companies and providing other organizational
and financial guidance. We may receive fees for these services,
and KAFA provides such managerial assistance on our behalf to
private portfolio companies that request this assistance.
Staffing
We do not currently have any employees and do not expect to have
any employees. KAFA provides services necessary for our
business, pursuant to the terms of the investment management
agreement. Our executive officers are comprised of Kevin S.
McCarthy, President and Chief Executive Officer; J.C. Frey,
Vice President, Assistant Secretary and Assistant Treasurer;
Terry A. Hart, Chief Financial Officer and Treasurer; David J.
Shladovsky, Chief Compliance Officer and Secretary; James C.
Baker, Vice President; and Ron M. Logan, Jr., Vice
President. Messrs. McCarthy and Frey serve as our portfolio
managers.
KAFA is operated by Mr. McCarthy and other senior personnel
of KACALP. Except for Messrs. Shladovsky and Frey, our
executive officers are employees of KAFA and are located in
Houston. Some of the services necessary for the origination and
administration of our investment portfolio are provided by
investment professionals located in Los Angeles who are, and
will continue to be, employed by KACALP.
Operating
and Regulatory Structure
We are a BDC under the 1940 Act and have elected to be treated
as a RIC under Subchapter M of the Code. As a RIC, we generally
will not be required to pay federal income taxes on any ordinary
income or capital gains that we receive from our portfolio
investments and our taxable subsidiaries and distribute to our
stockholders as dividends. To qualify as a RIC and maintain our
RIC status, we must meet specific
source-of-income
and asset diversification requirements and distribute in each of
our taxable years at least 90% of the sum of our
investment company taxable income (which generally
consists of ordinary income and realized net short-term capital
gains in excess of realized net long-term capital losses, if
any) and net tax-exempt interest out of assets legally available
for distribution. Our investments in equity securities issued by
certain private limited partnerships in which we invest may not
produce qualifying income for purposes of determining our
compliance with the 90% gross income test applicable to RICs. As
a result, we expect to form wholly-owned taxable subsidiaries to
make or hold certain investments in private limited
partnerships. Although, as a RIC, dividends received by us from
our taxable subsidiaries and distributed to our stockholders
will not be subject to federal income taxes, our taxable
subsidiaries will generally be subject to federal and state
income taxes on their income. The dividends received from such
taxable subsidiaries will be qualifying income for purposes of
the 90% gross income test. In general, the amount of cash
received from such wholly-owned subsidiaries will equal the
amount of cash received from the limited partnerships as reduced
by income taxes paid by such subsidiaries.
As a BDC, we will also generally be prohibited from acquiring
assets other than qualifying assets unless, after
giving effect to the acquisition, at least 70% of our total
assets are qualifying assets. Qualifying assets generally
include securities of eligible portfolio companies, cash, cash
equivalents, U.S. government securities and high-quality
debt instruments maturing in one year or less from the time of
investment. The Securities and Exchange Commission
(SEC) recently adopted new rules under the 1940 Act
to expand the definition of eligible
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portfolio company to include all private companies and
companies whose securities are not listed on a national
securities exchange. The new rules also permit us to include as
qualifying assets certain follow-on investments in companies
that were eligible portfolio companies at the time of initial
investment but that no longer meet the definition. The new rules
became effective November 30, 2006. We are no longer
required to determine the eligibility of a portfolio company by
reference to whether or not it has outstanding margin
securities. In addition to the adoption of the rules described
above, the SEC also proposed for comment a rule that would
include as eligible portfolio companies certain public companies
that have listed their securities on a national securities
exchange, as long as their public float
and/or
market capitalization are below a specified level. We will
continue to monitor closely any developments with respect to the
definition of eligible portfolio company, and intend to adjust
our investment focus as needed to comply with
and/or take
advantage of the new rules as well as any other regulatory,
legislative, administrative or judicial actions in this area.
As a BDC, we must adhere to certain substantive regulatory
requirements, and the 1940 Act contains certain provisions and
restrictions relating to transactions between BDCs and their
affiliates, including KAFA, principal underwriters, and our
affiliates. The majority of our directors must be persons other
than interested persons as defined in the 1940 Act,
and under the 1940 Act, we may not change the nature of our
business so as to cease to be, or to withdraw our election as, a
BDC unless first approved by the majority of our outstanding
voting securities.
Codes
of Ethics
We have adopted a supplemental antifraud code of ethics which
applies to, among others, our principal and senior financial
officers, including our principal executive officer, principal
financial officer. Our supplemental antifraud code of ethics is
filed as Exhibit 14.1 of this Annual Report on
Form 10-K.
The Company intends to disclose any amendments to or waivers of
required provisions of this code on
Form 8-K.
We have also adopted a code of ethics pursuant to
Rule 17j-1
under the 1940 Act that establishes personal trading procedures
for employees designated as access persons. Access persons may
engage in personal securities transactions, including
transactions involving securities that are currently held by us
or, in limited circumstances, that are being considered for
purchase or sale by us, subject to certain general restrictions
and procedures set forth in our code of ethics. Our code of
ethics is filed as Exhibit 99.2(R)(1) to pre-effective
Amendment No. 5 to our Registration Statement on
Form N-2,
filed with the Commission on September 18, 2006 and can be
accessed via the SECs Internet site at http://www.sec.gov.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 (the Act) imposes a
wide variety of regulatory requirements for publicly-held
companies and their insiders. Under the Act, we will be required
to review our policies and procedures to determine whether we
comply with the provisions of the Act. We will continue to
monitor our compliance with all future regulations that are
adopted under the Act and will take actions necessary to ensure
that we are in compliance therewith.
As of November 30, 2006, we are a non-accelerated filer. We
anticipate that our first year as an accelerated filer as
defined by the SEC will be for the fiscal year ended
November 30, 2007 at which time we will be required to
prepare and include in our annual report to stockholders for
such period a report regarding managements assessment of
our internal control over financial reporting under the
Securities Exchange Act of 1934 (the 1934 Act)
that are currently required to be included in such reports of
accelerated filers.
Available
Information
The Internet address for our website is http://www.kaynebdc.com.
We make, and will make in the future, available free of charge
on our website our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and any amendments to those reports as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. This information will be available at
the SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-202-551-8090.
The SEC maintains an Internet site that contains reports,
6
proxy and information statements, and other information filed by
us with the SEC which are available on the SECs Internet
site at http://www.sec.gov.
Forward-Looking
Statements
This
Form 10-K
includes statements reflecting assumptions, expectations,
projections, intentions or beliefs about future events that are
intended as forward-looking statements. All
statements included or incorporated by reference in this annual
report, other than statements of historical fact, that address
activities, events, developments that we expect, believe or
anticipate will or may occur in the future are forward-looking
statements. These statements represent our reasonable judgment
on the future based on various factors and using numerous
assumptions and are subject to known and unknown risks,
uncertainties, and other factors that could cause our actual
results to differ materially from those contemplated by the
statements. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They
use words such as anticipate, estimate,
project, forecast, plan,
may, will, should,
expect and other words of similar meaning. In
particular, these include, but are not limited to, statements
relating to the following:
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Our future operating results;
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Our business prospects and the prospects of our portfolio
companies and their ability to achieve their objectives;
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Our ability to make investments consistent with our investment
objective;
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The impact of investments that we expect to make;
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Our contractual arrangements and relationships with third
parties;
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The dependence of our future success on the general economy and
its impact on the energy industry;
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Our expected debt and equity financings and investments;
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The adequacy of our cash resources and working capital; and
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The timing of cash flows, if any, from the operations of our
portfolio companies.
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We undertake no obligation to update or revise any
forward-looking statements made herein.
Risk
Factors
In addition to the other information contained in this Annual
Report on
Form 10-K,
you should carefully consider the risks described below with
respect to our common stock. If any of the following events
occur, our business, financial condition, results of operations
and prospects could be materially adversely affected. In such
case, our net asset value and the trading price of our common
stock could decline, and our ability to pay dividends could be
materially, negatively impacted.
Risks
Related to Our Business and Structure
We are
a recently organized company with limited operating history, and
we might not be able to operate and grow our business or
implement our investment policies and strategies
successfully.
We were incorporated in Maryland in May 2006. We are subject to
all of the business risks and uncertainties associated with any
new business, including the risks that we will not achieve our
investment objective and that the value of your investment could
decline substantially. Our ability to achieve our investment
objective will depend on our ability to grow our investment
operations, which will depend, in turn, on our investment
advisers ability to identify, analyze, invest and monitor
companies that meet our investment criteria. Accomplishing this
result on a cost-effective basis will largely be a function of
our investment advisers structuring of investments and its
ability to provide competent and efficient investment management
services to us and access to financing investment opportunities
on acceptable terms. Even if we are able to grow our investment
operations, any failure to manage
7
our growth effectively could have a material adverse effect on
our business, financial condition, results of operations and
prospects. The results of our operations will depend on many
factors, including the availability of opportunities for
investment, readily accessible short and long-term funding
alternatives in the financial markets and economic conditions.
Furthermore, if we cannot successfully operate our business or
implement our investment policies and strategies, it could
negatively impact our ability to pay dividends and cause you to
lose all or part of your investment.
Our
success is dependent upon the members of our investment
advisers senior professionals, and the loss of any of them
could severely and detrimentally affect our
operations.
We continue to depend on the diligence, experience, skill and
network of business contacts of our investment advisers
senior professionals. We also depend on the information and deal
flow generated by our investment adviser in the course of its
investment and portfolio management activities. Because our
investment advisers senior professionals will evaluate,
negotiate, structure, close and monitor our investments, our
future success will depend on the continued service of our
investment advisers senior professionals. The departure of
any senior professionals of our investment adviser, or of a
significant number of the investment professionals of our
investment adviser, could have a material adverse effect on our
ability to achieve our investment objective. We have not entered
into employment agreements, nor do we have an employment
relationship, with any of these individuals. In addition, we can
offer no assurance that our investment adviser will remain our
investment adviser or that we will continue to have access to
its information and deal flow. The loss of any of our investment
advisers senior professionals could severely and
detrimentally affect our operations.
Our
investment advisers senior professionals have limited
experience managing a business development company and we cannot
assure you that their past experience will be sufficient to
manage our company as a business development
company.
The 1940 Act imposes numerous complex constraints on the
operations of business development companies. In order to
maintain our status as a business development company, the 1940
Act prohibits us from acquiring any assets other than
qualifying assets unless, after giving effect to the
acquisition, at least 70% of our total assets are qualifying
assets. We refer to this requirement as the 70% Test. Qualifying
assets generally may include securities of private
U.S. companies, cash, cash equivalents,
U.S. government securities and high-quality debt
instruments maturing one year or less from the time of
investment. The failure to comply with these provisions in a
timely manner could prevent us from qualifying as a business
development company or could force us to pay unexpected
penalties, which could be material. The lack of experience of
our investment advisers senior professionals in managing a
portfolio of assets under such regulatory constraints may hinder
their ability to take advantage of attractive investment
opportunities and, as a result, achieve our investment objective.
We may
be unable to obtain additional financing on terms that are
acceptable to us, which could inhibit the growth of our business
and adversely affect our performance.
We will have a continuing need for capital to finance our
investments. To qualify for and maintain RIC status, we are
required to distribute to our stockholders at least 90% of the
sum of investment company taxable income (which
generally consists of ordinary income and realized net
short-term capital gains in excess of realized net long-term
capital losses, if any) and net tax-exempt interest to our
stockholders on an annual basis. Accordingly, such earnings will
not be available to fund additional investments. We may also
need to employ leverage to make qualifying investments to
maintain our RIC status. Therefore, we may need to raise
additional capital, which we may elect to finance in part
through the issuance of Leverage Instruments. We may not be able
to obtain such financing on terms that we find acceptable, if at
all. The unavailability of funds from capital markets,
commercial banks or other sources on favorable terms could
inhibit the growth of our business and have a material adverse
effect on our performance.
We
operate in a highly competitive market for investment
opportunities.
We operate in a highly competitive market for investment
opportunities with competitors who may have greater resources, a
lower cost of capital and the ability to invest in Energy
Companies at interest rates and rates of return lower than those
that we will offer or at other terms more favorable than we will
offer or require. This may
8
cause us to lose investment opportunities or cause us to invest
on less favorable terms, and, as a result, the value of the
shares you purchase or the amount of any dividends you receive
may decline.
A large number of entities compete with us to make the types of
investments that we intend to make. We compete with other
business development companies, public funds, private funds,
including private equity and hedge funds, commercial and
investment banks, and commercial financing companies. Many of
our competitors are substantially larger and have considerably
greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and
access to funding sources that are not available to us. In
addition, some of our competitors may have higher risk
tolerances or different risk assessments, which could allow them
to consider a wider variety of investments and establish more
relationships than us. Furthermore, many of our competitors are
not subject to the regulatory restrictions that the 1940 Act
imposes on us as a business development company and do not seek
to meet the requirements of the Code with which we must comply
in order to qualify as a RIC. We cannot assure you that the
competitive pressures that we face will not have a material
adverse effect on our business, financial condition, results of
operations and prospects. Also, as a result of this competition,
we may not be able to take advantage of attractive investment
opportunities from time to time, and we may not be able to
identify and make investments that are consistent with our
investment objective.
We do not seek to compete solely based on the interest rates and
rates of return we will offer to prospective portfolio
companies. However, we believe some of our competitors may make
investments with interest rates and rates of return that will be
comparable to or lower than the rates we offer or require. We
may lose investment opportunities if we do not match our
competitors pricing, terms and structures. If we match our
competitors pricing, terms and structures, we may
experience decreased net investment income and increased risk of
principal loss, and the value of the shares you purchase or the
amount of any dividends you receive may decline.
Senior
professionals of our investment adviser provide services to
other investors, which could reduce the amount of time and
effort that they devote to us, which could negatively impact our
performance.
Conflicts of interest may arise because senior professionals of
our investment adviser carry on substantial investment
activities for other clients. Senior professionals of our
investment adviser may have financial incentives to favor
certain of such clients over us. Any of their proprietary
accounts and other customer accounts may compete with us for
specific investment opportunities.
Senior
professionals of our investment adviser provide advisory
services to other investment vehicles that may have common
investment objectives with ours, and may face conflicts of
interest in allocating investments.
As of November 30, 2006, KACALP serves as the investment
adviser to Kayne Anderson MLP Investment Company and Kayne
Anderson Energy Total Return Fund, Inc., which are two
closed-end management investment companies registered under the
1940 Act, as well as several private investment funds (together
with other funds advised by KAFA and KACALP, Affiliated
Funds). We refer to KACALP and KAFA together as
Kayne Anderson. Some of the Affiliated Funds have
investment objectives that are similar to or overlap with ours.
KAFA is operated by senior professionals of KACALP. These senior
professionals may at some time in the future, manage other
investment funds with the same investment objective as ours.
Kayne Anderson may buy or sell securities for us which differ
from securities which they may cause to be bought or sold for
their other accounts and customers, even though their investment
objectives and policies may be similar to ours.
Situations may occur when we could be disadvantaged because of
the investment activities conducted by Kayne Anderson for its
other accounts. Such situations may be based on, among other
things, regulatory restrictions on the combined size of
positions that may be taken for us and such other accounts,
thereby limiting the size of our position, or the difficulty of
liquidating an investment for us and the other accounts where
the market cannot absorb the sale of the combined position.
Our investment opportunities may be limited by investment
opportunities in Energy Companies that Kayne Anderson is
evaluating for the Affiliated Funds. To the extent a potential
investment is appropriate for us and one or more Affiliated
Funds, Kayne Anderson will need to fairly allocate that
investment to us or an Affiliated Fund, or both, depending on
its allocation procedures and applicable law related to combined
or joint transactions. There
9
may occur an attractive limited investment opportunity suitable
for us in which we cannot invest under the particular allocation
method being used for that investment.
Additionally, to the extent that Kayne Anderson sources and
structures private investments in Energy Companies, certain
employees of Kayne Anderson may become aware of actions planned
by publicly traded Energy Companies, such as acquisitions, that
may not be announced to the public. It is possible that we could
be precluded from investing in a publicly traded Energy Company
about which Kayne Anderson has material non-public information;
however, it is Kayne Andersons intention to ensure that
any material non-public information available to certain Kayne
Anderson employees not be shared with those employees of our
investment adviser responsible for the purchase and sale of
publicly traded Energy Company securities by us.
There
may be uncertainty as to the value of our portfolio
investments.
A large percentage of our portfolio investments will consist of
securities of private companies. The fair value of these
securities may not be readily determinable. We will value these
securities quarterly at fair value as determined in good faith
by our board of directors based on input from our investment
adviser, a third party independent valuation firm and our
valuation committee. We may also be required to value any
publicly traded securities at fair value as determined in good
faith by our board of directors to the extent necessary to
reflect significant events affecting the value of those
securities. Our board of directors will utilize the services of
an independent valuation firm to review the fair value of any
securities prepared by our investment adviser. The types of
factors that may be considered in fair value pricing of our
investments include the nature and realizable value of any
collateral, the portfolio companys ability to make
payments, the markets in which the portfolio company does
business, comparison to publicly traded companies, discounted
cash flow and other relevant factors. Because such valuations,
and particularly valuations of non-traded securities and private
companies, are inherently uncertain, they may fluctuate over
short periods of time and may be based on estimates. The
determination of fair value by our board of directors may differ
materially from the values that would have been used if a ready
market for these securities existed. Our net asset value could
be adversely affected if the determinations regarding the fair
value of our investments were materially higher than the values
that we ultimately realize upon the disposal of such securities.
We
will be subject to income tax if we are unable to qualify as a
RIC.
To qualify as a RIC under the Code, we must meet certain income
source, asset diversification and annual distribution
requirements. The annual distribution requirement for a RIC is
satisfied if we distribute at least 90% of our investment
company taxable income (which generally consists of
ordinary income and realized net short-term capital gains in
excess of realized net long-term capital losses, if any) and net
tax-exempt interest to our stockholders on an annual basis. If
we issue Leverage Instruments in the future, we would be subject
to certain asset coverage ratio requirements under the 1940 Act
as a business development company, and may be subject to
financial covenants under loan and credit agreements that could,
under certain circumstances, restrict us from making
distributions necessary to qualify as a RIC. If we are unable to
obtain cash from other sources, we may fail to qualify as a RIC
and, thus, may be subject to income tax.
