Kayne Anderson Energy Development Company (KED)

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Kayne Anderson Energy Development Company (KED)

Q4 2008 Earnings Call

February 9, 2009 5:00 pm ET


Monique Vo – Vice President of Investor Relations

Kevin S. McCarthy – President, Chief Executive Officer, Co-Portfolio Manager & Director

Terry A. Hart – Chief Financial Officer & Treasurer

J. C. Frey – Vice President, Assistant Treasurer, Assistant Secretary & Co-Portfolio Manager

David LeBonte – Head of Energy Research



My name is Angelia and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to Monique Vo, Vice President of Investor Relations.

Monique Vo

Welcome to the earnings call for the Kayne Anderson Development Company for the quarter and fiscal year ended November 30, 2008. Before we begin this afternoon I’d like to remind you that our call will include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events. These and other statements not relating strictly to historical or current facts are intended as forward-looking.

Generally words such as believe, expect, intend, estimate, anticipate, project, will and other similar expressions identify forward-looking statements which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ from the company’s historical experience, its present expectations or projections.

For a description of the factors that may cause such a variance I would direct you to the forward-looking statement discussion in our annual report on Form 10K and our quarterly reports on Form 10Q. These reports are available free of charge through our website at www.KayneFunds.com and at www.SEC.gov.

You should not place undue reliance on forward-looking statements. The company undertakes no obligation to update or revise forward-looking statements. There is no assurance that the company’s investment objectives will be obtained. With that, I will now turn the conference over to our President and Chief Executive Officer Kevin McCarthy.

Kevin S. McCarthy

Thank you for joining us today for our fourth quarter conference call for KED. Joining me today are Terry Hart and Jim Baker in Houston and J. C. Frey and David LaBonte, in Las Angeles. First we’d like to review market conditions for the MLP sector both during the quarter and since the beginning of the year. Then, we will review KED’s performance during the quarter ended November 30th as well as the performance of our four largest private investments. Next, Terry will discuss our financial performance and guidance based on our most recent portfolio. Then, we’ll open the phone lines for our Q&A session.

Fiscal year 2008 was a terrible year by almost any measure. With the collapse of the credit markets, the disappearance of many of Wall Street’s most prominent firms and the onset of the worldwide recession. As a result, we saw substantial declines in the overall capital markets, the energy markets and the MLP market. Calendar 2008 was the worst year for the Dow since 1931 and the worst year for the S&P 500 since 1937. The MLP market was affected as well with the Alerian MLP index declining over 38% during our fiscal year.

Much of this decline occurred in the fourth fiscal quarter when the decline in the financial markets both intensified and accelerated. During our fourth fiscal quarter the Alerian MLP index declined 33%. This quarter decline was more than two times the largest previous annual decline of that index. In addition to the absolute poor performance we also saw record volatility in this sector. From 1996 to the end of our third fiscal quarter there were only two days when the Alerian index changed more than 6%. In the 90 days that followed there have been nine days, a full 10% of the trading days where the changes exceeded 6%.

As a result of the severe decline in MLP prices, MLP yield at all time highs during our fiscal fourth quarter the market cap weighted average yield at November 30th was 11.7% almost twice the 6.4% at the end of fiscal ’07. Likewise, the spread between MLP yields and the 10 year treasury rose 174 basis points compared to an average of 238 basis points over the last five years.

The reasons for the poor performance in the MLP sector are numerous and interrelated. Clearly, the weak performance of the broader capital markets had a significant impact on buyers of MLPs both retail and institutional. Since 2005, a significant amount of new capital investors of MLPs came from hedge funds. The troubles in the hedge fund industry which have been well publicized as well as the reduced sources of leverage for these funds caused certain funds to sell a significant portion of their MLP holdings.

To a lesser extent, dedicated MLP closed end funds including KYN and KYE were required to sell MLPs in order to maintain their leverage ratios. Finally, as the overall market declined, retail investors were reducing portfolio leverage, reducing exposures to [inaudible] securities and moving to cash. Quite simply, there was an abundance of sellers and a dearth of buyers for MLPS.

Another part of the performance of MLPs during the second half of 2008 can be attributed to the sharp and substantial decline in commodity prices. From their peak in July, oil prices declined by more than $100 a barrel or 69%, natural gas prices declined by 58% and NGL prices declined by 73%. While much of the MLP revenue stream is fee based and not dependent on commodity prices, some MLPs are exposed directly and indirectly to commodity prices.

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