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Kayne Anderson Energy Development Co. (NYSE: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.

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.

As of May 31st, our long term investment portfolio consists of 82% equities and 18% fixed income securities. Since the beginning of the fiscal year, the percentage of fixed income securities has declined substantially. This shift is consistent with our plans to increase our equity holdings after we elected in January to no longer be treated as a regulated investment company or RIC. We accomplished this by reducing our holdings of second lien debt by $20.8 million since the beginning of the fiscal year. In anticipation of making additional investments in private MLPs we reduced the balance on our revolver from $85 million on November 30th to $68 million on May 31st. In addition, the company had $7.3 million invested in short term repurchase agreements at the end of the quarter. The company anticipates utilizing the proceeds from the repurchase agreements and new borrowing to make additional investments during the quarter. Over the long term we target a portfolio allocation of 70% to 80% in private MLPs, 15% to 20% in public MLPs and affiliates and 5% to 10% in second lien loans. We have several deals under discussion that will allow us to achieve these targets over the next several quarters.

Let me now turn to an update of our five largest investments. As I mentioned earlier, this has been a very positive quarter for several of our private MLPs but a portion of these gains were offset by the poor performance in ProPetro. Our largest investment is in Direct Fuels, a specialty processing, storage and distribution company located in North Texas. Direct Fuels continues to perform well above our original expectation. EBITDA through May 2008 is approximately 25% ahead of budget and looking forward, the updated forecast for 2008 is about 25% higher than 2007 EBIDTA. We expect that Direct Fuels will explore alternatives to raise additional equity capital in the next several quarters. During the period we increased our targeted valuation on Direct Fuels from $21 to $24.

Our second largest investment is Millennium Midstream, a national gas gathering and processing company with operations in Texas, Louisiana and the Gulf of Mexico. Millennium is also performing above original expectations due to several drivers. First, an accretive acquisition of West Texas Gathering assets which was completed in December; second, very strong processing margins; and finally increased volumes on its East Texas gathering system as a result of higher drilling activity in the James lines and Travis Peak formations. First quarter 2008 EBITDA performance was 17% higher than budget. Looking forward 2008 budgeted EBITDA is more than 25% higher than 2007. During the quarter, we increased our per unit evaluation on Millennium from $21.50 to just over $24.

Our third largest investment in International Resource Partners, a coal producer in Central Appalachia. The partnership’s performance has been somewhat disappointing from an operating standpoint as a series of unforeseen circumstances has resulted in production below budget. Fortunately, very strong commodity prices have more than offset any operational issues. Metallurgical coal prices which provide roughly half of the company’s cash flow are well over $200 per ton compared to $85 per ton at the time we invested in the partnership. Likewise, steam coal prices have increased from $45 per ton in June last year to over $130 per ton currently. The increase in coal prices will only have a minimal impact on the results on our International Resource Partners during 2008 as most of the company’s coal production is under contract for the remainder of the year. However, we expect a substantial increase in EBITDA during 2009 and a good percentage of the company’s contracts roll off at the end of this year. Largely as the result of the expected increase in EBITDA from 2009 we have increased the per unit evaluation from $20 to $23 per unit during the quarter.

Now, I’d like to turn to our fourth largest investment ProPetro. As we’ve discussed in our previous conference calls, ProPetro’s operations began showing weakness during the fourth calendar quarter of 2007. We believed at the time that this slowdown was the result of unusually low gas prices in the Rocky Mountains which was slowing drilling activity in the company’s major area of activity Uinta Basin. We expected that the completion of the Rockies’ express pipeline would eliminate the large price differential in the Rockies and that drilling activity would increase. While the completion of the price line did improve gas prices, drilling activity didn’t increase as quickly as we had anticipated but, more importantly, ProPetro began to lose business in spite of this increased activity. The situation at ProPetro continued to decline through the first calendar quarter. KED and the other lenders obtained an operational consultant who made many recommendations on the financial and operational side of the business. Those recommendations included replacing senior management and closing certain unprofitable locations.

In April, a new CEO was named, and more importantly, or as importantly, the seller of the Utah business rejoined the company and is actively involved. Certain operating locations were closed and surplus equipment was sold. Operating results have improved substantially since April with June revenue up more than 20% compared to March. We still have a long way to go before reaching a level of profitability that would ensure that KED received its principal and accrued interest, but we’re encouraged by the progress that has been made over the last three months.