To qualify as a RIC, we must also meet certain asset
diversification requirements at the end of each quarter of each
taxable year. In particular, to meet the asset diversification
requirement for a RIC, we must diversify our holdings so that,
at the end of each quarter of each taxable year, (i) at
least 50% of the value of our total assets is represented by
cash and cash items (including receivables),
U.S. Government securities, the securities of other RICs
and other securities, with such other securities limited for
purposes of such calculation, in respect of any one issuer, to
an amount not greater than 5% of the value of our total assets
and not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of our
total assets is invested in the securities (other than
U.S. Government securities or the securities of other RICs)
of any one issuer, the securities (other than the securities of
other RICs) of any two or more issuers that we control (by
owning 20% or more of their voting power) and that are
determined to be engaged in the same or similar trades or
businesses or related trades or businesses, or the securities of
one or more qualified publicly traded partnerships. We may issue
Leverage Instruments if necessary to make qualifying investments
to satisfy such diversification requirements. We expect to form
one or more taxable subsidiaries to make and hold investments in
accordance with our investment objective, and such taxable
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subsidiaries would in turn hold equity securities issued by
certain private limited partnerships. Although we intend that
any investment in such taxable subsidiaries and private limited
partnerships will be within the 25% limit set forth above, it is
possible that the IRS will not respect our determinations that
certain taxable subsidiaries and private limited partnerships
are not engaged in the same or similar trades or businesses or
related trades or businesses. If any such controlled entities
are determined to be engaged in related trades or businesses,
our ownership in them would be aggregated, possibly causing a
failure to satisfy the 25% limit set forth above. In addition,
we may invest in private limited partnerships acquiring assets
in anticipation of an initial public offering (i.e.,
Private MLPs). Initial public offerings of such private limited
partnerships may cause these entities to become qualified
publicly traded partnerships, which, if we do not rebalance our
portfolio holdings by the end of a quarter of a taxable year, we
could cause our aggregate holdings of qualified publicly traded
partnerships to exceed the 25% limit set forth above.
To qualify as a RIC, we must also meet certain income source
requirements. To meet the income source requirement for a RIC,
at least 90% of our gross income in each taxable year must be
derived from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition
of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures or
forward contracts) derived with respect to our business of
investing in such stock, securities, or currencies, and net
income derived from interests in qualified publicly traded
partnerships. Income derived from a partnership (other than a
qualified publicly traded partnership) is treated for purposes
of the 90% gross income test as if the income of the partnership
was earned directly by the RIC. We may invest in certain equity
securities issued by private limited partnerships, and income
earned with respect to such partnerships may not be qualifying
income for purposes of the 90% gross income test. Although we do
not anticipate income from our direct investments in the equity
securities of private limited partnerships to exceed the limits
set forth above, we cannot be certain that this will be the
case. We expect to form one or more wholly-owned taxable
subsidiaries to make and hold certain investments in accordance
with our investment objective, and such taxable subsidiaries
would in turn hold equity securities issued by certain private
limited partnerships. We may purchase the debt of private
limited partnerships and our taxable subsidiaries, which hold
equity securities issued by private limited partnerships.
Interest income paid or accrued on such debt should be
qualifying income for purposes of the 90% gross income test,
provided that the debt is respected as debt for tax purposes. It
is possible that such debt could be recharacterized as equity
for tax purposes, although we intend to mitigate this
possibility by carefully monitoring the debt-equity ratio of the
specific investments and the terms and features of the debt
instruments.
Failure to comply with the 90% gross income test may result in
our having to dispose of certain investments at times we would
not consider advantageous in order to prevent the loss of RIC
status. Because such investments will be in private companies,
any such dispositions could be made at disadvantageous prices
and may result in substantial losses.
If we fail to qualify as a RIC for any reason and remain or
become subject to corporate income tax, the resulting corporate
taxes could substantially reduce our net assets, the amount of
income available for distribution and the amount of our
distributions. Such a failure would have a material adverse
effect on us and our stockholders.
For federal income tax purposes, we include in income certain
amounts that we have not yet received in cash, such as original
issue discount, which may arise if we receive warrants in
connection with the purchase of a loan or possibly in other
circumstances, or contracted
payments-in-kind,
which represents contractual dividends or interest added to the
loan balance and due at the end of the loan term. Such original
issue discount or increases in loan balances as a result of
contracted
payment-in-kind
arrangements will be included in income before we receive any
corresponding cash payments. We also may be required to include
in income certain other amounts that we will not receive in
cash. Because in certain cases we may recognize income before or
without receiving cash representing such income, we may have
difficulty meeting the tax requirement to distribute at least
90% of the sum of our investment company taxable
income and net tax-exempt interest, if any, to our
stockholders in each tax year to maintain our status as a RIC.
Accordingly, we may have to sell some of our investments at
times we would not consider advantageous, use additional
leverage, raise equity capital or reduce new investment
originations to meet these distribution requirements. If we are
not able to obtain cash from other sources, we may fail to
qualify as a RIC and thus be subject to income tax.
11
We pay
our investment adviser a base management fee based upon our
total assets, which may create an incentive for our investment
adviser to cause us to incur more leverage than is prudent in
order to maximize its compensation.
We pay our investment adviser a quarterly base management fee
based on the value of our total assets (including assets
acquired with leverage). Accordingly, our investment adviser has
an economic incentive to increase our leverage. If our leverage
is increased, we will be exposed to increased risk of loss, bear
the increased cost of issuing and servicing such senior
indebtedness, and will be subject to any additional covenant
restrictions imposed on us in an indenture or other instrument
or by the applicable lender, which could negatively impact our
business and results of operation.
We pay
our investment adviser incentive compensation based on our
portfolios performance. This arrangement may lead our
investment adviser to recommend riskier or more speculative
investments in an effort to maximize its incentive
compensation.
In addition to its base management fee, our investment adviser
earns incentive compensation in two parts. The first part, the
Net Investment Income Fee, is payable quarterly and is equal to
20% of the excess, if any, of our Adjusted Net Investment Income
for the quarter that exceeds a quarterly hurdle rate equal to
1.875% (7.50% annualized) of our average net assets for such
quarter. Average net assets is calculated by averaging net
assets at the last day of such quarterly period and at the last
day of such prior quarterly period or commencement of operations
(net assets is defined as our total assets less total
liabilities (including liabilities associated with Leverage
Instruments) determined in accordance with generally accepted
accounting principles). The second part of the incentive fee
will be determined and payable in arrears as of the end of each
fiscal year (or upon termination of the investment management
agreement, as of the termination date) and will equal
(1) 20% of Adjusted Realized Capital Gains, less
(2) the aggregate amount of all capital gains fees paid to
our investment adviser in prior years.
The way in which the incentive fee payable to our investment
adviser is determined may encourage our investment adviser to
use leverage to increase the return on our investments. Under
certain circumstances, the use of leverage may increase the
likelihood of default, which would adversely affect our
stockholders, including our investors, because their interests
would be subordinate. In addition, our investment adviser will
receive the incentive fee based, in part, upon net capital gains
realized on our investments. Unlike the portion of the incentive
fee based on income, there is no hurdle rate applicable to the
portion of the incentive fee based on net capital gains. As a
result, our investment adviser may have a tendency to invest
more in investments that are likely to result in capital gains
as compared to income-producing securities. Other key criteria
related to determining appropriate investments and investment
strategies, including the preservation of capital, might be
under-weighted if our investment adviser focuses exclusively or
disproportionately on maximizing its income. Such a practice
could result in our investing in more speculative securities
than would otherwise be the case, which could result in higher
investment losses.
We may
be obligated to pay our investment adviser incentive
compensation even if we incur a loss or experience a decrease in
net assets.
Pursuant to the investment management agreement, our investment
adviser is entitled to receive incentive compensation for each
fiscal quarter in an amount equal to 20% of the excess, if any,
of our Adjusted Net Investment Income for the quarter that
exceeds a quarterly hurdle rate equal to 1.875% (7.50%
annualized) of our average net assets for such quarter. Average
net assets is calculated by averaging net assets at the last day
of such quarterly period and at the last day of such prior
quarterly period or commencement of operations (net assets is
defined as our total assets less total liabilities (including
liabilities associated with Leverage Instruments, as defined
below) determined in accordance with generally accepted
accounting principles). Leverage Instruments refer to shares of
preferred stock, commercial paper, or notes and other
borrowings. The calculation of the incentive fee includes any
deferred income accrued, but not yet received. As a result, we
may pay an incentive fee on income, the receipt of which may be
uncertain or deferred.
The investment management agreement provides that our Adjusted
Net Investment Income for purposes of the Net Investment Income
Fee excludes realized and unrealized capital losses that we may
incur in the fiscal quarter, even if such capital losses result
in a net decrease in net assets for that quarter. Thus, we may
be required to
12
pay our investment adviser incentive compensation for a fiscal
quarter even if there is a decline in the value of our portfolio
during that quarter.
Our investment adviser may also receive incentive compensation
equal to (1) 20% of (a) our adjusted net realized
capital gains (realized capital gains less realized capital
losses) on a cumulative basis from the closing date of our
initial public offering to the end of such fiscal year, less
(b) any unrealized capital losses at the end of such fiscal
year, less (2) the aggregate amount of all Capital Gains
Fees we paid to KAFA in prior fiscal years. Thus, we may be
required to pay our investment adviser incentive compensation
with respect to capital gains for a fiscal year even if we
generate a net investment loss for that year. The calculation of
the Capital Gains Fee includes any capital gains that result
from cash distributions that are treated as a return of capital.
In that regard, any such return of capital will be treated as a
decrease in our cost basis of an investment for purposes of
calculating the Capital Gains Fee.
Our
investment advisers liability is limited under the
investment management agreement, and we agree to indemnify our
investment adviser against certain liabilities, which may lead
our investment adviser to act in a riskier manner on our behalf
than it would when acting for its own account.
Our investment adviser has not assumed any responsibility to us
other than to provide the services described in the investment
management agreement, and it is not be responsible for any
action of our board of directors in declining to follow our
investment advisers advice or recommendations. Pursuant to
the investment management agreement, our investment adviser and
its members, managers, officers and employees are not liable to
us under the investment management agreement for their acts
absent willful misfeasance, bad faith, gross negligence or
reckless disregard in the performance of their duties. We have
agreed to indemnify, defend and protect our investment adviser
and its members, managers, officers and employees with respect
to all expenses, losses, damages, liabilities, demands, charges
and claims arising from acts of our investment adviser not
constituting willful misfeasance, bad faith, gross negligence or
reckless disregard in the performance of their duties. These
protections may lead our investment adviser to act in a riskier
manner when acting on our behalf than it would when acting for
its own account.
Regulations
governing our operation as a business development company will
affect our ability to, and the way in which we, raise additional
capital.
Our business may benefit from raising capital in addition to the
proceeds from our initial public offering. We may acquire
additional capital through the issuance of Leverage Instruments
and additional common stock. If we issue Leverage Instruments we
may do so up to the maximum amount permitted by the 1940 Act. We
generally will not be able to issue and sell our common stock at
a price below net asset value per share. We may, however, sell
our common stock, or warrants, options or rights to acquire our
common stock, at prices below the current net asset value of the
common stock if our board of directors determines that such sale
is in the best interests of our company and its stockholders,
and our stockholders approve such sale. In any such case, the
price at which our securities are to be issued and sold may not
be less than a price that, in the determination of our board of
directors, closely approximates the market value of such
securities (less any underwriting commission or discount).
We may also make rights offerings to our stockholders at prices
per share less than the net asset value per share, subject to
applicable requirements of the 1940 Act. If we raise additional
funds by issuing more common stock or Leverage Instruments
convertible into, or exchangeable for, our common stock, the
percentage ownership of our stockholders at that time would
decrease and they may experience dilution. Moreover, we can
offer no assurance that we will be able to issue and sell
additional equity securities in the future, on favorable terms
or at all.
If we
issue Leverage Instruments, you will be exposed to additional
risks, including the risk that our use of leverage can magnify
the effect of any losses we incur.
We intend to seek to enhance our total returns through the use
of leverage by issuing Leverage Instruments. Although our use of
leverage may create an opportunity for increased returns for our
common stock, it also results in additional risks and can
magnify the effect of any losses. If we do incur leverage, a
decrease in the value of our investments would have a greater
negative impact on the value of our common stock than if we did
not use leverage.
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If the income and gains from the investments purchased with
leverage, net of increased expenses associated with such
leverage, do not cover the cost of such leverage, the return to
holders of our common stock will be less than if leverage had
not been used. There is no assurance that our use of leverage,
if any, will be successful. Leverage involves other risks and
special considerations for common stockholders including, but
not limited to, the following:
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Our ability to pay dividends on common stock would be restricted
if dividends on the preferred stock
and/or
interest on borrowings have not been paid, or set aside for
payment.
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Under the provisions of the 1940 Act, we are permitted, as a
business development company, to issue debt or preferred stock
or other senior securities only in amounts such that our asset
coverage, as defined in the 1940 Act, equals at least 200% after
each issuance of senior securities. If the value of our assets
declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments
and, depending on the nature of our leverage, repay a portion of
our debt at a time when such sales
and/or
repayments may be disadvantageous.
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It is likely that any debt we incur will be governed by an
indenture or other instrument containing covenants that may
restrict our operating flexibility or our ability to pay
dividends and other distributions on common stock in certain
instances.
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Any Leverage Instruments that we issue or incur may be secured
by a lien on our assets, which, in the event of a default under
the instrument governing the debt, would subject such collateral
to liquidation by the lenders.
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We and, indirectly, our stockholders will bear the cost of
issuing and servicing our Leverage Instruments.
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Any Leverage Instruments that we issue in the future will have
rights, preferences and privileges over our income and against
our assets in liquidation that are more favorable than those of
our common stock.
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There will likely be greater volatility of net asset value and
market price of our common stock than a comparable portfolio
without leverage.
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When we use leverage, the management fee payable to our
investment adviser may be higher than if we did not use leverage.
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We may be subject to certain restrictions on investments imposed
by guidelines of one or more rating agencies, which may issue
ratings for the Leverage Instruments issued by us.
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The 1940 Act provides certain rights and protections for
preferred stockholders which may adversely affect the interests
of our common stockholders, including rights that could delay or
prevent a transaction or a change in control to the detriment of
the holders of our common stock.
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If
certain of our Targeted Investments are deemed not to be
qualifying assets, we could be precluded from investing in this
strategic manner, or deemed to be in violation of the 1940 Act,
in which case we may not qualify to be treated as a business
development company.
To maintain our status as a business development company, we
must not acquire any assets other than qualifying
assets unless, at the time of and after giving effect to
such acquisition, at least 70% of our total assets are
qualifying assets, which we refer to as the 70%
Test. Qualifying assets generally include securities of
eligible portfolio companies, cash, cash equivalents,
U.S. government securities and high-quality debt
instruments maturing in one year or less from the time of
investment. The SEC recently adopted new rules under the 1940
Act to expand the definition of eligible portfolio
company to include all private companies and companies
whose securities are not listed on a national securities
exchange, and, accordingly, we are no longer required to
determine the eligibility of a portfolio company by reference to
whether or not it has outstanding margin securities. The new
rules also permit us to include as qualifying assets certain
follow-on investments in companies that were eligible portfolio
companies at the time of initial investment but that no longer
meet the definition. Although these rules expand the total
amount of potential investments available to business
development companies generally, we may not be able to identify
any of our Targeted Investments solely as a result of the
adoption of the new rules. Additionally, any failure to
otherwise
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comply with any provision of the 70% Test in a timely manner
could prevent us from qualifying as a business development
company.
In addition to the adoption of the rules described above, the
SEC also proposed for comment a rule that would include as
eligible portfolio companies certain public companies that have
listed their securities on a national securities exchange, as
long as their public float
and/or
market capitalization are below a specified level. We will
continue to monitor closely any developments with respect to the
definition of eligible portfolio company, and intend to adjust
our investment focus as needed to comply with
and/or take
advantage of the new rules as well as any other regulatory,
legislative, administrative or judicial actions in this area. If
adopted, the effect of these rules could also cause us to modify
our investment strategy to avail ourselves of different
investment opportunities.
Changes
in laws or regulations governing our operations and those of our
portfolio companies or our investment adviser may adversely
affect our business or cause us to alter our business
strategy.
We, our portfolio companies and our investment adviser will be
subject to regulation at the local, state and federal level. New
legislation may be enacted or new interpretations, rulings or
regulations could be adopted, including those governing the
types of investments we are permitted to make, any of which
could harm us, our investment adviser and our stockholders,
potentially with retroactive effect.
Additionally, any changes to the laws and regulations governing
our operations relating to permitted investments may cause us to
alter our investment strategy in order to avail ourselves of new
or different opportunities. Such changes could result in
material differences to the strategies and plans and may result
in our investment focus shifting from the areas of expertise of
our investment adviser to other types of investments in which
our investment adviser may have less expertise or little or no
experience. Thus, any such changes, if they occur, could have a
material adverse effect on our results of operations and the
value of your investment.
We may
experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating
results due to a number of factors, including changes in the
fair values of our portfolio investments, the interest rate
payable on the debt securities we acquire, the default rate on
such securities, the level of distributions (if any) on the
equity interests we acquire, the level of our expenses,
variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter
competition in our markets and general economic conditions. As a
result of these factors, results for any period should not be
relied upon as being indicative of performance in future periods.
Inflation
may cause the real value of our investments to
decline.
Inflation risk is the risk that the value of assets or income
from an investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real
value of our common stock and dividends can decline.
We are
exposed to risks associated with changes in interest rates
because increases in market interest rates may both reduce the
value of a portion of our portfolio investments and increase our
cost of capital.
A portion of our debt investments bears interest at fixed rates,
and the value of these investments generally will be negatively
affected by increases in market interest rates. In addition, an
increase in interest rates makes it more expensive to use debt
to finance our investments. As a result, a significant increase
in market interest rates could both reduce the value of our
portfolio investments and increase our cost of capital, which
would reduce our net investment income. In that regard, rising
interest rates could also cause the yield of our common stock to
be less attractive to investors.
