Attached files
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EX-32.1 - EXHIBIT 32.1 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c90967exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c90967exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - KAYNE ANDERSON ENERGY DEVELOPMENT CO | c90967exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 814-00725
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
(Exact name of registrant as specified in its charter)
20-4991752 | ||
Maryland | (I.R.S. Employer | |
(State of Incorporation) | Identification Number) | |
717 Texas Avenue, Suite 3100 | ||
Houston, Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code:
(713) 493-2020
(713) 493-2020
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act) Yes o No þ
Indicate the number of shares of outstanding of each of the issuers classes of common stock,
as of the latest practicable date: Common stock, $0.001 par value per share, 10,134,023 shares
outstanding as of October 1, 2009.
TABLE OF CONTENTS
Page | ||||||||
PART I |
||||||||
Item 1. Financial Statements |
||||||||
2 | ||||||||
5 | ||||||||
9 | ||||||||
10 | ||||||||
11 | ||||||||
12 | ||||||||
13 | ||||||||
35 | ||||||||
41 | ||||||||
42 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
44 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
1
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF AUGUST 31, 2009
(amounts in 000s)
(UNAUDITED)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Long-Term Investments 112.1% |
||||||||
Equity Investments(a) 92.7% |
||||||||
United States 92.7% |
||||||||
Publicly Traded MLP and MLP Affiliate(b) 35.5% |
||||||||
Calumet Specialty Products Partners, L.P. |
28 | $ | 394 | |||||
Capital Product Partners L.P.(c) |
107 | 845 | ||||||
Copano Energy, L.L.C |
73 | 1,140 | ||||||
Copano Energy, L.L.C. Unregistered, Class D Units(d) |
76 | 1,103 | ||||||
DCP Midstream Partners, LP |
92 | 2,053 | ||||||
Eagle Rock Energy Partners, L.P.(c)(e) |
1,113 | 3,728 | ||||||
Eagle Rock Energy Partners, L.P. Unregistered(c)(d)(f) |
149 | 481 | ||||||
Enbridge Energy Management, L.L.C.(g) |
26 | 1,115 | ||||||
Enbridge Energy Partners, L.P. |
93 | 4,001 | ||||||
Energy Transfer Equity, L.P. |
124 | 3,330 | ||||||
Energy Transfer Partners, L.P. |
40 | 1,626 | ||||||
Enterprise GP Holdings L.P. |
2 | 59 | ||||||
Enterprise Products Partners L.P. |
207 | 5,586 | ||||||
Exterran Partners, L.P. |
83 | 1,302 | ||||||
Global Partners LP (c) |
142 | 3,128 | ||||||
Holly Energy Partners, L.P. |
7 | 245 | ||||||
Inergy, L.P. |
99 | 2,766 | ||||||
Kinder Morgan Management, LLC(g) |
34 | 1,595 | ||||||
K-Sea Transportation Partners L.P. |
9 | 167 | ||||||
Magellan Midstream Holdings, L.P. |
90 | 1,962 | ||||||
MarkWest Energy Partners, L.P. |
108 | 2,221 | ||||||
Martin Midstream Partners L.P. |
49 | 1,170 | ||||||
Navios Maritime Partners L.P.(c) |
46 | 543 | ||||||
ONEOK Partners, L.P. |
19 | 934 | ||||||
OSG America L.P. |
40 | 332 | ||||||
Penn Virginia Resource Partners, L.P. |
8 | 117 | ||||||
Plains All American Pipeline, L.P.(h) |
103 | 4,875 | ||||||
Quicksilver Gas Services LP (c) |
20 | 298 | ||||||
Regency Energy Partners LP |
156 | 2,532 | ||||||
Targa Resources Partners LP |
36 | 612 | ||||||
TC PipeLines, LP |
10 | 370 | ||||||
Teekay LNG Partners L.P. |
103 | 2,353 | ||||||
Teekay Offshore Partners L.P. |
20 | 279 | ||||||
TEPPCO Partners, L.P. |
13 | 421 | ||||||
TransMontaigne Partners L.P.(c) |
46 | 1,238 | ||||||
Williams Partners L.P. |
139 | 2,766 | ||||||
57,687 | ||||||||
See accompanying notes to consolidated financial statements
2
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF AUGUST 31, 2009
(amounts in 000s)
(UNAUDITED)
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF AUGUST 31, 2009
(amounts in 000s)
(UNAUDITED)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Private MLP(d)(i) 57.1% |
||||||||
Direct Fuels Partners, L.P. Class A Common Units(h) |
2,500 | $ | 33,750 | |||||
Direct Fuels Partners, L.P. Class A Convertible Preferred Units(h)(j)
|
96 | 1,910 | ||||||
Direct Fuels Partners, L.P. Class B Convertible Preferred Units(h)(k) |
27 | 538 | ||||||
International Resource Partners LP |
1,500 | 30,000 | ||||||
Quest Midstream Partners, L.P. |
350 | 1,575 | ||||||
VantaCore Partners LP(h) |
1,465 | 24,899 | ||||||
92,672 | ||||||||
Other Private Equity(i) 0.1% |
||||||||
ProPetro Services, Inc. Warrants(d)(l) |
2,905 | | ||||||
Trident Resources Corp. Warrants(m) |
100 | 75 | ||||||
75 | ||||||||
Total Equity Investments (Cost $176,817) |
150,434 | |||||||
Interest | Maturity | Principal | ||||||||||||
Rate | Date | Amount | ||||||||||||
Fixed Income Investments(i) 19.4% |
||||||||||||||
United States 17.9% |
||||||||||||||
Midstream 2.7% |
||||||||||||||
DCP Midstream, LLC |
9.75 | % | 3/15/19 | $ | 2,000 | 2,378 | ||||||||
Targa Resources, Inc. |
8.50 | 11/01/13 | 2,155 | 1,950 | ||||||||||
4,328 | ||||||||||||||
Upstream 4.9% |
||||||||||||||
Hilcorp Energy Company |
7.75 | 11/01/15 | 6,585 | 6,075 | ||||||||||
Petroleum Development Corporation |
12.00 | 2/15/18 | 2,000 | 1,860 | ||||||||||
7,935 | ||||||||||||||
Oilfield Services 4.4% |
||||||||||||||
Dresser, Inc. |
(n | ) | 5/04/15 | 5,000 | 4,175 | |||||||||
ProPetro Services, Inc.(d) |
(o | ) | 2/15/13 | 35,000 | 3,000 | |||||||||
7,175 | ||||||||||||||
Coal 1.6% |
||||||||||||||
Drummond Company, Inc. |
7.38 | 2/15/16 | 3,000 | 2,640 | ||||||||||
Other 4.3% |
||||||||||||||
Energy Future Holdings Corp.(p) |
(q | ) | 10/10/14 | 9,232 | 7,016 | |||||||||
Total United States (Cost $59,669) |
29,094 | |||||||||||||
Canada 1.5% |
||||||||||||||
Upstream 1.5% |
||||||||||||||
Athabasca Oil Sands Corp.(r) (Cost $2,434) |
13.00 | 7/30/11 | 2,500 | 2,398 | ||||||||||
Total Fixed Income Investments (Cost $62,103) |
31,492 | |||||||||||||
Total Long-Term Investments (Cost $238,920) |
181,926 | |||||||||||||
See accompanying notes to consolidated financial statements
3
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF AUGUST 31, 2009
(amounts in 000s)
(UNAUDITED)
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF AUGUST 31, 2009
(amounts in 000s)
(UNAUDITED)
Interest | Maturity | |||||||||
Description | Rate | Date | Value | |||||||
Short-Term Investments 4.5% |
||||||||||
Repurchase Agreement 4.5% |
||||||||||
J.P. Morgan Securities
Inc. (Agreement dated
8/31/2009 to be
repurchased at $7,386),
collateralized by $7,604
in U.S. Treasury bills
(Cost $7,386) |
0.12 | % | 9/01/09 | $ | 7,386 | |||||
Total Investments 116.6% (Cost $246,306) |
189,312 | |||||||||
Senior Secured Revolving Credit Facility Borrowings |
(52,000 | ) | ||||||||
Other Assets in Excess of Total Liabilities |
25,047 | |||||||||
Net Assets |
$ | 162,359 | ||||||||
(a) | Unless otherwise noted, equity investments are common units/common shares. |
|
(b) | Unless otherwise noted, security is not treated as an eligible portfolio company under the
1940 Act. As a business development company, the Company is generally prohibited from
acquiring assets other than qualifying assets unless at least 70% of its total assets
(excluding deferred tax assets) are qualifying assets under the 1940 Act. As of August 31,
2009, the percentage of the Companys total assets (excluding deferred tax assets) that are
qualifying assets was 71.6%. See Note 3 for information about qualifying assets. |
|
(c) | All or a portion of the Companys holdings in this security are treated as an eligible
portfolio company under the 1940 Act (see Note 3). |
|
(d) | Fair valued and restricted security (see Notes 2, 4 and 9). |
|
(e) | Common units are unregistered but may be sold pursuant to Rule 144 under the Securities Act
of 1933, as amended (the Securities Act). |
|
(f) | Unregistered common Units which were placed in escrow for a period of 18 months following the
sale of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1,
2010). |
|
(g) | Distributions are paid-in-kind. |
|
(h) | The Company believes that it is an affiliate of Plains All American, L.P., and that it may be
an affiliate of Direct Fuels Partners, L.P and VantaCore Partners LP (see Note 6). |
|
(i) | Unless otherwise noted, security is treated as an eligible portfolio company under the 1940
Act. |
|
(j) | The Class A Convertible Preferred Units are convertible into Class A Common Units on a
one-for-one basis at a price of $20.00 per unit. |
|
(k) | The Class B Convertible Preferred Units are convertible into Class A Common Units on a
one-for-one basis at a price of $18.50 per unit. |
|
(l) | Warrants relate to the Companys floating rate senior secured second lien term loan facility
with ProPetro Services, Inc. These warrants are non-income producing and expire on February
15, 2017. |
|
(m) | Warrants are non-income producing and expire on November 30, 2013. |
|
(n) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 575 basis points (6.02% as of August 31, 2009). |
|
(o) | Floating rate senior secured second lien term loan facility. Securitys default interest rate
is LIBOR + 1100 basis points, but the Company is not accruing interest income on this security
(see Note 2Investment Income). |
|
(p) | Energy Future Holdings Corp., formerly TXU Corp., is a privately-held energy company with a
portfolio of competitive and regulated energy subsidiaries, including TXU Energy, Oncor and
Luminant. |
|
(q) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 350 basis points (3.78% as of August 31, 2009). |
|
(r) | Security is not treated as an eligible portfolio company under the 1940 Act. |
See accompanying notes to consolidated financial statements
4
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Long-Term Investments - 112.0% |
||||||||
Equity Investments(a) - 93.6% |
||||||||
United States 93.6% |
||||||||
Publicly Traded MLP and MLP Affiliate(b) 36.9% |
||||||||
Atlas Energy Resources, LLC |
131 | $ | 2,198 | |||||
Atlas Pipeline Partners, L.P. |
65 | 471 | ||||||
BreitBurn Energy Partners L.P. |
47 | 399 | ||||||
Calumet Specialty Products Partners, L.P. |
67 | 613 | ||||||
Capital Product Partners L.P. |
40 | 346 | ||||||
Constellation Energy Partners LLC |
35 | 181 | ||||||
Copano Energy, L.L.C |
75 | 900 | ||||||
Copano Energy, L.L.C. Unregistered, Class D Units(c) |
76 | 750 | ||||||
Crosstex Energy, L.P. |
152 | 907 | ||||||
DCP Midstream Partners, LP |
74 | 607 | ||||||
Duncan Energy Partners L.P. |
54 | 704 | ||||||
Eagle Rock Energy Partners, L.P. |
27 | 215 | ||||||
Eagle Rock Energy Partners, L.P. Unregistered(c)(d)(e) |
1,595 | 11,823 | ||||||
El Paso Pipeline Partners, L.P. |
18 | 319 | ||||||
Enbridge Energy Management, L.L.C.(f) |
24 | 687 | ||||||
Enbridge Energy Partners L.P. |
100 | 2,821 | ||||||
Energy Transfer Equity, L.P. |
65 | 1,064 | ||||||
Energy Transfer Partners, L.P. |
74 | 2,438 | ||||||
Enterprise Products Partners L.P. |
258 | 5,524 | ||||||
Exterran Partners, L.P. |
82 | 894 | ||||||
Global Partners LP |
140 | 1,596 | ||||||
Hiland Partners, LP |
16 | 167 | ||||||
Holly Energy Partners, L.P. |
1 | 4 | ||||||
Inergy Holdings, L.P. |
20 | 410 | ||||||
Inergy, L.P. |
88 | 1,469 | ||||||
Kinder Morgan Management, LLC(f) |
35 | 1,439 | ||||||
K-Sea Transportation Partners L.P. |
12 | 177 | ||||||
Magellan Midstream Holdings, L.P. |
56 | 1,678 | ||||||
MarkWest Energy Partners, L.P. |
77 | 981 | ||||||
Martin Midstream Partners L.P. |
59 | 1,042 | ||||||
Navios Maritime Partners L.P. |
10 | 43 | ||||||
ONEOK Partners, L.P. |
82 | 3,839 | ||||||
OSG America L.P. |
46 | 214 | ||||||
Penn Virginia Resource Partners, L.P. |
41 | 527 | ||||||
Plains All American Pipeline, L.P.(g) |
103 | 3,514 |
See accompanying notes to consolidated financial statements
5
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
No. of | ||||||||
Description | Shares/Units | Value | ||||||
Publicly Traded MLP and MLP Affiliate(b) (Continued) |
||||||||
Regency Energy Partners LP |
66 | $ | 602 | |||||
Spectra Energy Partners, LP |
28 | 565 | ||||||
Targa Resources Partners LP |
86 | 742 | ||||||
TC PipeLines, LP |
59 | 1,337 | ||||||
Teekay LNG Partners L.P. |
83 | 1,166 | ||||||
Teekay Offshore Partners L.P. |
59 | 588 | ||||||
TEPPCO Partners, L.P. |
61 | 1,392 | ||||||
Western Gas Partners, LP |
67 | 902 | ||||||
Williams Partners L.P. |
115 | 1,609 | ||||||
Williams Pipeline Partners L.P. |
20 | 297 | ||||||
60,161 | ||||||||
Private MLP(c)(h) 56.6% |
||||||||
Direct Fuels Partners, L.P.(g) |
2,500 | 37,500 | ||||||
International Resource Partners LP |
1,500 | 24,000 | ||||||
Quest Midstream Partners, L.P.(g) |
350 | 4,637 | ||||||
VantaCore Partners LP(g) |
1,465 | 25,998 | ||||||
92,135 | ||||||||
Other Private Equity(h) 0.1% |
||||||||
ProPetro Services, Inc. Warrants(c)(i) |
2,905 | | ||||||
Trident Resources Corp. Warrants(j) |
100 | 75 | ||||||
75 | ||||||||
Total Equity Investments (Cost $211,596) |
152,371 | |||||||
See accompanying notes to consolidated financial statements
6
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
Interest | Maturity | Principal | ||||||||||||
Description | Rate | Date | Amount | Value | ||||||||||
Fixed Income Investments(h) 18.4% |
||||||||||||||
United States 17.2% |
||||||||||||||
Midstream 4.7% |
||||||||||||||
Knight, Inc. |
6.50 | % | 9/01/12 | $ | 7,530 | $ | 6,024 | |||||||
Targa Resources, Inc. |
8.50 | 11/01/13 | 2,155 | 1,185 | ||||||||||
Targa Resources Investments, Inc. |
(k | ) | 2/09/15 | 1,046 | 471 | |||||||||
7,680 | ||||||||||||||
Upstream 1.8% |
||||||||||||||
Hilcorp Energy Company |
7.75 | 11/01/15 | 4,000 | 2,860 | ||||||||||
Oilfield Services 9.7% |
||||||||||||||
Dresser, Inc. |
(l | ) | 5/04/15 | 5,000 | 3,150 | |||||||||
ProPetro Services, Inc.(c) |
(m | ) | 2/15/13 | 35,000 | 10,000 | |||||||||
Stallion Oilfield Services Ltd. |
(n | ) | 7/18/12 | 5,000 | 2,625 | |||||||||
15,775 | ||||||||||||||
Other 1.0% |
||||||||||||||
Energy Future Holdings Corp. |
(o | ) | 10/10/14 | 2,500 | 1,725 | |||||||||
Total United States (Cost $58,061) |
28,040 | |||||||||||||
Canada(p) 1.2% |
||||||||||||||
Upstream 1.2% |
||||||||||||||
Athabasca Oil Sands Corp.(Cost $2,434) |
13.00 | 7/30/11 | 2,500 | 1,873 | ||||||||||
Total Fixed Income Investments (Cost
$60,495) |
29,913 | |||||||||||||
Total Long-Term Investments (Cost $272,091) |
182,284 | |||||||||||||
Short-Term Investments 3.9% |
||||||||||||||
Repurchase Agreements 3.9% |
||||||||||||||
J.P. Morgan Securities Inc. (Agreements
dated 11/28/2008 to be repurchased at
$6,325), collateralized by $6,513 in U.S.
