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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
INVESTMENT COMPANY ACT FILE NUMBER 811-22435
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
 
(Exact name of registrant as specified in charter)
     
717 Texas Avenue, Suite 3100, Houston, Texas   77002
     
(Address of principal executive offices)   (Zip code)
David Shladovsky, Esq.
KA Fund Advisors, LLC, 717 Texas Avenue, Suite 3100, Houston, Texas 77002
 
(Name and address of agent for service)
Registrant’s telephone number, including area code: (713) 493-2020
Date of fiscal year end: November 30, 2011
Date of reporting period: February 28, 2011
 
 

 

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

Table of Contents

Item 1: Scheduled Investments
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2011
(amounts in 000’s)
(UNAUDITED)
 
                 
    No. of
 		       
Description
  Shares/Units     Value  
 
Long-Term Investments — 132.8%
               
Equity Investments(1) — 108.8%
               
United States — 108.8%
               
Private MLP(2)(3) — 68.7%
               
Direct Fuels Partners, L.P. — Class A Common Units(4)
    2,500     $ 25,000  
Direct Fuels Partners, L.P. — Convertible Preferred Units(4)(5)
    143       2,715  
Direct Fuels Partners, L.P. — Class D Preferred Units(4)(6)
    324       6,723  
International Resource Partners LP
    1,500       94,500  
Plains All American GP LLC
    3       5,302  
VantaCore Partners LP(4)
    1,465       19,773  
VantaCore Partners LP — Preferred Units(7)
    36       564  
                 
               154,577  
                 
Publicly Traded MLP and MLP Affiliate — 40.1%
               
Buckeye Partners, L.P. 
    83       5,366  
Capital Product Partners L.P. 
    228       2,218  
Chesapeake Midstream Partners, L.P. 
    40       1,042  
Copano Energy, L.L.C. 
    265       9,604  
Crestwood Midstream Partners LP
    77       2,321  
DCP Midstream Partners, LP
    109       4,594  
Eagle Rock Energy Partners, L.P. 
    432       4,204  
Eagle Rock Energy Partners, L.P. — Warrants(8)(9)
    370       1,363  
Enbridge Energy Management, L.L.C.(4)
    65       4,370  
Enbridge Energy Partners, L.P. 
    58       3,880  
Energy Transfer Partners, L.P. 
    112       6,113  
Enterprise Products Partners L.P. 
    153       6,660  
Exterran Partners, L.P. 
    82       2,443  
Global Partners LP
    142       3,871  
Holly Energy Partners, L.P. 
    16       966  
Inergy, L.P. 
    96       3,974  
Kinder Morgan Management, LLC(4)
    9       602  
MarkWest Energy Partners, L.P. 
    55       2,465  
Martin Midstream Partners L.P. 
    45       1,799  
ONEOK Partners, L.P. 
    76       6,357  
Penn Virginia GP Holdings, L.P. 
    31       819  
Plains All American Pipeline, L.P.(3)
    103       6,728  
Targa Resources Partners LP
    30       1,038  
Teekay LNG Partners L.P. 
    51       1,946  
Teekay Offshore Partners L.P. 
    23       664  
Teekay Tankers Ltd. 
    73       785  
TransMontaigne Partners L.P. 
    61       2,445  
Western Gas Partners, LP
    44       1,602  
                 
              90,239  
                 
Total Equity Investments (Cost $156,769)
    244,816  
         
 
 
 

 

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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2011
(amounts in 000’s)
(UNAUDITED)
                                 
    Interest
 		    Maturity
 		    Principal
 		       
Description
  Rate     Date     Amount     Value  
 
Debt Investments — 24.0%
                               
Upstream — 14.1%
                               
Antero Resources LLC
    9.375 %     12/1/17     $ 9,500     $ 10,260  
BreitBurn Energy Partners L.P. 
    8.625       10/15/20       2,000       2,102  
Carrizo Oil & Gas, Inc. 
    8.625       10/15/18       5,875       6,242  
Comstock Resources, Inc. 
    7.750       4/1/19       2,000       2,010  
Laredo Petroleum, Inc. 
    9.500       2/15/19       3,000       3,143  
Petroleum Development Corporation
    12.000       2/15/18       2,000       2,260  
Rosetta Resources Inc. 
    9.500       4/15/18       5,005       5,543  
                                 