Our
board of directors may change most of our operating policies and
strategies without prior notice or stockholder approval, the
effects of which may adversely affect your investment in our
common stock.
Our board of directors has the authority to modify or waive most
of our current operating policies and our strategies without
prior notice and without stockholder approval. We cannot predict
the effect any changes to our
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current operating policies and strategies would have on our
business, operating results and value of our stock. However, the
effects might be adverse, which could adversely affect your
interest in our common stock. In the event that our board of
directors determines that we cannot economically pursue our
investment objective under the 1940 Act, they may at some
future date decide to withdraw our election to be treated as a
business development company and convert us to an operating
company not subject to regulation under the 1940 Act, or cause
us to liquidate. The withdrawal of our election to be treated as
a business development company or our liquidation may not be
effected without approval of a requisite percentage of our board
of directors and the holders of our shares of common stock.
Risks
Related to Our Investments
The
energy industry is subject to many risks.
We concentrate our investments in the energy industry. The
revenues, income (or losses) and valuations of Energy Companies
can fluctuate suddenly and dramatically due to any one or more
of the following factors:
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Supply and Demand Risk. Risks relating to the
decrease in the production of natural gas, natural gas liquids,
crude oil, coal or other energy commodities, the volume of such
commodities available for transportation, mining, processing,
storage or distribution, may create a sustained decline in the
demand for such products.
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Commodity Pricing Risk. Risks relating to the
margins that Energy Companies receive from companies that
explore, develop, produce, gather, transport, process, store,
refine, distribute, mine or market natural gas, natural gas
liquids, crude oil, refined petroleum products or coal.
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Regulatory Risk. Risks relating to significant
federal, state and local government laws and regulations
throughout many aspects of Energy Company operations, including
the construction, maintenance, and controls for safety and the
environment.
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Operational Risk. Risks relating to the
disruption of operations, including the integration of newly
acquired assets, unanticipated operation and maintenance
expenses, lack of proper asset integrity, underestimated cost
projections, inability to renew or increased costs of rights of
way, failure to obtain the necessary permits to operate and
failure of third-party contractors to perform their contractual
obligations, among others.
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Competition Risk. Risks relating to the
substantial competition that exists for Energy Companies to
acquire, expand or construct assets and facilities, obtain and
retain customers and contracts, and secure trained personnel.
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Acquisition Risk. Risks relating to the
continued growth through acquisitions and increase in dividends
or distributions to equity holders.
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Interest Rate Risk. Risks relating to the
value of debt and equity values in our portfolio due to interest
rate declines.
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Catastrophe Risk. Risks relating to the many
hazards inherent to transport, process, store, mine and market
natural gas, natural gas liquids, crude oil, coal, refined
petroleum products or other hydrocarbons, including damage to
infrastructure caused by natural disasters such as hurricanes,
tornadoes, fire, or floods.
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Depletion and Exploration Risk. Risks relating
to the natural depletion of energy reserves and inability for
Energy Companies to expand their reserves through exploration,
development or acquisitions.
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Terrorism/Market Disruption Risk. Risks
relating to acts of terror on our energy infrastructure,
including changes to insurance markets, both in premium costs
and coverage allowed.
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Affiliated Party Risk. Risks related to the
inability or failure of an Energy Companys parent or
sponsors to satisfy payments and obligations on their behalf.
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Financing Risk. Risks relating to the ability
for Energy Companies to, if necessary, rely upon and access
capital markets to raise money and pay for their existing
obligations. Some of the portfolio companies in which we will
invest may rely on capital markets to raise money to pay their
existing obligations.
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Investing
in private companies may be riskier than investing in publicly
traded companies due to the lack of available public
information.
We will invest in primarily private companies, which may be
subject to higher risk than investments in publicly traded
companies. Little public information exists about many of these
companies, and we will be required to rely on the ability of our
investment adviser to obtain adequate information to evaluate
the potential risks and returns involved in investing in these
companies. If we are unable to obtain all material information
about these companies, we may not make a fully informed
investment decision, and we may lose some or all of our
investments in these companies. These factors could subject us
to greater risk than investments in publicly traded companies
and negatively affect our investment returns, which could
negatively impact the dividends paid to you and the value of
your investment.
The
lack of liquidity in our investments might prevent us from
disposing of them at opportune times and prices.
We will primarily make investments in private companies.
Substantially all of these securities will be subject to legal
and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. The illiquidity of our
investments may make it difficult for us to sell such
investments at advantageous times and prices or in a timely
manner. In addition, if we are required to liquidate all or a
portion of our portfolio quickly, we may realize significantly
less than the value at which we have previously recorded our
investments. We may also encounter other restrictions on our
ability to liquidate an investment in a publicly traded
portfolio company to the extent that we have, or one of our
affiliates has, material non-public information regarding such
portfolio company. In providing services to us, our investment
adviser is not permitted to use material non-public information
of which Kayne Anderson is in possession. If we are unable to
sell our assets at opportune times, we might suffer a loss
and/or
reduce the dividends to our stockholders.
Our
investments in thinly traded securities may be difficult to
trade and value.
Although certain of the equity securities of the Energy
Companies in which we invest will trade on major stock
exchanges, certain securities may trade less frequently,
particularly those with smaller capitalizations. Securities with
limited trading volumes may display volatile or erratic price
movements. In this event, if we are one of the largest investors
in certain of these companies, it may be more difficult for us
to buy and sell significant amounts of such securities without
an unfavorable impact on prevailing market prices. Larger
purchases or sales of these securities by us in a short period
of time may cause abnormal movements in the market price of
these securities. As a result, these securities may be difficult
to dispose of at a fair price at the times when we believe it is
desirable to do so. Investment of our capital in securities that
are less actively traded or over time experience decreased
trading volume may restrict our ability to take advantage of
other market opportunities.
Our
prospective investments in small and developing portfolio
companies may be risky.
Our investments in small and developing companies involve a
number of significant risks, including the following:
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these companies may have limited financial resources and may be
unable to meet their obligations under the securities that we
hold, which may be accompanied by a deterioration in the value
of their assets;
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there is generally less public information readily available
about these companies, including investment research, industry
reports and news analysis, and our investigation of such
investment opportunities may require significantly higher cost,
longer time frame, and more extensive management commitment
compared to investments in companies with a greater degree of
visibility in the public markets;
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these companies typically have shorter operating histories and
smaller market shares than larger businesses, which tend to
render them more vulnerable to competitors actions and
market conditions, as well as general economic downturns;
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these companies are more likely to depend on the management
talents and efforts of a small group of persons; therefore, the
death, disability, resignation or termination of one or more of
these persons could have a material adverse impact on our
portfolio company and, in turn, on us;
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these companies may have less predictable operating results, and
may require substantial additional capital to support their
operations, finance expansion or maintain their competitive
position.
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In addition, in the course of providing significant managerial
assistance to certain of our portfolio companies, including
small and developing companies, certain of our officers and
directors and senior professionals of our investment adviser may
serve as directors on the boards of such companies. To the
extent that litigation arises out of our investments in these
companies, our officers and directors, our investment adviser
and its senior professionals may be named as defendants in such
litigation, which could result in an expenditure of funds and
the diversion of management time and resources.
Our
equity investments may decline in value.
The equity interests in which we invest may not appreciate or
may decline in value. Accordingly, we may not be able to realize
gains from our equity interests, and any gains that we do
realize on the disposition of any equity interests may not be
sufficient to offset any other losses we experience. As a
result, the equity interests in which we invest may decline in
value, which may negatively impact our ability to pay you
dividends and cause you to lose all or part of your investment.
The
debt securities in which we invest are subject to credit risk
and prepayment risk.
In addition to the other risks described elsewhere, debt
securities of Energy Companies are subject to credit risk and
prepayment risk.
Credit Risk. An issuer of a debt security may
be unable to make interest payments and repay principal. We
could lose money if the issuer of a debt obligation is, or is
perceived to be, unable or unwilling to make timely principal
and/or
interest payments, or to otherwise honor its obligations. The
downgrade of a security by rating agencies may further decrease
its value. Additionally, a portfolio company may issue to us a
debt security that has
payment-in-kind
interest, which represents contractual interest added to the
principal balance and due at the maturity date of the debt
security in which we invest. It is possible that by effectively
increasing the principal balance payable to us or deferring cash
payment of such interest until maturity, the use of
payment-in-kind
features will increase the risk that such amounts will become
uncollectible when due and payable.
Prepayment Risk. Certain debt instruments,
particularly any rated below investment grade or unrated
securities in which we invest, may contain call or redemption
provisions which would allow the issuer thereof to prepay
principal prior to the debt instruments stated maturity.
This is known as prepayment risk. Prepayment risk is greater
during a falling interest rate environment as issuers can reduce
their cost of capital by refinancing higher yielding debt
instruments with lower yielding debt instruments. An issuer may
also elect to refinance their debt instruments with lower
yielding debt instruments if the credit standing of the issuer
improves. To the extent debt securities in our portfolio are
called or redeemed, we may be forced to reinvest in lower
yielding securities or debt securities of issuers of lower
credit quality.
High
oil and gas prices may increase alternative sources of capital
available to Energy Companies and reduce demand for our Targeted
Investments.
As a result of the current high prices for oil and natural gas
relative to historical levels, Energy Companies are generally
experiencing strong financial results and increased cash flows.
Therefore, they currently may have less financial need to raise
capital than in a lower commodity price environment. As a
result, high commodity prices may have the effect of delaying
the deployment of the net proceeds from our initial public
offering, reducing the number of companies seeking investments
similar to our Targeted Investments or causing us to achieve
lower total returns on our Targeted Investments.
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Our
portfolio companies may incur debt or issue securities that rank
in right of payment equally with, or senior to, our investments
in such companies. As a result, the holders of such debt or
other obligations may be entitled to payments of principal and
interest or other payments prior to any payments to us,
preventing us from obtaining the full value of our investment in
the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant portfolio
company.
We intend to invest a portion of our assets in subordinated
debt, preferred stock and common equity issued by our portfolio
companies. The portfolio companies usually will have, or may be
permitted to incur, debt that ranks in right of payment equally
with, or senior to, our investment. By their terms, such debt
instruments may provide that the holders are entitled to receive
payment of interest or principal on or before the dates on which
we are entitled to receive payments in respect of our
investment. Also, in the event of insolvency, liquidation,
dissolution, reorganization or bankruptcy of a portfolio
company, holders of debt instruments ranking senior to our
investment in that portfolio company would typically be entitled
to receive payment in full before we receive any distribution in
respect of our investment. After repaying such senior creditors,
the portfolio company may not have any remaining assets
available for repaying its obligation to us. In the case of debt
ranking equally with securities in which we invest, we would
have to share on an equal basis any distributions with other
creditors holding such debt in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company. As a result, we may be prevented
from obtaining the full value of our investment in the event of
an insolvency, liquidation, dissolution, reorganization or
bankruptcy of the relevant portfolio company.
Second
priority liens on collateral securing loans that we make to our
portfolio companies may be subject to control by senior
creditors with first priority liens. If there is a default, the
value of the collateral may not be sufficient to repay in full
both the first priority creditors and us.
Certain loans that we make to portfolio companies, including the
second-lien or term B loans, will be secured on a
second priority basis by the same collateral securing senior
secured debt of such companies. The first priority liens on the
collateral will secure the portfolio companys obligations
under any outstanding senior debt and may secure certain other
future debt that may be permitted to be incurred by the company
under the agreements governing the loans. The holders of
obligations secured by the first priority liens on the
collateral will be entitled to receive proceeds from any
realization of the collateral to repay their obligations in full
before us. In addition, the value of the collateral in the event
of liquidation will depend on market and economic conditions,
the availability of buyers and other factors. There can be no
assurance that the proceeds, if any, from the sale or sales of
all of the collateral would be sufficient to satisfy the loan
obligations secured by the second priority liens after payment
in full of all obligations secured by the first priority liens
on the collateral. If such proceeds are not sufficient to repay
amounts outstanding under the loan obligations secured by the
second priority liens, then we, to the extent not repaid from
the proceeds of the sale of the collateral, will only have an
unsecured claim against the companys remaining assets, if
any.
The rights we may have with respect to the collateral securing
the loans we make to our portfolio companies with senior debt
outstanding may also be limited pursuant to the terms of one or
more intercreditor agreements that we enter into with the
holders of senior debt. Under such an intercreditor agreement,
at any time that obligations that have the benefit of the first
priority liens are outstanding, any of the following actions
that may be taken in respect of the collateral will be at the
direction of the holders of the obligations secured by the first
priority liens: the ability to cause the commencement of
enforcement proceedings against the collateral; the ability to
control the conduct of such proceedings; the approval of
amendments to collateral documents; releases of liens on the
collateral; and waivers of past defaults under collateral
documents. We may not have the ability to control or direct such
actions, even if our rights are adversely affected.
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The
Greenfield Ventures in which we seek to invest may involve
energy projects with limited or no operating history on a
non-recourse basis in arrangements where the ventures
obligations will be secured solely by the underlying assets of
the project. Numerous factors may adversely affect the
projects ability to generate sufficient revenues to enable
it to meet its obligations.
The Greenfield Ventures in which we seek to invest may have
little operating history, and we may therefore have no assurance
that a project will operate successfully. In addition, these
projects may not have any assets other than assets associated
with the project, and that ventures obligations may not be
guaranteed by any other company. A ventures only source of
revenue may be payments received under gathering, processing or
transportation contracts, and if a venture is unable to make
payments when due, its only recourse may be to the cash flows
generated by that project and to the project itself. The
Greenfield Ventures may not generate sufficient cash flows at
the time of investment (often during the construction period) to
fund cash distributions on equity or interest payments on debt.
We may structure such investments as
pay-in-kind
securities for the period until project construction period is
completed, at which time those interest payments or dividends
would instead be made in cash.
Many factors can materially adversely impact a projects
ability to operate at full capacity, including breakdown or
failure of equipment or related processes; non-performance by
third parties, such as suppliers of inputs and operators and
managers of projects; performance of the facility below expected
levels of output or efficiency; failure of the facility to
operate at design specifications; labor disputes; changes in
applicable law; unavailability of electric transmission service;
failure to obtain, maintain or renew necessary permits or to
meet the conditions of such permits; government exercise of
eminent domain power or similar events; and catastrophic events
including fires, explosions, earthquakes and droughts.
The occurrence of these events could significantly reduce or
eliminate a projects revenues or significantly increase
the expenses of the project, thereby jeopardizing the
projects ability to make payments of principal and
interest on loans made or cash distributions on equity
securities of the Greenfield Venture.
Economic
downturns could harm our portfolio companies operations
and ability to satisfy their obligations to their respective
lenders and other investors, including us.
Our portfolio companies may be susceptible to economic downturns
and may be unable to repay loans or fulfill their other
financial obligations during these periods. Therefore, our
non-performing assets are likely to increase and the value of
our portfolio is likely to decrease during these periods.
Adverse economic conditions also may decrease the value of our
equity investments and the value of collateral securing some of
our loans. Economic downturns could lead to financial losses in
our portfolio and decreases in revenues, net income and assets.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or others could lead to
defaults and, potentially, acceleration of its loans and
foreclosure on the assets securing such loans, which could
trigger cross-defaults under other agreements and jeopardize our
portfolio companys ability to meet its obligations under
the investments that we hold. We may incur expenses to the
extent necessary to seek recovery upon default or to negotiate
new terms with a defaulting portfolio company. In addition, if
one of our portfolio companies were to go bankrupt, even though
we may have structured our interest as senior debt, depending on
the facts and circumstances, including the extent to which we
actually provided managerial assistance to that portfolio
company, a bankruptcy court might recharacterize our debt
holding and subordinate all or a portion of our claim to that of
other creditors. This could negatively impact our ability to pay
you dividends and cause you to lose all or part of your
investment.
The
marine transportation companies in which we invest are and will
continue to be substantially affected by the highly cyclical
nature of the tanker industry, which cyclicality is beyond our
control.
Marine transportation (or tanker) companies are
exposed to many of the same risks as other Energy Companies, as
summarized above. In addition, the highly cyclical nature of the
tanker industry may lead to volatile changes in charter rates
and vessel values, which may adversely affect the earnings of
tanker companies in our portfolio. Fluctuations in charter rates
and vessel values result from changes in the supply and demand
for tanker capacity and changes in the supply and demand for oil
and oil products. Historically, the tanker markets have been
volatile because many conditions and factors can affect the
supply and demand for tanker capacity. Changes in
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demand for transportation of oil over longer distances and
supply of tankers to carry that oil may materially affect
revenues, profitability and cash flows of tanker companies.
The successful operation of vessels in the charter market
depends upon, among other things, obtaining profitable spot
charters and minimizing time spent waiting for charters and
traveling unladen to pick up cargo. The value of tanker vessels
may fluctuate and could adversely affect the value of any tanker
company securities in our portfolio. Declining tanker values
could affect the ability of tanker companies to raise cash by
limiting their ability to refinance their vessels, thereby
adversely impacting tanker company liquidity.
Tanker company vessels are at risk of damage or loss because of
events such as mechanical failure, collision, human error, war,
terrorism, piracy, cargo loss, bad weather and natural
disasters. In addition, changing economic, regulatory and
political conditions in some countries, including political and
military conflicts, have from time to time resulted in attacks
on vessels, mining of waterways, piracy, terrorism, labor
strikes, boycotts and government requisitioning of vessels.
These sorts of events could interfere with shipping lanes and
result in market disruptions and a significant loss of tanker
company earnings, which could affect the value of our investment
and impact our ability to pay dividends and cause you to lose
all or part of your investment.
When
we are a debt or non-controlling equity investor in a portfolio
company, we generally will not be in a position to control the
entity, and management of the portfolio company may make
decisions that could decrease the value of our portfolio
holdings.
We anticipate primarily making debt and non-controlling equity
investments, and will therefore be subject to the risks that a
portfolio company may make business decisions with which we
disagree and that the stockholders and management of such
company may take risks or otherwise act in ways that do not
serve our interests. Due to the lack of liquidity for our
investments in private companies, we may not be able to dispose
of our interests in our portfolio companies as readily as we
would like or at an appropriate valuation. As a result, a
portfolio company may make decisions that could decrease the
value of our portfolio holdings.