The impact of ProPetro’s performance on KED has been substantial. ProPetro is no longer current on the interest payments for our second lien debt and we are in discussions with the company to convert our loan to a [PIC] loan at a higher rate. However, because the receipt of that interest is not assured, we recognized no interest income from ProPetro during the quarter and have written off $800,000 of accrued interest booked at the end of the first quarter. KED distributable cash flow was 11% lower than the previous quarter as a result of not recognizing interest on this loan. Likewise, we’ve reduced the fair market value of the investment to $20 million or 57% of par to reflect the fact that we may not receive full repayment of principal in certain scenarios.

Our fifth largest investment is VantaCore Partners, a private MLP which operations an aggregate quarry and asphalt business. In spite of the general slowdown in construction activity across the US, VantaCore continues to perform at a level above its first year budget. In addition, the partnership is negotiating an agreement to purchase an aggregates company in the southern United States. If successful, this deal would close before the end of the third quarter and is expected to be accretive to VantaCore’s distributable cash flow. If the acquisition is completed, the partnership is expected to redeem all of KED’s second lien debt at 103% of par. The company expects to utilize the proceeds from the redemption of the debt plus an additional $12.5 million to purchase additional common units of VantaCore. I have to caution though that like any acquisition, there’s a chance that this deal will not close due to unforeseen circumstances.

So, to summarize, we’re pleased with the performance of our private MLPs and we expect to see distribution increases in several of these names as the year progresses. We continue to make progress in reconfiguring our portfolio in conjunction with the conversion to a tactical corporation. In anticipation of making additional investments, we kept our leverage significantly below our targeted levels and as mentioned previously, we expect to purchase $20 million of additional units in VantaCore funded in part with the redemption of our $7.5 million secured debt resulting in a net new investment of $12.5 million. In addition, we have circled and expect to close during the quarter a $7.5 million investment in senior secured notes of a Canadian oil sands company and we’re in advanced discussions with a midstream pipeline MLP regarding a $2 million pipe transaction. Both of these transactions are subject to additional diligence on our part and there’s a risk that such transactions will not close. We continue to have discussions with a third party about forming another large private MLP but those discussions are in a very early stage and if successful wouldn’t be completed during this quarter.

With that, I’ll now turn the conference over to our Chief Financial Officer Terry McCarthy who will discuss our financial performance and guidance.

Terry A. Hart

During the second quarter we had a net increase in net assets resulting from operations of $5.2 million and our net asset value at the end of the quarter was $236.8 million or $23.51 per share. This compares to a net asset value as of February 29, 2008 of $235.3 million or $23.41 per share. KED had a net investment loss for the second quarter of $1.5 million which included $900,000 of deferred income tax benefit. Interest income earned from KED’s fixed income investments and its short term investments were the primary components of its reported $1 million of investment income for the period. KED received $4.9 million in dividends and distributions of which $4.7 million was treated as a return of capital. As a result, the contributions to investment income from such dividends and distributions was $200,000.

Operating expenses for the period were $3.6 million including $1.3 million of base investment management fees, $900,000 of interest expense and $600,000 for other operating expenses. Operating expenses also included a bad debt expense of $800,000 which relates to interest accrued on the company’s ProPetro investment during the first quarter 2008. The charges were taken during the second quarter when we determined that the collection of this interest was not expected.

During the second quarter KED had net realized gains from its investments of $900,000 and net unrealized gains of $5.8 million both of which are net of differed income taxes. Significant unrealized gains on our private MLPs were partially offset by unrealized losses on our ProPetro investment and our public MLP portfolio. On July 1st KED declared a dividend of $0.42 per common share or $4.2 million based on its second quarter results. This dividend represents and increase of 1.2% compared to the quarterly dividend of $0.415 per share for the first fiscal quarter. As of May 31st KED had $68 million in borrowings under its revolving credit facility and had approximately $7.3 million in short term investments and repurchase agreements.

Let’s now turn to our guidance which we review on a quarterly basis and provide updates if necessary. Let’s start with dividends, distributions and interest income that we can estimate can be earned from the portfolio. I’d like to emphasize that the portfolio composition and the average yields are as of July 3rd and do not reflect any additional changes in the portfolio allocations that are expected to occur after that date. As always, we will report those changes each quarter. With that caveat in mind, our portfolio at July 3rd consisted of $84.6 million invested in public MLPs and MLP affiliates with an average yield of 8%, $166.8 million invested in private MLPs with an average yield of 7.9%. It’s important to note that the valuations and yields for the private MLPs are as of May 31st. We had $34.1 million invested in fixed income securities of private companies with an average yield of 8.9% and these figures exclude our investment in ProPetro. Finally, we had $1.4 million in investments in repurchase agreements with the yield of 2.1%.

