KAYNE ANDERSON MLP INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS
(amounts in 000s, except share and per share amounts)
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For the
Nine Months
Ended
August
31,
2013
(Unaudited)
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For the Fiscal Year
Ended
November 30,
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For the
Period
September 28,
2004
(1)
through
November 30,
2004
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2012
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2011
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2010
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2009
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2008
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2007
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2006
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2005
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Per Share of Common Stock
(2)
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Net asset value, beginning of period
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$
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28.51
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$
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27.01
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$
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26.67
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$
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20.13
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$
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14.74
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$
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30.08
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$
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28.99
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$
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25.07
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$
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23.91
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$
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23.70
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(3)
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Net investment income (loss)
(4)
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(0.55
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)
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(0.71
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)
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(0.69
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)
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(0.44
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)
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(0.33
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)
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(0.73
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)
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(0.73
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(0.62
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)
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(0.17
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)
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0.02
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Net realized and unrealized gain (loss)
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6.68
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4.27
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2.91
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8.72
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7.50
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(12.56
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)
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3.58
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6.39
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2.80
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0.19
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Total income (loss) from operations
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6.13
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3.56
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2.22
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8.28
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7.17
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(13.29
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)
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2.85
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5.77
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2.63
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0.21
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Dividends and distributions auction rate preferred
(4)(5)
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(0.01
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)
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(0.10
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(0.10
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(0.10
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(0.05
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Common dividends
(5)
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(1.70
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)
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(1.54
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(1.26
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)
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(0.84
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)
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(0.09
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)
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(0.13
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)
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Common distributions return of
capital
(5)
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(0.55
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)
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(0.72
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)
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(1.08
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)
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(1.94
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)
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(1.99
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)
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(1.84
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)
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(1.75
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(1.37
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Total dividends and distributions common
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(1.70
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)
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(2.09
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(1.98
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(1.92
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(1.94
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(1.99
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(1.93
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(1.75
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(1.50
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Underwriting discounts and offering costs on the issuance of auction rate preferred stock
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(0.03
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Effect of issuance of common stock
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0.06
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0.02
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0.09
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0.16
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0.12
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0.26
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0.11
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Effect of shares issued in reinvestment of distributions
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0.01
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0.01
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0.01
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0.02
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0.05
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0.04
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0.01
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Total capital stock transactions
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0.07
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0.03
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0.10
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0.18
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0.17
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0.04
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0.27
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0.08
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Net asset value, end of period
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$
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33.01
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$
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28.51
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$
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27.01
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$
|
26.67
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$
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20.13
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$
|
14.74
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$
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30.08
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$
|
28.99
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$
|
25.07
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$
|
23.91
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Market value per share of common stock, end of period
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$