Terrorist
attacks, acts of war or natural disasters may affect any market
for our common stock, impact the businesses in which we invest
and harm our business, operating results and financial
condition.
Terrorist acts, acts of war or natural disasters may disrupt our
operations, as well as the operations of the businesses in which
we invest. Such acts have created, and continue to create,
economic and political uncertainties and have contributed to
global economic instability. Future terrorist activities,
military or security operations, or natural disasters could
further weaken the domestic and global economies and create
additional uncertainties, which may negatively impact the
businesses in which we invest directly or indirectly and, in
turn, could have a material adverse impact on our business,
operating results and financial condition. Losses from terrorist
attacks and natural disasters are often uninsurable.
Numerous
factors may reduce the distributions paid by an Energy Company
to us, which in turn may reduce the dividends we pay to our
common stockholders.
We expect that a substantial portion of the cash flow received
by us will be derived from our investment in equity securities
of Energy Companies. The amount of cash that an Energy Company
has available for dividends or distributions and the tax
character of such dividends or distributions are dependent upon
the amount of cash generated by the Energy Companys
operations. Cash available for dividends or distributions will
vary from month to month and is largely dependent on factors
affecting the Energy Companys operations and factors
affecting the energy industry in general. In addition to the
risk factors described above, other factors which may reduce the
amount of cash an Energy Company has available for dividends or
distributions include increased operating costs, maintenance
capital expenditures, acquisition costs, expansion, construction
or exploration costs and borrowing costs.
21
Our
portfolio investments may be concentrated in a limited number of
portfolio companies in the energy industry, which will subject
us to a risk of significant loss if any of these companies were
to suffer a significant loss.
While we intend for the investments in our portfolio to be
allocated among a substantial number of companies, we may invest
up to 25% of our assets in any one portfolio company and our
investments may initially be concentrated in a limited number of
companies. As a consequence of this concentration, the aggregate
returns we initially realize may be adversely affected if a
small number of our investments perform poorly or if we need to
write down the value of any one such investment. Beyond the
applicable federal income tax diversification requirements, we
do not have fixed guidelines for diversification, and our
investments could be concentrated in relatively few portfolio
companies. We estimate that, once we have invested substantially
all of the net proceeds from our initial public offering, we
will have invested in approximately 20 to 35 portfolio
companies, depending on the availability of appropriate
investment opportunities consistent with our investment
objective and market conditions. Financial difficulty on the
part of any single portfolio company will expose us to a greater
risk of loss than would be the case if we were a
diversified company holding numerous investments. To
the extent that we take large positions in the securities of a
small number of portfolio companies, our net asset value and the
market price of our common stock may fluctuate as a result of
changes in the financial condition or in the markets
assessment of such portfolio companies to a greater extent than
that of a diversified investment company. These factors could
negatively impact our ability to pay you dividends and cause you
to lose all or part of your investment.
In addition, our investments will be concentrated in the energy
industry. Consequently, we will be exposed to the risks of
adverse developments affecting the energy industry to a greater
extent than if our investments were dispersed over a variety of
industries. See The energy industry is subject
to many risks.
We may
not have sufficient funds to make follow-on investments. Our
decision not to make a follow-on investment may have a negative
impact on a portfolio company in need of such an investment or
may result in a missed opportunity for us.
After our initial investment in a portfolio company, we may be
called upon from time to time to provide additional funds to
such company or have the opportunity to increase our investment
in a successful situation by among other things, making a
follow-on investment or exercising a warrant to purchase common
stock. There is no assurance that we will make, or will have
sufficient funds to make, follow-on investments. Any decision
not to make a follow-on investment or any inability on our part
to make such an investment may have a negative impact on a
portfolio company in need of such an investment or may result in
a missed opportunity for us to increase our participation in a
successful operation and may dilute our equity interest or
reduce the expected yield on our investment.
Our
investments in Limited Partnerships are subject to special risks
arising from conflicts of interest and tax
characterization.
An investment in Limited Partnership units involves some risks
which differ from an investment in the common shares of a
corporation. Holders of Limited Partnership units have limited
control and voting rights on matters affecting the partnership.
In addition, there are certain tax risks associated with an
investment in MLP units and conflicts of interest exist between
common unit holders and the general partner. For example,
conflicts of interest may arise from incentive distribution
payments paid to the general partner, or referral of business
opportunities by the general partner or one of its affiliates to
an entity other than the Limited Partnership.
The
publicly traded MLP securities in which we invest are subject to
price fluctuations.
The publicly traded MLP securities in which we invest may be
subject to general movements in the stock market, and a
significant drop in the stock market may depress the price of
securities to which we have exposure. MLP securities prices
fluctuate for several reasons, including changes in the
financial condition of a particular MLP, investors
perceptions of MLPs, the general condition of the relevant stock
market, or when political, catastrophic or economic events
affecting the MLPs occur. In addition, the prices of publicly
traded MLP securities may be sensitive to rising interest rates
given their yield-based nature.
22
We may
invest a portion of our assets in foreign securities. Investing
in foreign securities typically involves more risks than
investing in U.S. securities.
Foreign securities may be issued and traded in foreign
currencies. As a result, their values may be affected by changes
in exchange rates between foreign currencies and the
U.S. dollar. For example, if the value of the
U.S. dollar increases compared to a foreign currency, an
investment in that foreign currency will decrease in value
because it will be worth fewer U.S. dollars.
The political, economic, and social structure of some foreign
countries may be less stable and more volatile than those in the
U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations,
foreign ownership limitations and tax increases. It is possible
that a government may take over assets or operations of a
company or impose restrictions on the exchange or export of
currency or other assets. Some countries also may have different
legal systems that may make it difficult for us to vote proxies,
exercise stockholder rights, and pursue legal remedies with
respect to foreign investments. Diplomatic and political
developments, including rapid and adverse political changes,
social instability, regional conflicts, terrorism and war, could
affect the economies, industries and securities and currency
markets, and the value of our investments, in
non-U.S. countries.
These factors are extremely difficult, if not impossible, to
predict and take into account with respect to our investments in
foreign securities.
Brokerage commissions and other fees generally are higher for
foreign securities. Government supervision and regulation of
foreign stock exchanges, currency markets, trading systems and
brokers may be less than in the U.S. The procedures and
rules governing foreign transactions and custody (holding of our
assets) also may involve delays in payment, delivery or recovery
of money or investments.
Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less
information publicly available about foreign companies than
about most U.S. public companies.
Certain foreign securities may be less liquid and more volatile
than many U.S. securities. This means we may at times be
unable to sell foreign securities at favorable prices or at all.
Dividend and interest income from foreign securities may be
subject to withholding taxes by the country in which the issuer
is located, and we may not be able to pass through to our
stockholders foreign tax credits or deductions with respect to
these taxes.
Our
use of derivatives instruments may result in losses greater than
if they had not been used and the counterparty in a derivative
transaction may default on its obligations.
We may purchase and sell derivative investments such as
exchange-listed and
over-the-counter
put and call options on securities, enter into various interest
rate transactions such as swaps, floors or collars or credit
transactions and enter into total return swaps. The use of
derivatives has risks, including the imperfect correlation
between the value of such instruments and the underlying assets,
the possible default of the other party to the transaction or
illiquidity of the derivative investments, any of which could
materially adversely impact the performance of our common stock.
Furthermore, the ability to successfully use these techniques
depends on the ability of our investment adviser to correctly
predict pertinent market movements, which cannot be assured.
Thus, their use may result in losses greater than if they had
not been used, may require us to sell or purchase portfolio
securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation we can
realize on an investment or may cause us to hold a security that
we might otherwise sell. Additionally, amounts paid by us as
premiums and cash or other assets held in margin accounts with
respect to derivative transactions are not otherwise available
to us for investment purposes.
The use of interest rate swaps is a highly specialized activity
that involves investment techniques and risks different from
those associated with ordinary portfolio security transactions.
Depending on market conditions in general, our use of swaps
could enhance or harm the overall performance of our common
stock. For example, we may use interest rate swaps in connection
with any use by us of Leverage Instruments. To the extent there
is a decline in interest rates, the value of the interest rate
swap could decline, and could result in a decline in the net
asset
23
value of our common stock. In addition, if short-term interest
rates are lower than our fixed rate of payment on the interest
rate swap, the swap will reduce the net asset value of our
common stock.
The
transaction expenses for our investments in private companies
may be higher than customary brokerage
commissions.
Unlike the publicly traded securities that we may hold, we will
generally acquire and dispose of our investments in private
companies through privately negotiated transactions. The
negotiation and documentation of such transactions will often be
complex, and the transaction costs that we incur during the
course of investing in a private company will be significantly
greater than customary brokerage commissions that we would pay
if we were investing in publicly traded securities. We
anticipate that our annual portfolio turnover rate will be
approximately 10% to 20%, but that rate may vary greatly from
year to year. Portfolio turnover rate is not considered a
limiting factor in our investment advisers execution of
investment decisions.
Risks
Related to Our Common Stock
We may
be unable to invest a significant portion of the net proceeds
from our initial public offering on acceptable terms in an
appropriate timeframe.
Delays in investing the net proceeds from our initial public
offering may cause our performance to be worse than that of
other fully invested business development companies or other
lenders or investors pursuing comparable investment strategies.
We cannot assure you that we will be able to identify any
investments that meet our investment objective or that any
investment that we make will produce a positive return. We may
be unable to invest the net proceeds from our initial public
offering on acceptable terms within the time period that we
anticipate or at all, which could harm our financial condition
and operating results.
We anticipate that, depending on market conditions, it will take
us up to nine months to invest substantially all of the net
proceeds from our initial public offering in securities meeting
our investment objective. During this period, we will invest the
net proceeds from our initial public offering primarily in cash,
cash equivalents, U.S. government securities, repurchase
agreements and high-quality debt instruments maturing in one
year or less from the time of investment, which may produce
returns that are significantly lower than the returns which we
expect to achieve when our portfolio is fully invested in
securities meeting our investment objective. As a result, any
dividends that we pay during this period may be substantially
lower than the dividends that we may be able to pay when our
portfolio is fully invested in securities meeting our investment
objective. In addition, until such time as the net proceeds from
our initial public offering are invested in securities meeting
our investment objective, the market price for our common stock
may decline. Thus, the initial return on your investment may be
lower than when, if ever, our portfolio is fully invested in
securities meeting our investment objective.
We may
not be able to pay dividends and our dividends may not grow over
time. We may have difficulty paying our required dividends if we
recognize income before or without receiving cash representing
such income.
We intend to pay quarterly dividends to our stockholders out of
assets legally available for distribution. We cannot assure you
that we will achieve investment results that will allow us to
make a specified level of cash dividends or
year-to-year
increases in cash dividends. Our ability to pay dividends might
be harmed by, among other things, the risk factors described
herein. In addition, the inability to satisfy the asset coverage
test applicable to us as a business development company can
limit our ability to pay dividends. All dividends will be paid
at the discretion of our board of directors and will depend on
our earnings, our financial condition, maintenance of our RIC
status and such other factors as our board of directors may deem
relevant from time to time. We cannot assure you that we will
pay dividends to our stockholders in the future.
For federal income tax purposes, we include in income certain
amounts that we have not yet received in cash, such as original
issue discount, which may arise if we receive warrants in
connection with the making of a loan or possibly in other
circumstances, or
payment-in-kind
interest, which represents contractual interest added to the
principal balance and due at the end of the maturity date of
debt securities in which we invest. Such original issue discount
or increases in principal balances as a result of
payment-in-kind
arrangements, both of which could be
24
significant relative to our overall investment activities, are
included in our income before we receive any corresponding cash
payments. While we focus primarily on investments that will
generate a current cash return, our investment portfolio may
also include securities that do not pay some or all of their
return in periodic current cash distributions.
Since in some cases we may recognize taxable income before or
without receiving cash representing such income, we may have
difficulty meeting the tax requirement to distribute at least
90% of our ordinary income and realized net short-term capital
gains in excess of realized net long-term capital losses, if
any, to maintain RIC tax treatment. Accordingly, we may have to
sell some of our investments at times we would not consider
advantageous, raise additional debt or equity capital or reduce
new investment originations to meet these distribution
requirements. If we are not able to obtain cash from other
sources, we may fail to qualify for RIC treatment and thus
become subject to income tax.
An
investment in our common stock will involve certain tax risks
that could negatively impact our common
stockholders.
In addition to other risk considerations, an investment in our
common stock will involve certain tax risks, including, but not
limited to, the risks summarized below. Tax matters are very
complicated, and the federal, state, local and foreign tax
consequences of an investment in and holding of our common stock
will depend on the facts of each investors situation.
Investors are encouraged to consult their own tax advisers
regarding the specific tax consequences that may affect such
investors.
We cannot assure you what percentage of the dividends paid on
our common stock, if any, will be treated as qualified dividend
income or long-term capital gain or what the tax rates on
various types of income or gain will be in future years. The
favorable rates on qualified dividend income and long-term
capital gains are currently scheduled to increase for certain
income received or gains realized for taxable years beginning
after December 31, 2010.
MLP Tax Risks. Our ability to meet our
investment objective will depend on the level of taxable income
and distributions we receive from the securities in which we
invest, a factor over which we have no control. The benefit we
derive from our investment in MLPs is largely dependent on the
MLPs being treated as partnerships for federal income tax
purposes. If, as a result of a change in current law or a change
in an MLPs business, an MLP were treated as a corporation
for federal income tax purposes, such MLP would be obligated to
pay federal income tax on its income at a maximum corporate tax
rate of 35%. Therefore, if an MLP were classified as a
corporation for federal income tax purposes, the amount of cash
available for distribution from such MLP would be reduced. As a
result, treatment of an MLP as a corporation for federal income
tax purposes would result in a reduction in the after-tax return
of our investment in such MLP, which would likely cause a
reduction in the net asset value of our common stock.
Tax Law Change Risk. Changes in tax laws or
regulations, or interpretations thereof in the future, could
adversely affect us or the Energy Companies in which we invest.
Any such changes could negatively impact our common
stockholders. For example, new legislation could negatively
impact the amount and tax characterization of dividends received
by our common stockholders.
An
investment in our shares is not intended for investors seeking
short-term profit potential.
Investing in shares of our common stock is intended for
investors seeking long-term capital growth and income and is not
meant to provide a vehicle for those who invest for short-term
profit potential. The portfolio securities we seek will
generally be illiquid. Therefore, our ability to receive
interest, dividends or cash distributions or otherwise realize
any return on illiquid investments in the short-term will be
limited, and, as a result, our financial condition and the
performance of our common stock during any short-term period may
be impaired. An investment in our shares should not be
considered a complete investment program. You should take into
account your investment objectives as well as your other
investments when considering the purchase of our common stock.
25
Future
offerings of Leverage Instruments, which would be senior to our
common stock upon liquidation, or equity securities, could
dilute our existing stockholders and may be senior to our common
stock for the purposes of dividends and
distributions.
In the future, we may attempt to increase our capital resources
by making additional offerings of Leverage Instruments, subject
to the restrictions of the 1940 Act. Upon the liquidation of our
company, holders of our Leverage Instruments would receive a
distribution of our available assets prior to the holders of our
common stock. Additional equity offerings by us may dilute the
holdings of our existing stockholders or reduce the value of our
common stock, or both. Any preferred stock we may issue would
have a preference on dividends that could limit our ability to
pay dividends to the holders of our common stock. Because our
decision to issue securities in any future offering will depend
on market conditions and other factors which may be beyond our
control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, our stockholders bear the
risk of our future offerings reducing the market price of our
common stock and diluting their stock holdings in us.
Shares
of closed-end management investment companies, including
business development companies, may trade at a discount from net
asset value.
Shares of closed-end management investment companies, including
business development companies, may trade at a discount from net
asset value. This characteristic of a closed-end investment
company is a risk separate and distinct from the risk that our
net asset value will decrease. Our shares of common stock are
not subject to redemption. Investors desiring liquidity may,
subject to applicable securities laws, trade their shares of
common stock on any exchange where such shares are then trading
at current market value, which may differ from the then current
net asset value. We cannot predict whether our common stock will
trade at, above, or below net asset value.
We may
make investments with which you may not agree.
We will have significant flexibility in investing and may make
investments with which you may not agree. Although we have
attempted to describe our Targeted Investments and their
expected characteristics, our goal is to allocate investments in
compliance with the 1940 Act, the RIC qualification requirements
of the Code and in accordance with our investment objective. If
such rules and regulations change or if the energy finance
market dictates that we vary our investment approach, then we
will adjust our investment allocations and strategy accordingly.
Certain
provisions of Maryland law and our Charter and Bylaws could
hinder, delay or prevent a change in control of our
company.
Our charter (the Charter), Bylaws and the Maryland
General Corporation Law include provisions that could limit the
ability of other entities or persons to acquire control of us or
to change the composition of our board of directors. We are
subject to the Maryland Business Combination Act (the
Business Combination Act) to the extent such statute
is not preempted by applicable requirements of the 1940 Act.
However, our board of directors has adopted a resolution
exempting any business combination between us and any other
person from the Business Combination Act, subject to prior
approval of such business combination by our board of directors,
including a majority of our directors who are not interested
persons as defined in the 1940 Act. In addition, the Maryland
Control Share Acquisition Act (the Control Share
Act) provides that control shares of a Maryland
corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter. Our
Bylaws contain a provision exempting from the Control Share Act
any and all acquisitions by any person of our shares of common
stock. If the applicable board resolution is repealed or our
board of directors does not otherwise approve a business
combination, the Business Combination Act and the Control Share
Act (if we amend our Bylaws to be subject to that Act) may
discourage others from trying to acquire control of us and
increase the difficulty of consummating any offer.
We have also adopted other measures that may make it difficult
for a third party to obtain control of us, including provisions
of our Charter classifying our board of directors in three
classes serving staggered three-year terms, and provisions
authorizing our board of directors to classify or reclassify
shares of our stock in one or more classes or series, to cause
the issuance of additional shares of our stock, and to amend our
Charter, without
26
stockholder approval, to increase or decrease the number of
shares of stock that we have authority to issue. These
provisions, as well as other provisions of our Charter and
Bylaws, could have the effect of discouraging, delaying,
deferring or preventing a transaction or a change in control
that might otherwise be in the best interests of our
stockholders. As a result, these provisions may deprive our
common stockholders of opportunities to sell their common stock
at a premium over the then current market price of our common
stock.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS.