Treasury notes (Cost $6,325) |
0.10 | 12/01/08 | 6,325 | |||||||||||
Total Investments 115.9% (Cost $278,416) |
188,609 | |||||||||||||
Senior Secured Revolving Credit Facility Borrowings |
(57,000 | ) | ||||||||||||
Other Assets in Excess of Other Liabilities |
31,078 | |||||||||||||
Net Assets |
$ | 162,687 | ||||||||||||
See accompanying notes to consolidated financial statements
7
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2008
(amounts in 000s)
(a) | Unless otherwise noted, equity investments are common units/common shares. |
|
(b) | Unless otherwise noted, security is not treated as an eligible portfolio company under the
1940 Act. As a business development company, the Company is generally prohibited from
acquiring assets other than qualifying assets unless at least 70% of its total assets
(excluding deferred tax assets) are qualifying assets under the 1940 Act. As of November 30,
2008, the percentage of the Companys total assets (excluding deferred tax assets) that are
qualifying assets was 73.9%. See Note 3 for information about qualifying assets. |
|
(c) | Fair valued and restricted security (see Notes 2, 4 and 9). |
|
(d) | Security is treated as an eligible portfolio company under the 1940 Act (See Note 3). |
|
(e) | The Companys investment in Eagle Rock Energy Partners, L.P. consists of 1,530 unregistered
common units, of which 582 unregistered common units ($4,069 fair value at November 30, 2008)
were placed in escrow for a period of 18 months following the sale of Millennium Midstream
Partners, L.P. |
|
(f) | Distributions are paid-in-kind. |
|
(g) | The Company believes that it is an affiliate of Plains All American, L.P., and that it may be
an affiliate of Direct Fuels Partners, L.P., VantaCore Partners LP, and Quest Midstream
Partners, L.P. (see Note 6). |
|
(h) | Unless otherwise noted, security is treated as an eligible portfolio company under the 1940
Act. |
|
(i) | Warrants relate to the Companys floating rate senior secured second lien term loan facility
with ProPetro Services, Inc. These warrants are non-income producing and expire on February
15, 2017. |
|
(j) | Warrants are non-income producing and expire on November 30, 2013. |
|
(k) | Floating rate senior secured term loan facility. Interest is paid-in-kind at a rate of LIBOR
+ 500 basis points (9.11% as of November 30, 2008) |
|
(l) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 575 basis points (7.99% as of November 30, 2008). |
|
(m) | Floating rate senior secured second lien term loan facility. Securitys default interest rate
is LIBOR + 900 basis points, but the Company is not accruing interest income on this security
(see Note 2Investment Income). |
|
(n) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 600 basis points (8.51% as of November 30, 2008). |
|
(o) | Floating rate senior secured second lien term loan facility. Security pays interest at a rate
of LIBOR + 350 basis points (5.27% as of November 30, 2008). Energy Future Holdings Corp.,
formerly TXU Corp., is a privately-held energy company with a portfolio of competitive and
regulated energy subsidiaries, including TXU Energy, Oncor and Luminant. |
|
(p) | Security is not treated as an eligible portfolio company under the 1940 Act. |
See accompanying notes to consolidated financial statements
8
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
(amounts in 000s, except share and per share amounts)
August 31, | November 30, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Investments, at fair value: |
||||||||
Non-affiliated (Cost $164,840 and $188,740, respectively) |
$ | 115,954 | $ | 110,635 | ||||
Affiliated (Cost $74,080 and $83,351, respectively) |
65,972 | 71,649 | ||||||
Repurchase agreements (Cost $7,386 and $6,325, respectively) |
7,386 | 6,325 | ||||||
Total investments (Cost $246,306 and $278,416, respectively) |
189,312 | 188,609 | ||||||
Deposits with brokers |
| 123 | ||||||
Deferred income tax asset |
25,701 | 31,370 | ||||||
Receivable for securities sold |
| 688 | ||||||
Interest, dividends and distributions receivable, net |
517 | 403 | ||||||
Debt issuance costs, prepaid expenses and other assets |
530 | 981 | ||||||
Total Assets |
216,060 | 222,174 | ||||||
LIABILITIES |
||||||||
Senior secured revolving credit facility |
52,000 | 57,000 | ||||||
Payable for securities purchased |
52 | 60 | ||||||
Investment management fee payable |
816 | 1,074 | ||||||
Current income tax payable |
100 | 100 | ||||||
Accrued directors fees and expenses |
73 | 76 | ||||||
Accrued expenses and other liabilities |
660 | 1,177 | ||||||
Total Liabilities |
53,701 | 59,487 | ||||||
NET ASSETS |
$ | 162,359 | $ | 162,687 | ||||
NET ASSETS CONSIST OF |
||||||||
Common stock, $0.001 par value (200,000,000 shares authorized at August
31, 2009 and November 30, 2008; 10,134,023 and 10,102,986 shares issued
and outstanding at August 31, 2009 and November 30, 2008, respectively) |
$ | 10 | $ | 10 | ||||
Paid-in capital |
206,253 | 215,953 | ||||||
Accumulated net investment loss, net of income taxes, less dividends |
(4,118 | ) | (3,942 | ) | ||||
Accumulated net realized gains (losses) on investments, net of income taxes |
(3,438 | ) | 7,464 | |||||
Net unrealized losses on investments, net of income taxes |
(36,348 | ) | (56,798 | ) | ||||
NET ASSETS |
$ | 162,359 | $ | 162,687 | ||||
NET ASSET VALUE PER SHARE |
$ | 16.02 | $ | 16.10 | ||||
See accompanying notes to consolidated financial statements
9
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in 000s)
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
August 31, | August 31, | August 31, | August 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
INVESTMENT INCOME |
||||||||||||||||
Income |
||||||||||||||||
Dividends and Distributions: |
||||||||||||||||
Non-affiliated investments |
$ | 1,715 | $ | 2,217 | $ | 6,248 | $ | 6,477 | ||||||||
Affiliated investments |
1,947 | 2,749 | 5,846 | 7,831 | ||||||||||||
Total dividends and distributions |
3,662 | 4,966 | 12,094 | 14,308 | ||||||||||||
Return of capital |
(2,442 | ) | (3,825 | ) | (9,972 | ) | (12,844 | ) | ||||||||
Net dividends and distributions |
1,220 | 1,141 | 2,122 | 1,464 | ||||||||||||
Interest and other income: |
||||||||||||||||
Non-affiliated investments |
1,046 | 648 | 2,486 | 3,882 | ||||||||||||
Affiliated investments |
| 85 | | 373 | ||||||||||||
Total interest and other income |
1,046 | 733 | 2,486 | 4,255 | ||||||||||||
Total investment income |
2,266 | 1,874 | 4,608 | 5,719 | ||||||||||||
Expenses |
||||||||||||||||
Base investment management fees |
816 | 1,328 | 2,369 | 4,052 | ||||||||||||
Bad debt expense |
| | | 830 | ||||||||||||
Professional fees |
185 | 229 | 618 | 719 | ||||||||||||
Directors fees |
73 | 76 | 217 | 240 | ||||||||||||
Administration fees |
31 | 54 | 113 | 202 | ||||||||||||
Insurance |
38 | 38 | 116 | 113 | ||||||||||||
Custodian fees |
19 | 20 | 51 | 61 | ||||||||||||
Other expenses |
33 | 162 | 385 | 441 | ||||||||||||
Total Expenses Before Interest Expense |
1,195 | 1,907 | 3,869 | 6,658 | ||||||||||||
Interest expense |
341 | 1,003 | 1,021 | 3,549 | ||||||||||||
Total Expenses |
1,536 | 2,910 | 4,890 | 10,207 | ||||||||||||
Net Investment Income (Loss) Before Income Taxes |
730 | (1,036 | ) | (282 | ) | (4,488 | ) | |||||||||
Deferred income tax benefit (expense) |
(290 | ) | 386 | 106 | 1,682 | |||||||||||
Net Investment Income (Loss) |
440 | (650 | ) | (176 | ) | (2,806 | ) | |||||||||
REALIZED AND UNREALIZED GAINS (LOSSES) |
||||||||||||||||
Net Realized Gains (Losses) |
||||||||||||||||
Investments |
(5,060 | ) | (6,340 | ) | (17,543 | ) | (2,851 | ) | ||||||||
Foreign currency transactions |
33 | (30 | ) | 27 | (30 | ) | ||||||||||
Options |
| | 17 | | ||||||||||||
Deferred income tax benefit |
1,715 | 2,370 | 6,597 | 1,072 | ||||||||||||
Net Realized Losses |
(3,312 | ) | (4,000 | ) | (10,902 | ) | (1,809 | ) | ||||||||
Net Change in Unrealized Gains (Losses) |
||||||||||||||||
Investments |
14,456 | (6,985 | ) | 32,812 | (1,852 | ) | ||||||||||
Foreign currency translations |
(18 | ) | 3 | 10 | 3 | |||||||||||
Options |
| | | | ||||||||||||
Deferred income tax benefit (expense) |
(5,176 | ) | 2,598 | (12,372 | ) | 688 | ||||||||||
Deferred income tax expense conversion to a
taxable corporation |
| | | (3,828 | ) | |||||||||||
Net Change in Unrealized Gains (Losses) |
9,262 | (4,384 | ) | 20,450 | (4,989 | ) | ||||||||||
Net Realized and Unrealized Gains (Losses) |
5,950 | (8,384 | ) | 9,548 | (6,798 | ) | ||||||||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS |
$ | 6,390 | $ | (9,034 | ) | $ | 9,372 | $ | (9,604 | ) | ||||||
See accompanying notes to consolidated financial statements
10
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(amounts in 000s, except share amounts)
Nine Months | For the Year | |||||||
Ended | Ended | |||||||
August 31, | November 30, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
OPERATIONS |
||||||||
Net investment loss |
$ | (176 | ) | $ | (3,532 | ) | ||
Net realized gains (losses) |
(10,902 | ) | 7,483 | |||||
Net change in unrealized gains (losses) |
20,450 | (67,004 | ) | |||||
Net change in unrealized losses conversion to taxable corporation. |
| (3,810 | ) | |||||
Net Increase (Decrease) in Net Assets Resulting from Operations |
9,372 | (66,863 | ) | |||||
DIVIDENDS AND DISTRIBUTIONS |
||||||||
Dividends |
| | ||||||
Distributions return of capital |
(10,103 | )(1) | (16,766 | )(2) | ||||
Dividends and Distributions |
(10,103 | ) | (16,766 | ) | ||||
CAPITAL STOCK TRANSACTIONS |
||||||||
Issuance of 31,037 and 52,540 shares of common stock from
reinvestment of dividends |
403 | 1,183 | ||||||
Increase in Net Assets from Capital Stock Transactions |
403 | 1,183 | ||||||
Total Decrease in Net Assets |
(328 | ) | (82,446 | ) | ||||
NET ASSETS |
||||||||
Beginning of period |
162,687 | 245,133 | ||||||
End of period |
$ | 162,359 | $ | 162,687 | ||||
(1) | This is an estimate of the characterization of the distributions paid to common stockholders
for the nine months ended August 31, 2009 as either a dividend (ordinary income) or
distribution (return of capital). This estimate is based on the Companys operating results
during the period. The actual characterization of the common stock distributions made during
the current year will not be determinable until after the end of the fiscal year when the
Company can determine earnings and profits and, therefore, it may differ from the preliminary
estimates. |
|
(2) | All distributions paid to common stockholders for the fiscal year ended November 30, 2008
were characterized as distributions (return of capital). This characterization is based on the
Companys earnings and profits. |
See accompanying notes to consolidated financial statements
11
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in 000s)
(UNAUDITED)
Nine Months Ended | ||||||||
August 31, | August 31, | |||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 9,372 | $ | (9,604 | ) | |||
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities: |
||||||||
Purchase of long-term investments |
(27,571 | ) | (58,886 | ) | ||||
Sale of U.S. Treasury Bills |
| 14,250 | ||||||
Proceeds from sale of long-term investments |
34,137 | 68,597 | ||||||
Sale (purchase) of short-term investments, net |
(1,061 | ) | 5,712 | |||||
Realized losses on investments |
17,498 | 2,881 | ||||||
Return of capital distributions |
9,972 | 12,844 | ||||||
Unrealized losses (gains) on investments (excluding impact of $10 and
$0 of foreign currency translations) |
(32,812 | ) | 1,852 | |||||
Deferred income tax provision |
5,669 | 386 | ||||||
Accretion of bond discount |
(866 | ) | (407 | ) | ||||
Decrease (increase) in deposits with brokers |
123 | (2 | ) | |||||
Decrease in receivable for securities sold |
688 | 335 | ||||||
Decrease (increase) in interest, dividends and distributions receivable. |
(114 | ) | 1,134 | |||||
Decrease in prepaid expenses and other assets |
451 | 443 | ||||||
Decrease in payable for securities purchased |
(8 | ) | (6,967 | ) | ||||
Decrease in investment management fee payable |
(258 | ) | (16 | ) | ||||
Decrease in accrued directors fees and expenses |
(3 | ) | (3 | ) | ||||
Increase (decrease) in accrued expenses and other liabilities |
(517 | ) | 291 | |||||
Net Cash Provided by Operating Activities |
14,700 | 32,840 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Repayments of senior secured revolving credit facility |
(5,000 | ) | (7,500 | ) | ||||
Repayments of treasury secured revolving credit facility |
| (14,000 | ) | |||||
Cash distributions to shareholders |
(9,700 | ) | (11,340 | ) | ||||
Net Cash Used in Financing Activities |
(14,700 | ) | (32,840 | ) | ||||
NET INCREASE (DECREASE) IN CASH |
| | ||||||
CASH BEGINNING OF PERIOD |
| | ||||||
CASH END OF PERIOD |
$ | | $ | | ||||
Supplemental disclosure of cash flow information:
Non-cash financing activities not included herein consist of reinvestment of distributions pursuant
to the Companys dividend reinvestment plan of $403 and $1,183 for the nine months ended August 31,
2009 and August 31, 2008, respectively.