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35.57
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$
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31.13
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$
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28.03
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$
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28.49
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$
|
24.43
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$
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13.37
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$
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28.27
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$
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31.39
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$
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24.33
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$
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24.90
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Total investment return based on common stock market
value
(6)
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20.3
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%
(7)
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19.3
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%
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|
5.6
|
%
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|
26.0
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%
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|
103.0
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%
|
|
|
(48.8
|
)%
|
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|
(4.4
|
)%
|
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|
37.9
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%
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3.7
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%
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|
|
(0.4
|
)%
(7)
|
See accompanying notes to financial statements.
13
KAYNE ANDERSON MLP INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS
(amounts in 000s, except share and per share amounts)
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|
For the
Nine Months
Ended
August
31,
2013
(Unaudited)
|
|
|
For the Fiscal Year
Ended
November 30,
|
|
|
For the
Period
September 28,
2004
(1)
through
November 30,
2004
|
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|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
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2006
|
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|
2005
|
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|
Supplemental Data and Ratios
(8)
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|
Net assets applicable to common stockholders, end of period
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|
$
|
3,291,337
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|
$
|
2,520,821
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|
|
$
|
2,029,603
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|
|
$
|
1,825,891
|
|
|
$
|
1,038,277
|
|
|
$
|
651,156
|
|
|
$
|
1,300,030
|
|
|
$
|
1,103,392
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|
|
$
|
932,090
|
|
|
$
|
792,836
|
|
Ratio of expenses to average net assets
|
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|
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|
Management fees
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
|
|
2.1
|
%
|
|
|
2.1
|
%
|
|
|
2.2
|
%
|
|
|
2.3
|
%
|
|
|
3.2
|
%
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
Other expenses
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
2.3
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
3.4
|
|
|
|
1.5
|
|
|
|
1.2
|
|
Interest expense and distributions on mandatory redeemable preferred stock
(4)
|
|
|
2.2
|
|
|
|
2.4
|
|
|
|
2.3
|
|
|
|
1.9
|
|
|
|
2.5
|
|
|
|
3.4
|
|
|
|
2.3
|
|
|
|
1.7
|
|
|
|
0.8
|
|
|
|
0.0
|
|
Income tax expense
|
|
|
15.0
|
|
|
|
7.2
|
|
|
|
4.8
|
|
|
|
20.5
|
|
|
|
25.4
|
|
|
|
|
(9)
|
|
|
3.5
|
|
|
|
13.8
|
|
|
|
6.4
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
19.8
|
%
|
|
|
12.2
|
%
|
|
|
9.7
|
%
|
|
|
24.7
|
%
|
|
|
30.4
|
%
|
|
|
5.9
|
%
|
|
|
8.3
|
%
|
|
|
18.9
|
%
|
|
|
8.7
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment income/(loss) to average net
assets
(4)
|
|
|
(2.4
|
)%
|
|
|
(2.5
|
)%
|
|
|
(2.5
|
)%
|
|
|
(1.8
|
)%
|
|
|
(2.0
|
)%
|
|
|
(2.8
|
)%
|
|
|
(2.3
|
)%
|
|
|
(2.4
|
)%
|
|
|
(0.7
|
)%
|
|
|
0.5
|
%
|
Net increase/(decrease) in net assets to common stockholders resulting from operations to average net
assets
|
|
|
18.8
|
%
(7)
|
|
|
11.6
|
%
|
|
|
7.7
|
%
|
|
|
34.6
|
%
|
|
|
43.2
|
%
|
|
|
(51.2
|
)%
|
|
|
7.3
|
%
|
|
|
21.7
|
%
|
|
|
10.0
|
%
|
|
|
0.9
|
%
(7)
|
Portfolio turnover rate
|
|
|
17.2
|
%
(7)
|
|
|
20.4
|
%
|
|
|
22.3
|
%
|
|
|
18.7
|
%
|
|
|
28.9
|
%
|
|
|
6.7
|
%
|
|
|
10.6
|
%
|
|
|
10.0
|
%
|
|
|
25.6
|
%
|
|
|
11.8
|
%
(7)
|
Average net assets
|
|
$
|
2,916,133
|
|
|
$
|
2,346,249
|
|
|
$
|
1,971,469
|
|
|
$
|
1,432,266
|
|
|
$
|
774,999
|
|
|
$
|
1,143,192
|
|
|
$
|
1,302,425
|
|
|
$
|
986,908
|
|
|
$
|
870,672
|
|
|
$
|
729,280
|
|
Senior unsecured notes outstanding, end of period
|
|
|
1,175,000
|
|
|
|
890,000
|
|
|
|
775,000
|
|
|
|
620,000
|
|
|
|
370,000
|
|
|
|
304,000
|
|
|
|
505,000
|
|
|
|
320,000
|
|
|
|
260,000
|
|
|
|
|
|
Credit facility outstanding, end of period
|
|
|
13,000
|
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
Auction rate preferred stock, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
Mandatory redeemable preferred stock, end of period
|
|
|
399,000
|
|
|
|
374,000
|
|
|
|
260,000
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common stock outstanding
|
|
|
92,865,010
|
|
|
|
82,809,687
|
|
|
|
72,661,162
|
|
|
|
60,762,952
|
|
|
|
46,894,632
|
|
|
|
43,671,666
|
|
|
|
41,134,949
|
|
|
|
37,638,314
|
|
|
|
34,077,731
|
|
|
|
33,165,900
|
|
Asset coverage of total debt
(10)
|
|
|
410.6
|
%
|
|
|
418.5
|
%
|
|
|
395.4
|
%
|
|
|
420.3
|
%
|
|
|
400.9
|
%
|
|
|
338.9
|
%
|
|
|
328.4
|
%
|
|
|
449.7
|
%
|
|
|
487.3
|
%
|
|
|
|
|
Asset coverage of total leverage (debt and preferred
stock)
(11)
|
|
|
307.4
|
%
|
|
|
296.5
|
%
|
|
|
296.1
|
%
|
|
|
334.1
|
%
|
|
|
333.3
|
%
|
|
|
271.8
|
%
|
|
|
292.0
|
%
|
|
|
367.8
|
%
|
|
|
378.2
|
%
|
|
|
|
|
Average amount of borrowings per share of common stock during the period
(2)
|
|
$
|
11.21
|
|
|
$
|
10.80
|
|
|
$
|
10.09
|
|
|
$
|
7.70
|
|
|
$
|
6.79
|
|
|
$
|
11.52
|
|
|
$
|
12.14
|
|
|
$
|
8.53
|
|
|
$
|
5.57
|
|
|
|
|
|
See accompanying notes to financial statements.
14
KAYNE ANDERSON MLP INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS
(amounts in 000s, except share and per share amounts)
(1)
|
Commencement of operations.
|
(2)
|
Based on average shares of common stock outstanding.
|
(3)
|
Initial public offering price of $25.00 per share less underwriting discounts of $1.25 per share and offering costs of $0.05 per share.
|
(4)
|
Distributions on the Companys mandatory redeemable preferred stock are treated as an operating expense under GAAP and are included in the calculation of net
investment income (loss). See Note 2 Significant Accounting Policies.
|
(5)
|
The information presented for the nine months ended August 31, 2013 is an estimate of the characterization of the distribution paid and is based on the Companys
operating results during the period. The information presented for each of the other periods is a characterization of the total distributions paid to preferred stockholders and common stockholders as either a dividend (eligible to be treated as
qualified dividend) or a distribution (return of capital) and is based on the Companys earnings and profits.
|
(6)
|
Total investment return is calculated assuming a purchase of common stock at the market price on the first day and a sale at the current market price on the last day of
the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to the Companys dividend reinvestment plan.
|
(8)
|
Unless otherwise noted, ratios are annualized.
|
(9)
|
For the fiscal year ended November 30, 2008, the Company accrued deferred income tax benefits of $339,991 (29.7% of average net assets) primarily related to
unrealized losses on investments. Realization of a deferred tax benefit was dependent on whether there would be sufficient taxable income of the appropriate character within the carryforward periods to realize a portion or all of the deferred tax
benefit. Because it could not have been predicted whether the Company would incur a benefit in the future, a deferred income tax expense of 0% was assumed.
|
(10)
|
Calculated pursuant to section 18(a)(1)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by Senior Notes or any other
senior securities representing indebtedness and mandatory redeemable preferred stock divided by the aggregate amount of Senior Notes and any other senior securities representing indebtedness. Under the 1940 Act, the Company may not declare or make
any distribution on its common stock nor can it incur additional indebtedness if, at the time of such declaration or incurrence, its asset coverage with respect to senior securities representing indebtedness would be less than 300%. For purposes of
this test, the Credit Facility is considered a senior security representing indebtedness.
|
(11)
|
Calculated pursuant to section 18(a)(2)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by Senior Notes, any other
senior securities representing indebtedness and preferred stock divided by the aggregate amount of Senior Notes, any other senior securities representing indebtedness and preferred stock. Under the 1940 Act, the Company may not declare or make any
distribution on its common stock nor can it issue additional preferred stock if at the time of such declaration or issuance, its asset coverage with respect to all senior securities would be less than 200%. In addition to the limitations under the
1940 Act, the Company, under the terms of its mandatory redeemable preferred stock, would not be able to declare or pay any distributions on its common stock if such declaration would cause its asset coverage with respect to all senior securities to
be less than 225%. For purposes of these tests, the Credit Facility is considered a senior security representing indebtedness.
|
See accompanying notes to financial statements.