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Not applicable, as we are not an accelerated filer and have not
received written comments from the Commission staff regarding
any of our periodic or current reporting.
We do not own any real estate or other physical properties for
our operations. Under our Investment Management Agreement, KAFA
is responsible for providing office space and equipment that is
reasonably necessary for our operations. Our principal executive
offices are located at 1100 Louisiana, Suite 4550, Houston,
Texas, 77002, and certain corporate officers and other
significant investment personnel and operations are located at
1800 Avenue of the Stars, Second Floor, Los Angeles, California,
90067.
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ITEM 3.
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LEGAL
PROCEEDINGS.
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We are not currently subject to any legal proceedings.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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No matters were submitted to a vote of security holders since
our initial public offering on September 21, 2006 through
the fiscal year ended November 30, 2006.
PART II
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Common
Stock Price Range and Net Asset Value per Share
Our common stock trades on the NYSE under the symbol
KED. We completed our initial public offering of KED
on September 21, 2006 at a price of $25.00 per share. Prior
to such date, there was no public market for our common stock.
The closing market price of our common stock on January 31,
2007 was $24.30 per share, and we had six shareholders of
record on this date. Since many of our shares are held by
brokers and other institutions on behalf of our stockholders, we
are unable to estimate the total number of underlying
stockholders and individual participants represented by these
six shareholders of record as of January 31, 2007.
The following tables lists net asset value per share (NAV
per share) at November 30, 2006 and the high and low
sales price for our common stock during our initial fiscal
quarter in operation from September 21, 2006, the date of
our initial public offering, through November 30, 2006.
During the period, we did not pay any dividends.
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High Sales
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Low Sales
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NAV(1)
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Price
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Price
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Fourth Fiscal Quarter (period from
September 21, 2006 to November 30, 2006)
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$
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24.19
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$
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24.95
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$
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21.56
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(1) |
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NAV per share is determined as of the last day of the quarter
ended and therefore may not reflect the NAV per share on the
date of the high and low sales price, which may or may not fall
on the last day of the quarter. NAV per share is based on
outstanding shares at the end of each quarter. |
27
Dividends
On January 12, 2007, we paid an initial dividend of
$0.22 per common share (for the period from
September 21, 2006 to November 30, 2006), totaling
$2.2 million. We currently intend to distribute quarterly
dividends to our common stockholders. Our quarterly dividends,
if any, will continue to be determined by our board of directors.
As stated, we are a business development company and have
elected to be taxed as a RIC under Subchapter M of the Internal
Revenue Code of 1986. To maintain our RIC status, we must
distribute at least 90% of our investment company taxable
income (which generally consists of ordinary income and
realized net short-term capital gains in excess of realized net
long-term capital losses, if any) and net tax-exempt interest
out of the assets legally available for distribution. A portion
of the cash distributions we receive from our investments will
be treated as a return of capital and therefore generally would
not be treated as investment company taxable income.
While we anticipate that we would distribute some or all of such
return of capital, we are not required to do so in order to
maintain our RIC status. In order to avoid certain excise taxes
imposed on RICs, we must distribute during each calendar year an
amount at least equal to the sum of (1) 98% of our ordinary
income for the calendar year, (2) 98% of our capital gains
in excess of our capital losses for the one-year period ending
on November 30, the last day of our taxable year, and
(3) any ordinary income and net capital gains for preceding
years that were not distributed during such years. We currently
intend to make sufficient distributions to satisfy the annual
distribution requirement and to avoid the excise taxes.
Although we currently intend to distribute realized net capital
gains (i.e., net long-term capital gains in excess of
short-term capital losses), if any, at least annually, out of
the assets legally available for such dividends, we may in the
future decide to retain such capital gains for investment and
designate such retained amount as a deemed distribution.
We cannot assure you that we will achieve results that will
permit the payment of any cash distributions and, if we incur
indebtedness or issue senior securities, we will be prohibited
from making distributions if doing so causes us to fail to
maintain the asset coverage ratios stipulated by the 1940 Act or
if distributions are limited by terms of any of our borrowings.
If we issue Leverage Instruments, we will be prohibited from
paying dividends if doing so causes us to fail to maintain the
asset coverage ratios stipulated by the 1940 Act or if dividends
are limited by the terms of any of our Leverage Instruments.
We have also established an opt out dividend
reinvestment plan for our common stockholders. As a result, if
we declare a dividend, then stockholders cash dividends
will generally be automatically reinvested in additional shares
of our common stock, unless they specifically opt
out of the dividend reinvestment plan and elect to receive
cash dividends.
Recent
Sales of Unregistered Securities
Prior to our initial public offering, we issued 60 shares
of our common stock to KAFA for an aggregate purchase price of
$1,500. Such shares were issued pursuant to an exemption from
the registration requirements of the Securities Act of 1933
under Section 4(2) of the Securities Act of 1933 as a
transaction by an issuer not involving any public offering.
Issuer
Purchases of Equity Securities
We did not repurchase any of our securities during the period of
September 21, 2006 through November 30, 2006.
28
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ITEM 6.
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SELECTED
FINANCIAL DATA.
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The following selected financial information and other data for
the period ended September 21, 2006 through
November 30, 2006 is derived from our financial statements
included in this Annual Report on
Form 10-K
which has been audited by PricewaterhouseCoopers, LLP, an
independent registered public accounting firm. This selected
financial information and other data should be read in
conjunction with our financial statements, related notes thereto
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in this
Annual Report on
Form 10-K.
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For the Period
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September 21, 2006*
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through November 30, 2006
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(amounts in 000s, except
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per share and other data)
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Statement of Operations
Data
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Total investment income
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$
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2,047
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Total expenses
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1,183
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Net investment income
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864
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Net realized and unrealized gains
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7,824
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Net increase in net assets
resulting from operations
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8,688
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Per Share Data
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Net asset value
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$
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24.19
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Net increase in net assets
resulting from operations
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0.87
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Statement of Assets and
Liabilities Data
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Total assets
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$
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243,604
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Total net assets
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241,914
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Other Data
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Total return based on market
value(1)
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(10.7
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)%
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Total return based on net asset
value(2)
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3.7
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%
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Number of portfolio companies at
period end public
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29
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Number of portfolio companies at
period end private
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7
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* |
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Commencement of operations |
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(1) |
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Total return based on market value equals the decrease in the
closing price at November 30, 2006 of $22.32 per share
to the initial public offering price of $25.00 per share at
September 21, 2006. Total return based on market value is
not annualized. |
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Total return based on net asset value equals the increase in the
net asset value at November 30, 2006 of $24.19 per
share over the initial net asset value of $23.32 per share
at September 21, 2006, after deducting underwriting and
offering costs. Total return based on net asset value is not
annualized. |
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ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following information contained in this section should be
read in conjunction with the Item 6. Selected
Financial Data and our financial statements and notes
thereto appearing elsewhere in this Annual Report on
Form 10-K.
Overview
We are incorporated under the laws of the State of Maryland. We
invest primarily in private Energy Companies that are not traded
publicly (non-traded). We completed our initial
public offering of 10,000,000 shares of common stock at
$25.00 per share on September 21, 2006. We have filed an
election to be treated as a business development company
(BDC) under the Investment Company Act of 1940
(the 1940 Act), and we are classified as a
closed-end, non-diversified management investment company under
the 1940 Act.
Our operations will continue to be externally managed and
advised by our investment adviser, KAFA, pursuant to an
investment management agreement. Our investment objective is to
generate both current income and capital appreciation primarily
through equity and debt investments. We will seek to achieve
this objective by investing at least 80% of our total assets in
securities of Energy Companies.
A key focus area for our investments in the energy industry will
continue to be equity and debt investments in Midstream Energy
Companies structured as limited partnerships. We also expect to
evaluate equity and debt investments in Other Energy Companies,
and debt investments in Upstream Energy Companies. We refer to
these investments as our Targeted Investments. Under
current market conditions, we expect that our Targeted
Investments will generally range in size from $10 million
to $60 million, although a few investments may be in excess
of this range.
We may seek to enhance our total returns through the use of
leverage, which may include the issuance of shares of preferred
stock, commercial paper or notes and other borrowings (each a
Leverage Instrument and collectively, the
Leverage Instruments). We currently expect to use
leverage in an aggregate amount equal to 30% of our total
assets, which includes assets obtained through such leverage.
Market
Overview and Outlook
While only 30% of our portfolio is targeted for MLPs and MLP
Affiliates once we are fully invested, these securities
represent a substantially larger percentage of our long-term
investments during our ramp up period. Our performance has been
enhanced by the continued strong performance of the MLP sector.
A market-weighted composite of 55 MLPs (the MLP
Composite) had a total return of 28.1% for calendar 2006,
driven largely by increases in distributions. During the year,
the MLP Composite increased distributions by 14.6%, which we
believe is the strongest year on record for MLP distribution
growth.
The stock market performance of the MLP Composite was strong
throughout the first nine months of the calendar year and
exceedingly strong during the fourth quarter. We believe that
much of the performance during the fourth quarter is
attributable to increased investment in the MLP sector following
planned changes to the taxation of Canadian Royalty Trusts
announced on October 31, 2006.
During calendar 2006, long-term interest rates (as measured by
10-year U.S.
Treasury notes) increased significantly during the first half of
the year and then peaked near the end of the second calendar
quarter. During the third and fourth calendar quarters,
long-term interest rates declined substantially and ended the
year approximately 30 basis points higher than the start of the
year, but approximately 50 basis points lower than the peak near
the end of the second quarter.
We look forward to continuing to execute our business plan to
achieve high total returns by investing in private MLPs,
publicly traded MLPs and MLP Affiliates, and private midstream,
upstream and other energy companies. We are encouraged by the
number and quality of opportunities that we see across all
sub-sectors
of the energy industry.
30
Recent
Developments
On February 15, 2007, the Company invested approximately
$34 million in a second lien term loan issued by ProPetro
Services, Inc. (ProPetro), a private oilfield
service company that provides a broad range of drilling and
production related services to oil and natural gas exploration
and production companies in Texas, Oklahoma, Utah and Colorado.
In conjunction with its investment in the term loan, the Company
received 2,904,620 warrants to purchase shares in ProPetro,
which represents an 8.4% fully diluted interest in ProPetro.
On December 28, 2006, we and other institutional investors
formed Millennium Midstream Partners, LP (the
Partnership), a private limited partnership. The
Partnership was formed to acquire the assets of Millennium
Midstream Energy, LLC and its affiliates, which consist of
gathering, processing and pipeline assets in Texas and
Louisiana. We made an investment of $47.5 million in the
Partnership. Through our investment, we received 2,375,000
Class B common units that represent a 39% limited
partnership interest in Millennium Midstream Partners, LP.;
2,375,000 Class A common warrants, and 212 incentive
distribution rights.
Portfolio
and Investment Activity
Our investments as of November 30, 2006 were comprised of
equity securities of $63.9 million and fixed income
investments of $42.6 million. Included in the equity
securities was $0.9 million invested in warrants of a
privately-held exploration company, and the remaining
$63.0 million was in publicly traded MLPs and MLP
Affiliates. All of our fixed income investments
($42.6 million) were in private Energy Companies, of which
we made eleven different investments in these seven portfolio
companies.
Certain of our fixed income securities accrue interest at
variable rates determined on a basis of a benchmark, such as
LIBOR, or the prime rate, with stated maturities at origination
that typically range from 5 to 10 years. Other fixed income
investments accrue interest at fixed rates. As of
November 30, 2006, 82% or $35.0 million of our
interest-bearing portfolio is floating rate debt and 18% or
$7.6 million is fixed rate debt.
Results
of Operations
Set forth below is an explanation of our results of operations
for the period from September 21, 2006 (inception) through
November 30, 2006, our first fiscal and taxable year in
operation.
Investment Income. Investment income for the
period was $2.1 million and consisted primarily of interest
income on our short-term investments in repurchase agreements
and fixed income investments. We earned $0.7 million of
cash dividends and distributions, substantially all of which
were treated as a return of capital during the period.
Operating Expenses. Total operating expenses
for the period were $1.2 million, including
$0.6 million of investment management fees (net of fee
waivers) and $0.2 million for professional fees for the
period. Investment management fees (net of fee waivers) were
equal to an annual rate of 1.25% of average total assets.
Net Investment Income. During the period, our
net investment income totaled $0.9 million, which consisted of
$2.1 million of investment income, primarily from our interest
income on short-term investments in repurchase agreements. This
investment income was reduced by total operating expenses of
$1.2 million for the period.
Net Realized Gains. During the period, we had
net realized gains from our investments of $0.1 million.
Net Change in Unrealized Appreciation on
Investments. During the period, we had net
unrealized gains from our investments of $7.7 million.
Net Increase in Net Assets Resulting from
Operations. Our net increase in net assets
resulting from operations for the period was $8.7 million.
This increase is composed primarily of the change in net
unrealized gains of $7.7 million and, to a lesser extent,
net investment income of $0.9 million and net realized
gains of $0.1 million as noted above.
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Liquidity
and Capital Resources
On September 21, 2006, we completed our initial public
offering of 10,000,000 shares of common stock at
$25.00 per share, less an underwriting discount of
$1.59 per share. After considering underwriting discounts,
offering costs and organizational expenses, we had approximately
$233.2 million invested in short-term repurchase agreements
and no indebtedness.
As of November 30, 2006, we had approximately
$135.1 million invested in short-term repurchase
agreements. As of January 31, 2007, we had approximately
$90.4 million in repurchase agreements. Consistent with our
investment objective, we anticipate investing these proceeds
within nine months of our initial public offering on
September 21, 2006.
Contractual
Obligations
Investment Management Agreement. We have
entered into an investment management agreement with KAFA under
which we have material future rights and commitments. Pursuant
to the investment management agreement, KAFA has agreed to serve
as our investment adviser and provide on our behalf significant
managerial assistance to our portfolio companies to which we are
required to provide such assistance. Payments under the
investment management agreement include (1) a base
management fee, (2) an incentive fee, and
(3) reimbursement of certain expenses. For the period, we
paid $0.6 million in base management fees, net of $0.2 million
in fee waivers, and zero in incentive fees.
As of November 30, 2006, we did not have, or have not
entered into, any long-term debt obligations, long-term
liabilities, capital or operating lease obligations or purchase
obligations that require minimum payments or any other
contractual obligation at the present, within the next five
years or beyond.
Approval
of Investment Management Agreement
Our Board of Directors approved an Investment Management
Agreement (the Agreement) with KA
Fund Advisors, LLC (KAFA). The Board of
Directors, including those directors who are not parties to the
Agreement or interested persons (as defined in the
Investment Company Act of 1940, as amended (the 1940
Act)) of any such party (the Independent
Directors), at meetings held on September 5 and 11,
2006, took into consideration information provided at the
meetings, as well as a wide variety of materials relating to the
services expected to be provided by KAFA, including reports on
KAFAs relevant investment experience; proposed portfolio
composition; past portfolio activities for other investment
companies advised by KAFA; and other information relating to the
nature, extent and quality of services expected to be provided
by KAFA to us. In addition, the Board reviewed information
regarding, as applicable, our advisory fee and expense
comparisons, descriptions of various related functions such as
compliance monitoring and portfolio trading practices, and
information about the personnel providing investment management
services to us.
In deciding to approve the Agreement, the Board of Directors did
not identify any single issue or particular information that, in
isolation, was the controlling factor. This summary describes
the most important, but not all, of the factors considered by
the Board.
Nature, Extent and Quality of Services. The
Board considered the depth and quality of KAFAs investment
management process, including its extensive industry and sector
experience, the ability to source and analyze potential
investments and the integrity of senior management and other
personnel; the low turnover rates of key personnel, the ability
to recruit qualified personnel with relevant expertise, and the
overall financial strength, stability and reputation of the
organization. The Board discussed the expected quality of the
services to be provided by KAFA and noted KAFAs
sophistication in the relevant investment areas for us. It was
noted that the Directors had been provided with copies of
KAFAs Form ADV Parts I and II, which includes various
information regarding KAFAs personnel, organization and
policies. The Boards consensus was that the nature, extent
and quality of the services expected to be provided by KAFA
should benefit us and our stockholders.
Investment Performance. At the date of these
meetings, we had not yet commenced investment operations so the
Board reviewed KAFAs investment performance for its other
investment companies, knowing that such information was of some
value with respect to us despite the different investment
emphasis for us. The Board noted
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the favorable performance of the two other closed-end investment
vehicles managed by KAFA. The Board ultimately concluded that
KAFA is likely to have investment performance in managing us
that will benefit us and our stockholders.
Advisory Fees and Total Expenses. The Board
reviewed the various components of the proposed advisory fee
(including the incentive structure) and our expected total
expenses and compared such amounts with the average fee and
expense levels of other business development companies,
including those with a similar industry emphasis. The Board
observed that our proposed advisory fees and total expenses were
reasonable compared to other comparable business development
companies. The Board noted, in particular, a lower based fee for
us than many other peer funds and the absence of a
catch-up
feature on our incentive fee which is common for other
business development companies, and makes our fee more favorable
to stockholders. The Board noted that KAFA has agreed to waive
50 basis points of its regular management fee for the first
year, thus indicating a substantial investment by KAFA in us.
The Board concluded that the reasonable level of fees charged by
KAFA should benefit us and our stockholders.
Adviser Costs, Level of Profits and Economies of
Scale. The Board did not review information
regarding KAFAs expected profitability of providing
services to us, but noted the overall reasonable level of the
advisory fees and expenses and the initial fee waiver. The Board
also noted that the level of profitability to KAFA is likely to
vary depending on the performance of us and the resulting level
of advisory fees received under the incentive structure. The
Board also noted KAFAs need to maintain a reasonable level
of profitability to retain and recruit qualified professionals
and that all internal trading and personnel costs will be borne
by KAFA and not by us. The Board acknowledged that travel
expenses related to our investment activities would be paid by
us. The Boards consensus was that it would review this
area in more detail once we have a period of operations to
assess, and KAFA can produce useful profitability and cost
information.