During the nine months ended August 31, 2009, there were no income taxes paid and interest paid was
$1,343. During the nine months ended August 31, 2008, state income taxes paid were $42 and interest
paid was $2,881.
See accompanying notes to consolidated financial statements
12
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
1. ORGANIZATION
Kayne Anderson Energy Development Company (the Company) was organized as a Maryland
corporation on May 24, 2006. The Company is an externally managed, non-diversified closed-end
management investment company that has elected to be treated as a business development company
(BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). The Company
commenced investment operations on September 21, 2006. The Companys shares of common stock are
listed on the New York Stock Exchange (NYSE) under the symbol KED. For the fiscal year ended
November 30, 2007 and prior periods, the Company was treated as a regulated investment company
(RIC) under the U.S. Internal Revenue Code of 1986, as amended (the Code). Since December 1,
2007, the Company has been taxed as a corporation (see Note 5Income Taxes).
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. Adoption of New Accounting Standards In May 2009, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 165 (SFAS No. 165), Subsequent Events. The Company has
adopted SFAS No. 165 with these financial statements.
SFAS No. 165 requires the Company to recognize in the financial statements the effects of all
subsequent events that provide additional evidence about conditions that existed at the date of the
Statement of Assets and Liabilities. For non-recognized subsequent events that must be disclosed
to keep the financial statements from being misleading, the Fund will be required to disclose the
nature of the event as well as an estimate of its financial effect, or a statement that such an
estimate cannot be made. In addition, SFAS No. 165 requires the Company to disclose the date
through which the subsequent events have been evaluated. Management has evaluated any matters
requiring such disclosure through the date when such financial statements were available to be
issued and has noted no such events. Subsequent events after such date have not been evaluated
with respect to the impact on such financial statements.
In June 2009, the FASB issued Statement on Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) required by the FASB to be
applied to nongovernmental entities. SFAS No. 168 reorganizes thousands of GAAP pronouncements
into roughly 90 accounting topics and displays them using a consistent structure. Also included is
relevant Securities and Exchange Commission guidance organized using the same topical structure in
separate sections. SFAS No. 168 will be effective for financial statements issued for reporting
periods that end after September 15, 2009 and will supersede all then-existing non-SEC accounting
and reporting standards. This statement will have an impact on the Companys financial statements
since all future references to authoritative accounting literature will be references in accordance
with SFAS No. 168. The Company will adopt SFAS No. 168 for the quarter ending November 30, 2009.
The Company is currently evaluating the effect on its financial statement disclosures since all
future references to authoritative accounting literature will be references in accordance with the
Codification. As SFAS No. 168 is not intended to change or alter existing GAAP, it is not expected
to have any impact on the Companys consolidated financial statements and will only impact
references for accounting guidance.
13
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
In April 2009, the FASB issued FASB Staff Position (FSP) No. 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. Effective for interim and annual reporting
periods ending after June 15, 2009, FSP No. 157-4 illustrates how companies should determine
whether there have been significant decreases in the volume and level of activity for a Level 1 or
Level 2 asset or liability to be measured at fair value when compared to normal market activity.
If an entity determines that there have been significant decreases, then transactions or quoted
prices may not be representative of fair value. While FSP No. 157-4 does not prescribe a
methodology for determining fair value for assets and liabilities that have significant decreases
in volume and level of activity, all relevant observable inputs should be considered including
quoted market prices, bid and ask prices and indicative price quotes to estimate fair value of an
asset or liability.
During fiscal 2009, the Company has considered bid and ask prices from third-party price
sheets, indicative price quotes and quoted market prices when estimating fair value for the
Companys fixed income investments and other private equity. FSP No. 157-4 is not expected to have
a significant impact on the Companys method of valuation for the assets and liabilities in the
Companys consolidated financial statements.
C. Interim Periods The unaudited consolidated financial statements contained in this report
include all material adjustments of a normal and recurring nature that, in the opinion of
management, are necessary for a fair statement of the results for the interim periods. The results
of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of
the results to be expected for the full year or any other interim period. Certain reclassifications
have been made to prior period amounts in order to conform to current year presentation. The
accompanying consolidated financial statements included herein should be read in conjunction with
the financial statements and related notes thereto contained in the Companys Annual Report on Form
10-K for the fiscal year ended November 30, 2008.
D. Principles of Consolidation Prior to February 29, 2008, the Company owned subsidiary
limited partnerships (which elected to be treated as taxable entities) and limited liability
companies to make and hold certain of its private portfolio investments. These portfolio
investments were consolidated in the Companys schedule of investments, statements of assets and
liabilities, statements of operations, statements of cash flows and statements of changes in net
assets. On February 29, 2008, all of the Companys subsidiaries were dissolved and all of the
assets and liabilities of the subsidiaries were distributed to the Company. The consolidated
financial statements include the accounts of the Company and its subsidiaries which directly and
indirectly owned securities in the Companys portfolio. All significant intercompany accounts and
transactions have been eliminated in consolidation.
E. Calculation of Net Asset Value The Company determines its net asset value as of the close
of regular session trading on the NYSE no less frequently than the last business day of each
quarter. Net asset value is computed by dividing the value of the Companys assets (including
accrued interest and dividends), less all of its liabilities (including accrued expenses,
distributions payable and any borrowings) by the total number of common shares outstanding.
F. Investment Valuation Readily marketable portfolio securities listed on any exchange other
than the NASDAQ Stock Market, Inc. (NASDAQ) are valued, except as indicated below, at the last
sale price on the business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid and asked prices on
such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing
price. Portfolio securities traded on more than one securities exchange are valued at the last sale
price on the 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 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,
the fair market value is determined by using the mean of the bid and ask prices provided by the
syndicate bank or principal market maker. When price quotes are not available, fair market value
will be based on prices of comparable securities.
14
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
Exchange-traded options and futures contracts are valued at the last sale price at the close
of trading in the market where such contracts are principally traded or, if there was no sale on
the applicable exchange on such day, at the mean between the quoted bid and ask price as of the
close of trading on such exchange.
The Companys portfolio includes securities that are privately issued or illiquid. For these
securities, as well as any other portfolio security held by the Company for which reliable market
quotations are not readily available, valuations are determined in good faith by the board of
directors of the Company (the board of directors) under a valuation policy and a consistently
applied valuation process. Unless otherwise determined by the board of directors, the following
valuation process, approved by the board of directors, is used for such securities:
| Investment Team Valuation. The applicable investments are valued by senior
professionals of KA Fund Advisors, LLC (KAFA) responsible for the portfolio
investments. |
| Investment Team Valuation Documentation. Preliminary valuation conclusions are
documented and discussed with senior management of KAFA. Such valuations are submitted to
the Valuation Committee (a committee of the board of directors) on a quarterly basis.
These valuations stand for intervening periods of time unless a senior officer of KAFA
determines that material adjustments to such preliminary valuations are appropriate to
avoid valuations that are stale or do not represent fair value. Such adjustments may
occur on the date that the Company calculates the dividend reinvestment plan net asset
value. |
| Valuation Committee. The Valuation Committee meets each quarter to consider new
valuations presented by KAFA, if any, which were made in accordance with the Valuation
Procedures in such quarter. The Valuation Committees valuation determinations are
subject to ratification by the board. |
| Valuation Firm. No less frequently than quarterly, a third-party valuation firm
engaged by the board of directors reviews the valuation methodologies and calculations
employed for these securities. The independent valuation firm provides third-party
valuation consulting services to the board of directors which consist of certain limited
procedures that the Company identified and requested them to perform. For the quarter
ended August 31, 2009, the independent valuation firm provided limited procedures on
investments in seven portfolio companies, comprising approximately 51.4% of the total
investments (59.9% of net assets and 45.0% of total assets) at fair value as of August
31, 2009. Upon completion of the limited procedures, the independent valuation firm
concluded that the fair value of those investments subjected to the limited procedures
did not appear to be unreasonable. |
| Board of Directors Determination. The board of directors considers the valuations
provided by KAFA and the Valuation Committee and ratifies valuations for the applicable
securities at each quarterly board meeting. The board of directors considers the reports
provided by the third-party valuation firm in reviewing and determining in good faith the
fair value of the applicable portfolio securities. |
During the course of such valuation process, whenever possible, privately-issued equity and
debt investments are valued using comparisons of valuation ratios of the portfolio companies that
issued such equity and debt securities to any peer companies that are publicly traded. The value
derived from this analysis is then discounted to reflect the illiquid nature of the investment. The
Company also utilizes comparative information such as acquisition transactions, public offerings or
subsequent equity sales to corroborate its valuations. Due to the inherent uncertainty of
determining the fair value of investments that do not have a readily available market value, the
fair value of the Companys investments in privately-issued securities may differ significantly
from the values that would have been used had a ready market existed for such investments, and the
differences could be material.
Factors that the Company may take into account in fair value pricing its investments include,
as relevant, the portfolio companys ability to make payments and its earnings and discounted cash
flow, the markets in which the portfolio company does business, comparison to publicly traded
securities, the nature and realizable value of any collateral and other relevant factors.
15
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
Unless otherwise determined by the board of directors, securities that are convertible into or
otherwise will become publicly traded (e.g., through subsequent registration or expiration of a
restriction on trading) will be valued through the process described above, using a valuation based
on the market value of the publicly traded security less a discount. The discount will initially be
equal in amount to the discount negotiated at the time of purchase. To the extent that such
securities are convertible or otherwise become publicly traded within a time frame that may be
reasonably determined, KAFA will determine an applicable discount in accordance with a methodology
approved by the Valuation Committee.
SFAS No. 157. In September 2006, the FASB issued Statement on Financial Accounting Standards,
Fair Value Measurements (SFAS No. 157). 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 December 1, 2007, the Company adopted SFAS No. 157. The Company has performed an
analysis of all existing investments and derivative instruments to determine the significance and
character of all inputs to their fair value determination. Based on this assessment, the adoption
of this standard did not have any material effect on the Companys net asset value.
At August 31, 2009, the Company held 59.9% of its net assets applicable to common stockholders
(45.0% of total assets) in securities that were fair valued pursuant to the procedures adopted by
the board of directors. The aggregate fair value of these securities at August 31, 2009 was $97,256
(See Note 9 Restricted Securities).
At November 30, 2008, the Company held 70.5% of its net assets applicable to common
stockholders (51.6% of total assets) in securities that were fair valued pursuant to the procedures
adopted by the board of directors. The aggregate fair value of these securities at November 30,
2008 was $114,708 (See Note 9 Restricted Securities).
G. 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.
H. 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.
I. Return of Capital Estimates Distributions received from the Companys investments in MLPs
generally are comprised of income and return of capital. The Company records investment income and
return of capital based on estimates made at the time such distributions are received. Such
estimates are based on historical information available from MLPs and other industry sources. These
estimates may subsequently be revised based on information received from MLPs after their tax
reporting periods are concluded.
16
Table of Contents
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
The following table sets forth the Companys estimated return of capital for distributions
received from its public and private MLPs, both as a percentage of total distributions and in
thousands of dollars. The return of capital portion of the distributions is a reduction to
investment income and results in an equivalent reduction in the cost basis of the associated
investments and increases Net Realized Gains and Net Change in Unrealized Gains in each of the
comparative periods.
Three Months Ended | Nine Months Ended | |||||||||||||||
August 31, | August 31, | August 31, | August 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Distributions received, estimated as return of capital portion |
67 | % | 77 | % | 82 | % | 90 | % | ||||||||
Return of capital attributable to Net Realized Gains |
$ | 418 | $ | 452 | $ | 2,889 | $ | 1,055 | ||||||||
Return of capital attributable to Net Change in Unrealized Gains |
2,024 | 3,373 | 7,083 | 11,789 | ||||||||||||
Total return of capital |
$ | 2,442 | $ | 3,825 | $ | 9,972 | $ | 12,844 | ||||||||
For the six months ended May 31, 2009, the Company estimated the return of capital
portion of distributions received to be 89%. The Company reduced its estimate of return of capital
for the nine months ended August 31, 2009 based on tax reporting information received during third
quarter 2009. This reduction caused the estimated return of capital percentage for the quarter
ended August 31, 2009 to be 67%.
J. Investment Income The Company records dividends and distributions on the ex-dividend
date. Interest income is recognized on the accrual basis, including amortization of premiums and
accretion of discounts to the extent that such amounts are expected to be collected. When investing
in securities with payment in-kind interest, the Company will accrue interest income during the
life of the security even though it will not be receiving cash as the interest is accrued. In
accordance with Statement of Position 93-1, Financial Accounting and Reporting for High-Yield Debt
Securities by Investment Companies, to the extent that interest income to be received is not
expected to be realized, a reserve against income is established.
Many of the Companys debt securities were purchased at a discount or premium to the par value
of the security. The non-cash accretion of a discount to par value increases interest income while
the non-cash amortization of a premium to par value decreases interest income. The amount of these
non-cash adjustments can be found in the Companys Statement of Cash Flows. The non-cash accretion
of a discount increases the cost basis of the debt security, which results in an offsetting
unrealized loss. The non-cash amortization of a premium decreases the cost basis of the debt
security which results in an offsetting unrealized gain. During the nine months ended August 31,
2009, the Company has recognized non-cash accretion of $643 and an equal and offsetting unrealized
loss related to the original discount on the Companys investment in ProPetro Services, Inc.
(ProPetro).
During first quarter 2008, the Company recorded $1,286 in interest income related to its
investment in ProPetro. During second quarter 2008, the Company established a full reserve of $830,
which represented past due interest accrued during first quarter 2008. Since the second quarter of
2008, the Company has not accrued interest income on its investment in ProPetro other than the
non-cash accretion described above.