Based on this portfolio, we estimate dividends, distributions and interest income to be approximately $5.8 million per quarter. Please note that this estimate does not include the impact of return on capital which will reduce net investment income reported under GAAP. Additionally, this estimate does not include interest income from our ProPetro investment as we do not anticipate a cash interest payment.

Let’s now turn to our estimates of interest expense and operating expenses. Based on $69 million borrowed at July 3rd under our revolving credit facility, we estimate interest expense to be $700,000 per quarter. We estimate our base management fees to be approximately $1.3 million per quarter and other operating expenses are estimated to be approximately $600,000 a quarter. We do not provide guidance on realized gains or on incentive management fees but, as mentioned previously we had $900,000 of after tax realized gains for the quarter ended May 31st.

We’d like to supplement our normal guidance practice with additional information related to our plans to make new investments during the remainder of the third fiscal quarter. As of July 3rd our debt to total asset ratio was approximately 22% which is significantly less of our target of 30%. To capitalize on investment opportunities and to bring our leverage closer to our target, we anticipate making an additional $20 million of investments which will be funded primarily with borrowings on our revolving credit facility. These new investments are expected to include an additional $12.5 million equity investment in VantaCore and $7.5 million of private senior secured debt securities. We expect distribution and interest income from these investments to be approximately $600,000 per quarter. Please note that this estimate represents a full quarter of income. The timing and amounts of these investments is uncertain and these investments will not earn a full quarter of income during the fiscal third quarter. To the extent such investments are funded with borrowings, we will incur interest expense from the date of such investment. As with any transaction that’s not yet closed, there’s a risk that these transactions will not close which is why we have not included them in our basic guidance.

Now, I’d like to turn the call back to Kevin.

Kevin S. McCarthy

That’s the conclusion of our prepared remarks. Operator, at this time we’d like to begin the question and answer portion of our call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gabe Moreen – Merrill Lynch.

Gabe Moreen – Merrill Lynch

A couple of questions, on ProPetro, are they okay just from a working capital standpoint? Is there any need for additional capital on their part at this point or are they okay I guess to just operate their business at this point?

Kevin S. McCarthy

They are very tight on working capital and the first lien lenders have provided them the liquidity they need to keep on operating. But, the cash position there has been something that we’ve been monitoring very, very closely on virtually a daily basis.

Gabe Moreen – Merrill Lynch

Is there any consideration on some sort of recap that would require you guys, or would you be willing to put in additional investment there?

Kevin S. McCarthy

We’re in discussions regarding a recap of that investment at this point is contemplate that we would just convert our existing cash pay security to a [PIC] security and that would provide the company the flexibility to continue to improve its operations through the remainder of 2008. Our expectation or our hope there is that we continue the trends of improvement that we’ve seen over the last three months throughout the remainder of 2008 and we would be looking for a liquidity event at some point during 2009.

Gabe Moreen – Merrill Lynch

Moving on to Direct Fuels, you mentioned the drivers behind some of the performance of that MLP and IRP but in terms of it being ahead of budget of Direct Fuels can you pinpoint any specific factors there?

Kevin S. McCarthy

Basically all parts of their business are working well. They’re transmix business is performing very well both on a volume and margin basis. Their ethanol pipeline business from a volume perspective is operating above budget and as you may know, their bio diesel facility came on stream at the beginning of the year and is operating with higher margins than projected. It is basically performing very, very well in all aspects of its business. Certainly strong diesel prices have benefited the company?

Gabe Moreen – Merrill Lynch

I guess in terms of your investment there, you mentioned potentially seeking additional capital but I don’t think you had mentioned that as specifically being on your list for the third quarter. Is an additional investment of direct fuel something you’re looking at?

Kevin S. McCarthy

No.

Gabe Moreen – Merrill Lynch

Then just in terms of VantaCore, I guess switching your position from debt to equity, will you pick up any additional cash flow based on that anticipated switch in your capital investment there?