                              31,560  
                                 
Midstream and Other — 6.8%
                               
Crestwood Holdings Partners, LLC
    (10)       10/1/16       7,135       7,385  
Foresight Energy LLC
    9.625       8/15/17       5,000       5,375  
Genesis Energy, L.P. 
    7.875       12/15/18       2,500       2,563  
                                 
                              15,323  
                                 
Oilfield Services — 3.1%
                               
ProPetro Services, Inc.(2)(3)(8)(11)
    (12)       2/15/12       10,500       7,000  
                                 
Total Debt Investments (Cost $79,962)
    53,883  
         
Total Long-Term Investments (Cost $236,731)
    298,699  
         
                No. of
 		       
                Shares/Units        
Short-Term Investments — 1.7%
                               
Money Market Fund — 1.3%
                               
J.P. Morgan U.S. Treasury Plus Money Market Fund (Cost $2,963)
    2,963       2,963  
                 
 
                                 
Repurchase Agreement — 0.4%
                               
J.P. Morgan Securities Inc. (Agreement dated 2/28/2011 to be repurchased at $1,000), collateralized by $1,020 in U.S. Treasury securities (Cost $1,000)
    0.050        3/1/11                    1,000  
                                 
Total Short-Term Investments (Cost $3,963)
    3,963  
         
Total Investments — 134.5% (Cost $240,694)
    302,662  
         
Senior Secured Revolving Credit Facility Borrowings
    (56,000 )
Total Liabilities in Excess of Other Assets
    (21,661 )
         
Net Assets
  $ 225,001  
         
 
 
(1) Unless otherwise noted, equity investments are common units/common shares.
 
(2) Fair valued and restricted security.
 
(3) Kayne Anderson Energy Development Company (the “Company”) believes that it may be an affiliate of Direct Fuels Partners, L.P. (“Direct Fuels”), International Resource Partners LP (“IRP”) and VantaCore Partners LP (“VantaCore”) and that it is an affiliate of Plains All American GP LLC, Plains All American Pipeline, L.P. and ProPetro Services, Inc. (“ProPetro”).

 

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KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2011
(amounts in 000’s)
(UNAUDITED)
 
(4) All or a portion of distributions are paid-in-kind.
 
(5) The Convertible Preferred Units consist of three classes — Class A, B and C. Each class has a liquidation preference of $20.00 per unit and is convertible into Class A Common Units.
 
(6) The Class D Preferred Units are senior to Direct Fuels’ Convertible Preferred Units and Class A Common Units. The Class D Preferred Units have a liquidation preference of $20.00 per unit and were issued by Direct Fuels to holders of common units and preferred units in lieu of cash distributions.
 
(7) The Preferred Units have a liquidation preference of $17.50 per unit and were issued on February 15, 2011 by VantaCore to holders of the common units in lieu of a full cash distribution for the quarter. The Preferred Units are senior to VantaCore’s Common Units.
 
(8) Security is non-income producing.
 
(9) The Company holds 370 warrants of Eagle Rock Energy Partners, L.P. (“Eagle Rock”). Each warrant entitles the holder to purchase one Eagle Rock common unit for $6.00 on the specified days of March 15, May 15, August 15 and November 15 through the expiration date of May 15, 2012.
 
(10) Floating rate first lien senior secured term loan. Security pays interest at a rate of LIBOR + 850 basis points, with a 2% LIBOR floor (10.50% as of February 28, 2011).
 
(11) The Company also holds 184,890 common shares, which represents 23.5% of the total shares outstanding, of ProPetro Services, Inc. The Company assigned no value to these shares as of February 28, 2011.
 
(12) Floating rate senior secured first lien term loan facility. The Company is not accruing interest income on this security.

 

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     From time to time, certain of the Company’s investments may be restricted as to resale. For instance, private investments that are not registered under the Securities Act of 1933, as amended, cannot be offered for public sale in a non-exempt transaction without first being registered. In other cases, certain of the Company’s investments have restrictions such as lock-up agreements that preclude the Company from offering these securities for public sale.
     At February 28, 2011, the Company held the following restricted investments.
 