During the three and nine months ended August 31, 2009, the Company received $60 and $180 of
paid-in-kind stock dividends in total from Enbridge Energy Management, L.L.C. and Kinder Morgan
Management, LLC. For these comparative periods in fiscal 2008, the Company received $43 and $259
of paid-in-kind stock dividends in total from these entities. Paid-in-kind stock dividends consist
of additional units of Enbridge Energy Management, L.L.C. and Kinder Morgan Management, LLC. The
additional units are not reflected in investment income during the period received but are recorded
as unrealized gains upon receipt.
K. Distributions to Stockholders Distributions to common stockholders are recorded on the
ex-dividend date. The estimated character of distributions 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 distribution until after the end of the fiscal
year. The Company informs its common stockholders in January following the fiscal year of the
character of distributions deemed paid during the fiscal year.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
L. Income Taxes For the fiscal periods ended November 30, 2007 and November 30, 2006, the
Company qualified for the tax treatment applicable to regulated investment companies under
Subchapter M of the Code. For these fiscal periods, the Company was required to make the requisite
distributions to its stockholders, which relieved it from federal income or excise taxes for these
periods. Since December 1, 2007, the Company has been taxed as a corporation and will pay federal
and applicable state corporate taxes on its taxable income.
The Company invests primarily in MLPs, which generally are treated as partnerships for federal
income tax purposes. As a limited partner in the MLPs, the Company includes its allocable share of
the MLPs taxable income in computing its own taxable income. Deferred income taxes reflect
(i) taxes on unrealized gains / (losses), which are attributable to the temporary differences
between fair market value and tax basis, (ii) the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes and (iii) the net tax benefit of accumulated net operating losses. To
the extent the Company has a deferred tax asset, consideration is given as to whether or not a
valuation allowance is required. The need to establish a valuation allowance for deferred tax
assets is assessed periodically by the Company based on the criterion established by the Statement
of Financial Accounting Standards, Accounting for Income Taxes (SFAS No. 109), that it is more
likely than not that some portion or all of the deferred tax asset will not be realized. In the
assessment for a valuation allowance, consideration is given to all positive and negative evidence
related to the realization of the deferred tax asset. This assessment considers, among other
matters, the nature, frequency and severity of current and cumulative losses, forecasts of future
profitability (which are highly dependent on cash distributions from the Companys MLP holdings),
the duration of statutory carryforward periods and the associated risk that operating loss
carryforwards may expire unused.
The Company may rely on information provided by the MLPs, which may not necessarily be timely,
to estimate our state income tax provision and taxable income allocable to the MLP units held in
the portfolio. Such estimates are made in good faith. From time to time, as new information becomes
available, the Company modifies its estimates or assumptions regarding its income tax provision and
related deferred tax liability (asset).
As of December 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 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. 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 (See Note 5
Income Taxes). The Companys policy is to classify interest and penalties associated with
underpayment of federal and state income taxes, if any, as income tax expense on its Statement of
Operations.
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 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.
N. Foreign Currency Translations The books and records of the Company are maintained in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the rate of exchange as of the
valuation date; and (ii) purchases and sales of investment securities, income and expenses at the
relevant rates of exchange prevailing on the respective dates of such transactions.
The Company does not isolate that portion of gains and losses on investments in equity and
debt securities which is due to changes in the foreign exchange rates from that which is due to
changes in market prices of equity securities. Accordingly, realized and unrealized foreign
currency gains and losses with respect to such securities are included in the reported net realized
and unrealized gains and losses on investment transactions balances.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
Net realized foreign exchange gains or losses represent gains and losses from transactions in
foreign currencies and foreign currency contracts, foreign exchange gains or losses realized
between the trade date and settlement date on security transactions, and the difference between the
amounts of interest and dividends recorded on the Companys books and the U.S. dollar equivalent of
such amounts on the payment date.
Net unrealized foreign exchange gains or losses represent the difference between the cost of
assets and liabilities (other than investments) recorded on the Companys books from the value of
the assets and liabilities (other than investments) on the valuation date.
O. 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. If the Company repurchases a
written call option prior to its exercise, the difference between the premium received and the
amount paid to repurchase the option is treated as a realized gain or loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying security in
determining whether the Company has realized a gain or loss. 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. See Note 7 Option Contracts for more detail on option contracts
written and purchased.
3. QUALIFYING ASSETS UNDER THE 1940 ACT
As a BDC under the 1940 Act, the Company is generally prohibited from acquiring assets other
than qualifying assets unless at least 70% of its total assets, excluding deferred taxes, are
qualifying assets under the 1940 Act. The Company makes investments in eligible portfolio
companies (EPC) and other qualifying assets. EPCs generally include various domestic private
companies and related investments, but also include certain public companies with outstanding
common equity with a total market value of less than $250 million.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
As of August 31, 2009 and November 30, 2008, the percentages of the Companys EPCs and other
qualifying assets compared to total assets (excluding deferred taxes) are set forth below.
August 31, | November 30, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Qualifying assets: |
||||||||
Private MLPs and other private equity |
$ | 92,672 | $ | 92,210 | ||||
Publicly traded MLP and MLP Affiliate investments: |
||||||||
Capital Products Partners L.P.(1) |
527 | | ||||||
Eagle Rock Energy Partners, L.P. (2) |
4,209 | 11,823 | ||||||
Global Partners LP(1) |
368 | | ||||||
Navios Maritime Partners L.P. (1) |
543 | | ||||||
Quicksilver Gas Services LP(1) |
197 | | ||||||
TransMontaigne Partners L.P. (1) |
1,238 | | ||||||
$ | 7,082 | $ | 11,823 | |||||
Fixed income investments |
29,094 | 29,913 | ||||||
Repurchase agreement and deposits with brokers |
7,386 | 6,448 | ||||||
Receivable for securities sold |
| 688 | ||||||
Qualifying assets |
$ | 136,234 | $ | 141,082 | ||||
Total assets: |
||||||||
Total assets |
$ | 216,060 | $ | 222,174 | ||||
Less: deferred income tax asset |
(25,701 | ) | (31,370 | ) | ||||
Total assets, net |
$ | 190,359 | $ | 190,804 | ||||
Qualifying assets as a percentage of total assets |
71.6 | % | 73.9 | % |
(1) | Securities of publicly-traded MLPs that were designated as EPCs based on their total
market capitalization of less than $250 million at the time of purchase.
|
|
(2) | Represents units received as partial consideration related to the sale of Millennium
Midstream Partners, L.P. (Millennium was a Private MLP investment) to Eagle Rock Energy
Partners, L.P. on October 1, 2008. BDC rules consider securities received as consideration
from the sale of an EPC to be an EPC. |
4. FAIR VALUE
SFAS No. 157. In September 2006, the FASB issued Statement on Financial Accounting Standards,
Fair Value Measurements (SFAS No. 157). 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.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
As of December 1, 2007, the Company adopted SFAS No. 157. The Company has performed an
analysis of all existing investments and derivative instruments to determine the significance and
character of all inputs to their fair value determination. Based on this assessment, the adoption
of this standard did not have any material effect on the Companys net asset value. However, the
adoption of the standard does require the Company to provide additional disclosures about the
inputs used to develop the measurements and the effect of certain measurements on changes in net
assets for the reportable periods as contained in the Companys periodic filings. Further,
valuation techniques to measure fair value shall maximize the use of relevant observable inputs
that do not require significant adjustment and minimize the use of unobservable inputs.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into the following three broad categories.
| Level 1 Quoted unadjusted prices for identical instruments in active markets to
which the Company has access at the date of measurement. |
| Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable
in active markets. Level 2 inputs are those in markets for which there are few
transactions, the prices are not current, little public information exists or instances
where prices vary substantially over time or among brokered market makers. |
| Level 3 Model derived valuations in which one or more significant inputs or
significant value drivers are unobservable. Unobservable inputs are those inputs that
reflect the Companys own assumptions that market participants would use to price the
asset or liability based on the best available information. |
The following table presents our assets measured at fair value on a recurring basis at August
31, 2009. Note that the valuation levels below are not necessarily an indication of the risk or
liquidity associated with the underlying investment. For instance, the Companys repurchase
agreements, which are collateralized by U.S. Treasury notes, are generally high quality and liquid;
however, the Company reflects these repurchase agreements as Level 2 because the inputs used to
determine fair value may not always be quoted prices in an active market.
Quoted Prices in | Prices with Other | One or More | ||||||||||||||
Active Markets | Observable Inputs | Unobservable Inputs | ||||||||||||||
Assets at Fair Value | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Long-Term Investments |
$ | 181,926 | $ | 56,103 | $ | 28,567 | $ | 97,256 | ||||||||
Repurchase Agreements |
7,386 | | 7,386 | | ||||||||||||
Total assets at fair value |
$ | 189,312 | $ | 56,103 | $ | 35,953 | $ | 97,256 | ||||||||
The Company did not have any liabilities that were measured at fair value on a recurring basis
at August 31, 2009.
The following table presents our assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the three and nine months ended August 31, 2009.
Three Months Ended | ||||
August 31, 2009 | ||||
Balance May 31, 2009 |
$ | 98,919 | ||
Transfers out of Level 3 |
(2,391 | ) | ||
Realized gains |
| |||
Unrealized gains, net |
190 | |||
Purchases, issuances or settlements |
538 | |||
Balance August 31, 2009 |
$ | 97,256 | ||
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
Nine Months Ended | ||||
August 31, 2009 | ||||
Balance November 30, 2008 |
$ | 114,708 | ||
Transfers out of Level 3 |
(10,781 | ) | ||
Realized gains |
| |||
Unrealized losses, net |
(9,138 | ) | ||
Purchases, issuances or settlements |
2,467 | |||
Balance August 31, 2009 |
$ | 97,256 | ||
The $190 of unrealized gains, net, and $9,138 of unrealized losses, net, presented in the
tables above for the three and nine months ended August 31, 2009 relate to investments that are
still held at August 31, 2009, and the Company presents these unrealized gains (losses) on the
Consolidated Statement of Operations Net Change in Unrealized Gains (Losses).
The Company did not have any liabilities that were measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) at August 31, 2009.
5. INCOME TAXES
Deferred income taxes reflect (i) taxes on unrealized gains/(losses), which are attributable
to the difference between fair market value and tax basis, (ii) the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and (iii) the net tax benefit of accumulated net
operating losses. Components of the Companys deferred tax assets and liabilities are as follows:
August 31, | November 30, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Deferred tax assets: |
||||||||
Organizational costs |
$ | 16 | $ | 19 | ||||
Net operating loss carryforwards |
12,567 | 4,846 | ||||||
Net unrealized losses on investment securities |
16,937 | 28,329 | ||||||
Deferred tax liabilities: |
||||||||
Basis reductions resulting from estimated return of capital |
(3,819 | ) | (1,824 | ) | ||||
Total net deferred tax asset |
$ | 25,701 | $ | 31,370 | ||||
At August 31, 2009 the Company had a federal net operating loss carryforward of $34,108
(deferred tax asset of $11,583). Realization of the deferred tax assets and net operating loss
carryforwards are dependent, in part, on generating sufficient taxable income prior to expiration
of the loss carryforwards. If not utilized, $2,013, $11,338 and $20,757 of the net operating loss
carryforward will expire in 2027, 2028 and 2029, respectively. In addition, the Company has state
net operating losses which total approximately $31,995 (deferred tax asset of $984). These state
net operating losses expire in 2014 through 2029.
The Company periodically reviews the recoverability of its deferred tax asset based on the
weight of objective evidence and criteria of whether it is more likely than not that the asset
would be utilized under SFAS No. 109. The Companys analysis of the need for a valuation allowance
considers that it has incurred a cumulative loss over the three year period ended November 30, 2008
and through second quarter 2009. A significant portion of the Companys net pre-tax losses related
to unrealized depreciation of investments occurred during fourth quarter 2008 as a result of the
unprecedented decline in the overall financial, commodity and MLP markets.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
When assessing the recoverability of its deferred tax asset, significant weight was given to
the Companys forecast of future taxable income, which is based principally on the expected
continuation of cash distributions from the Companys MLP holdings and interest income from its
fixed income holdings at or near current levels. Consideration was also given to the effects of
potential of additional future realized and unrealized losses on investments and the period over
which these deferred tax assets can be realized, as the expiration dates for the federal tax loss
carryforwards are 18 and 20 years.
Based on the Companys assessment, it has determined that it is more likely than not that the
net deferred tax asset will be realized through future taxable income of the appropriate character.
Accordingly, no valuation allowance has been established for the Companys net deferred tax asset.
The Company will continue to assess the need for a valuation allowance in the future. The
Company will review its financial forecasts in relation to actual results and expected trends on an
ongoing basis. Unexpected significant decreases in cash distributions from the Companys MLP
holdings or significant further declines in the fair value of its portfolio of investments may
change the Companys assessment regarding the recoverability of its deferred tax asset and would
likely result in a valuation allowance. If a valuation allowance is required to reduce the deferred
tax asset in the future, it could have a material impact on the Companys net asset value and
results of operations in the period it is recorded.
As of August 31, 2009 and November 30, 2008, the identified cost of investments for federal
income tax purposes was $235,772 and $264,473, respectively. The cost basis of investments includes
a $10,534 and $13,943 reduction in basis attributable to the Companys portion of the allocated
losses from its MLP investments at August 31, 2009 and November 30, 2008, respectively. Gross
unrealized appreciation and depreciation of investments for federal income tax purposes were as
follows:
August 31, | November 30, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Gross unrealized appreciation of investments |
$ | 11,050 | $ | 2,205 | ||||
Gross unrealized depreciation of investments |
(57,510 | ) | (78,069 | ) | ||||
Net unrealized depreciation before tax |
$ | (46,460 | ) | $ | (75,864 | ) | ||
Components of the Companys income tax benefit (expense) for the following comparative periods
were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
August 31, | August 31, | August 31, | August 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Deferred income tax benefit (expense) net investment loss
(income) |
$ | (290 | ) | $ | 386 | $ | 106 | $ | 1,682 | |||||||
Deferred income tax benefit realized losses |
1,715 | 2,370 | 6,597 | 1,072 | ||||||||||||
Deferred income tax benefit (expense) unrealized losses (gains) |
(5,176 | ) | 2,598 | (12,372 | ) | 688 | ||||||||||
Deferred income tax expense conversion to a taxable corporation |
| | | (3,828 | ) | |||||||||||
Income tax benefit (expense) |
$ | (3,751 | ) | $ | 5,354 | $ | (5,669 | ) | $ | (386 | ) | |||||
The Company adopted FIN 48 as of December 1, 2007, and the adoption of the interpretation
did not have a material effect on the Companys net asset value. The Companys policy is to
classify interest and penalties associated with underpayment of federal and state income taxes, if
any, as income tax expense on its Consolidated
Statement of Operations. As of August 31, 2009, the Company did not have any interest or
penalties associated with the underpayment of any income taxes. All tax years since inception
remain open and subject to examination by tax jurisdictions.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
6. AGREEMENTS AND AFFILIATIONS
A. Administration Agreement On February 27, 2009, the Administration Agreement between the
Company and Bear Stearns Funds Management Inc., dated September 20, 2006, was terminated. The
termination was by mutual agreement of the parties. No penalties were incurred by the Company
resulting from the termination of the Administration Agreement with Bear Stearns Funds Management
Inc.