15
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Kayne Anderson MLP
Investment Company (the Company) was organized as a Maryland corporation on June 4, 2004, and is a non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the
1940 Act). The Companys investment objective is to obtain a high after-tax total return by investing at least 85% of its net assets plus any borrowings (total assets) in energy-related master limited partnerships and
their affiliates (collectively, MLPs), and in other companies that, as their principal business, operate assets used in the gathering, transporting, processing, storing, refining, distributing, mining or marketing of natural gas, natural
gas liquids (including propane), crude oil, refined petroleum products or coal (collectively with MLPs, Midstream Energy Companies). The Company commenced operations on September 28, 2004. The Companys shares of common stock
are listed on the New York Stock Exchange, Inc. (NYSE) under the symbol KYN.
2. Significant
|
Accounting Policies
|
A.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ
materially from those estimates.
B.
Reclassifications
Certain prior year amounts in the accompanying financial
statements have been reclassified to conform to the current years presentation.
C.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, liquid investments with an original maturity of three months or less and include money market fund accounts.
D.
Calculation of Net Asset Value
The Company determines its net asset value no less frequently than as of the last day of each month based on the most recent close of regular session
trading on the NYSE, and makes its net asset value available for publication monthly. Currently, the Company calculates its net asset value on a weekly basis. Net asset value is computed by dividing the value of the Companys assets (including
accrued interest and distributions and current and deferred income tax assets), less all of its liabilities (including accrued expenses, distributions payable, current and deferred accrued income taxes, and any borrowings) and the liquidation value
of any outstanding preferred stock, by the total number of common shares outstanding.
E.
Investment Valuation
Readily marketable portfolio securities listed on any exchange other than the NASDAQ Stock Market, Inc. (NASDAQ) are valued, except as indicated below, at the last sale price on the business day as of which such value is
being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and ask prices on such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing price. Portfolio
securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities.
Equity securities traded in the
over-the-counter
market,
but excluding securities admitted to trading on the NASDAQ, are valued at the closing bid prices. Debt securities that are considered bonds are valued by using the mean of the bid and ask prices provided by an independent pricing service. For debt
securities that are considered bank loans, the fair market value is determined by the mean of the bid and ask prices provided by the agent or syndicate bank or principal market maker. When price quotes are not available, fair market value will be
based on prices of comparable securities. In certain cases, the Company may not be able to purchase or sell debt securities at the quoted prices due to the lack of liquidity for these securities.
16
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Exchange-traded options and futures contracts are valued at the last sales price at the close of trading in the market where such contracts are principally traded or, if there was no sale on the
applicable exchange on such day, at the mean between the quoted bid and ask price as of the close of such exchange.
The
Company holds securities that are privately issued or otherwise restricted as to resale. For these securities, as well as any other portfolio security held by the Company for which reliable market quotations are not readily available, valuations are
determined in a manner that most accurately reflects fair value of the security on the valuation date. Unless otherwise determined by the Board of Directors, the following valuation process is used for such securities:
|
|
|
Investment Team Valuation.
The applicable investments are valued by senior professionals of KA Fund Advisors,
LLC (KAFA or the Adviser) who are responsible for the portfolio investments. The investments will be valued monthly with new investments valued at the time such investment was made.
|
|
|
|
Investment Team Valuation Documentation.
Preliminary valuation conclusions will be determined by senior management
of KAFA. Such valuations and supporting documentation is submitted to the Valuation Committee (a committee of the Companys Board of Directors) or the Board of Directors on a quarterly basis.
|
|
|
|
Valuation Committee.
The Valuation Committee meets to consider the valuations submitted by KAFA at the end of each
quarter. Between meetings of the Valuation Committee, a senior officer of KAFA is authorized to make valuation determinations. All valuation determinations of the Valuation Committee are subject to ratification by the Board of Directors at its next
regular meeting.
|
|
|
|
Valuation Firm.
Quarterly, a third-party valuation firm engaged by the Board of Directors reviews the valuation
methodologies and calculations employed for these securities.
|
|
|
|
Board of Directors Determination.
The Board of Directors meets quarterly to consider the valuations provided by
KAFA and the Valuation Committee and ratify valuations for the applicable securities. The Board of Directors considers the report provided by the third-party valuation firm in reviewing and determining in good faith the fair value of the applicable
portfolio securities.
|
At August 31, 2013, the Company held 6.3% of its net assets applicable to common
stockholders (3.5% of total assets) in securities valued at fair value pursuant to procedures adopted by the Board of Directors, with fair value of $208,003. See Note 3 Fair Value and Note 7 Restricted
Securities.
F.