Ancillary Benefits. The Board considered a
variety of other benefits that might be enjoyed by KAFA,
including possible ancillary benefits to its affiliated
broker-dealer, which is expected to be used for only a minimal
amount of our trading and only in a manner permitted by
applicable law. The Board perceived no other material ancillary
benefits other than those that would arise generally from
increasing KAFAs overall assets under management.
Conclusion. Based on its review, including
consideration of each of the factors referred to above, the
Board concluded that the Agreement would be fair and reasonable
to us and our stockholders, that our stockholders should receive
reasonable value in return for the advisory fees paid to KAFA by
us, and that the approval of the Agreement was in the best
interest for us and our stockholders.
Dividends
On January 12, 2007, we paid an initial dividend of
$0.22 per common share (for the period from
September 21, 2006 to November 30, 2006), totaling
$2.2 million.
Off-Balance
Sheet Arrangements
At November 30, 2006, we did not have any off-balance sheet
liabilities or other contractual obligations that are reasonably
likely to have a current or future material effect on our
financial condition, other than the investment advisory and
management agreement with KAFA.
Critical
Accounting Policies
Our most significant accounting policies in accordance with GAAP
are described below. The preparation of our financial statements
in conformity with GAAP requires management to make estimates
and judgments that affect our reported amounts of assets,
liabilities, revenues and expenses. Estimates and judgments are
based on information available at the time such estimates and
judgments are made, and adjustments made to these estimates and
judgments often relate to information not previously available.
Changes in the economic environment, financial markets and any
other parameters used in determining such estimates could cause
actual results to differ. Estimates
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and judgments are used in, among other things, to develop fair
value assumptions, to assess future tax exposure and the
realization of tax assets.
We have identified the following four (4) critical
accounting policies that require a significant amount of
estimation and judgment and are considered to be important to
the portrayal of our assets, liabilities, revenues and expenses:
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Valuation of Non-Traded Portfolio Investments
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Determination of Net Asset Value
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Federal Income Taxes
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Return of Capital Estimates
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Valuation of Non-Traded Portfolio
Investments. As a business development company,
we generally invest in illiquid or otherwise restricted
securities including debt and equity securities of non-traded,
emerging companies. For these securities, as well as any other
portfolio security held by us for which reliable market
quotations are not readily available, we determine valuations
using the following valuation process, unless otherwise
determined by the Board of Directors:
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Investment Team Valuation. Investments are
initially valued by Kayne Anderson investment professionals
responsible for the portfolio investments.
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Investment Team Valuation
Documentation. Preliminary valuation conclusions
are documented and discussed with senior management of Kayne
Anderson. Such valuations generally are submitted to the
Valuation Committee or the Board of Directors on a quarterly
basis, and stand for intervening periods of time.
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Valuation Committee. The Valuation Committee
meets on or about the end of each quarter to consider new
valuations presented by Kayne Anderson, if any, which were made
in accordance with the Valuation Procedures in such quarter.
Between meetings of the Valuation Committee, a senior officer of
Kayne Anderson is authorized to make valuation determinations.
The Valuation Committees valuations stand for intervening
periods of time unless the Valuation Committee meets again at
the request of Kayne Anderson, the Board of Directors, or the
Committee itself. All valuation determinations of the Valuation
Committee are subject to ratification by the Board at its next
regular meeting.
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Valuation Firm. On at least a quarterly basis,
a third-party valuation firm engaged by the Board of Directors
reviews the valuation methodologies and calculations employed
for these securities.
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Board of Directors Determination. The Board of
Directors meets quarterly to consider the valuations provided by
Kayne Anderson 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.
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When an external event such as a purchase transaction, public
offering or subsequent equity sale occurs, our board will use
the pricing indicated by the external event to corroborate
and/or
assist in the valuation.
Unless otherwise determined by the Board of Directors,
securities that are convertible into or otherwise will become
publicly tradable (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
market 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 determined. To the
extent that such securities are convertible or otherwise become
publicly traded within a time frame that may be reasonably
determined, Kayne Anderson may determine an amortization
schedule for the discount in accordance with a methodology
approved by the Valuation Committee.
Unless otherwise determined by the Board of Directors,
securities that are not convertible into or otherwise will
become publicly tradable are valued at fair value as determined
in good faith, considering, among other factors, discounted cash
flow models, comparisons of financial ratios of peer companies
that are public and other measures.
34
Determination of fair values can involve subjective judgments
and estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current auditing standards, the
notes to our financial statements will refer to the uncertainty
with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.
Determination of Net Asset Value. We will
determine our net asset value per share of our common stock as
of the close of regular session trading on the NYSE (normally
4:00 p.m. Eastern time) quarterly. Net asset value per
share of our common stock is computed by dividing the value of
all of our assets (including accrued interest and dividends),
less all of our liabilities (including accrued expenses,
dividends payable and any borrowings) and the liquidation value
of any outstanding preferred stock, by the total number of
shares outstanding.
As noted above in Valuation of Non-Traded Portfolio
Investments, our portfolio will primarily include
securities that are privately issued or illiquid. For these
securities, as well as any other portfolio security held by us
for which reliable market quotations are not readily available,
valuations will be determined in good faith by our board of
directors under the consistently-applied valuation policy
described above.
Our portfolio will also include publicly traded securities. For
these securities, with a readily available market price, the
valuation procedure is as described below. Readily marketable
portfolio securities listed on any exchange other than the
NASDAQ are valued, except as indicated below, at the last sale
price on the business day as of which such value is being
determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and
asked prices on such day. Securities admitted to trade on the
NASDAQ are valued at the NASDAQ official closing price.
Portfolio securities traded on more than one securities exchange
are valued at the last sale price on the business day as of
which such value is being determined at the close of the
exchange representing the principal market for such securities.
Equity securities traded in the
over-the-counter
market, but excluding securities admitted to trading on the
NASDAQ, will be valued at the closing bid prices. Fixed income
securities that are considered corporate bonds with a remaining
maturity of 60 days or more are valued by using the mean of
the bid and ask prices provided by an independent pricing
service. For fixed income securities that are considered
corporate bank loans with a remaining maturity of 60 days
or more, the fair market value is determined by the mean of the
bid and ask prices provided by the syndicate bank or principal
market maker. When price quotes are not available, fair market
value will be based on prices of comparable securities. Fixed
income securities that mature within 60 days are valued on
an amortized cost basis.
Federal Income Taxes. Because federal income
tax regulations differ from GAAP, distributions in accordance
with tax regulations may differ from net investment income and
realized gains recognized for financial reporting purposes.
These differences may be permanent or temporary. We reclassify
permanent differences among capital accounts in our financial
statements to reflect the tax character of each difference.
As stated, we are a business development company and have
elected to be taxed as a RIC under Subchapter M of the Internal
Revenue Code of 1986. As a RIC, we generally will not be
required to pay federal income taxes on any ordinary income or
capital gains that we receive from our portfolio investments and
our taxable subsidiaries in so far as we distribute such amounts
to our stockholders as dividends. To qualify and maintain our
RIC status, we must meet specific
source-of-income
and asset diversification requirements and distribute in each of
our taxable years at least 90% of our investment company
taxable income (which generally consists of ordinary
income and realized net short-term capital gains in excess of
realized net long-term capital losses, if any) and net
tax-exempt interest out of the assets legally available for
distribution.
We expect to continue to form
wholly-owned
taxable subsidiaries to make or hold certain investments in
private limited partnerships. Although, as a RIC, dividends
received by us from our taxable subsidiaries and distributed to
our stockholders will not be subject to federal income taxes,
our taxable subsidiaries will generally be subject to federal
and state income taxes on their income. As a result, the net
return to us on such investments held by these subsidiaries will
be reduced to the extent that the subsidiaries are subject to
income taxes.
Return of Capital Estimates. Dividends and
distributions received from our investments in MLPs generally
are comprised of income and return of capital. The return of
capital portion of the dividends and distributions is a
reduction to investment income in our Statement of Operations
and results in an equivalent reduction to the cost basis of the
associated investments. The reduction to the cost basis results
in an increase to either net realized gains or the net change in
unrealized gains from investments. We record investment income
and
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return of capital based on estimates made at the time when we
receive such distributions. We base these estimates on
historical information available from our MLP investments and
other industry sources. We may revise these estimates based on
information received from our MLP investments after their tax
reporting periods are concluded. Any changes to these estimates
may be material.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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We are subject to financial market risks, including changes in
interest rates and in the valuations of our investment portfolio.
Interest Rate Risk. Interest rate risk
primarily results from variable rate fixed income securities in
which we invest. Fixed income investments in our portfolio are
based on floating and fixed rates. Loans bearing a floating
interest rate are usually based on a LIBOR and, in most cases,
an additional set of basis points. The interest rates for these
fixed income instruments typically have one to six-month
durations and reset at the current market interest rates. As of
November 30, 2006, our floating rate investments totaled
approximately $35.0 million (82%) of our total fixed income
investments of $42.6 million. Based on sensitivity analysis
of the variable rate financial obligations in our fixed income
investment portfolio at November 30, 2006, we estimate that
a one percentage point interest rate movement in the average
market interest rates (either higher or lower) over the
12 months ended November 30, 2007 would either
decrease or increase net investment income by approximately
$0.4 million.
We may hedge against interest rate fluctuations for these
floating rate instruments using standard hedging instruments
such as futures, options and forward contracts subject to the
requirements of the 1940 Act. Hedging activities may mitigate
our exposure to adverse changes in interest rates, but certain
hedging transactions, such as interest rate swaps, can also have
the adverse effect of limiting our ability to participate in a
lower interest rate environment with respect to our portfolio of
investments.
Portfolio Investment Valuation. We carry our
investments at fair value, as determined by our board of
directors. Investments for which market quotations are readily
available are valued at such market quotations. Fixed income and
equity securities that are not publicly traded or whose market
price is not readily available are valued at fair value as
determined in good faith by our board of directors. The types of
factors that we may take into account in fair value pricing of
our investments include, as relevant, the nature and realizable
value of any collateral, the portfolio companys ability to
make payments and its earnings and discounted cash flow, the
markets in which the portfolio company does business, comparison
to publicly traded securities and other relevant factors.
When an external event such as a purchase transaction, public
offering or subsequent equity sale occurs, we use the pricing
indicated by the external event to corroborate our private
equity valuation. Because there is not a readily available
market value for most of the investments in our portfolio, we
value substantially all of our portfolio investments at fair
value as determined in good faith by our board under a valuation
policy and a consistently applied valuation process. 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 our investments may differ significantly from
the values that would have been used had a ready market existed
for such investments. These differences could be material.
In addition, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the valuations currently assigned.
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ITEM 8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
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Our financial statements and financial statement schedules are
set forth at beginning on pages F-1 in this annual report and
are incorporated herein by reference.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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ITEM 9A.
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CONTROLS
AND PROCEDURES.
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We are a non-accelerated filer for the period ending
November 30, 2006. As such, the information relating to
internal control over financial reporting required to be
disclosed in annual reports to stockholders of accelerated
filers under applicable SEC regulations is not required for the
period contained in this report. We expect to be an accelerated
filer for the fiscal year ended November 30, 2007.
(a) Evaluation of Controls and
Procedures. The Companys management,
with the participation of the Companys President and Chief
Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in
Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered in
this report. Based upon such evaluation, the Companys
President and Chief Financial Officer concluded that our
disclosure controls and procedures were effective and provided
reasonable assurance that information required to be disclosed
in the reports that we file or submit under the 1934 Act is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. However, in designing and
evaluating our disclosures controls and procedures, management
recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
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ITEM 9B.
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OTHER
INFORMATION.
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Not applicable.
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PART III
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ITEM 10.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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The information required by this item will be contained in our
Proxy Statement for our 2007 Annual Stockholder Meeting, which
information is incorporated herein by reference.
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ITEM 11.
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EXECUTIVE
COMPENSATION.
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The information required by this item will be contained in our
Proxy Statement for our 2007 Annual Stockholder Meeting, which
information is incorporated herein by reference.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item will be contained in our
Proxy Statement for our 2007 Annual Stockholder Meeting, which
information is incorporated herein by reference.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
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The information required by this item will be contained in our
Proxy Statement for our 2007 Annual Stockholder Meeting, which
information is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The information required by this item will be contained in our
Proxy Statement for our 2007 Annual Stockholder Meeting, which
information is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
|
|
|
|
(a)
|
The following documents are filed as part of this Annual Report
on Form 10-K:
|
|
|
|
|
1.
|
Financial Statements See the Index to Financial
Statements on
Page F-1.
|
|
|
2.
|
Financial Statement Schedules None. We have omitted
financial statement schedules because they are not required or
are not applicable, or the required information is shown in the
financial statements or notes to the financial statements.
|
|
|
3.
|
Exhibits.
|
38
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Charter Form of
Articles of Amendment and Restatement.*
|
|
3
|
.2
|
|
Amended and Restated Bylaws.*
|
|
4
|
.1
|
|
Form of Common Stock Certificate.*
|
|
10
|
.1
|
|
Form of Investment Management
Agreement between Registrant and KA Fund Advisors, LLC.*
|
|
10
|
.2
|
|
Form of Administration Agreement
between Registrant and Bear Stearns Funds Management Inc.*
|
|
10
|
.3
|
|
Form of Custody Agreement between
Registrant and The Custodial Trust Company.*
|
|
10
|
.4
|
|
Form of Dividend Reinvestment
Plan.*
|
|
10
|
.5
|
|
Form of Transfer Agency Agreement
between Registrant and American Stock Transfer & Trust
Company.*
|
|
10
|
.6
|
|
Form of Accounting Services
Agreement between Registrant and Ultimus Fund Solutions, LLC.*
|
|
14
|
.1
|
|
Supplemental Antifraud Code of
Ethics of Registrant filed herewith.
|
|
31
|
.1
|
|
Certification by Chief Executive
Officer pursuant to Exchange Act Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 filed herewith.
|
|
31
|
.2
|
|
Certification by Chief Financial
Officer pursuant to Exchange Act Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 filed herewith.
|
|
32
|
.1
|
|
Certification by Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 filed herewith.
|
|
|
|
* |
|
Previously filed as an exhibit to Registrants
Pre-Effective Amendment No. 5 to its Registration Statement
on
Form N-2
(File
No. 333-134829)
as filed with the Securities and Exchange Commission on
September 18, 2006. |
39
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
|
|
|
* |
|
Commencement of operations |
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kayne Anderson Energy Development Company:
In our opinion, the accompanying statement of assets and
liabilities, including the schedule of investments, and the
related statements of operations, changes in net assets and cash
flows and the financial highlights present fairly, in all
material respects, the financial position of Kayne Anderson
Energy Development Company (the Company) at
November 30, 2006, and the results of its operations, the
changes in its net assets, its cash flows and its financial
highlights for the period September 21, 2006 (commencement
of operations) through November 30, 2006, in conformity
with accounting principles generally accepted in the United
States of America. These financial statements and financial
highlights (hereafter referred to as financial
statements) are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit
of these financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit, which included
confirmation of securities owned at November 30, 2006 by
correspondence with the custodian, provides a reasonable basis
for our opinion.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 16, 2007
F-2
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description:
|
|
Shares/Units
|
|
|
Value
|
|
|
Long-Term
Investments 44.0%
|
|
|
|
|
|
|
|
|
Equity
Investments(a) 26.4%
|
|
|
|
|
|
|
|
|
Publicly Traded MLP and MLP
Affiliate 26.0%
|
|
|
|
|
|
|
|
|
Atlas Pipeline Partners, L.P.
|
|
|
40
|
|
|
$
|
1,934
|
|
BreitBurn Energy Partners L.P.(b)
|
|
|
12
|
|
|
|
259
|
|
Calumet Specialty Products
Partners, L.P.
|
|
|
113
|
|
|
|
4,294
|
|
Crosstex Energy, L.P.
|
|
|
9
|
|
|
|
349
|
|
DCP Midstream Partners, LP
|
|
|
64
|
|
|
|
2,141
|
|
Enbridge Energy Management,
L.L.C.(c)(d)
|
|
|
34
|
|
|
|
1,663
|
|
Enbridge Energy Partners L.P.
|
|
|
30
|
|
|
|
1,494
|
|
Energy Transfer Equity, L.P.
|
|
|
220
|
|
|
|
6,389
|
|
Energy Transfer Partners,
L.P.
|
|
|
3
|
|
|
|
175
|
|
Enterprise Products Partners
L.P.
|
|
|
195
|
|
|
|
5,502
|
|
Global Partners LP
|
|
|
82
|
|
|
|
1,935
|
|
Hiland Holdings GP, LP(b)
|
|
|
21
|
|
|
|
508
|
|
Hiland Partners, LP
|
|
|
30
|
|
|
|
1,603
|
|
Inergy, L.P.
|
|
|
27
|
|
|
|
794
|
|
Kinder Morgan Management, LLC(c)(d)
|
|
|
212
|
|
|
|
9,746
|
|
Magellan Midstream Partners,
L.P.
|
|
|
30
|
|
|
|
1,161
|
|
MarkWest Energy Partners,
L.P.
|
|
|
64
|
|
|
|
3,639
|
|
MarkWest Hydrocarbon, Inc.(c)
|
|
|
14
|
|
|
|
584
|
|
Martin Midstream Partners
L.P.
|
|
|
45
|
|
|
|
1,396
|
|
Natural Resources Partners
L.P.
|
|
|
4
|
|
|
|
220
|
|
Natural Resources Partners
L.P. Subordinated Units
|
|
|
8
|
|
|
|
439
|
|
ONEOK Partners, L.P.
|
|
|
84
|
|
|
|
5,101
|
|
Plains All American Pipeline,
L.P.
|
|
|
51
|
|
|
|
2,596
|
|
Regency Energy Partners LP
|
|
|
17
|
|
|
|
469
|
|
TC PipeLines, LP
|
|
|
18
|
|
|
|
587
|
|
Teekay LNG Partners L.P.
|
|
|
47
|
|
|
|
1,490
|
|
TEPPCO Partners, L.P.
|
|
|
42
|
|
|
|
1,646
|
|
Universal Compression Partners,
L.P.(b)
|
|
|
68
|
|
|
|
1,681
|
|
Valero L.P.
|
|
|
16
|
|
|
|
867
|
|
Williams Partners L.P.
|
|
|
60
|
|
|
|
2,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,983
|
|
|
|
|
|
|
|
|
|
|
Other Equity
0.4%
|
|
|
|
|
|
|
|
|
Trident Resources
Corp. Warrants(e)
|
|
|
167
|
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
Total Equity Investments (Cost
$57,585)
|
|
|
|
|
|
|
63,900
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-3
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS (CONTINUED)
AS OF NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Maturity
|
|
|
Principal
|
|
|
|
|
Description:
|
|
Rate
|
|
Date
|
|
|
Amount
|
|
|
Value
|
|
|
Fixed Income
Investments 17.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
11.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream
6.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SemGroup, L.P.
|
|
8.750%
|
|
|
11/15/15
|
|
|
$
|
7,500
|
|
|
$
|
7,575
|
|
Targa Resources, Inc.
|
|
(f)
|
|
|
10/31/12
|
|
|
|
486
|
|
|
|
488
|
|
Targa Resources, Inc.
|
|
(g)
|
|
|
10/31/12
|
|
|
|
2,004
|
|
|
|
2,012
|
|
Targa Resources, Inc.
|
|
(h)
|
|
|
10/31/07
|
|
|
|
4,843
|
|
|
|
4,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream
4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDX Funding, LLC
|
|
(i)
|
|
|
3/31/13
|
|
|
|
6,300
|
|
|
|
6,355
|
|
Coldren Resources, Inc.
|
|
(j)
|
|
|
7/14/11
|
|
|
|
416
|
|
|
|
419
|
|
Coldren Resources, Inc.
|
|
(k)
|
|
|
7/14/11
|
|
|
|
2,584
|
|
|
|
2,603
|
|
SandRidge Energy Inc.
|
|
(l)
|
|
|
11/20/07
|
|
|
|
2,500
|
|
|
|
2,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States
(Cost $26,794)
|
|
|
|
|
|
|
|
|
|
|
|
|
26,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream
6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident Exploration Corp.
|
|
(m)
|
|
|
4/26/11
|
|
|
|
5,500
|
|
|
|
5,638
|
|
Trident Resources Corp.
|
|
(n)
|
|
|
11/22/11
|
|
|
|
10,000
|
|
|
|
10,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Canada (Cost
$14,401)
|
|
|
|
|
|
|
|
|
|
|
|
|
15,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Income Investments
(Cost $41,195)
|
|
|
|
|
|
|
|
|
|
|
|
|
42,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Investments
(Cost $98,780)
|
|
|
|
|
|
|
|
|
|
|
|
|
106,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Investments 55.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
Agreement 55.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear, Stearns & Co. Inc.