Kevin S. McCarthy

Yes, there’s a slight pickup in the dividend rate on the common versus we were seeing a spread over LIBOR there. With the decline in LIBOR the rate on that second lien debt is slightly under what the yield is on our common, so we have a slight pickup in income there. That was not included in Terry’s numbers.

Gabe Moreen – Merrill Lynch

And in terms of VantaCore’s overall cap structure, I mean in terms of the additional equity, are they going to be heavier layered equity after this happens?

Kevin S. McCarthy

They’re still targeting a relatively conservative debt to EBITDA ratio. I believe pro forma for this acquisition and new refinancing it will be roughly three times EBITDA.

Gabe Moreen – Merrill Lynch

Then last question for me, you mentioned the double digit distribution growth resulting from the portfolio public MLPs, just generically any sort of target for what the private MLP portfolio will kick off this year in terms of anticipated distribution growth?

Kevin S. McCarthy

No, we’re not providing guidance on that. That’s highly dependent on operations and we don’t have control over that and in general the private MLPs tend to operating at much higher coverage ratios and so a lot of this increase in value initially we’re building cushions. We’d expect that to translate more substantially going forward in to increasing the distributions but no specific guidance on it.

Operator

Your next question comes from Jeff Nathan – Private Investor.

Jeff Nathan – Private Investor

I have a few questions I’d like to ask, when you weight your portfolio as to larger investments because the ProPetro was many times your average investment, how do you make that determination which one is worthy of a triple weighting or quadruple weighting?

Kevin S. McCarthy

Well, we had targeted, we basically have five large investments and those investments are investments where we have significant influence and view in to the operations. We’ll typically have a board seat, we’ll be able to undergo significant diligence. Our smaller positions whether it be a private MLP like Quest or in the public MLPs or second lien debt we have much less access to information and to the diligence. So, we really scale the size of our investment based on the amount of diligence we can do and the amount of influence that we can have and oversight on a going forward basis.

Jeff Nathan – Private Investor

Is this your only disappointing investment of the larger ones?

Kevin S. McCarthy

Yes. Of the five, four are operating quite well and ProPetro has been a disappointment and a significant use of our time.

Jeff Nathan – Private Investor

One thing I don’t understand, why don’t private MLPs yield more than ones that are public and more liquid?

Kevin S. McCarthy

They do.

Jeff Nathan – Private Investor

They do?

Kevin S. McCarthy

For example, the distribution on VantaCore is currently $2 per unit, our initial purchase price was $20 per unit so that is yielding 10% for example.

Jeff Nathan – Private Investor

Your chart you provided in the press release shows a yield 7.9% which is less than the 8% in the public ones, as a grouping.

Kevin S. McCarthy

That relates to what we’ve done is we’ve for example in International Resource Partners we purchased that MLP at an initial yield of 8.5%. The company, as I mentioned, we increased it in value mainly because of the anticipated increase in EBITDA during 2009, they haven’t increased their distribution but we’ve increased our valuation therefore the yield on our value has gone down. We’d expect as companies continue to increase their distribution set, that yield would go up.

Jeff Nathan – Private Investor

Do you have any concern for the leverage ratio that you initially set as a target with the lack of availability of credit today that’s changed drastically in the last few months?

Kevin S. McCarthy

I think, as we mentioned, we think that 22% leverage is probably too low. We had targeted 30% leverage but I think in light of the market and the credit tightness, even with the additional $20 million of investments that we anticipate, we’ll still be under our target leverage ratio of 30% and probably will continue to do that for the next several quarters until we have a better sense on where the market is going.

Jeff Nathan – Private Investor

And how does your incentive monies come in? When do they become effective, your returns?

Kevin S. McCarthy

We have a two tier incentive structure, one is based on the investment income that we receive and it’s on a GAAP reported basis. Because the return of capital nature on the distributions received, it’s unlikely that we’ll earn an incentive fee on an income basis. We also have an incentive fee based on realized gain but that is realized gains net of unrealized losses so we’ll only get an incentive to the extent that net-net all the realized gains have exceeded any losses that we have on the books. So, right now there’s no accrual for an incentive fee based on realized gains that we’ve had to date.

Jeff Nathan – Private Investor

So you have to wait until you offset the ProPetro loss?

Kevin S. McCarthy

Right.

Jeff Nathan – Private Investor

So it seems that you’re not directly correlated too much to the energy success of oil and gas prices.