Repurchase Agreements
From time to time, the Company has agreed to purchase securities from
financial institutions subject to the sellers agreement to repurchase them at an
agreed-upon
time and price (repurchase agreements). The financial institutions with whom the Company enters
into repurchase agreements are banks and broker/dealers which KAFA considers creditworthy. The seller under a repurchase agreement is required to maintain the value of the securities as collateral, subject to the agreement, at not less than the
repurchase price plus accrued interest. KAFA monitors daily the
mark-to-market
of the value of the collateral, and, if necessary, requires the seller to maintain
additional securities so that the value of the collateral is not less than the repurchase price. Default by or bankruptcy of the seller would, however, expose the Company to possible loss because of adverse market action or delays in connection with
the disposition of the underlying securities. As of August 31, 2013, the Company did not have any repurchase agreements.
G.
Short Sales
A short sale is a transaction in which the Company sells securities it does not own (but has borrowed) in anticipation of or to hedge against a decline in the market price of the securities. To complete a short sale,
the Company may arrange through a broker to borrow the securities to be delivered to the buyer. The proceeds received by the Company for the short sale are retained by the broker until the Company replaces the borrowed securities. In borrowing the
securities to be delivered to the buyer, the Company becomes obligated to replace the securities borrowed at their market price at the time of replacement, whatever the price may be.
17
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
The Companys short sales, if any, are fully collateralized. The Company is required to maintain assets consisting of cash or liquid securities equal in amount to the liability created by the short
sale. These assets are adjusted daily to reflect changes in the value of the securities sold short. The Company is liable for any dividends or distributions paid on securities sold short.
The Company may also sell short against the box (
i.e.,
the Company enters into a short sale as described above while
holding an offsetting long position in the security which it sold short). If the Company enters into a short sale against the box, the Company would segregate an equivalent amount of securities owned as collateral while the short sale is
outstanding. During the nine months ended August 31, 2013, the Company did not engage in any short sales.
H.
Security
Transactions
Security transactions are accounted for on the date these securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis.
I.
Return of Capital Estimates
Distributions received from the Companys investments in MLPs and other securities
generally are comprised of income and return of capital. The Company records investment income and return of capital based on estimates made at the time such distributions are received. The Company estimates that 90% of the MLP distributions
received will be treated as a return of capital. Such estimates for MLPs and other investments are based on historical information available from each investment and other industry sources. These estimates may subsequently be revised based on
information received from MLPs after their tax reporting periods are concluded.
The return of capital portion of the
distributions is a reduction to investment income, results in an equivalent reduction in the cost basis of the associated investments and increases net realized gains (losses) and net change in unrealized gains (losses). If the cash distributions
received by the Company exceed its cost basis (
i.e
. its cost basis is zero), the distributions are treated as realized gains.
The Company includes all cash distributions received on its Statement of Operations and reduces its investment income by (i) the estimated return of capital and (ii) the distributions in excess of cost
basis. For the nine months ended August 31, 2013, the Company had $190,864 of return of capital and $2,298 of cash distributions that were in excess of cost basis, which were treated as realized gains.
In accordance with GAAP, the return of capital cost basis reductions for the Companys MLP investments are limited to the total
amount of the cash distributions received from such investments. For income tax purposes, the cost basis reductions for the Companys MLP investments typically exceed cash distributions received from such investments due to allocated losses
from these investments. See Note 6 Income Taxes. The following table sets forth the Companys estimated total return of capital portion of the distributions received from its investments.
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August
31,
2013
|
|
|
Nine Months
Ended
August
31,
2013
|
|
Return of capital portion of dividends and distributions received
|
|
|
87
|
%
|
|
|
86
|
%
|
Return of capital attributable to net realized gains (losses)
|
|
$
|
18,318
|
|
|
$
|
39,760
|
|
Return of capital attributable to net change in unrealized gains (losses)
|
|
|
51,285
|
|
|
|
151,104
|
|
|
|
|
|
|
|
|
|
|
Total return of capital
|
|
$
|
69,603
|
|
|
$
|
190,864
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended August 31, 2013, the Company estimated the return of capital portion
of distributions received to be $69,351 (87%) and $190,612 (86%), respectively. These amounts were increased by $252 due to the 2012 tax reporting information received by the Company in the fiscal third quarter 2013. As a result, the return of
capital percentages were unchanged for the three and nine months ended August 31, 2013.
18
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
J.
Investment Income
The Company records dividends and distributions on the ex-dividend date. Interest income is recognized on the accrual basis, including amortization of premiums and
accretion of discounts. When investing in securities with payment in-kind interest, the Company will accrue interest income during the life of the security even though it will not be receiving cash as the interest is accrued. To the extent that
interest income to be received is not expected to be realized, a reserve against income is established.
Debt securities that
the Company may hold will typically be purchased at a discount or premium to the par value of the security. The non-cash accretion of a discount to par value increases interest income while the non-cash amortization of a premium to par value
decreases interest income. The accretion of a discount and amortization of a premium are based on the effective interest method. The amount of these non-cash adjustments, if any, can be found in the Companys Statement of Cash Flows. The
non-cash accretion of a discount increases the cost basis of the debt security, which results in an offsetting unrealized loss. The non-cash amortization of a premium decreases the cost basis of the debt security, which results in an offsetting
unrealized gain. To the extent that par value is not expected to be realized, the Company discontinues accruing the non-cash accretion of the discount to par value of the debt security.
The Company receives paid-in-kind and non-cash dividends and distributions in the form of additional units or shares from the investments
listed in the table below. For paid-in-kind dividends/distributions, the additional units are not reflected in investment income during the period received but are recorded as unrealized gains upon receipt. Non-cash dividends/distributions are
reflected in investment income because the Company has the option to receive its dividends/distributions in cash or in additional shares/units of the security. The Company estimates return of capital on these non-cash dividends/distributions. During
the three and nine months ended August 31, 2013, the Company received the following paid-in-kind and non-cash dividends and distributions.
