Kayne Anderson Energy Development Company (KED)

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Kayne Anderson Energy Development Company (KED)

F1Q10 Earnings Call

April 7, 2010 9:15 am ET


Monique Vo – Investor Relations

Kevin McCarthy - President and Chief Executive Officer

Terry Hart – Chief Financial Officer


Gabe Moreen – Merrill Lynch

Chris Harris – Wells Fargo



(Operator Instructions) Welcome everyone to the earnings conference for Q1 2010. Thank you, Ms. Vo, you may begin your conference.

Monique Vo

Welcome to the earnings call for the Kayne Anderson Energy Development Company for the quarter ended February 28, 2010.

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 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 10-K and our quarterly reports on Form 10-Q. 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 any 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 McCarthy

First I’d like to review market conditions for both the MLP sector as the broader energy sector, and then I’ll provide a quick look at our portfolio and review the performance of our private investments. Next, Terry Hart will go through the details of our new credit facility and discuss our financial performance and guidance based on our most recent portfolio. Then we’ll open the phone lines for our Q&A session.

With that, let’s turn to a review of market conditions. When looking at market conditions in the energy sector, one really needs to look at crude oil and natural gas separately because at least for now they’re quite different markets. On the oil side, global demand for oil is expected to grow in 2010 driven largely by economic growth in Asia. On the supply side, crude production is expected to grow this year as companies shift their drilling budgets to more oil related projects. But production increases are not expected to keep pace with demand growth. As a result, most analysts are projected continued strength in oil prices.

On the natural gas side, it’s been a very strange three months. On the one hand we had a very strong helping hand from Mother Nature as weather was substantially colder than normal. If you remember, on the last call we spoke of the record levels of gas storage. No one thought that we could work off the excess before 2011 but we did. Gas storage is not at levels similar to last year at this time. On the other hand, production hasn’t declined nearly as much as expected if at all. With a continued focus on ramping up drilling activity in the major shale plays, there’s increasing concern that we may be entering into a new supply bubble.

Drilling activity has increased from a trough of less than 670 gas rigs in July of last year to almost 950 gas rigs as of last week. The increases come in large part from horizontal rigs which are much more efficient than traditional vertical rigs. As a result, in spite of the good news on the gas storage front, natural gas prices have been crushed. Near month gas prices have fallen from the $6.00 range in early January to under $4.00 as recently as last week. While most energy professionals expect that gas prices will recover during the rest of 2010 few believe that gas prices will return to the $6.00 range anytime soon.

The slow down in domestic economic activity has made a very difficult market for the refiners. Weak domestic demand for their product, mainly diesel, jet fuel and gasoline, has caused refined product prices to remain weak. Coupled with very strong oil prices, which is the raw material for the refiners, we’ve seen very weak profitability for the refining segment. We believe that this sector will return to more normal profit levels as domestic economy continues to recover.

In the coal markets, we’ve seen a substantial improvement in the market for metallurgical coal, driven by strong demand in China, Japan and India. We’ve seen domestic met coal prices increase from the $70 to $80 per ton range last year to $140 per ton range currently. Most analysts are projecting that this market will continue to strengthen into 2011.

The strength of the met coal market as well as the cold weather has eased the oversupply problem in the steam coal market and caused steam coal prices to strengthen slightly. While prices have recovered from the lows seen in 2009 this market still has a long way to go. Demand is expected to strengthen but only modestly in 2010. In 2011 and 2012 steam coal prices are expected to increase significantly as domestic electricity demand recovers and steam coal supply continues to decline in light of the difficult permitting environment.

Read the rest of this transcript for free on seekingalpha.com