Kevin S. McCarthy

Well, I think in general whether it be for our public MLP funds or for KED, there’s limited exposure to commodity prices. Obviously for a coal producer there’s far more exposure. What we’ve found recently is that there’s a much greater correlation to the overall market which has been performing very poorly as well as [BDCs]. We’ve substantially outperformed the [BDC] group over the past six months because its performed very poorly. We didn’t expect to have a high correlation to commodity prices, we expected to have a higher correlation to MLP prices and what its turned out, certainly in the last several months, as we’ve had the highest correlation with the overall market.

Jeff Nathan – Private Investor

The correlation I was looking for was whether you’d have higher volumes in you pipeline if prices of commodities were higher.

Kevin S. McCarthy

We think that will, as I mentioned early in the call, on a long term basis higher commodity prices will drive higher drilling which will drive higher volumes, it’s just not immediate.

Jeff Nathan – Private Investor

So there’s a lag of a year or so?

Kevin S. McCarthy

Yes.

Operator

Your next question comes from Jeremy [Tonin] – UBS.

Jeremy [Tonin] – UBS

Just a quick question, I’m wondering what your thoughts were on the MLP IPO market? And, how close the portfolio companies were to eventually reaching an IPO?

Kevin S. McCarthy

I think that the IPO market has slowed down substantially from 2007. There have been three IPOs completed this year raising about $750 million. We think that the window is still open if you have a high quality MLP in the midstream area, we think you can access the public market. I think it would be far more difficult for an upstream MLP to access the IPO market. We continue to monitor all our investments and when appropriate we and the company will consider the public markets but I can’t comment on to the specific timing of any of our portfolio companies.

Operator

Your next question comes from Selman Akyol – Stifel Nicolaus & Company, Inc.

Selman Akyol – Stifel Nicolaus & Company, Inc.

Two quick questions if I may, first of all on ProPetro, you said that they were losing business but why are they losing business?

Kevin S. McCarthy

They were losing business really because as far as we can see in attention from the management of the company that ProPetro bought, the Utah drilling and cementing business. That’s why we thought getting the original owner back in the saddle and very active in the business was critical, it was his relationships that built that business. He is a significant equity holder and a second lien holder along with us so he’s very incentivized to turn the business around financially. And, what we found is sort of reputationally he is also very incentivized to not have the business that he built atrophy away. So, most of the improvement that we’ve seen over the last three months have been the result of [Bill Marvin] getting back in to the business, getting those customers back that had been lost, motivating the people in the Utah operation basically to start working hard and being customer attentive. I think what had happened was they had essentially a monopoly up there for some period of time, competition, a small competitor came in and the company didn’t respond to having the competitor. Now, they’re much more aggressive, much more customer focused and we’re starting to see the benefits of that.

Selman Akyol – Stifel Nicolaus & Company, Inc.

But you’ve seen an improvement over the last three months from when he came back but yet you went ahead and wrote the asset down in terms of the $1.1 million just to be conservative?

Kevin S. McCarthy

Yes, and also remember that the valuation is as of May 31st so we did it based on the information we had at the time. June has continued to improve but that’s a May 31st valuation and as I said in the prepared remarks, we still have a long way to go. We’re up significantly but we still have a long way to go before we get full principle and interest back.

Selman Akyol – Stifel Nicolaus & Company, Inc.

Just to sum up it’s more execution issues than anything else? It’s not like its pricing or anything of that nature?

Kevin S. McCarthy

It’s mainly execution and it’s a people business and long term relationships matter and we have the right guy in Utah running the business and we have the right guy in Midland running the rest of the business.

Selman Akyol – Stifel Nicolaus & Company, Inc.

Last question here, briefly you talked about doing another project with a third party, can you give any more comment on that?

Kevin S. McCarthy

I was really only giving that as an example that we continue to see opportunities to do other large private MLPs like the Direct Fuel or Millennium. There still are parties that are interested, we’re having discussions, they’re still in the early stages in terms of getting companies to decide to go forward, etc. I don’t want to give any more color at this point other than to let you know that there’s still those opportunities out there.

Operator

At this time there are no further questions. Gentlemen do you have any closing remarks?

Kevin S. McCarthy

Thank you operator. I’d like to thank everyone for the time this morning and they’re continued interest in KED both during this call and since our IPO. Please also refer to our website at www.KayneFunds.com for additional updates and we look forward to having additional conference calls in the future. Thank you very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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