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August
31,
2013
|
|
|
Nine Months
Ended
August
31,
2013
|
|
Paid-in-kind dividends/distributions
|
|
|
|
|
|
|
|
|
Buckeye Partners, L.P. (Class B Units)
(1)
|
|
$
|
1,027
|
|
|
$
|
2,983
|
|
Crestwood Midstream Partners LP (Class C Units)
(2)
|
|
|
|
|
|
|
612
|
|
Enbridge Energy Management, L.L.C.
|
|
|
126
|
|
|
|
316
|
|
Kinder Morgan Management, LLC
|
|
|
5,255
|
|
|
|
16,522
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,408
|
|
|
$
|
20,433
|
|
Non-cash distributions
|
|
|
|
|
|
|
|
|
Energy Transfer Partners, L.P.
|
|
|
4,404
|
|
|
|
4,404
|
|
Enterprise Products Partners L.P.
|
|
|
5,961
|
|
|
|
5,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,365
|
|
|
|
10,365
|
|
|
|
|
|
|
|
|
|
|
Total paid-in-kind and non-cash dividends/distributions
|
|
$
|
16,773
|
|
|
$
|
30,798
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Converted into common units on September 1, 2013.
|
(2)
|
Converted into common units on April 1, 2013.
|
K.
Distributions to Stockholders
Distributions to common stockholders are recorded on the ex-dividend date. Distributions to mandatory redeemable preferred stockholders are accrued on a
daily basis as described in Note 12 Preferred Stock. As required by the Distinguishing Liabilities from Equity topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification, the Company
includes the accrued distributions on its mandatory redeemable preferred stock as an operating expense due to the fixed term of this obligation. For tax purposes the payments made to the holders of the Companys mandatory redeemable preferred
stock are treated as dividends or distributions.
19
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
The estimated characterization of the distributions paid to preferred and common stockholders will be either a dividend (eligible to be treated as qualified dividend income) or distribution (return of
capital). This estimate is based on the Companys operating results during the period. The actual characterization of the preferred and common stock distributions made during the current year will not be determinable until after the end of the
fiscal year when the Company can determine earnings and profits and, therefore, the characterization may differ from the preliminary estimates.
L.
Partnership Accounting Policy
The Company records its pro-rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from
the underlying partnerships and adjusts the cost basis of the underlying partnerships accordingly. These amounts are included in the Companys Statement of Operations.
M.
Federal and State Income Taxation
The Company, as a corporation, is obligated to pay federal and state income tax on its taxable income. The Company invests its assets primarily in
MLPs, which generally are treated as partnerships for federal income tax purposes. As a limited partner in the MLPs, the Company includes its allocable share of the MLPs taxable income in computing its own taxable income. Deferred income taxes
reflect (i) taxes on unrealized gains (losses), which are attributable to the temporary difference between fair value and tax basis, (ii) the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes and (iii) the net tax benefit of accumulated net operating and capital losses. To the extent the Company has a deferred tax asset, consideration is given as to
whether or not a valuation allowance is required. The need to establish a valuation allowance for deferred tax assets is assessed periodically by the Company based on the Income Tax Topic of the FASB Accounting Standards Codification that it is more
likely than not that some portion or all of the deferred tax asset will not be realized. In the assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the realization of the deferred tax asset.
This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly dependent on future cash distributions from the Companys MLP holdings),
the duration of statutory carryforward periods and the associated risk that operating and capital loss carryforwards may expire unused.
The Company may rely to some extent on information provided by the MLPs, which may not necessarily be timely, to estimate taxable income allocable to the MLP units held in the portfolio and to estimate
the associated deferred tax liability. Such estimates are made in good faith. From time to time, as new information becomes available, the Company modifies its estimates or assumptions regarding the deferred tax liability.
The Companys policy is to classify interest and penalties associated with underpayment of federal and state income taxes, if any, as
income tax expense on its Statement of Operations. For the three and nine months ended August 31, 2013, the Company did not have any interest or penalties associated with the underpayment of any income taxes. The tax years from 2009 through
2012 remain open and subject to examination by tax jurisdictions.
N.
Derivative Financial Instruments
The
Company may utilize derivative financial instruments in its operations.
Interest rate swap
contracts.
The Company may use hedging techniques such as interest rate swaps to mitigate potential interest rate risk on a portion of the Companys leverage. Such interest rate swaps would principally be used to
protect the Company against higher costs on its leverage resulting from increases in interest rates. The Company does not hedge any interest rate risk associated with portfolio holdings. Interest rate transactions the Company uses for hedging
purposes expose it to certain risks that differ from the risks associated with its portfolio holdings. A decline in interest rates may result in a decline in the value of the swap contracts, which, everything else being held constant, would result
in a decline in the net assets of the Company. In addition, if the counterparty to an interest rate swap defaults, the Company would not be able to use the anticipated net receipts under the interest rate swap to offset its cost of financial
leverage.
20
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Interest rate swap contracts are recorded at fair value with changes in value during the reporting period, and amounts accrued under the agreements, included as unrealized gains or losses in the Statement
of Operations. Monthly cash settlements under the terms of the interest rate swap agreements or termination payments are recorded as realized gains or losses in the Statement of Operations. The Company generally values its interest rate swap
contracts based on dealer quotations, if available, or by discounting the future cash flows from the stated terms of the interest rate swap agreement by using interest rates currently available in the market. See
Note 8 Derivative Financial Instruments.
Option contracts.
The
Company is also exposed to financial market risks including changes in the valuations of its investment portfolio. The Company may purchase or write (sell) call options. A call option on a security is a contract that gives the holder of the option,
in return for a premium, the right to buy from the writer of the option the security underlying the option at a specified exercise price at any time during the term of the option.
The Company would realize a gain on a purchased call option if, during the option period, the value of such securities exceeded the sum of
the exercise price, the premium paid and transaction costs; otherwise the Company would realize either no gain or a loss on the purchased call option. The Company may also purchase put option contracts. If a purchased put option is exercised, the
premium paid increases the cost basis of the securities sold by the Company.