(Agreement dated 11/30/06 to be repurchased at $135,154),
collateralized by $139,055 in U.S. Treasury Strips (Cost
$135,134)
|
|
5.270
|
|
|
12/01/06
|
|
|
|
|
|
|
|
135,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
99.9% (Cost $233,914)
|
|
|
|
|
|
|
|
|
|
|
|
|
241,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets in Excess of Total
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
$
|
241,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-4
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS (CONCLUDED)
AS OF NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
(a) |
|
Unless otherwise noted, equity investments are common
units/common shares. |
|
(b) |
|
Security is currently non-income producing but is expected to
pay distributions within the next 12 months. |
|
(c) |
|
Security is not treated as a publicly traded partnership for
regulated investment company (RIC) qualification
purposes. To qualify as a RIC for tax purposes, the Company may
directly invest up to 25% of its total assets in equity and debt
securities of entities treated as publicly traded partnerships.
At November 30, 2006, the Company had 21.1% of its net
assets invested in securities treated as publicly traded
partnerships. It is the Companys intention to be treated
as a RIC for tax purposes. |
|
(d) |
|
Distributions are paid in-kind. |
|
(e) |
|
Warrants relate to our floating rate unsecured term loan
facility with Trident Resources Corp. These warrants are
non-income producing and expire on November 30, 2013. |
|
(f) |
|
Floating rate letter of credit facility. Security pays interest
at a rate of LIBOR + 225 basis points (7.62% as of
November 30, 2006). |
|
(g) |
|
Floating rate senior secured first lien term loan facility.
Security pays interest at a rate of LIBOR + 225 basis points
(7.62% as of November 30, 2006). |
|
(h) |
|
Floating rate senior secured first lien bridge loan facility.
Security pays interest at a rate of LIBOR + 225 basis points
(7.62% as of November 30, 2006). |
|
(i) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 525 basis points
(10.62% as of November 30, 2006). |
|
(j) |
|
Floating rate letter of credit facility. Security pays interest
at a rate of LIBOR less 12.5 basis points (5.25% as of
November 30, 2006). |
|
(k) |
|
Floating rate senior secured first lien term loan. Security pays
interest at a rate of LIBOR + 400 basis points (9.39% as of
November 30, 2006). |
|
(l) |
|
Floating rate senior unsecured bridge loan facility. Security
pays interest at a rate of LIBOR + 450 basis points (11.00% as
of November 30, 2006). |
|
(m) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 750 basis
points (12.88% as of November 30, 2006). |
|
(n) |
|
Floating rate unsecured term loan facility. Interest is
paid-in-kind
at a rate of LIBOR + 1200 basis points (17.37% as of
November 30, 2006). |
See accompanying notes to financial statements.
F-5
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF ASSETS AND LIABILITIES
AS OF NOVEMBER 30, 2006
(amounts in 000s, except share and per share
amounts)
|
|
|
|
|
ASSETS
|
Investments, at fair value
(Cost $98,780)
|
|
$
|
106,545
|
|
Repurchase agreement
(Cost $135,134)
|
|
|
135,134
|
|
|
|
|
|
|
Total investments
(Cost $233,914)
|
|
|
241,679
|
|
Deposits with brokers
|
|
|
101
|
|
Receivable for securities sold
|
|
|
567
|
|
Interest, dividends and
distributions receivable
|
|
|
931
|
|
Receivable for offering costs
|
|
|
200
|
|
Prepaid expenses
|
|
|
126
|
|
|
|
|
|
|
Total Assets
|
|
|
243,604
|
|
|
|
|
|
|
|
LIABILITIES
|
Investment management fee payable
|
|
|
571
|
|
Accrued directors fees and
expenses
|
|
|
63
|
|
Accrued expenses and other
liabilities
|
|
|
1,056
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,690
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
241,914
|
|
|
|
|
|
|
NET ASSETS CONSIST OF
|
|
|
|
|
Common stock, $0.001 par
value (10,000,060 shares issued and outstanding, and
200,000,000 shares authorized)
|
|
$
|
10
|
|
Paid-in capital
|
|
|
233,216
|
|
Undistributed net investment income
|
|
|
864
|
|
Accumulated net realized gains on
investments
|
|
|
59
|
|
Net unrealized gains on investments
|
|
|
7,765
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
241,914
|
|
|
|
|
|
|
NET ASSET VALUE PER
SHARE
|
|
$
|
24.19
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-6
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF OPERATIONS
FOR THE PERIOD SEPTEMBER 21, 2006* THROUGH
NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
Income
|
|
|
|
|
Dividends and distributions
|
|
$
|
709
|
|
Return of capital
|
|
|
(705
|
)
|
|
|
|
|
|
Net dividends and distributions
|
|
|
4
|
|
Interest
|
|
|
2,043
|
|
|
|
|
|
|
Total Investment Income
|
|
|
2,047
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Investment management fees
|
|
|
799
|
|
Professional fees
|
|
|
217
|
|
Reports to stockholders
|
|
|
125
|
|
Organizational fees
|
|
|
75
|
|
Directors fees
|
|
|
63
|
|
Administration fees
|
|
|
42
|
|
Insurance
|
|
|
30
|
|
Custodian fees
|
|
|
17
|
|
Other expenses
|
|
|
43
|
|
|
|
|
|
|
Total Expenses Before
Investment Management Fee Waivers
|
|
|
1,411
|
|
Investment management fee waivers
|
|
|
(228
|
)
|
|
|
|
|
|
Total Expenses
|
|
|
1,183
|
|
|
|
|
|
|
Net Investment Income
|
|
|
864
|
|
|
|
|
|
|
REALIZED AND UNREALIZED
GAINS
|
|
|
|
|
Net Realized Gains
|
|
|
|
|
Investments
|
|
|
59
|
|
|
|
|
|
|
Net Realized Gains
|
|
|
59
|
|
|
|
|
|
|
Net Change in Unrealized
Gains
|
|
|
|
|
Investments
|
|
|
7,765
|
|
|
|
|
|
|
Net Change in Unrealized Gains
|
|
|
7,765
|
|
|
|
|
|
|
Net Realized and Unrealized
Gains
|
|
|
7,824
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
|
|
$
|
8,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Commencement of operations |
See accompanying notes to financial statements.
F-7
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD SEPTEMBER 21, 2006* THROUGH
NOVEMBER 30, 2006
(amounts in 000s, except share amounts)
|
|
|
|
|
OPERATIONS
|
|
|
|
|
Net investment income
|
|
$
|
864
|
|
Net realized gains
|
|
|
59
|
|
Net change in unrealized gains
|
|
|
7,765
|
|
|
|
|
|
|
Net Increase in Net Assets
Resulting from Operations
|
|
|
8,688
|
|
|
|
|
|
|
CAPITAL STOCK
TRANSACTIONS
|
|
|
|
|
Proceeds from initial public
offering of 10,000,000 shares of common stock
|
|
|
250,000
|
|
Underwriting discounts and
offering expenses associated with the issuance of common stock
|
|
|
(16,775
|
)
|
|
|
|
|
|
Net Increase in Net
Assets
|
|
|
233,225
|
|
|
|
|
|
|
Total Increase in Net
Assets
|
|
|
241,913
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
Beginning of period
|
|
|
1
|
|
|
|
|
|
|
End of
period(1)
|
|
$
|
241,914
|
|
|
|
|
|
|
|
|
|
* |
|
Commencement of operations |
|
(1) |
|
Includes undistributed net investment income of $864. |
See accompanying notes to financial statements.
F-8
FOR THE PERIOD SEPTEMBER 21, 2006* THROUGH
NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
$
|
8,688
|
|
Adjustments to reconcile net
increase in net assets resulting from operations to net cash
used in operating activities:
|
|
|
|
|
Purchase of investments
|
|
|
(102,578
|
)
|
Proceeds from sale of investments
|
|
|
3,153
|
|
Purchase of short-term
investments, net
|
|
|
(135,134
|
)
|
Realized gains on investments
|
|
|
(59
|
)
|
Return of capital distributions
|
|
|
705
|
|
Unrealized gains
|
|
|
(7,765
|
)
|
Accretion of bond discount
|
|
|
(1
|
)
|
Increase in deposits with brokers
|
|
|
(101
|
)
|
Increase in receivable for
securities sold
|
|
|
(567
|
)
|
Increase in interest, dividend and
distributions receivables
|
|
|
(931
|
)
|
Increase in prepaid expenses
|
|
|
(126
|
)
|
Increase in investment management
fee payable
|
|
|
571
|
|
Increase in accrued
directors fees and expenses
|
|
|
63
|
|
Increase in accrued expenses and
other liabilities
|
|
|
1,056
|
|
|
|
|
|
|
Net Cash Used in Operating
Activities
|
|
$
|
(233,026
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
Proceeds from the issuance of
common stock
|
|
|
250,000
|
|
Underwriting discount and offering
expenses from the issuance of shares of common stock, including
the increase in the receivable for offering costs of $200
|
|
|
(16,975
|
)
|
|
|
|
|
|
Net Cash Provided by Financing
Activities
|
|
$
|
233,025
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(1
|
)
|
CASH BEGINNING OF
PERIOD
|
|
|
1
|
|
|
|
|
|
|
CASH END OF
PERIOD
|
|
$
|
|
|
|
|
|
|
|
|
|
|
* |
|
Commencement of operations |
See accompanying notes to financial statements.
F-9
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
(amounts in 000s, except share and per share
amounts)
Kayne Anderson Energy Development Company (the
Company) was organized as a Maryland corporation on
May 24, 2006. The Company is registered under the
Investment Company Act of 1940, as amended (the 1940
Act), as a non-diversified closed-end investment company,
and has filed an election to be treated a business development
company under the 1940 Act. 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 net assets together with the proceeds of any
borrowings (total assets) in securities of companies
that derive the majority of their revenue from activities in the
energy industry, 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
sale of coal and coal reserves; the marine transportation of
crude oil, refined petroleum products, liquefied natural gas
(LNG), 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. The Company commenced investment operations on
September 21, 2006 and, prior to such date, had no
operations other than the sale and issuance of 60 shares of
common stock at an aggregate purchase price of $1.5 to KA
Fund Advisors, LLC (KAFA) on August 2,
2006. The Companys shares of common stock are listed on
the New York Stock Exchange, Inc. (NYSE) under the
symbol KED.
|
|
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. Calculation of Net Asset Value The
Company determines its net asset value as of the close of
regular session trading on the NYSE (normally 4:00 p.m.
Eastern time) 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
dividends), less all of its liabilities (including accrued
expenses, dividends payable and any borrowings) by the total
number of common shares outstanding.
C. Investment Valuation Readily
marketable portfolio securities listed on any exchange other
than the NASDAQ Stock Market, Inc. (NASDAQ) are
valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day,
except for short sales and call option contracts written, for
which the last quoted asked price is used. 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. Fixed income
securities that are considered corporate bonds with a remaining
maturity of 60 days or more are valued by using the mean of
the bid and ask prices provided by an independent pricing
service. For fixed income securities that are considered
corporate bank loans with a remaining maturity of 60 days
or more, the fair market value is determined by the mean of the
bid and ask prices provided by the syndicate bank or principal
market maker. When price quotes are not available, fair market
value will be based
F-10
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
on prices of comparable securities. Fixed income securities that
mature within 60 days are valued on an amortized cost basis.
The Companys portfolio may include securities that are
privately issued or illiquid. For these securities, as well as
any other portfolio security held by the Company for which
reliable market quotations are not readily available, valuations
will be determined in good faith by our board of directors under
a valuation policy and a consistently applied valuation process.
Unless otherwise determined by the board of directors of the
Company, the following valuation process, approved by the board
of directors, will be used for such securities:
|
|
|
|
|
Investment Team Valuation. The applicable
investments will initially be valued by the investment
KAFAs senior professionals responsible for the portfolio
investments.
|
|
|
|
Investment Team Valuation
Documentation. Preliminary valuation conclusions
will be documented and discussed with senior management of KAFA.
Such valuations will be submitted to the Valuation Committee (a
committee of the board of directors) on a quarterly basis, and
until determinations of the Valuation Committee are made with
respect to such valuations, they will stand for intervening
periods of time unless a senior officer of KAFA determines that
adjustments to such preliminary valuations are appropriate to
avoid valuations that are stale or do not represent fair value.
|
|
|
|
Valuation Committee. The Valuation Committee
shall meet on or about the end of each quarter to consider new
valuations presented by KAFA, if any, which were made in
accordance with the Valuation Procedures in such quarter.
Between meetings of the Valuation Committee, a senior officer of
KAFA is authorized to make valuation determinations. The
Valuation Committees valuation determinations will be
subject to ratification by the board at its next regular meeting.
|
|
|
|
Valuation Firm. No less frequently than
quarterly, a third-party valuation firm engaged by the board of
directors will review the valuation methodologies and
calculations employed for these securities. Initially the
independent third-party valuation firm is Duff &
Phelps, LLC.
|
|
|
|
Board of Directors Determination. The board of
directors will consider the valuations provided by KAFA and the
Valuation Committee and ratify valuations for the applicable
securities at each quarterly board meeting. The board of
directors will consider the reports provided by the third-party
valuation firm in reviewing and determining in good faith the
fair value of the applicable portfolio securities.
|
During the course of such valuation process, whenever possible,
privately-issued equity investments are valued using comparisons
of financial ratios of the portfolio companies that issued such
equity securities to any peer companies that are public. The
value is then discounted to reflect the illiquid nature of the
investment, as well as the Companys minority, non-control
position. When an external event such as a purchase transaction,
public offering or subsequent equity sale occurs, the Company
uses the pricing indicated by the external event to corroborate
our valuation. Due to the inherent uncertainty of determining
the fair value of investments that do not have a readily
available market value, the fair value of the Companys
investments in privately-issued securities may differ
significantly from the values that would have been used had a
ready market existed for such investments, and the differences
could be material.
Factors that the Company may take into account in fair value
pricing its investments include, as relevant, the portfolio
companys ability to make payments and its earnings and
discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly traded securities, the
nature and realizable value of any collateral and other relevant
factors.
Unless otherwise determined by the board of directors,
securities that are convertible into or otherwise will become
publicly traded (e.g., through subsequent registration or
expiration of a restriction on trading) will be valued through
the process described above, using a valuation based on the
market value of the publicly traded security less a discount.
The discount will initially be equal in amount to the discount
negotiated at the time of purchase. To the
F-11
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
extent that such securities are convertible or otherwise become
publicly traded within a time frame that may be reasonably
determined, the investment adviser may determine an amortization
schedule for the discount in accordance with a methodology
approved by the Valuation Committee.
Any derivative transaction that the Company enters into may,
depending on the applicable market environment, have a positive
or negative value for purposes of calculating our net asset
value. Any option transaction that the Company enters into may,
depending on the applicable market environments, have no value
or a positive/negative value. Exchange traded options and
futures contracts are valued at the closing price in the market
where such contracts are principally traded.
Determination of fair values can involve subjective judgments
and estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current auditing standards, the
notes to the financial statements hereby refer to the
uncertainty with respect to the possible effect of such
valuations, and any change in such valuations, on our financial
statements.
At November 30, 2006, the Company did not hold any
securities that were fair valued as determined pursuant to
procedures adopted by the board of directors.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement on Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements. This standard
establishes a single authoritative definition of fair value,
sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements
already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The changes to
current generally accepted accounting principles from the
application of this Statement relate to the definition of fair
value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. As of
November 30, 2006, the Company does not believe the
adoption of SFAS No. 157 will impact the financial
statement amounts; however, additional disclosures may be
required about the inputs used to develop the measurements and
the effect of certain of the measurements on changes in net
assets for the period.