                                                             
                Number of
 		                               
                Units,
 		                               
                Warrants, or
 		                Fair Value
 		    Percent
 		    Percent
 		 
        Acquisition
 		  Type of
 		  Principal ($)
 		    Cost
 		    Fair
 		    per Unit/
 		    of Net
 		    of Total
 		 
Investment   Security   Date   Restriction   (in 000s)     Basis     Value     Warrant     Assets     Assets  
 
Level 3 Investments(1)
                                                           
Direct Fuels Partners, L.P.(2)
  Class A Common Units   6/11/07   (3)     2,500     $ 41,359     $ 25,000     $ 10.00       11.1 %      8.2 % 
Direct Fuels Partners, L.P. 
  Class A Convertible Preferred Units(4)   5/14/09   (3)     96       1,952       1,808       18.75       0.8       0.6  
Direct Fuels Partners, L.P. 
  Class B Convertible Preferred Units(4)   8/25/09   (3)     27       538       511       19.00       0.2       0.2  
Direct Fuels Partners, L.P. 
  Class C Convertible Preferred Units(4)   11/20/09   (3)     20       408       396       19.50       0.2       0.1  
Direct Fuels Partners, L.P. 
  Class D Preferred Units   (5)   (3)     324       5       6,723       20.75       3.0       2.2  
International Resource Partners LP(6)
  Class A Units   6/12/07   (3)     1,500       26,276       94,500       63.00       42.0       30.9  
Plains All American GP LLC
  Class A Common Units   12/23/10,   (3)                                                
        12/31/10         3       5,008       5,302       1,522       2.4       1.7  
ProPetro Services, Inc. 
  Common Shares   2/15/07   (3)     184,890       —       —       —       —       —  
ProPetro Services, Inc. 
  Secured Term Loan   2/15/07   (3)   $ 10,500       35,789       7,000       n/a       3.1       2.3  
VantaCore Partners LP(7)
  Class A Common Units   5/21/07,   (3)                                                
        8/04/08         1,465       21,663       19,773       13.50       8.8       6.5  
VantaCore Partners LP
  Preferred Units(8)   2/24/11   (3)     36       —       564       15.50       0.2       0.2  
                                                             
Total
  $ 132,998     $ 161,577               71.8 %     52.9 %
                                         
Level 2 Investments(9)
                                                           
BreitBurn Energy Partners L.P. 
  Senior Notes   (10)   (11)   $ 2,000     $ 2,050     $ 2,102       n/a       0.9 %      0.7 % 
Carrizo Oil & Gas, Inc. 
  Senior Notes   (10)   (11)   $ 5,875       6,030       6,242       n/a       2.8       2.0  
Crestwood Holdings Partners, LLC
  Senior Notes   (10)   (3)   $ 7,135       7,030       7,385       n/a       3.3       2.4  
Foresight Energy LLC
  Senior Notes   8/6/10   (3)   $ 5,000       4,970       5,375       n/a       2.4       1.8  
Genesis Energy, L.P. 
  Senior Notes   11/12/10   (11)   $ 2,500       2,500       2,563       n/a       1.1       0.9  
Laredo Petroleum, Inc.
  Senior Notes   1/12/11   (3)   $ 3,000       3,000       3,143       n/a       1.4       1.0  
                                                             
Total
  $ 25,580     $ 26,810               11.9 %     8.8 %
                                         
Total of all restricted securities
  $ 158,578     $ 188,387               83.7 %     61.7 %
                                         
 
 
(1) Securities are valued using inputs reflecting the Company’s own assumptions.
 
(2) The Company’s investment in Direct Fuels 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) The Direct Fuels Convertible Preferred Units consist of three classes — Class A, B and C. Each class has a liquidation preference of $20.00 per unit and is convertible into Class A Common Units. The Class A Preferred Units are convertible into Class A Common Units at a price of $20.00 per unit. The Class B Preferred Units are convertible into Class A Common Units at a price of $18.50 per unit. The Class C Preferred Units are convertible into Class A Common Units at a price of $15.50 per unit.
 
(5) The Direct Fuels Class D Preferred Units are senior to Direct Fuels’ Convertible Preferred Units and Class A Common Units. The Class D Preferred Units are being issued by Direct Fuels to the holders of common units and preferred units in lieu of cash distributions. During the three months ended February 28, 2011, we received Class D Preferred Units on February 15.
 
(6) The Company’s investment in IRP includes 10 incentive distribution rights (10% of total outstanding incentive distribution rights) for which the Company does not assign a value.

 

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(7) The Company’s investment in VantaCore includes 1,823 incentive distribution rights (18% of total outstanding incentive distribution rights) for which the Company does not assign a value.
 
(8) The VantaCore Preferred Units are senior to the VantaCore Common Units. The Preferred Units have a liquidation preference of $17.50 per unit and were issued on February 15, 2011 by VantaCore to holders of the Common Units in lieu of a full cash distribution for the quarter.
 
(9) These securities have 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. These securities have limited trading volume and are not listed on a national exchange.
 