The Company may also write (sell) call options
with the purpose of generating realized gains or reducing its ownership of certain securities. If the Company writes a call option on a security, the Company has the obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price. The Company will only write call options on securities that the Company holds in its portfolio (
i.e
., covered calls).
When the Company writes a call option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written.
Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. If the Company repurchases a written call option prior to its exercise, the difference between the
premium received and the amount paid to repurchase the option is treated as a realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Company has
realized a gain or loss. The Company, as the writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. See Note 8 Derivative Financial Instruments.
O.
Indemnifications
Under the Companys organizational documents, its officers and
directors are indemnified against certain liabilities arising out of the performance of their duties to the Company. In addition, in the normal course of business, the Company enters into contracts that provide general indemnification to other
parties. The Companys maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred, and may not occur. However, the Company has not had prior claims
or losses pursuant to these contracts and expects the risk of loss to be remote.
The Fair Value
Measurement Topic of the FASB Accounting Standards Codification (ASC 820) defines fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants under
current market conditions at the measurement date. As required by ASC 820, the Company has performed an analysis of all assets and liabilities (other than deferred taxes) measured at fair value to determine the significance and character of all
inputs to their fair value determination. Inputs are the assumptions, along with considerations of risk, that a market participant would use to value an asset or a liability. In general, observable inputs are based on market data that is readily
available, regularly distributed and verifiable that the Company obtains from independent, third-party sources. Unobservable inputs are developed by the Company based on its own assumptions of how market participants would value an asset or a
liability.
21
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Accounting Standards Update (ASU) No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs amends ASC 820. The amended
guidance clarifies the wording used to describe many requirements in accounting literature for fair value measurement and disclosure to establish consistency between U.S. GAAP and International Financial Reporting Standards (IFRSs).
ASU No. 2011-04 requires the inclusion of additional disclosures on assumptions used by the Company to determine fair value.
Specifically, for assets measured at fair value using significant unobservable inputs (Level 3), ASU No. 2011-04 requires that the Company (i) describe the valuation process, (ii) disclose quantitative information about unobservable inputs and
(iii) provide a qualitative discussion about the sensitivity of the fair value measurement to changes in the unobservable inputs and inter-relationships between the inputs.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.
|
|
|
Level 1
Valuations based on quoted unadjusted prices for identical instruments in active markets traded on a national exchange
to which the Company has access at the date of measurement.
|
|
|
|
Level 2
Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions,
the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
|
|
|
|
Level 3
Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.
Unobservable inputs are those inputs that reflect the Companys own assumptions that market participants would use to price the asset or liability based on the best available information.
|
The following table presents the Companys assets measured at fair value on a recurring basis at August 31, 2013, and the Company
presents these assets by security type and description on its Schedule of Investments or on its Statement of Assets and Liabilities. Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the
underlying investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Quoted Prices in
Active
Markets
(Level 1)
|
|
|
Prices with
Other
Observable Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
$
|
5,873,879
|
|
|
$
|
5,665,876
|
|
|
$
|
|
|
|
$
|
208,003
|
|
The Company did not have any liabilities that were measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) at August 31, 2013.
For the nine months ended August 31, 2013, there were no
transfers between Level 1 and Level 2.
As of August 31, 2013, the Company had senior unsecured notes (Senior
Notes) outstanding with aggregate principal amount of $1,175,000 and 15,960,000 shares of mandatory redeemable preferred stock outstanding with a total liquidation value of $399,000. See Note 11 Senior Unsecured Notes and Note
12 Preferred Stock.
Of the $399,000 of mandatory redeemable preferred stock, Series E ($120,000 liquidation value)
and Series F ($125,000 liquidation value) are publicly traded on the NYSE. As a result, the Company categorizes these series of mandatory redeemable preferred stock as Level 1. Of the $1,175,000 Senior Notes, Series HH ($175,000) are traded by
qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the Securities Act), through a market maker. As a result, the Company categorizes the Series HH
22
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Senior Notes as Level 2. The remaining three series of preferred stock (the Series A, B and C mandatory redeemable preferred stock) and the remaining Senior Notes were issued in private
placements to institutional investors and are not listed on any exchange or automated quotation system. As such, the Company categorizes all of the remaining Senior Notes ($1,000,000 aggregate principal amount) and Series A, B and C of the mandatory
redeemable preferred stock ($154,000 aggregate liquidation value) as Level 3 and determines the fair value of these instruments based on estimated market yields and credit spreads for comparable instruments with similar maturity, terms and
structure.
The Company records these instruments on its Statement of Assets and Liabilities at principal amount or liquidation
value. As of August 31, 2013, the estimated fair values of these leverage instruments are as follows.
|
|
|
|
|
|
|
|
|
Instrument
|
|
Principal Amount/
Liquidation
Value
|
|
|
Fair Value
|
|
Senior Notes (Series M through GG)
|
|
$
|
1,000,000
|
|
|
$
|
1,016,100
|
|
Senior Notes (Series HH)
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Mandatory redeemable preferred stock (Series A, B and C)
|
|
$
|
154,000
|
|
|
$
|
164,100
|
|
Mandatory redeemable preferred stock (Series E and F)
|
|
$
|
245,000
|
|
|
$
|
240,136
|
|
The following tables present the Companys assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the three and nine months ended August 31, 2013.
