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Kayne Anderson Energy Development Company (KED)
F3Q08 Earnings Call
October 9, 2008 10:00 am ET
Monique Vo – Investor Relations
Kevin S. McCarthy – President, Chief Executive Officer, Co-Portfolio Manager and Director
Terry A. Hart – Chief Financial Officer & Treasurer
James C. Baker – Vice President
J.C. Frey – Vice President, Assistant Treasurer, Assistant Secretary and Co-Portfolio Manager
David LaBonte - Senior Managing Director of Kayne Anderson Capital Advisors LP
John Kang - RBC Capital Markets
Alex Paul - Cedar Hill
Previous Statements by KED
» Kayne Anderson Energy Development Company Q4 2008 Earnings Call Transcript
» Kayne Anderson Energy Development Co. F2Q08 (Quarter End 5/31/08) Earnings Call Transcript
» Kayne Anderson Energy Q4 2007 Earnings Call Transcript
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, 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 statements 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 KayneFunds.com and at 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 attained.
With that, I will now turn the conference over to our President and Chief Executive Officer, Kevin McCarthy.
Kevin S. McCarthy
Joining me today in Houston are Terry Hart and Jim Baker and J.C. Frey and David LaBonte in Los Angeles.
First we'd like to review market conditions for the MLP sector both during the quarter and since September 1st, then we'll review KED's operational performance during the quarter ended August 31st, including a discussion regarding the performance of our five 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.
I probably don't need to remind anyone on the call that the global financial markets have deteriorated substantially since the end of our fiscal quarter. But before I discuss recent events, let me review what happened during the quarter.
The quarter began strong, with MLPs trading at the highest level since the beginning of the year. In June and July MLP prices went down approximately 8% as high commodity prices sparked concern about energy conservation and the Dow fell by almost 10%. After reaching a low point on August 5th, the Citi MLP Index increased by over 5% through the end of the quarter. Most industry participants were anticipating further strength in September and did not foresee the massive downturn the MLP sector was about to endure.
Since quarter end, the broader equity markets have declined significantly as a result of the global credit crisis. Between August 31st and October 8th, the Dow declined 19.7%. During this period the MLP market has been devastated. I hesitate to use such a strong word, but I think it's appropriate. Since the end of the quarter, the Citi MLP Index is down 35.8%. It is down 23% in the last five trading days. To give you a perspective on the magnitude of this decline, the largest quarterly decline for MLPs in the last 15 years was only 14%.
There are many reasons for the comparatively weak performance in the MLPs. What I'd like to highlight is that we believe the reasons are largely technical as the operating performance of the MLPs continues to be very strong. During the quarter, MLPs increased cash distributions by 12% year-over-year. While commodity prices have come down, processing spreads have remained strong, and concerns that high gasoline prices would lower demand have been mitigated.
What are the technical factors at play? Well, MLPs have been indirectly impacted by the credit crisis in several ways. First, the bankruptcy of Lehman had a significant impact on the sector. As one of the top three underwriters in the space, Lehman's retail system was a substantial owner of MLPs. Lehman's proprietary desk had participated in many pipe transactions and owned a significant number of MLPs in their book. Lehman also had a large dedicated fund of MLPs with close to a billion of assets that has become entangled in the Lehman bankruptcy.
Second, we believe that the investment and commercial banks that provide leverage to certain institutional funds, whether through prime brokerage accounts or total return swaps has continued to tighten their credit standards. This forces these hedge funds to either post more collateral or, more likely, sell securities.
Third, there's been some deleveraging among the dedicated MLP closed-end funds, including Kayne Anderson's two closed-end funds, in order to keep within leverage limitations. It's simply not possible to maintain strong credit ratios in light of a 35% decline in assets without reducing leverage.
Finally, we've seen retail investors who are understandably nervous about general market conditions convert some of their MLP holdings to cash.
The biggest question on the minds of all MLP investors is when is this going to turn around, and unfortunately, I don't have the answer to that. Clearly, we need to have a stabilization in the overall capital markets and an easing of the credit crunch. After that, we think that historically low MLP valuations will eventually bring investors back to the sector.