On February 27, 2009, the Company entered into an Administration Agreement (the
Administration Agreement) with Ultimus Fund Solutions, LLC (Ultimus). Pursuant to the
Administration Agreement, Ultimus will provide certain administrative services for the Company. The
Administration Agreement will terminate on February 27, 2010, with automatic one-year renewals
unless earlier terminated by either party as provided under the terms of the Administration
Agreement.
B. Investment Management Agreement The Company has entered into an investment management
agreement with KAFA under which the Company has material future rights and commitments. Pursuant to
the investment management agreement, KAFA has agreed to serve as investment adviser and provide
significant managerial assistance to portfolio companies to which the Company is required to
provide such assistance. Payments under the investment management agreement include (1) a base
management fee, (2) an incentive fee, and (3) reimbursement of certain expenses. On October 1,
2009, the Companys board of directors unanimously approved a one year renewal of the investment
management agreement with KAFA.
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 (excluding
deferred taxes) shall equal gross asset value (which includes assets attributable to or proceeds
from the use of Leverage Instruments), minus the sum of accrued and unpaid dividends on common
stock and accrued and unpaid dividends on preferred stock and accrued liabilities (other than
liabilities associated with leverage and deferred taxes). Liabilities associated with leverage
include the principal amount of any borrowings, commercial paper or notes that the Company may
issue, the liquidation preference of outstanding preferred stock, and other liabilities from other
forms of leverage such as short positions and put or call options held or written by the Company.
Incentive Fee. The incentive fee consists of two parts. The first part of the incentive fee
(the Net Investment Income Fee), which is calculated and payable quarterly in arrears, equals 20%
of the excess, if any, of Adjusted Net Investment Income for the quarter over a quarterly hurdle
rate equal to 1.875% (7.50% annualized) of average net assets for the quarter. Average net assets
is calculated by averaging net assets at the last day of the quarter and at the last day of such
prior quarter or commencement of operations (net assets is defined as total assets less total
liabilities (including liabilities associated with Leverage Instruments) determined in accordance
with GAAP.
For this purpose, Adjusted Net Investment Income means interest income (including accrued
interest that the Company has not yet received in cash), dividend and distribution income from
equity investments (but excluding that portion of cash distributions that are treated as a return
of capital) and any other income, including any other fees, such as commitment, origination,
syndication, structuring, diligence, monitoring and consulting fees or other fees that the Company
receives from portfolio companies (other than fees for providing significant managerial assistance
to portfolio companies) accrued during the fiscal quarter, minus operating expenses for the quarter
(including the base management fee, any interest expense, dividends paid on issued and outstanding
preferred stock, if any, and any accrued income taxes related to net investment income, but
excluding the incentive fee). Adjusted Net Investment Income does not include any realized capital
gains, realized capital losses or unrealized capital gains
or losses. Accordingly, the Company pays an incentive fee based partly on accrued interest,
the collection of which is uncertain or deferred. Adjusted Net Investment Income includes, in the
case of investments with a deferred interest feature (such as original issue discount, debt
instruments with payment-in-kind interest and zero coupon securities), accrued income that the
Company has not yet received in cash. For example, accrued interest, if any, on investments in zero
coupon bonds (if any) would be included in the calculation of the incentive fee, even though the
Company would not receive any cash interest payments in respect of payment on the bond until its
maturity date. Thus, if the Company does not have sufficient liquid assets to pay this incentive
fee or dividends to stockholders, the Company may be required to liquidate assets.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
The second part of the incentive fee (the Capital Gains Fee) is determined and payable in
arrears as of the end of each fiscal year (or upon termination of the investment management
agreement, as of the termination date), and equals (1) 20% of (a) net realized capital gains
(aggregate realized capital gains less aggregate realized capital losses) on a cumulative basis
from the closing date of 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 is treated as a decrease in the cost basis of an investment for purposes of
calculating the Capital Gains Fee.
Realized capital gains on an investment are calculated as the excess of the net amount
realized from the sale or other disposition of such security over the adjusted cost basis for the
security. Realized capital losses on a security are calculated as the amount by which the net
amount realized from the sale or other disposition of such security is less than the adjusted cost
basis of such security. Unrealized capital loss on a security is calculated as the amount by which
the adjusted cost basis of such security exceeds the fair value of such security at the end of a
fiscal year.
Components of the Companys management fees for the comparative financial periods are as
follows. There were no base management fee waivers, Capital Gains Fees or Net Investment Income
Fee for the comparative periods.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
August 31, | August 31, | August 31, | August 31, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Base management fees |
$ | 816 | $ | 1,328 | $ | 2,369 | $ | 4,052 | ||||||||
C. Portfolio Companies From time to time, the Company may control or may be an affiliate
of one or more portfolio companies, each as defined in the 1940 Act. In general, under the 1940
Act, the Company would control a portfolio company if the Company owned 25% or more of its
outstanding voting securities and would be an affiliate of a portfolio company if the Company
owned 5% or more of its outstanding voting securities. The 1940 Act contains prohibitions and
restrictions relating to transactions between investment companies and their affiliates (including
the Companys investment adviser), principal underwriters and affiliates of those affiliates or
underwriters.
The Company believes that there is significant ambiguity in the application of existing SEC
staff interpretations of the term voting security to complex structures such as limited
partnership interests of the kind in which the Company invests. As a result, it is possible that
the SEC staff may consider that certain securities investments in limited partnerships are voting
securities under the staffs prevailing interpretations of this term. If such determination is
made, the Company may be regarded as a person affiliated with and controlling the issuer(s) of
those securities for purposes of Section 17 of the 1940 Act.
In light of the ambiguity of the definition of voting securities, the Company does not intend
to treat any class of limited partnership interests that it holds as voting securities unless the
security holders of such class currently have the ability, under the partnership agreement, to
remove the general partner (assuming a sufficient vote of such securities, other than securities
held by the general partner, in favor of such removal) or the Company has an economic interest of
sufficient size that otherwise gives it the de facto power to exercise a controlling influence over
the partnership. The Company believes this treatment is appropriate given that the general partner
controls the partnership, and without the ability to remove the general partner or the power to
otherwise exercise a controlling influence over the partnership due to the size of an economic
interest, the security holders have no control over the partnership.
Affiliated Investments.
Direct Fuels Partners, L.P. At August 31, 2009, the Company held a 38% limited partnership
interest in Direct Fuels Partners, L.P. (Direct Fuels). The Company believes that the limited
partner interests of Direct Fuels should not be considered voting securities for purposes of the
1940 Act because of the limited scope and character of the rights of such securities. The Companys
President and Chief Executive Officer serves as a director on the board of the general partner for
Direct Fuels. Although the Company does not own any interest in the general partner of Direct
Fuels, it believes that it may be an affiliate of Direct Fuels under the 1940 Act by virtue of its
participation on the board of the general partner.
Plains All American, L.P. Robert V. Sinnott is a member of the Companys board of directors
and a senior executive of Kayne Anderson Capital Advisors, L.P. (KACALP), the managing member of
KAFA. Mr. Sinnott also serves as a director on the board of Plains All American GP LLC, the general
partner of Plains All American Pipeline, L.P. Members of senior management of KACALP and KAFA and
various affiliated funds managed by KACALP own units of Plains All American GP LLC. Various
advisory clients of KACALP and KAFA, including the Company, own units in Plains All American
Pipeline, L.P. The Company believes that it is an affiliate of Plains All American, L.P. under the
1940 Act by virtue of the ownership interests in the general partner by the Companys affiliates.
26
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
VantaCore Partners LP At August 31, 2009, the Company held a 39% limited partnership
interest in VantaCore Partners LP (VantaCore). The Company believes that the limited partner
interests of VantaCore should not be considered voting securities for purposes of the 1940 Act
because of the limited scope and character of the
rights of such securities. One of the Companys Senior Vice Presidents serves as a director on
the board of the general partner for VantaCore. Although the Company does not own any interest in
the general partner of VantaCore, it believes that it may be an affiliate of VantaCore under the
1940 Act by virtue of its participation on the board of the general partner.
Non-Affiliated Investments.
International Resource Partners LP At August 31, 2009, the Company held a 28% limited
partnership interest in International Resource Partners LP (IRP). The Company believes that the
limited partner interests of IRP should not be considered voting securities for purposes of the
1940 Act because of the limited scope and character of the rights of such securities. The Company
does not have a member of its management team serving as a director on the board of the general
partner for IRP, but does have observation rights with respect to IRPs board meetings. The Company
believes that the Company does not have the power to exercise a controlling influence over the
management or policies of this partnership or the general partner of IRP. Accordingly, the Company
believes that it is not an affiliate of IRP under the 1940 Act.
Quest Midstream Partners, L.P. At August 31, 2009, the Company held a 2.6% limited
partnership interest in Quest Midstream Partners, L.P. (Quest). The Company believes that the
limited partner interests of Quest should not be considered voting securities for purposes of the
1940 Act because of the limited scope and character of the rights of such securities. One of the
Companys Executive Vice Presidents served as a director on the board of the general partner for
Quest from November 2008 until June 2009. The Company no longer has a member of its management
team serving as a director on the board of the general partner for Quest, but does have observation
rights with respect to Quests board meetings. The Company believes that the Company does not have
the power to exercise a controlling influence over the management or policies of this partnership
or the general partner of Quest. Accordingly, the Company believes that it is not an affiliate of
Quest under the 1940 Act.
7. OPTION CONTRACTS
Transactions in option contracts for the nine months ended August 31, 2009 were as follows:
Number of | ||||||||
Contracts | Premium | |||||||
Options outstanding at beginning of period |
| | ||||||
Options written |
665 | $ | 97 | |||||
Options exercised |
(505 | ) | (80 | ) | ||||
Options expired |
(160 | ) | (17 | ) | ||||
Options outstanding at end of period |
| $ | | |||||
There were no option contracts written for the three months ended August 31, 2009.
SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. This standard amends and expands the disclosure requirements
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to illustrate how
and why an entity uses derivative instruments; how derivative instruments and related hedged items
are accounted for under SFAS No. 133; and how derivative instruments and related hedged items
affect an entitys financial position, financial performance and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. As of December 1, 2008, the Company adopted
SFAS No. 161.
27
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
The Company is exposed to financial market risks, including changes in interest rates and in
the valuations of its investment portfolio. The Company may write (sell) call options with the
purpose of reducing its holding of certain securities. A call option on a security is a contract
that gives the holder of the option, in return for a premium, the right to buy from the writer of
the option the security underlying the option at a specified exercise price at any time during the
term of the option. The writer of an option on a security has the obligation upon
exercise of the option to deliver the underlying security upon payment of the exercise price.
The successful use of options depends in part on the degree of correlation between the options and
securities. See Note 2 Significant Accounting Policies for more detail on option contracts
written.
The following table sets forth the effect of derivative instruments on the Consolidated
Statement of Operations.
Amount of Realized Gain | ||||||
Recognized | ||||||
in Income on Derivatives | ||||||
Derivatives not accounted for as hedging | Location of Gain | For the Nine Months Ended | ||||
instruments under SFAS No. 133 | on Derivatives Recognized in Income | August 31, 2009 | ||||
Call options |
Net Realized Gain - Options | $ | 17 |
8. INVESTMENT TRANSACTIONS
The following table sets forth the Companys purchases and sales of securities, exclusive of
short-term investments other than U.S. Treasuries, for each comparative period.
For the nine months ended | ||||||||
August 31, | August 31, | |||||||
2009 | 2008 | |||||||
Securities purchased |
$ | 27,571 | $ | 58,886 | ||||
Securities sold, excluding U.S. Treasuries |
$ | 34,137 | $ | 68,597 | ||||
Sales of U.S. Treasuries |
| 14,250 | ||||||
Total securities sold |
$ | 34,137 | $ | 82,847 | ||||
9. RESTRICTED SECURITIES
From time to time, certain of the Companys investments may be restricted as to resale. For
instance, private investments that are not registered under the Securities Act, and cannot, as a
result, be offered for public sale in a non-exempt transaction without first being registered. In
other cases, certain of the Companys investments have restrictions such as lock-up agreements that
preclude the Company from offering these securities for public sale.
28
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
At August 31, 2009, the Company held the following restricted securities.