|
|
|
|
|
Three Months Ended August 31, 2013
|
|
Equity
Investments
|
|
Balance May 31, 2013
|
|
$
|
173,513
|
|
Purchases
|
|
|
|
|
Issuances
|
|
|
1,027
|
|
Transfers out
|
|
|
|
|
Realized gains(losses)
|
|
|
|
|
Unrealized gains, net
|
|
|
33,463
|
|
|
|
|
|
|
Balance August 31, 2013
|
|
$
|
208,003
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31, 2013
|
|
Equity
Investments
|
|
Balance November 30, 2012
|
|
$
|
129,311
|
|
Purchases
|
|
|
65,000
|
|
Issuances
|
|
|
3,595
|
|
Transfers out
|
|
|
(67,896
|
)
|
Realized gains (losses)
|
|
|
|
|
Unrealized gains, net
|
|
|
77,993
|
|
|
|
|
|
|
Balance August 31, 2013
|
|
$
|
208,003
|
|
|
|
|
|
|
The $33,463 and $77,993 of unrealized gains presented in the tables above for the three and nine months
ended August 31, 2013 relate to investments that are still held at August 31, 2013, and the Company includes these unrealized gains on the Statement of Operations Net Change in Unrealized Gains.
The purchases of $65,000 for the nine months ended August 31, 2013 relate to the Companys investment in Capital Products Partners
L.P. (Class B Units) and Inergy Midstream, L.P. (Common Units). The issuances of $1,027 and $3,595 for the three and nine months ended August 31, 2013 relate to additional units received from Buckeye Partners, L.P. (Class B Units) and Crestwood
Midstream Partners LP (Class C Units). The transfers out of $67,896 for the nine months ended August 31, 2013 relate to the Companys investments in Crestwood Midstream Partners LP, Class C Units and Inergy Midstream, L.P., common units
that became marketable during the fiscal second quarter of 2013.
23
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Valuation Techniques and Unobservable Inputs
Unless otherwise determined
by the Board of Directors, the Company values its private investments in public equity (PIPE) investments that are convertible into or otherwise will become publicly tradeable (
e.g.,
through subsequent registration or expiration
of a restriction on trading) based on the market value of the publicly-traded security less a discount. The discount is initially equal to the discount negotiated at the time the Company agrees to a purchase price. To the extent that such securities
are convertible or otherwise become publicly traded within a time frame that may be reasonably determined, this discount will be amortized on a straight line basis over such estimated time frame.
One of the Companys private investments is Class B Units of Capital Product Partners L.P. (CPLP). The Class B Units are
convertible units (convertible on a one-for-one basis into common units) and are senior to CPLPs common units in terms of liquidation preference and priority of distributions. The Companys Board of Directors has determined that it is
appropriate to value the Class B Units using a convertible pricing model, which takes into account the units preference relative to the common units as well as its conversion features. This model takes into account the attributes of the Class
B Units (preferred dividend, conversion ratio and call features) to determine the estimated value of such units. In using this model, the Company estimates (i) the credit spread for CPLPs Class B Units, which is based on credit spreads for
companies in a similar line of business as CPLP and (ii) the expected volatility for CPLPs common units, which is based on CPLPs historical volatility as well as historical volatility for publicly-traded companies in a similar line of
business as CPLP. The Company applies a discount to the value derived from the convertible pricing model to account for an expected discount in market prices for convertible securities relative to the values calculated using pricing models.
The Companys investments in private companies are typically valued using one of or a combination of the following
valuation techniques: (i) analysis of valuations for publicly-traded companies in a similar line of business (public company analysis), (ii) analysis of valuations for comparable M&A transactions (M&A
analysis) and (iii) discounted cash flow analysis. The table entitled Quantitative Table for Valuation Techniques outlines the valuation technique(s) used for each asset category.
The public company analysis utilizes valuation ratios for publicly-traded companies in a similar line of business as the portfolio company
to estimate the fair value of such portfolio company. The Company typically focuses on the following valuation ratios: (a) distribution yields (yield analysis), which is calculated by dividing the companys annual distribution by
its stock price and (b) trading multiples (trading multiple analysis), which is the ratio of certain measures of cash flow to the companys enterprise value and equity value (as described below in more detail). To determine its
recommended valuation for Plains All American GP LLC (Plains GP LLC), the public company analysis uses a probability weighting between the yield analysis and trading multiple analysis based on its assessment of how Plains GP LLC will be
valued in its pending IPO.
For both the yield analysis and the trading multiple analysis, the Company utilizes projections
provided by external sources (
i.e.
, third party equity research estimates) as well as internally developed estimates, and the Company focuses on EBITDA, DCF and distribution projections for the current calendar year and next calendar year.
Based on this data, the Company selects a range of yields given the yields of similar publicly-traded companies and applies such yields to the portfolio companys projected distributions to estimate the portfolio companys equity value.
For the trading multiple analysis, the Company focuses on the ratio of enterprise value (EV) to earnings before interest expense, income tax expense, depreciation and amortization (EBITDA), which is referred to as an
EV/EBITDA multiple and the ratio of equity market value (EMV) to distributable cash flow (DCF), which is referred to as a EMV/DCF multiple. The Company selects a range of EV/EBITDA and EMV/DCF multiples given the trading
multiples of similar publicly-traded companies and applies such multiples to the portfolio companys projected EBITDA and DCF to estimate the portfolio companys enterprise value and equity value. When calculating these values, the Company
applies a discount to the portfolio companys estimated equity value for the size of the company and the lack of marketability in the portfolio companys securities.
24
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
The M&A analysis utilizes valuation multiples for historical M&A transactions for companies or assets in a similar line of business as the portfolio company to estimate the fair value of such
portfolio company. Typically, the Companys analysis focuses on EV/EBITDA multiples. The Company selects a range of multiples based on EV/EBITDA multiples for similar M&A transactions and applies such ranges to the portfolio companys
EBITDA to estimate the portfolio companys enterprise value. The Company utilizes projections provided by external sources as well as internally developed estimates to calculate the valuation multiples of the comparable M&A transactions.
