Kayne Anderson Energy Development Company (KED) periodically provides a preview of its quarterly filings by letting us know its latest NAV. Moreover, the company projects revenues (on a cash basis), expenses and distributable cash flow. We don’t take these projections as gospel truth. As the press release points out, much of the data included is based on income and expenses from a few weeks back, rather than KED actually seeking to peer into the future.
If energy prices jump, distributions could jump higher, or if the company recovers its non-performing ProPetro investment. Interest rates increasing could hurt earnings.
Still, as we invest in BDCs principally for reliable and predictable distribution income, we appreciate any kind of guidance. To be fair KED’s prior prognostications in the last couple of periods have been accurate. The guidance for Fiscal 2010 suggests KED’s business will be highly stable in the months ahead. Assets are almost unchanged from earlier periods, as is debt. The NAV is just a few percentage points up from the last quarter.
Income yields are down from a year ago, but interest costs are very low. Distributable Cash Flow is pegged at $0.31, which is marginally higher than the $0.30 KED has been paying out for the last 3 quarters.
Is an 8% distribution yield (on yesterday’s closing price of $14.96) adequate for the risk that earnings could drop should the energy markets downshift ? At a time when many BDCs and MLPs are raising fresh capital, or making acquisitions (or both), KED is not doing much. Moreover, the company still has debt outstanding, with the attendant risks inherent in leverage. On the other hand, as an investor in energy companies, KED’s income and its distributions are “tax efficient”. Or, put another way, all KED’s distributions in the year ahead are likely to be treated as return of capital. It reduces an investor’s basis, but there’s no current tax to pay. Anyone in a high tax state paying tax at the highest rate would have to earn 15% in a taxable investment to earn an equivalent amount after tax.
Disclosure: Author holds a long position in KED