Number of | ||||||||||||||||||||||||||||||
Units, | ||||||||||||||||||||||||||||||
Warrants, or | Fair Value | Percent | Percent | |||||||||||||||||||||||||||
Type of | Principal ($) | Cost | Fair | per Unit/ | of Net | of Total | ||||||||||||||||||||||||
Investment | Security | Restriction | (in 000s) | Basis | Value | Warrant | Assets | Assets | ||||||||||||||||||||||
Copano Energy, L.L.C |
Class D Units | (1 | ) | 76 | $ | 2,000 | $ | 1,103 | $ | 14.47 | 0.7 | % | 0.5 | % | ||||||||||||||||
Direct Fuels Partners, L.P (2) |
Class A Common Units | (3 | ) | 2,500 | 42,322 | 33,750 | 13.50 | 20.8 | 15.6 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class A Convertible Preferred Units | (3 | ) | 96 | 1,952 | 1,910 | 19.80 | 1.2 | 0.9 | |||||||||||||||||||||
Direct Fuels Partners, L.P. |
Class B Convertible Preferred Units | (3 | ) | 27 | 538 | 538 | 20.00 | 0.3 | 0.3 | |||||||||||||||||||||
Eagle Rock Energy Partners, L.P. |
Common Units | (1 | )(4) | 149 | 1,618 | 481 | 3.23 | 0.3 | 0.2 | |||||||||||||||||||||
International Resource Partners LP
(5) |
Class A Units | (3 | ) | 1,500 | 26,334 | 30,000 | 20.00 | 18.5 | 13.9 | |||||||||||||||||||||
ProPetro Services, Inc. |
Warrants | (3 | ) | 2,905 | 2,469 | | | | | |||||||||||||||||||||
ProPetro Services, Inc. |
Secured Term Loan | (3 | ) | $ | 35,000 | 33,192 | 3,000 | n/a | 1.8 | 1.4 | ||||||||||||||||||||
Quest Midstream Partners, L.P. |
Common Units | (3 | ) | 350 | 6,625 | 1,575 | 4.50 | 1.0 | 0.7 | |||||||||||||||||||||
VantaCore Partners LP (6) |
Class A Common Units | (3 | ) | 1,465 | 25,366 | 24,899 | 17.00 | 15.3 | 11.5 | |||||||||||||||||||||
Total of securities valued in accordance with procedures established by the board of directors(7) |
$ | 142,416 | $ | 97,256 | 59.9 | % | 45.0 | % | ||||||||||||||||||||||
Athabasca Oil Sands Corp. |
Senior Notes | $ | 2,500 | $ | 2,434 | $ | 2,398 | n/a | 1.5 | % | 1.1 | % | ||||||||||||||||||
DCP Midstream, LLC |
Senior Notes | $ | 2,000 | 2,107 | 2,378 | n/a | 1.5 | 1.1 | ||||||||||||||||||||||
Dresser, Inc. |
Secured Term Loan | $ | 5,000 | 4,827 | 4,175 | n/a | 2.6 | 1.9 | ||||||||||||||||||||||
Drummond Company, Inc. |
Senior Notes | $ | 3,000 | 2,564 | 2,640 | n/a | 1.6 | 1.2 | ||||||||||||||||||||||
Energy Future Holdings Corp. |
Secured Term Loan | $ | 9,232 | 6,899 | 7,016 | n/a | 4.3 | 3.3 | ||||||||||||||||||||||
Hilcorp Energy Company |
Senior Notes | $ | 6,585 | 6,048 | 6,075 | n/a | 3.7 | 2.8 | ||||||||||||||||||||||
Petroleum Development Corporation |
Senior Notes | $ | 2,000 | 1,845 | 1,860 | n/a | 1.2 | 0.9 | ||||||||||||||||||||||
Targa Resources, Inc. |
Senior Notes | $ | 2,155 | 2,187 | 1,950 | n/a | 1.2 | 0.9 | ||||||||||||||||||||||
Trident Resources Corp. |
Warrants | 100 | 411 | 75 | $ | 0.75 | | | ||||||||||||||||||||||
Total of securities valued by prices provided by market maker or independent pricing service(3)(8) |
$ | 29,322 | $ | 28,567 | 17.6 | % | 13.2 | % | ||||||||||||||||||||||
Total of all restricted securities |
$ | 171,738 | $ | 125,823 | 77.5 | % | 58.2 | % | ||||||||||||||||||||||
(1) | Unregistered security of a publicly-traded company. |
|
(2) | The Companys investment in Direct Fuels Partners, L.P. includes 200 incentive distribution
rights (20% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(3) | Unregistered security of a private company. |
|
(4) | Unregistered Common Units were placed in escrow for a period of 18 months following the sale
of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1, 2010). |
|
(5) | The Companys investment in International Resource Partners LP includes 10 incentive
distribution rights (10% of total outstanding incentive distribution rights) for which the
Company does not assign a value. |
|
(6) | The Companys investment in VantaCore Partners LP includes 1,823 incentive distribution
rights (18% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(7) | Restricted securities that represent Level 3 categorization under SFAS No. 157 where reliable
market quotes are not readily available. Securities are valued in accordance with the
procedures established by the board of directors as more fully described in Note 2 -
Significant Accounting Policies. |
|
(8) | Restricted securities that represent Level 2 categorization under SFAS No. 157. Securities
with a fair market value determined by the mean of the bid and ask prices provided by a
syndicate bank, principal market maker or an independent pricing service as more fully
described in Note 2 Significant Accounting Policies. These securities have limited trading
volume and are not listed on a national exchange. |
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
At November 30, 2008, the Company held the following restricted securities.
Number of | ||||||||||||||||||||||||||||||
Units, | ||||||||||||||||||||||||||||||
Warrants, | Fair Value | Percent | Percent | |||||||||||||||||||||||||||
Type of | or Principal ($) | Cost | Fair | per Unit/ | of Net | of Total | ||||||||||||||||||||||||
Investment | Security | Restriction | (in 000s) | Basis | Value | Warrant | Assets | Assets | ||||||||||||||||||||||
Copano Energy, L.L.C |
Class D Units | (1 | ) | 76 | $ | 2,000 | $ | 750 | $ | 9.85 | 0.5 | % | 0.3 | % | ||||||||||||||||
Direct Fuels Partners, L.P (2) |
Class A Common Units | (3 | ) | 2,500 | 45,048 | 37,500 | 15.00 | 23.0 | 16.9 | |||||||||||||||||||||
Eagle Rock Energy Partners, L.P. |
Common Units | (1 | ) | 1,013 | 13,233 | 7,754 | 7.65 | 4.8 | 3.5 | |||||||||||||||||||||
Eagle Rock Energy Partners, L.P. |
Common Units | (1 | )(4) | 582 | 6,989 | 4,069 | 6.99 | 2.5 | 1.8 | |||||||||||||||||||||
International Resource Partners
LP (5) |
Class A Units | (3 | ) | 1,500 | 27,234 | 24,000 | 16.00 | 14.8 | 10.8 | |||||||||||||||||||||
ProPetro Services, Inc. |
Warrants | (3 | ) | 2,905 | 2,469 | | | | | |||||||||||||||||||||
ProPetro Services, Inc. |
Secured Term Loan | (3 | ) | $ | 35,000 | 32,550 | 10,000 | n/a | 6.1 | 4.5 | ||||||||||||||||||||
Quest Midstream Partners, L.P. |
Common Units | (3 | ) | 350 | 6,625 | 4,637 | 13.25 | 2.8 | 2.1 | |||||||||||||||||||||
VantaCore Partners LP (6) |
Class A Common Units | (3 | ) | 1,465 | 27,526 | 25,998 | 17.75 | 16.0 | 11.7 | |||||||||||||||||||||
Total of securities valued in accordance with procedures established by the board of directors(7) |
$ | 163,674 | $ | 114,708 | 70.5 | % | 51.6 | % | ||||||||||||||||||||||
Athabasca Oil Sands Corp. |
Senior Notes | $ | 2,500 | $ | 2,434 | $ | 1,873 | n/a | 1.2 | % | 0.9 | % | ||||||||||||||||||
Dresser, Inc. |
Secured Term Loan | $ | 5,000 | 4,805 | 3,150 | n/a | 1.9 | 1.4 | ||||||||||||||||||||||
Energy Future Holdings Corp. |
Secured Term Loan | $ | 2,500 | 1,967 | 1,725 | n/a | 1.1 | 0.8 | ||||||||||||||||||||||
Hilcorp Energy Company |
Senior Notes | $ | 4,000 | 3,811 | 2,860 | n/a | 1.8 | 1.3 | ||||||||||||||||||||||
Knight, Inc. |
Senior Notes | $ | 7,530 | 7,055 | 6,024 | n/a | 3.7 | 2.7 | ||||||||||||||||||||||
Stallion Oilfield Services Ltd. |
Secured Term Loan | $ | 5,000 | 4,922 | 2,625 | n/a | 1.6 | 1.2 | ||||||||||||||||||||||
Targa Resources, Inc. |
Senior Notes | $ | 2,155 | 2,192 | 1,185 | n/a | 0.7 | 0.5 | ||||||||||||||||||||||
Targa Resources Investments, Inc. |
Secured Term Loan | $ | 1,046 | 760 | 471 | n/a | 0.3 | 0.2 | ||||||||||||||||||||||
Trident Resources Corp. |
Warrants | 100 | 411 | 75 | $ | 0.75 | | | ||||||||||||||||||||||
Total of securities valued by prices provided by market maker or independent pricing service(3)(8) |
$ | 28,357 | $ | 19,988 | 12.3 | % | 9.0 | % | ||||||||||||||||||||||
Total of all restricted securities |
$ | 192,031 | $ | 134,696 | 82.8 | % | 60.6 | % | ||||||||||||||||||||||
(1) | Unregistered security of a publicly-traded company. |
|
(2) | The Companys investment in Direct Fuels Partners, L.P. includes 200 incentive distribution
rights (20% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(3) | Unregistered security of a private company. |
|
(4) | Unregistered Common Units were placed in escrow for a period of 18 months following the sale
of Millennium Midstream Partners, L.P. (the escrow account will be released on April 1, 2010). |
|
(5) | The Companys investment in International Resource Partners LP includes 10 incentive
distribution rights (10% of total outstanding incentive distribution rights) for which the
Company does not assign a value. |
|
(6) | The Companys investment in VantaCore Partners LP includes 1,823 incentive distribution
rights (18% of total outstanding incentive distribution rights) for which the Company does not
assign a value. |
|
(7) | Restricted securities that represent Level 3 categorization under SFAS No. 157 where reliable
market quotes are not readily available. Securities are valued in accordance with the
procedures established by the board of directors as more fully described in Note 2 -
Significant Accounting Policies. |
|
(8) | Restricted securities that represent Level 2 categorization under SFAS No. 157. Securities
with a fair market value determined by the mean of the bid and ask prices provided by a
syndicate bank, principal market maker or an independent pricing service as more fully
described in Note 2 Significant Accounting Policies. These securities have limited trading
volume and are not listed on a national exchange. |
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
10. SENIOR SECURED AND TREASURY SECURED REVOLVING CREDIT FACILITIES
On June 4, 2007, the Company established two credit facilities totaling $200,000. Unless
otherwise terminated in advance, the two credit facilities terminate no later than June 4, 2010.
The first facility, the Senior Secured Revolving Credit Facility (the Investment Facility) has
availability of $100,000 with the ability to increase availability to $250,000. Interest on the
Investment Facility is charged at LIBOR plus 125 basis points or the prime rate plus 25 basis
points. The second facility, the Treasury Secured Revolving Credit Facility (the Treasury
Facility), permitted the Company to borrow up to $100,000 and invest the proceeds in
U.S. government securities. Interest on the Treasury Facility was charged at LIBOR plus 20 basis
points or the prime rate.
On January 31, 2008, the Company terminated the Treasury Facility. All amounts of principal
and interest were paid in full, and the Company sold its U.S. Treasury Bills, which were held as
collateral for the amount outstanding under the Treasury Facility.
On February 21, 2008, the Company amended the Investment Facility as a result of its
announcement that it would no longer be treated as a RIC under the Code and that it would be taxed
as a corporation for the fiscal year ended November 30, 2008 and for future fiscal years. The
amendment removed the Companys requirement to maintain its RIC status and modified certain other
terms in accordance with the Companys intention to be taxed as a corporation.
On September 19, 2008, the Company amended the Investment Facility to modify the calculation
of its borrowing base. The modification was driven by the Companys stated strategy to increase its
portfolio of private MLPs and decrease its holdings of private debt securities.
Investment Facility The obligations under the Investment Facility are collateralized by
substantially all of the Companys assets (excluding investments in U.S. government securities),
and are guaranteed by any of the Companys future subsidiaries, other than special purpose
subsidiaries. The Investment Facility contains affirmative and reporting covenants and certain
financial ratio and restrictive covenants, including: (a) maintaining a ratio, on a consolidated
basis, of total assets less liabilities (other than indebtedness) to aggregate indebtedness
(excluding non-recourse indebtedness of special purpose subsidiaries) of the Company and its
subsidiaries, of not less than 2.50:1.0, (b) maintaining the value of the portion of the Companys
portfolio that can be converted into cash within specified time periods and valuations at no less
than 10% of the principal amount outstanding under the Investment Facility (less fully cash
collateralized letters of credit) during any period when adjusted outstanding principal amounts
exceed a specified threshold percentage of the Companys adjusted borrowing base, (c) maintaining
consolidated net assets at each fiscal quarter end of not less than the greater of: 40% of the
consolidated total assets of the Company and its subsidiaries, and $100,000 plus 25% of the net
proceeds from any sales of equity securities by the Company and its subsidiaries subsequent to the
closing of the Investment Facility, (d) limitations on additional indebtedness, (e) limitations on
liens, (f) limitations on mergers and other fundamental changes, (g) limitations on dividends and
other specified restricted payments, (h) limitations on disposition of assets, (i) limitations on
transactions with affiliates, (j) limitations on agreements that prohibit liens on properties of
the Company and its subsidiaries, (k) limitations on sale and leaseback transactions, (l)
limitations on specified hedging transactions, (m) limitations on changes in accounting treatment
and reporting practices, (n) limitations on specified amendments to the Companys investment
management agreement during the continuance of a default, (o) limitations on the aggregate amount
of unfunded commitments, and (p) limitations on establishing deposit, securities or similar
accounts not subject to control agreements in favor of the lenders. The Investment Facility also
contains customary representations and warranties and events of default.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
Under the terms of the Investment Facility, non-performing investments could reduce the
Companys borrowing base and could cause the Company to be in default under the terms of its loans
under the Investment Facility. Debt investments are generally characterized as non-performing if
such investments are in default of any payment obligations and MLP equity investments are generally
characterized as non-performing if such investments fail to pay distributions, in their most recent
fiscal quarter, that are greater than 80% of their minimum quarterly distribution amount.
Under the terms of the Investment Facility, if borrowings exceed 90% of borrowing base, the
Company is restricted in paying distributions to stockholders to no more than the amount of
Distributable Cash Flow for the current and prior three quarters.
As of August 31, 2009, the Company had $52,000 borrowed under its Investment Facility (at an
interest rate of 1.51%) which represented 67.1% of its borrowing base of $77,532. The maximum
amount that the Company can borrow under its Investment Facility is limited to the lesser of the
commitment amount of $100,000 and its borrowing base.
As of August 31, 2009, the Company was in compliance with all financial and operational
covenants required by the Investment Facility.
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
11. FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the nine months ended August 31, 2009;
the years ended November 30, 2008 and 2007, and the period September 21, 2006 (inception) to
November 30, 2006.