D. Repurchase Agreements The Company has
agreed to purchase securities from financial institutions
subject to the sellers agreement to repurchase them at an
agreed-upon
time and price (repurchase agreements). The
financial institutions with whom the Company enters into
repurchase agreements are banks and broker/dealers which KAFA
considers creditworthy. The seller under a repurchase agreement
is required to maintain the value of the securities as
collateral, subject to the agreement, at not less than the
repurchase price plus accrued interest. KAFA monitors daily the
mark-to-market
of the value of the collateral, and, if necessary, requires the
seller to maintain additional securities, so that the value of
the collateral is not less than the repurchase price. Default by
or bankruptcy of the seller would, however, expose the Company
to possible loss because of adverse market action or delays in
connection with the disposition of the underlying securities.
E. Short Sales A short sale is a
transaction in which the Company sells securities it does not
own (but has borrowed) in anticipation of or to hedge against a
decline in the market price of the securities. To complete a
short sale, the Company may arrange through a broker to borrow
the securities to be delivered to the buyer. The proceeds
received by the Company for the short sale are retained by the
broker until the Company replaces the borrowed securities. In
borrowing the securities to be delivered to the buyer, the
Company becomes obligated to replace the securities borrowed at
their market price at the time of replacement, whatever the
price may be.
All short sales are fully collateralized. The Company maintains
assets consisting of cash or liquid securities equal in amount
to the liability created by the short sale. These assets are
adjusted daily to reflect changes in the value of the securities
sold short. The Company is liable for any dividends or
distributions paid on securities sold short.
F-12
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
The Company may also sell short against the box
(i.e., the Company enters into a short sale as described
above while holding an offsetting long position in the security
which it sold short). If the Company enters into a short sale
against the box, the Company segregates an
equivalent amount of securities owned as collateral while the
short sale is outstanding.
At November 30, 2006, there were no open short sales.
F. Option Writing When the Company
writes an 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. The difference between the premium and the
amount paid on effecting a closing purchase transaction,
including brokerage commissions, is also treated as a realized
gain, or if the premium is less than the amount paid for the
closing purchase transaction, as a realized 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. If a put option is
exercised, the premium reduces the cost basis of the securities
purchased by the Company. 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.
During the period of September 21, 2006 (inception) through
November 30, 2006, the Company did not enter into written
option transactions.
G. 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. Dividend and distribution
income is recorded on the ex-dividend date.
H. Investment Income and Return of Capital
Estimates Distributions received from the
Companys investments in MLPs generally are comprised of
income and return of capital. For the period of
September 21, 2006 (inception) through November 30,
2006, the Company estimated that 100% of the MLP distributions
received would be treated as a return of capital. The Company
recorded as return of capital the amount of $705 of dividends
and distributions received from its investments. The return of
capital of $705, resulted in an equivalent reduction in the cost
basis of the associated investments. Net Realized Gains and Net
Change in Unrealized Gains in the accompanying Statement of
Operations were increased by $1 and $704, respectively,
attributable to the recording of such dividends and
distributions as reduction in the cost basis of investments. The
Company records investment income and return of capital based on
estimates made at the time such distributions are received. Such
estimates are based on historical information available from
MLPs and other industry sources. These estimates may
subsequently be revised based on information received from MLPs
after their tax reporting periods are concluded. Interest income
is recognized on the accrual basis, including amortization of
premiums and accretion of discounts.
I. Dividends and Distributions to
Stockholders Dividends and distributions to
common stockholders are recorded on the ex-dividend date. The
character of dividends made during the year may differ from
their ultimate characterization for federal income tax purposes.
The Company is unable to make final determinations as to the
character of the dividend until after the end of the calendar
year. The Company informs its common stockholders in January
following the calendar year of the character of dividends deemed
paid during the fiscal year.
J. Partnership Accounting Policy The
Company records its pro-rata share of the income/(loss) and
capital gains/(losses), to the extent of dividends it has
received, allocated from the underlying partnerships and adjusts
the cost of the underlying partnerships accordingly. These
amounts are included in the Companys Statement of
Operations.
K. Income Taxes The Company intends to
qualify for the tax treatment applicable to regulated investment
companies under Subchapter M of the Internal Revenue Code of
1986, as amended, and among other things is required to make the
requisite distributions to its stockholders, which will relieve
it from federal income or excise
F-13
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
taxes. Although, as a regulated investment company, dividends
received by the Company and distributed to its stockholders will
not be subject to federal income or excise taxes, the
Companys taxable subsidiaries will generally be subject to
federal and state income taxes on their income. The Company
expects to form
wholly-owned
taxable subsidiaries to make or hold certain investments in
private limited partnerships.
Income and capital gain distributions made by regulated
investment companies often differ from the aggregate GAAP basis
net investment income and net realized gains. For the Fund, the
principal reason for these differences is the return of capital
treatment of dividends and distributions from MLPs and certain
other investments. Net investment income and net realized gains
for GAAP purposes may differ from taxable income for federal
income tax purposes primarily due to wash sales and disallowed
partnership losses from MLPs.
As of November 30, 2006, none of the Companys losses
were disallowed as a result of wash sales for federal income tax
purposes.
The tax basis of the components of distributable earnings can
differ from the amounts reflected in the Statement of Assets and
Liabilities due to temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At
November 30, 2006, the components of the distributable
earnings on a tax basis for the Company were as follows:
|
|
|
|
|
Undistributed ordinary income
|
|
$
|
997
|
|
Undistributed long-term capital
gains
|
|
|
|
|
Unrealized appreciation
|
|
|
7,765
|
|
|
|
|
|
|
Total distributable earnings
|
|
$
|
8,762
|
|
|
|
|
|
|
During fiscal 2006, the Company did not pay any dividends or
distributions.
At November 30, 2006, the identified cost of investments
for Federal income tax purposes was $233,914. At
November 30, 2006, gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were
as follows:
|
|
|
|
|
Gross unrealized appreciation of
investments
|
|
$
|
7,919
|
|
Gross unrealized depreciation of
investments
|
|
|
(154
|
)
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
7,765
|
|
|
|
|
|
|
In July 2006, the Financial Accounting Standards Board issued
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes
(FIN No. 48). This standard defines the
threshold for recognizing the benefits of tax-return positions
in the financial statements as more likely than not
to be sustained by the taxing authority and requires measurement
of a tax position meeting the more likely than not
criterion, based on the largest benefit that is more than
50 percent likely to be realized. FIN 48 is effective
as of the beginning of the first fiscal year beginning after
December 15, 2006. At adoption, companies must adjust their
financial statements to reflect only those tax positions that
are more likely than not to be sustained as of the
adoption date. As of November 30, 2006, the Company has not
evaluated the impact that will result from adopting FIN 48.
L. Organizational and Offering Costs
Organizational expenses estimated at $75 were treated as an
expense during the Companys initial fiscal period.
Offering costs of approximately $845 incurred in connection with
the sale of shares of common stock were charged to paid-in
capital when the shares were issued.
M. Indemnifications Under the
Companys organizational documents, its officers and
directors are indemnified against certain liabilities arising
out of the performance of their duties to the Company. In
addition, in the normal course of business, the Company enters
into contracts that provide general indemnification to other
parties. The Companys maximum exposure under these
arrangements is unknown, as this would involve future
F-14
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
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.
|
|
3.
|
AGREEMENTS
AND AFFILIATIONS
|
The Company has entered into an investment management agreement
with KAFA under which the Company has material future rights and
commitments. Pursuant to the investment management agreement,
KAFA has agreed to serve as investment adviser and provide
significant managerial assistance to portfolio companies to
which the Company is required to provide such assistance.
Payments under the investment management agreement include (1) a
base management fee, (2) an incentive fee, and (3) reimbursement
of certain expenses.
Base Management Fee. The Company pays an
amount equal on an annual basis to 1.75% of average total assets
to KAFA as compensation for services rendered. This amount is
payable each quarter after the end of the quarter. For purposes
of calculating the base management fee, the average total
assets for each quarterly period are determined by
averaging the total assets at the last day of that quarter with
the total assets at the last day of the prior quarter (or as of
the commencement of operations for the initial period if a
partial quarter). Total assets shall equal gross asset value
(which includes assets attributable to or proceeds from the use
of Leverage Instruments), minus the sum of accrued and unpaid
dividends and distributions on common stock and accrued and
unpaid dividends on preferred stock and accrued liabilities
(other than liabilities associated with leverage used by the
Company). 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.
During the first twelve months of the Companys investment
activities (from September 25, 2006 until
September 24, 2007), KAFA has contractually agreed to waive
or reimburse the Company for base management fees in an amount
equal on an annual basis to 0.50% of average total assets.
Incentive Fee. The incentive fee consists of
two parts. The first part of the incentive fee (the Net
Investment Income Fee), which is calculated and payable
quarterly in arrears, equals 20% of the excess, if any, of
Adjusted Net Investment Income for the quarter over a quarterly
hurdle rate equal to 1.875% (7.50% annualized) of average net
assets for the quarter. Average net assets is calculated by
averaging net assets at the last day of the quarter and at the
last day of such prior quarter or commencement of operations
(net assets is defined as total assets less total liabilities
(including liabilities associated with Leverage Instruments)
determined in accordance with GAAP).
For this purpose, Adjusted Net Investment Income
means interest income (including accrued interest that the
Company has not yet received in cash), dividend and distribution
income from equity investments (but excluding that portion of
cash distributions that are treated as a return of capital) and
any other income, including any other fees, such as commitment,
origination, syndication, structuring, diligence, monitoring and
consulting fees or other fees that the Company receives from
portfolio companies (other than fees for providing significant
managerial assistance to portfolio companies) accrued during the
fiscal quarter, minus operating expenses for the quarter
(including the base management fee, any interest expense,
dividends paid on issued and outstanding preferred stock, if
any, and any accrued income taxes related to net investment
income, but excluding the incentive fee). Adjusted Net
Investment Income does not include any realized capital gains,
realized capital losses or unrealized capital gains or losses.
Accordingly, the Company pays an incentive fee based partly on
accrued interest, the collection of which is uncertain or
deferred. Adjusted Net Investment Income includes, in the case
of investments with a deferred interest feature (such as
original issue discount, debt instruments with
payment-in-kind
interest and zero coupon securities), accrued income that the
Company has not yet received in cash. For example, accrued
interest, if any, on investments in zero coupon bonds (if any)
will be included in the calculation of the incentive fee, even
though the Company will not receive any cash interest payments
in respect of payment on the bond until its maturity date. Thus,
if the Company does not have sufficient liquid assets to pay
this incentive fee or
F-15
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
dividends to stockholders, the Company may be required to
liquidate assets. The calculations will be appropriately pro
rated for any period of less than one quarter.
The second part of the incentive fee (the Capital Gains
Fee) is determined and payable in arrears as of the end of
each fiscal year (or upon termination of the investment
management agreement, as of the termination date), and will
equal (1) 20% of (a) net realized capital gains
(aggregate realized capital gains less aggregate realized
capital losses) on a cumulative basis from the closing date of
this offering to the end of such fiscal year, less (b) any
unrealized capital losses at the end of such fiscal year based
on the valuation of each investment on the applicable
calculation date compared to its adjusted cost basis (such
difference, Adjusted Realized Capital Gains), less
(2) the aggregate amount of all Capital Gains Fees paid to
KAFA in prior fiscal years. The calculation of the Capital Gains
Fee includes any capital gains that result from the cash
distributions that are treated as a return of capital. In that
regard, any such return of capital will be treated as a decrease
in the cost basis of an investment for purposes of calculating
the Capital Gains Fee.
Realized capital gains on an investment will be calculated as
the excess of the net amount realized from the sale or other
disposition of such security over the adjusted cost basis for
the security. Realized capital losses on a security will be
calculated as the amount by which the net amount realized from
the sale or other disposition of such security is less than the
adjusted cost basis of such security. Unrealized capital loss on
a security will be calculated as the amount by which the
adjusted cost basis of such security exceeds the fair value of
such security at the end of a fiscal year. All fiscal year-end
valuations will be determined in accordance with generally
accepted accounting principles, the 1940 Act and pricing
procedures of the Company.
For the period September 21, 2006 (inception) through
November 30, 2006, the Company paid $571 in base management
fees, net of $228 in fee waivers, and none in incentive fees.
For the period of September 21, 2006 (inception) through
November 30, 2006, KA Associates, Inc., an affiliate of
KAFA, earned approximately $2 in brokerage commissions from
portfolio transactions executed on behalf of the Company.
From time to time, certain of the Companys investments may
be restricted as to resale, particularly our private
investments. Such restricted investments are valued in
accordance with the procedures established by the Board of
Directors and more fully described in Note 2
Significant Accounting Policies.
As of November 30, 2006, the Company did not have any
investments that were restricted from resale.
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|
5.
|
INVESTMENT
TRANSACTIONS
|
For the period September 21, 2006 (inception) through
November 30, 2006, the Company purchased and sold
securities in the amount of $102,578 and $3,153 (excluding
short-term investments), respectively.
The Company has 200,000,000 shares of common stock
authorized. Of the 10,000,060 shares of common stock
outstanding at November 30, 2006, KAFA owned
60 shares. Transactions in common shares for the period
September 21, 2006 (inception) through November 30,
2006, were as follows:
|
|
|
|
|
Shares outstanding at
September 21, 2006
|
|
|
60
|
|
Shares issued as a result of the
initial public offering
|
|
|
10,000,000
|
|
|
|
|
|
|
Shares outstanding at
November 30, 2006
|
|
|
10,000,060
|
|
|
|
|
|
|
F-16
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONTINUED)
(amounts in 000s, except share and per share
amounts)
The following is a schedule of financial highlights for the
period September 21, 2006 (inception) to November 30,
2006.
|
|
|
|
|
Per Share of Common
Stock
|
|
|
|
|
Net asset value, beginning of
period(1)
|
|
$
|
23.32
|
|
Income from
Operations
|
|
|
|
|
Net investment income
|
|
|
0.09
|
|
Net realized and unrealized gain
on investments
|
|
|
0.78
|
|
|
|
|
|
|
Total income from investment
operations
|
|
|
0.87
|
|
|
|
|
|
|
Net asset value end of
period
|
|
$
|
24.19
|
|
|
|
|
|
|
Per share market value
end of period
|
|
$
|
22.32
|
|
|
|
|
|
|
Total investment return based on
market
value(2)
|
|
|
(10.72
|
)%
|
Supplemental Data and
Ratios(3)
|
|
|
|
|
Net assets end of
period
|
|
$
|
241,914
|
|
Ratio of expenses to average net
assets, including investment management fee waivers
|
|
|
2.59
|
%
|
Ratio of expenses to average net
assets, excluding investment management fee waivers
|
|
|
3.09
|
%
|
Ratio of net investment income to
average net assets
|
|
|
1.89
|
%
|
Net increase in net assets
resulting from operations to average net assets
|
|
|
18.99
|
%
|
Portfolio turnover rate
|
|
|
5.56
|
%(4)
|
|
|
|
(1) |
|
Initial public offering price of $25.00 per share less
underwriting discounts of $1.59 per share and offering
costs of $0.09 per share. |
|
(2) |
|
Not annualized. 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. |
|
(3) |
|
Unless otherwise noted, ratios are annualized. |
|
(4) |
|
Not annualized. Calculated based on the sales of long-term
investments of $3,153 divided by the monthly average long-term
investment balance of $56,730. |
F-17
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
FINANCIAL STATEMENTS (CONCLUDED)
(amounts in 000s, except share and per share
amounts)
On February 15, 2007, the Company invested approximately
$34 million in a second lien term loan issued by ProPetro
Services, Inc. (ProPetro), a private oilfield
service company that provides a broad range of drilling and
production related services to oil and natural gas exploration
and production companies in Texas, Oklahoma, Utah and Colorado.
In conjunction with its investment in the term loan, the Company
received 2,904,620 warrants to purchase shares in ProPetro,
which represents an 8.4% fully diluted interest in ProPetro.
On December 28, 2006, the Company and other institutional
investors announced the formation of Millennium Midstream
Partners, LP (the Partnership), a private limited
partnership. The Partnership was formed to acquire the assets of
Millennium Midstream Energy, LLC and its affiliates, which
consist of gathering, processing and pipeline assets in Texas
and Louisiana.
In conjunction with the formation of the Partnership, the
Company made a $47.5 million equity investment. As part of
the investment, the Company received 2,375,000 Class B
common units, which represent a 39% limited partnership
interest; 2,375,000 Class A common warrants, and
212 incentive distribution rights.
On January 12, 2007, the Company paid its initial dividend
to its common stockholders in the amount of $0.22 per
share, for a total of $2,200. Of this total, pursuant to the
Companys dividend reinvestment plan, $19 was reinvested
into the Company, and 808 shares of common stock were
purchased in the open market to satisfy the reinvestment plan.
F-18
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KAYNE ANDERSON ENERGY DEVELOPMENT
COMPANY
|
|
|
|
By:
|
/s/ Kevin
S. McCarthy
|
Kevin S. McCarthy
Chairman of the Board of
Directors,
President and Chief Executive
Officer
Date: February 16, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
/s/ Kevin
S. McCarthy
Kevin
S. McCarthy
|
|
Chairman of the Board of
Directors, President and Chief Executive Officer
(Principal Executive Officer)
|
|
February 16, 2007
|
|
|
|
|
|
/s/ Terry
A. Hart
Terry
A. Hart
|
|
Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer)
|
|
February 16, 2007
|
|
|
|
|
|
/s/ Keith
B. Forman
Keith
B. Forman
|
|
Director
|
|
February 16, 2007
|
|
|
|
|
|
/s/ Barry
R. Pearl
Barry
R. Pearl
|
|
Director
|
|
February 16, 2007
|
|
|
|
|
|
/s/ Albert
L. Richey
Albert
L. Richey
|
|
Director
|
|
February 16, 2007
|
|
|
|
|
|
/s/ Robert
V. Sinnott
Robert
V. Sinnott
|
|
Director
|
|
February 16, 2007
|
|
|
|
|
|
/s/ William
L.
Thacker William
L. Thacker
|
|
Director
|
|
February 16, 2007
|