Kayne Anderson Energy Development Company (KED)

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Kayne Anderson Energy Development Co. (KED)

F2Q08 Earnings Call

July 8, 2008 10:00 am ET

Executives

Monique Vo – Investor Relations

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

Terry A. Hart – Chief Financial Officer & Treasurer

James C. Baker – Vice President

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

David [Lavonte]

Analysts

Gabe Moreen – Merrill Lynch

Jeff Nathan – Private Investor

Jeremy [Tonin] – UBS

Selman Akyol – Stifel Nicolaus & Company, Inc.

Presentation

Operator

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2008 Kayne Anderson Energy Development Company 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) Ms. Vo you may begin your conference.

Monique Vo

Good morning everyone. Welcome to the second quarter 2008 earnings call for the Kayne Anderson Energy Development Company in which we will discuss the quarter ended May 31, 2008. Before we begin this morning, 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, expects, 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 discussion of the factors that may cause such a variance, I would direct you to the forward-looking statements discussion in our annual report on Form 10K and our quarterly report 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 any forward-looking statements. There’s 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

Good morning everyone. Thanks for joining us today for the second quarter 2008 earnings call for KED. Joining me today are Terry Hart and Jim Baker in Houston and J.C. Frey and David [Lavonte] in Los Angeles. First, we’d like to review KED’s operational performance during the quarter ended May 31st. Then, we’ll provide you with an update on the market conditions, the outlook for MLPs and the performance for our five largest investments and additional investments that we’re currently evaluating. Next, Terry will discuss our financial performance and guidance based on our most recent portfolio. Then, we’ll open our phone lines for our Q&A session.

This was a very positive quarter in terms of the development of several of our private MLPs but unfortunately, a portion of those gains were offset by the poor performance of our ProPetro investment and a decrease in value of our public MLPs. As we’ll discuss in more detail, we expect to continue that positive development with our largest private MLPs over the next several quarters and we’re working hard to improve the performance of ProPetro. During the first quarter we had a total return of 2.2% based on the change in NAD plus dividends paid during the quarter. KED outperformed the Citigroup MLP index by 1.2% during this period. The increase in NAD was principally as a result of unrealized gains of $20.5 million in our portfolio of private MLPs offset by an unrealized loss of $10.2 million on our ProPetro investment and an unrealized loss of $2.4 million on our portfolio of publically traded MLPs. Last week we announced an increase in KED’s quarterly distribution to $0.42 per share an increase of 1.2% over the $0.415 paid for the first quarter. This dividend represents an increase of 5% over the prior year and as a result of our most recent dividend increase we are now yielding approximately 7.5%.

The second quarter was a challenging one for the MLP market. March, 2008 was one of the worse months on records for the MLP space. The Citi index was down 6.1% for the month and at its lowest point on March 20th, was down 9.2%. The MLP market improved substantially over the rest of the quarter but still ended up flat with the start of the quarter. In spite of the turbulent market, our share price closed out the quarter essentially flat gaining $0.11 from $23.76 on February 29th to $23.87 on May 30th. Since quarter end, the broader equity markets have declined amid concerns about the health of the financial sector and the overall economy as well as inflationary factors. The DOW declined almost 11% and the Citi MLP index is currently down almost 10% since May 31st. We expect the MLP equity markets to continue to face challenges in the next several months as concerns remain over economic weakness, inflationary pressures and continued credit troubles. Furthermore, the continued need for MLPs to access the market for capital to fund growth will continue to put pressure on MLP unit prices.

In contrast to the stock price performance, operating performance for the MLPs has been very strong over the past six months. We believe this performance will continue for several reasons: higher commodity prices encourage more drilling which translates to higher levels of midstream activity; processing margins which is the spread between crude oil and national gas prices are near all time highs; and natural gas production in new basins in the Rocky Mountains, the mid continents and Appalachia require new infrastructure which bodes well for many MLPs. This strong operating performance has allowed MLPs to increase their cash distribution substantially. MLP distributions for the second quarter were 12% higher than the corresponding period in 2007. Based on the strong performance to date and the strong operating outlook for the rest of the year, our research department is looking for another year of 10% plus growth in distributions.

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