August 31, | November 30 | |||||||||||||||
2009 | 2008 | 2007 | 2006 | |||||||||||||
(Unaudited) | ||||||||||||||||
Per Share of Common Stock(1) |
||||||||||||||||
Net asset value, beginning of period |
$ | 16.10 | $ | 24.39 | $ | 24.19 | $ | 23.32 | ||||||||
Net investment income (loss) |
(0.02 | ) | (0.35 | ) | 0.36 | 0.09 | ||||||||||
Net realized and unrealized gain (loss) on investments |
0.94 | (5.89 | ) | 1.18 | 0.78 | |||||||||||
Net change in unrealized losses conversion to taxable corporation |
| (0.38 | ) | | | |||||||||||
Total income (loss) from investment operations |
0.92 | (6.62 | ) | 1.54 | 0.87 | |||||||||||
Dividends(2) |
| | (0.95 | ) | | |||||||||||
Distributions from net realized long-term capital gains(2) |
| | (0.15 | ) | | |||||||||||
Distributions return of capital(2) |
(1.00 | ) | (1.67 | ) | (0.24 | ) | | |||||||||
Total Dividends and Distributions |
(1.00 | ) | (1.67 | ) | (1.34 | ) | | |||||||||
Net asset value, end of period |
$ | 16.02 | $ | 16.10 | $ | 24.39 | $ | 24.19 | ||||||||
Market value per share, end of period |
$ | 11.64 | $ | 9.63 | $ | 23.14 | $ | 22.32 | ||||||||
Total investment return based on market value(3) |
31.0 | % | (54.8 | )% | 9.3 | % | (10.7 | )% | ||||||||
Supplemental Data and Ratios(4) |
||||||||||||||||
Net assets, end of period |
$ | 162,359 | $ | 162,687 | $ | 245,133 | $ | 241,914 | ||||||||
Ratio of expenses to average net assets:(5) |
||||||||||||||||
Management fees |
2.0 | % | 2.4 | % | 2.0 | % | 1.7 | % | ||||||||
Other expenses |
1.3 | % | 1.1 | % | 0.8 | % | 1.4 | % | ||||||||
Subtotal |
3.3 | % | 3.5 | % | 2.8 | % | 3.1 | % | ||||||||
Interest expense |
0.9 | % | 2.0 | % | 1.0 | % | | |||||||||
Management fee waivers |
| | (0.4 | )% | (0.5 | )% | ||||||||||
Bad debt expense |
| 0.4 | % | | | |||||||||||
Tax expense (benefit) |
4.7 | % | (15.5 | )% | 0.8 | % | | |||||||||
Total expenses |
8.9 | % | (9.6 | )% | 4.2 | % | 2.6 | % | ||||||||
Ratio of net investment income (loss) to average net assets |
(0.2 | )% | (1.6 | )% | 1.5 | % | 1.9 | % | ||||||||
Net increase (decrease) in net assets resulting from operations to
average net assets |
5.9 | %(6) | (31.1 | )% | 6.2 | % | 3.7 | %(6) | ||||||||
Portfolio turnover rate |
15.6 | %(6) | 27.0 | % | 28.8 | % | 5.6 | %(6) | ||||||||
Average net assets |
$ | 158,292 | $ | 214,818 | $ | 248,734 | $ | 235,199 | ||||||||
Average amount of borrowings outstanding under the Credit Facilities. |
$ | 53,624 | $ | 75,563 | $ | 32,584 | | |||||||||
Average amount of borrowings outstanding per share of common stock
during the period |
$ | 5.31 | $ | 7.50 | $ | 3.25 | |
(1) | Based on average shares of common stock outstanding of 10,106,611 for the nine months ended
August 31, 2009; 10,073,398 for year ended November 30, 2008; 10,014,496 for the year ended
November 30, 2007 and 10,000,060 for the period of September 21, 2006 through November 30,
2006. |
|
(2) | The information presented for the nine months ended August 31, 2009 is a current estimate of
the characterization of the distributions paid to common stockholders. The information
presented for each of the other periods is a characterization of a portion of the total
distributions paid to common stockholders as either dividends (ordinary income) or
distributions (return of capital). This characterization is based on the Companys earnings
and profits. |
|
(3) | Not annualized for the nine months ended August 31, 2009 and for the period September 21,
2006 through November 30, 2006. Total investment return is calculated assuming a purchase of
common stock at the market price on the first day and a sale at the current market price on
the last day of the period reported. The calculation also assumes reinvestment of
distributions, if any, at actual prices pursuant to the Companys dividend reinvestment plan. |
|
(4) | Unless otherwise noted, ratios are annualized. |
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in 000s, except option contracts written, share and per share amounts)
(UNAUDITED)
(5) | The following table sets forth the components of the ratio of expenses to average total
assets. |
For the Period | ||||||||||||||||
Ended | ||||||||||||||||
August 31, | As of November 30, | |||||||||||||||
2009 | 2008 | 2007 | 2006 | |||||||||||||
(Unaudited) | ||||||||||||||||
Management fees |
1.5 | % | 1.7 | % | 1.7 | % | 1.6 | % | ||||||||
Other expenses |
0.9 | 0.8 | 0.7 | 1.3 | ||||||||||||
Subtotal |
2.4 | % | 2.5 | % | 2.4 | % | 2.9 | % | ||||||||
Interest expense |
0.6 | 1.4 | 0.9 | | ||||||||||||
Management fee waivers |
| | (0.4 | ) | (0.4 | ) | ||||||||||
Bad debt expense |
| 0.3 | | | ||||||||||||
Tax expense (benefit) |
3.5 | (11.1 | ) | 0.7 | | |||||||||||
Total expenses |
6.5 | % | (6.9 | )% | 3.6 | % | 2.5 | % | ||||||||
Average total assets |
$ | 215,743 | $ | 302,007 | $ | 290,922 | $ | 246,802 | ||||||||
(6) | Not annualized. |
12. COMMON STOCK
The Company has 200,000,000 shares of common stock authorized. Transactions in common shares
for the nine months ended August 31, 2009 were as follows:
Shares outstanding at November 30, 2008 |
10,102,986 | |||
Shares issued through reinvestment of dividends and distributions |
31,037 | |||
Shares outstanding at August 31, 2009 |
10,134,023 | |||
13. SUBSEQUENT EVENTS
We have evaluated subsequent events through October 9, 2009, the date our financial statements
were issued, and up to the time of filing of our financial statements with the SEC.
On October 1, 2009, the Company declared its quarterly distribution of $0.30 per common share
for the period June 1, 2009 through August 31, 2009 for a total of $3,040. The distribution is
payable on October 29, 2009 to shareholders of record on October 16, 2009.
On October 1, 2009, the Companys board of directors unanimously approved a one year renewal of the
investment management agreement with KAFA. The investment management agreement expires on October
2, 2010.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussions should be read together with the unaudited consolidated financial
statements and the notes thereto included in this report and with the audited consolidated
financial statements and notes thereto included in our Annual Report on Form 10-K.
Forward-Looking Statements
Certain statements in this Form 10-Q include statements reflecting assumptions, expectations,
projections, intentions or beliefs about future events that are intended as forward-looking
statements. These statements represent our reasonable judgment on the future based on various
factors and using numerous assumptions and are subject to known and unknown risks, uncertainties,
and other factors that could cause our actual results to differ materially from those contemplated
by the statements. You can identify these statements by the fact that they do not relate strictly
to historical or current facts. They use words such as anticipate, estimate, project,
forecast, plan, may, will, should, expect and other words of similar meaning. In
particular, these include, but are not limited to, statements relating to the following:
| Our future operating results; |
| Our business prospects and the prospects of our portfolio companies and their
ability to achieve their objectives; |
| Our ability to make investments consistent with our investment objective; |
| The impact of investments that we expect to make; |
| Our contractual arrangements and relationships with third parties; |
| The dependence of our future success on the general economy and its impact on the
energy industry; |
| Our expected debt and equity financings and investments; |
| The adequacy of our cash resources and working capital; and |
| The timing of cash flows, if any, from the operations of our portfolio companies. |
| We undertake no obligation to update or revise any forward-looking statements made
herein. |
Overview
Kayne Anderson Energy Development Company (we, us, and our) is a non-diversified,
closed-end management investment company that has elected to be treated as a BDC under the 1940
Act. Our common stock began trading on the NYSE on September 21, 2006 through our initial public
offering of 10,000,000 shares of common stock at $25.00 per share. By electing to be treated as a
BDC, we are subject to provision of the 1940 Act, including the requirements that we must have at
least 70% of assets in eligible portfolio companies, generally defined as private companies with
a principal place of business in the United States.
On January 22, 2008, we announced that we no longer intend to be treated as a RIC under the
Code. Our decision was primarily based on our belief that private MLPs present the most attractive
investment opportunity for us and offer attractive risk-adjusted total returns for us and our
stockholders. Prior to this election, however, compliance with certain requirements necessary to
qualify as a RIC limited our ability to invest in additional private MLPs. As a result of this
change, we will be taxed as a corporation for our fiscal year ended November 30, 2008 and for
future fiscal years, paying federal and applicable state corporate taxes on our taxable income and
capital gains. We will continue to be regulated as a BDC under the 1940 Act.
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Our operations are externally managed and advised by our investment adviser, KA Fund Advisors,
LLC (KAFA), pursuant to an investment management agreement. Our investment objective is to
generate both current income and capital appreciation primarily through equity and debt
investments. We will seek to achieve this objective by investing at least 80% of our total assets
in securities of Energy Companies.
A key focus area for our investments in the energy industry is and will continue to be equity
and debt investments in Midstream Energy Companies structured as limited partnerships. We also
expect to continue to evaluate equity and debt investments in Other Energy Companies, and debt
investments in Energy Companies.
We 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, including
borrowings under our credit facility. We currently expect to use leverage in an aggregate amount
equal to 25% 30% of our total assets, which includes assets obtained through such leverage. As of
August 31, 2009, our leverage to total assets was 24.1%.
Portfolio and Investment Activity
Our investments as of August 31, 2009 were comprised of equity securities of $150.4 million
and fixed income investments of $31.5 million. Certain of our fixed income securities accrue
interest at variable rates determined on a basis of a benchmark, such as the London Interbank
Offered Rate (LIBOR), or the prime rate, with stated maturities at origination that typically
range from 5 to 10 years. Other fixed income investments accrue interest at fixed rates. As of
August 31, 2009, 45.1%, or $14.2 million, of our interest-bearing portfolio is floating rate debt
and 54.9%, or $17.3 million, is fixed rate debt.
Our portfolio allocations as of August 31, 2009 and November 30, 2008 are set forth below.
For both periods our holdings of private MLPs was below our target of 70% of long-term investments.
Over time, we intend to rotate out of certain public MLPs and fixed income securities and into
additional private MLPs as attractive investment opportunities arise.
Number of Portfolio Companies at | Percent of Long-Term Investments at | |||||||||||||||
August 31, | November 30, | August 31, | November 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Publicly Traded MLP and MLP Affiliate |
34 | 43 | 31.7 | % | 33.0 | % | ||||||||||
Private MLP |
4 | 4 | 50.9 | 50.6 | ||||||||||||
Other Private Equity |
1 | 1 | 0.1 | 0.0 | ||||||||||||
Fixed Income Investments |
9 | 9 | 17.3 | 16.4 | ||||||||||||
48 | 57 | 100.0 | % | 100.0 | % | |||||||||||
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Our Top Ten Portfolio Investments as of August 31, 2009
Listed below are our top ten portfolio investments as of August 31, 2009, represented as a
percentage of our total assets.
Public/ | Equity/ | Amount | Percent of | |||||||||||
Investment | Private | Debt | Sector | ($ in millions) | Total Assets(1) | |||||||||
1. Direct Fuels Partners, L.P.(2) |
Private | Equity | Midstream | $ | 36.2 | 16.8 | % | |||||||
2. International Resource Partners LP(3) |
Private | Equity | Coal | 30.0 | 13.9 | |||||||||
3. VantaCore Partners LP(4) |
Private | Equity | Aggregates and Mining | 24.9 | 11.5 | |||||||||
4. Energy Future Holdings Corp. |
Private | Debt | Other | 7.0 | 3.2 | |||||||||
5. Hilcorp Energy Company |
Private | Debt | Upstream | 6.1 | 2.8 | |||||||||
6. Enterprise Products Partners L.P. |
Public | Equity | Midstream | 5.6 | 2.6 | |||||||||
7. Plains All American Pipeline, L.P. |
Public | Equity | Midstream | 4.9 | 2.3 | |||||||||
8. Eagle Rock Energy Partners, L.P.(5) |
Public | Equity | Midstream/Upstream | 4.2 | 2.0 | |||||||||
9. Dresser, Inc. |
Private | Debt | Oilfield Services | 4.2 | 1.9 | |||||||||
10. Enbridge Energy Partners L.P. |
Public | Equity | Midstream | 4.0 | 1.8 | |||||||||
$ | 127.1 | 58.8 | % | |||||||||||
(1) | Total assets were $216.1 million as of August 31, 2009. |
|
(2) | Our investment in Direct Fuels Partners, L.P. includes 2,500,000 Class A Common Units; 96,448
Class A Convertible Preferred Units and 26,884 Class B Convertible Preferred Units, which
represents a 38% limited partnership interest, and 200 incentive distribution rights (20% of
total outstanding incentive distribution rights). |
|
(3) | Our investment in International Resource Partners LP includes 1,500,000 Class A Units, which
represents a 28% limited partnership interest, and 10 incentive distribution rights (10% of
total outstanding incentive distribution rights). |
|
(4) | Our investment in VantaCore Partners LP includes 1,464,673 Common Units, which represents a
39% limited partnership interest, and 1,823 incentive distribution rights (18% of total
outstanding incentive distribution rights). |
|
(5) | As partial consideration for the sale of Millennium Midstream Partners, L.P. to Eagle Rock
Energy Partners, L.P. (Eagle Rock) on October 1, 2008, we received 1,700,050 unregistered
common units. Of this total, 687,022 common units were placed in escrow for a period of 18
months from closing. As of August 31, 2009, we hold 1,112,944 unregistered common units that
are freely tradable, but must be sold pursuant to Rule 144 under the Securities Act of 1933,
as amended (the Securities Act) and 148,616 unregistered common units in escrow. |
Results of Operations For the three and nine months ended August 31, 2009
Set forth below is an explanation of our results of operations for the three and nine months
ended August 31, 2009, respectively
Investment Income. Investment income totaled $2.3 million and $4.6 million and consisted of
interest income on our fixed income investments and net dividends and distributions. We received
$3.7 million and $12.1 million of cash dividends and distributions, of which $2.4 million and $10.0
million was treated as a return of capital during the period. During the third quarter, we reduced
our estimate of return of capital from 89% to 82% based on tax reporting information received.
Operating Expenses. Operating expenses totaled $1.5 million and $4.9 million, including $0.8
million and $2.4 million of base investment management fees; $0.3 million and $1.0 million for
interest expense and $0.4 million and $1.5 million for other operating expenses. Base investment
management fees were equal to an annual rate of 1.75% of average total assets.
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Net Investment Income / (Loss). Our net investment income of $0.4 million and a net
investment loss of $0.2 million included a deferred income tax expense of $0.3 million and a
deferred income tax benefit of $0.1 million.
Net Realized Losses. We had net realized losses from our investments of $3.3 million and
$10.9 million, net of $1.7 million and $6.6 million of deferred tax benefit. During the second and
third quarters, we elected to monetize a portion of our holdings in certain public MLP investments
that had either eliminated or substantially decreased their quarterly distributions and certain
fixed income investments that were not current on interest payments. These sales accounted for the
majority of our realized losses during the three and nine months ended August 31, 2009.
Net Change in Unrealized Gains. We had net unrealized gains of $9.3 million and $20.5
million. This net unrealized gain consisted of $14.5 million and $32.8 million of unrealized gains
from investments and a deferred tax expense of $5.2 million and $12.3 million
Net Increase in Net Assets Resulting from Operations. We had an increase in net assets
resulting from operations of $6.4 million and $9.4 million. This increase is composed of the net
unrealized gains of $9.3 million and $20.5 million; net realized losses of $3.3 million and $10.9
million and net investment income of $0.4 million and a net investment loss of $0.2 million as
noted above.
Results of Operations For the three and nine months ended August 31, 2008
Set forth below is an explanation of our results of operations for the three and nine months
ended August 31, 2008, respectively.