(10) These securities were acquired at various dates throughout the three months ended February 28, 2011 and in prior years.
 
(11) Unregistered security of a public company.
At February 28, 2011, the cost basis of investments for federal income tax purposes was $230,085. At February 28, 2011, gross unrealized appreciation and depreciation of investments and options for federal income tax purposes were as follows:
         
Gross unrealized appreciation of investments
   $ 117,906  
Gross unrealized depreciation of investments
     (45,329 )
 
      
Net unrealized appreciation
   $ 72,577  
 
      
The identified cost basis of federal tax purposes is estimated based on information available from the Company’s portfolio companies. In some cases, this information is very limited. Accordingly, the actual cost basis may prove higher or lower than the estimated cost basis included in this footnote.
As required by the Fair Value Measurement and Disclosures of the FASB Accounting Standards Codification, the Company has performed an analysis of all assets and liabilities measured at fair value to determine the significance and character of all inputs to their fair value determination.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:
  •   Level 1 — Quoted unadjusted prices for identical instruments in active markets traded on a national exchange to which the Company has access at the date of measurement.
 
  •   Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
 
  •   Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.
Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the underlying investment. For instance, the Company’s repurchase agreements, which are collateralized by U.S. Treasury notes, are generally high quality and liquid; however, the Company reflects these repurchase agreements as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market.
The following table presents the Company’s assets measured at fair value on a recurring basis at February 28, 2011, and the Company presents these assets by security type and description on its Schedule of Investments.
                                 
            Quoted     Prices     One or  
            Prices in     with Other     More  
            Active     Observable     Unobservable  
            Markets     Inputs     Inputs  
Assets at Fair Value   Total     (Level 1)     (Level 2)     (Level 3)  
Equity investments
     $  244,816       $  90,239       $         —       $  154,577  
Debt investments
     53,883       —       46,883       7,000  
Short-term investments
     3,963       —       3,963       —  
 
                        
Total assets at fair value
     $  302,662       $  90,239       $  50,846       $  161,577  
 
                        

 

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The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended February 28, 2011.
                         
    Three Months Ended February 28, 2011  
    Total     Debt     Equity  
Balance — November 30, 2010
   $ 143,811     $ 4,500     $ 139,311  
Transfers out of Level 3
     —     —       —
Realized gains (losses)
     —       —       —  
Unrealized gains, net
     10,807       2,500       8,307  
Purchases, issuances or settlements
     6,959       —       6,959  
 
                  
Balance — February 28, 2011
   $ 161,577     $ 7,000     $ 154,577  
 
                  
The $10,807 of unrealized gains, net, presented in the table above for the three months ended February 28, 2011 relate to investments that were still held at February 28, 2011.
The purchases, issuances or settlements for the three months ended February 28, 2011 relate to the issuance of Class D Preferred Units of Direct Fuels in lieu of common and preferred distributions, the issuance of Preferred Units of VantaCore for the remainder of our minimum quarterly cash distribution that was not paid entirely in cash, and our investment in Plains All American GP LLC.
The Company did not have any liabilities that were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at February 28, 2011.
Securities valuation policies and other investment related disclosures are hereby incorporated by reference to the Company’s annual report previously filed with the Securities and Exchange Commission on form N-CSR on February 4, 2011 with a file number 811-22435.
Other information regarding the Company is available in the Company’s most recent annual report. This information is also available on the Company’s website at www.kaynefunds.com; or on the website of the Securities and Exchange Commission, www.sec.gov.

 

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Item 2: Controls and Procedures
     (a) As of a date within 90 days from the filing date of this report, the principal executive officer and principal financial officer concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)), were effective based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities and Exchange Act of 1934.
     (b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 3: Exhibits
  1.   The certifications of the registrant as required by Rule 30a-2(a) under the Act are exhibits to this report.
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY    
 
            
    /s/ Kevin S. McCarthy    
         
 
  Name:   Kevin S. McCarthy    
 
  Title:   Chairman of the Board of Directors,    
 
      President and Chief Executive Officer    
 
  Date:   April 15, 2011    
     Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
             
    /s/ Kevin S. McCarthy    
         
 
  Name:   Kevin S. McCarthy    
 
  Title:   Chairman of the Board of Directors, President and Chief Executive Officer    
 
  Date:   April 15, 2011    
 
            
    /s/ Terry A. Hart    
         
 
  Name:   Terry A. Hart    
 
  Title:   Chief Financial Officer and Treasurer    
 
  Date:   April 15, 2011