Investment Income. Investment income totaled $1.9 million and $5.7 million and consisted
primarily of interest income on our short-term investments in fixed income investments and
repurchase agreements. We earned $5.0 million and $14.3 million of cash dividends and
distributions, of which $3.8 million and $12.8 million was treated as a return of capital during
the period. During the period, we lowered our estimate of return of capital from 97% to 90% based
on 2007 K-1 data received from the MLPs. Consistent with second quarter 2008, we elected to no
longer accrue interest on our ProPetro investment.
Operating Expenses. Total operating expenses totaled $2.9 million and $10.2 million,
including $1.3 million and $4.0 million of base investment management fees; $1.0 million and $3.5
million for interest expense and $0.6 million and $2.7 million for other operating expenses. During
the second quarter, we also incurred $0.8 million of bad debt expense related to interest accrued
during the first quarter of 2008 on our fixed income investment in ProPetro. For the nine months
ended, interest expense included the write-off of capitalized debt issuance costs of $0.3 million
related to the termination of the Treasury Facility. Base investment management fees were equal to
an annual rate of 1.75% of average total assets. We did not pay a management fee or any incentive
fee with respect to any investments made under the Treasury Facility, which we terminated effective
January 31, 2008.
Net Investment Loss. Our net investment loss totaled $0.6 million and $2.8 million, which
consisted of $1.9 million and $5.7 million of investment income. This investment income was reduced
by total operating expenses of $2.9 million and $10.2 million and offset by deferred income tax
benefits of $0.4 million and $1.7 million.
Net Realized Gains (Losses). We had net realized losses from our investments of $4.0 million
and $1.8 million, which was net of deferred tax benefit of $2.4 million and $1.1 million. Our
realized losses of $5.0 million on the sale of equity and debt securities of SemGroup were the
driver of the realized loss during the third quarter.
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Net Change in Unrealized Gains (Losses). We had net unrealized losses from our investments of
$4.4 million and $5.0 million, both of which are net of tax. For the nine months ended, unrealized
gains on our private MLPs were offset by unrealized losses on our public MLP portfolio. For the
three months ended, the net unrealized losses consisted of $7.0 million of losses from our
investments and a net deferred tax benefit of $2.6 million. For the nine months ended, the net
unrealized losses consisted of $1.9 million of losses from our investments, a net deferred tax
benefit of $0.7 million and a deferred tax expense of $3.8 million relating to our conversion from
a RIC to a taxable corporation, effective December 1, 2007.
Net Increase (Decrease) in Net Assets Resulting from Operations. For the three months ended,
our net decrease in net assets resulting from operations for the period was $9.0 million. This
increase is composed of the net unrealized losses of $4.4 million, net realized losses of $4.0
million and net investment losses of $0.6 million as noted above.
For the nine months ended, our net decrease in net assets resulting from operations for the
period was $9.6 million. This decrease is composed of the net unrealized losses of $5.0 million,
net realized losses of $1.8 million and net investment losses of $2.8 million as noted above.
Liquidity and Capital Resources
As of August 31, 2009, we had approximately $7.4 million invested in short-term repurchase
agreements. As of October 1, 2009, we had approximately $6.2 million in repurchase agreements. Our
repurchase agreements are collateralized by U.S. Treasury bills, and our counterparty is J.P.
Morgan Securities Inc.
The Investment Facility has initial availability of up to $100 million with the ability to
increase credit available under the Investment Facility to an amount not to exceed $250 million by
obtaining additional commitments from existing lenders or new lenders. The Investment Facility has
a three year term (expiring on June 4, 2010) and bears interest, at our option, at either (i) LIBOR
plus 125 basis points or (ii) the prime rate plus 25 basis points.
The obligations under the Investment Facility are secured by substantially all of our assets,
and are guaranteed, generally, by any of our future subsidiaries. The Investment Facility contains
affirmative and reporting covenants and certain financial ratios and restrictive covenants,
including: (a) maintaining an asset coverage ratio of not less than 2.50:1.0; (b) maintaining
minimum liquidity at certain levels of outstanding borrowings; (c) maintaining a minimum of
shareholders equity; and (d) other customary restrictive covenants. The Investment Facility also
contains customary representations and warranties and events of default.
As of August 31, 2009, we had $52.0 million of borrowings under our Investment Facility at an
interest rate of 1.51%, and we had a borrowing base of $77.5 million. As of October 1, 2009, we had
$52.0 million of borrowings at an interest rate of 1.50%, and our borrowing base was $79.6 million.
The maximum amount that we can borrow under our Investment Facility is limited to the lesser of our
commitment amount of $100 million and our borrowing base.
Our Investment Facility expires on June 4, 2010. It is our intention to begin discussions
with our existing lenders to renew this facility, but we have no assurance as to the size or the
terms of a new facility.
Contractual Obligations
Investment Management Agreement. We have entered into an investment management agreement with
KAFA under which we have material future rights and commitments. Pursuant to the investment
management agreement, KAFA has agreed to serve as our investment adviser and provide on our behalf
significant managerial assistance to our portfolio companies to which we are required to provide
such assistance. Payments under the investment management agreement may include (1) a base
management fee, (2) an incentive fee, and (3) reimbursement of certain expenses. For the three and
nine months ended August 31, 2009, we accrued and paid $0.8 million and $2.4 million in base
management fees and did not accrue or pay any incentive fees. We do not pay management fees on
deferred taxes. On October 1, 2009, our board of directors unanimously approved a one
year renewal of the investment management agreement with KAFA. The investment management
agreement expires on October 2, 2010.
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As of August 31, 2009, we did not have, or have not entered into, any long-term debt
obligations, long-term liabilities, capital or operating lease obligations or purchase obligations
that require minimum payments or any other contractual obligation at the present, within the next
five years or beyond other than the borrowings outstanding under our Investment Facility described
above under Liquidity and Capital Resources.
The following table summarizes our obligations as of August 31, 2009 over the following
periods for the Investment Facility.
Payments by Period ($ in Millions) | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Investment Facility(1) |
$ | 52.0 | $ | 52.0 | | | |
(1) | The maximum amount that we can borrow under our credit facility is limited to the lesser of
the commitment amount of $100 million and our borrowing base. As of August 31, 2009, we had a
borrowing base of $77.5 million. |
Distributions
Payment of future distributions is subject to board approval, as well as meeting the covenants
of the Companys senior debt. During the quarter ended August 31, 2009, we paid distributions
totaling $3.0 million ($0.30 per common share).
On October 1, 2009, we declared our quarterly distribution of $0.30 per common share for the
period June 1, 2009 through August 31, 2009 for a total of $3.0 million. The distribution is
payable on October 29, 2009 to shareholders of record on October 16, 2009. It is anticipated that
substantially all of this distribution will be treated as a return of capital for tax purposes.
The component of our distribution that comes from our current or accumulated earnings and
profits will be taxable to a stockholder as corporate dividend income. This income will be treated
as qualified dividends for Federal income tax purposes at a rate of 15%. The special tax treatment
for qualified dividends is scheduled to expire on December 31, 2010. Distributions that exceed our
current or accumulated earnings and profits will continue to be treated as a tax-deferred return of
capital to the extent of a stockholders basis.
Off-Balance Sheet Arrangements
At August 31, 2009, 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.
Critical Accounting Policies
The section entitled Managements Discussion and Analysis of Financial Condition and Results
of Operations Critical Accounting Policies of our Annual Report on Form 10-K for the fiscal
year ended November 30, 2008 sets out a complete description of our critical accounting policies,
with respect to which there have been no material changes since the filing of our Form 10-K.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are subject to financial market risks, including changes in interest rates and in the
valuations of our investment portfolio.
Interest Rate Risk. Interest rate risk primarily results from variable rate debt securities
in which we invest and from borrowings under our Investment Facility. Debt investments in our
portfolio are based on floating and fixed rates. Debt investments bearing a floating interest rate
are usually based on a LIBOR and a spread consisting of additional basis points. The interest rates
for these debt instruments typically have one to six-month durations and reset at the current
market interest rates. As of August 31, 2009, the fair value of our floating rate investments,
excluding our ProPetro investment on which we are not accruing interest, totaled approximately
$11.2 million, or 39% of our total debt investments of $28.5 million (excluding ProPetro). Based on
sensitivity analysis of the floating rate debt investment portfolio at August 31, 2009 ($14.2
million par value), we estimate that a one percentage point interest rate movement in the average
market interest rates (either higher or lower) over the 12 months ended August 31, 2010 would
either decrease or increase net investment income before income taxes by approximately $0.1
million.
As of August 31, 2009, we had $52.0 million of borrowings under our Investment Facility at an
interest rate of 1.51%. This interest rate is based on LIBOR. Based on sensitivity analysis of the
Investment Facility at August 31, 2009, 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
August 31, 2010 would either decrease or increase net investment income before income taxes by
approximately $0.5 million.
We may hedge against interest rate fluctuations for these floating rate instruments using
standard hedging instruments such as futures, swaps, options and forward contracts, subject to the
requirements of the 1940 Act. Hedging activities may mitigate our exposure to adverse changes in
interest rates.
Impact of Market Prices on Portfolio Investment Valuation. We carry our investments at fair
value, as determined by our board of directors. Investments for which market quotations are readily
available are valued at such market quotations and are subject to daily changes in the market
prices of these securities.
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. Our investments that are not publicly traded may be indirectly impacted (positively or
negatively) by public market prices of securities that are comparable to these private investments.
Changes in market prices related to purchase transactions, public offerings and secondary offerings
can also impact the valuations of our investments that are not publicly traded.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Controls and Procedures.
The Companys officers, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) of the 1934 Act) as of the end of the period covered in
this report. Based upon such evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective and provided
reasonable assurance that information required to be disclosed in the reports that we file or
submit under the 1934 Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. However, in designing and
evaluating our disclosures controls and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls
and procedures are met. Additionally, in designing disclosure controls and procedures, our
management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential conditions.
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PART II
ITEM 1. LEGAL PROCEEDINGS
We are not a party in any material pending legal proceeding, and no such material proceedings
are known by us to be contemplated by governmental authorities.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Form
10-K for the year ended November 30, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 30, 2009, we held our 2009 Annual Meeting of Stockholders in Los Angeles, California
for the purpose of considering and voting upon the election of directors and a proposal to
authorize the Company to sell shares of its common stock for less than net asset value per share,
subject to certain conditions. Votes were cast as follows:
Proposal One:
Nominee | For | Withheld | ||||||
William L. Thacker |
7,682,243 | 255,430 | ||||||
Kevin S. McCarthy |
7,680,954 | 256,719 |
Both nominees were elected to the board of directors to serve for a term of three years (until
the 2012 Annual Meeting of Stockholders) or until their successors have been duly elected and
qualified. William R. Cordes, Barry R. Pearl , Albert L. Richey and Robert V. Sinnott continue to
serve as directors of the Company.
Proposal Two:
Holders in Favor | Total Holders | |
4
|
7 |
Votes in Favor | Votes Against | Votes Withheld | ||
3,639,290 | 279,719 | 58,696 |
As a result of the vote on this matter, the proposal has been approved.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:
Exhibit | ||||
Number | Description | |||
3.1 | Charter Form of Articles of Amendment and Restatement* |
|||
3.2 | Amended and Restated Bylaws.* |
|||
4.1 | Form of Common Stock Certificate.* |
|||
10.1 | Form of Investment Management Agreement between Registrant and KA Fund Advisors, LLC.* |
|||
10.2 | Administration Agreement between Registrant and Ultimus Fund Solutions, LLC.** |
|||
10.3 | Form of Custody Agreement between Registrant and The Custodial Trust Company (as assigned
to JPMorgan Chase Bank, N.A.).* |
|||
10.4 | Form of Amended Dividend Reinvestment Plan.*** |
|||
10.5 | Form of Transfer Agency Agreement between Registrant and American Stock Transfer & Trust
Company.* |
|||
10.6 | Form of Accounting Services Agreement between Registrant and Ultimus Fund Solutions, LLC.* |
|||
10.7 | Senior Secured Revolving Credit Agreement between Registrant, the lenders party thereto,
SunTrust Bank, as administrative agent for the lenders, and Citibank, N.A. as syndication
agent, dated June 4, 2007.**** |
|||
10.8 | First Amendment to Senior Secured Revolving Credit Agreement between Registrant, the
lenders party thereto, SunTrust Bank, as Administrative Agent for the Lenders, and
Citibank N.A., as Syndication Agent, dated February 21, 2008.***** |
|||
10.9 | Second Amendment to Senior Secured Revolving Credit Agreement between Registrant, the
lenders party thereto, SunTrust Bank, as Administrative Agent for the Lenders, and
Citibank N.A., as Syndication Agent, dated September 19, 2008. ****** |
|||
31.1 | Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
|||
31.2 | Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith. |
|||
32.1 | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- furnished herewith. |
|||
99.1 | Form of Fee Waiver Relating to Treasury Credit Investments between Registrant and KA Fund
Advisors, LLC.**** |
* | Previously filed as an exhibit to Registrants Pre-Effective
Amendment No. 5 to its Registration Statement on Form N-2 (File No.
333-134829) as filed with the Securities and Exchange Commission on
September 18, 2006 and incorporated by reference herein. |
|
** | Previously filed as an exhibit to Registrants Current Report on
Form 8-K (File No. 814-00725), as filed with the Securities and
Exchange Commission on March 6, 2009 and incorporated by reference
herein. |
|
*** | Previously filed as an exhibit to Registrants Quarterly Report on
Form 10-Q (File No. 814-00725), as filed with the Securities and
Exchange Commission on April 9, 2009 and incorporated by reference
herein. |
|
**** | Previously filed as an exhibit to Registrants Quarterly Report on
Form 10-Q (File No. 814-00725), as filed with the Securities and
Exchange Commission on July 16, 2007 and incorporated by reference
herein. |
|
***** | Previously filed as an exhibit to Registrants Current Report on
Form 8-K (File No. 814-00725) as filed with the Securities and
Exchange Commission on February 27, 2008 and incorporated by
reference herein. |
|
****** | Previously filed as an exhibit to Registrants Quarterly Report on
Form 10-Q (File No. 814-00725) as filed with the SEC on October 10,
2008 and incorporated by reference herein. |
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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY |
||||
Date: October 9, 2009 | By: | /s/ Kevin S. McCarthy | ||
Kevin S. McCarthy | ||||
Chairman of the Board of Directors, President and Chief Executive Officer |
||||
Date: October 9, 2009 | By: | /s/ Terry A. Hart | ||
Terry A. Hart | ||||
Chief Financial Officer and Treasurer |
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Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
31.1 | Certification by Chief Executive Officer pursuant to Exchange
Act Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 filed herewith. |
|||
31.2 | Certification by Chief Financial Officer pursuant to Exchange
Act Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 filed herewith. |
|||
32.1 | Certification by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
furnished herewith. |