The discounted cash flow analysis is used to estimate the equity value for the portfolio company based on estimated cash flows
of such portfolio company. Such cash flows include a terminal value for the portfolio company, which is typically based on an EV/EBITDA multiple. A present value of these cash flows is determined by using estimated discount rates (required equity
rate of return).
Under these valuation techniques, the Company estimates operating results of its portfolio companies
(including EBITDA, DCF and distributions). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on operating assumptions for such portfolio
company. These estimates will be sensitive to changes in assumptions specific to such portfolio company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: discounts
for lack of marketability, selection of publicly-traded companies, selection of similar M&A transactions, selected ranges for valuation multiples and expected required rates of return (discount rates).
Changes in EBITDA multiples, DCF multiples, or discount rates, each in isolation, may change the fair value of the Companys
portfolio investments. Generally, a decrease in EBITDA multiples or DCF multiples, or an increase in discount rates will result in a decrease in the fair value of the Companys portfolio investments.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair
value of the Companys investments may fluctuate from period to period. Additionally, the fair value of the Companys investments may differ from the values that would have been used had a ready market existed for such investments and may
differ materially from the values that the Company may ultimately realize.
The following table summarizes the significant
unobservable inputs that the Company uses to value its portfolio investments categorized as Level 3 as of August 31, 2013:
Quantitative Table for Valuation Techniques
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
Average
|
|
Assets at Fair Value
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Low
|
|
|
|
|
High
|
|
|
Equity securities of
|
|
$
|
68,855
|
|
|
- Discount to publicly-traded
|
|
- Current discount
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
%
|
|
public companies
|
|
|
|
|
|
securities
|
|
- Remaining restricted period
|
|
|
1 day
|
|
|
|
|
|
1 day
|
|
|
|
1 day
|
|
(PIPE) valued based
on a discount to
market value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities of
|
|
|
28,758
|
|
|
- Convertible pricing model
|
|
- Credit spread
|
|
|
6.5%
|
|
|
|
|
|
7.5%
|
|
|
|
7.0%
|
|
public companies
not valued based on a
discount to market
value
|
|
|
|
|
|
|
|
- Volatility
- Discount for
marketability
|
|
|
27.5%
8.0%
|
|
|
|
|
|
32.5%
8.0%
|
|
|
|
30.0%
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
Average
|
|
Assets at Fair Value
|
|
Fair Value
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Low
|
|
|
|
|
High
|
|
|
Equity securities of
|
|
|
108,280
|
|
|
- Public company analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
private companies
|
|
|
|
|
|
Yield analysis
|
|
- Expected IPO yield
|
|
|
3.0%
|
|
|
|
|
|
3.5%
|
|
|
|
3.3%
|
|
common units /
|
|
|
|
|
|
|
|
- Discount for marketability
|
|
|
7.5%
|
|
|
|
|
|
7.5%
|
|
|
|
7.5%
|
|
common equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading multiple analysis
|
|
- EV / 2014E EBITDA
|
|
|
21.0x
|
|
|
|
|
|
24.0x
|
|
|
|
22.5x
|
|
|
|
|
|
|
|
|
|
- Discount for marketability
|
|
|
7.5%
|
|
|
|
|
|
7.5%
|
|
|
|
7.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- M&A analysis
|
|
- Selected EV / EBITDA
multiples
|
|
|
22.0x
|
|
|
|
|
|
24.0x
|
|
|
|
23.0x
|
|
|
|
|
|
|
|
- Discounted cash flow
|
|
- Equity rate of return
|
|
|
15.0%
|
|
|
|
|
|
17.5%
|
|
|
|
16.3%
|
|
|
|
|
|
|
|
|
|
Equity securities of
|
|
|
2,110
|
|
|
- Discounted cash flow
|
|
- Equity rate of return
|
|
|
25%
|
|
|
|
|
|
25%
|
|
|
|
25%
|
|
private trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
208,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys investment in the Buckeye Partners, L.P. Class B Units converted into common units on September 1, 2013. As of August 31, 2013, the Company valued
the Class B Units at the same price as the common units.
|
The
Companys investments are concentrated in the energy sector. The focus of the Companys portfolio within the energy sector may present more risks than if the Companys portfolio were broadly diversified across numerous sectors of the
economy. A downturn in the energy sector would have a larger impact on the Company than on an investment company that does not concentrate in energy. The performance of securities in the energy sector may lag the performance of other industries or
the broader market as a whole. Additionally, to the extent that the Company invests a relatively high percentage of its assets in the securities of a limited number of issuers, the Company may be more susceptible than a more widely diversified
investment company to any single economic, political or regulatory occurrence. At August 31, 2013, the Company had the following investment concentrations.
|
|
|
|
|
Category
|
|
Percent of
Total
Assets
|
|
Securities of energy companies
|
|
|
99.3
|
%
|
Equity securities
|
|
|
99.6
|
%
|
MLP securities
|
|
|
90.5
|
%
|
Largest single issuer
|
|
|
8.9
|
%
|
Restricted securities
|
|
|
3.5
|
%
|
5. Agreements
|
and Affiliations
|
A.
Administration Agreement
The Company has entered into an administration agreement with Ultimus Fund Solutions, LLC (Ultimus), which may be amended from time to time. Pursuant to the administration agreement,
Ultimus will provide certain administrative services for the Company. The administration agreement has automatic one-year renewals unless earlier terminated by either party as provided under the terms of the administration agreement.
B.
Investment Management Agreement
The Company has entered into an investment management agreement with KAFA under
which KAFA, subject to the overall supervision of the Companys Board of Directors, manages the
day-to-day
operations of, and provides investment advisory services
to, the Company. For providing these services, KAFA receives a management fee from the Company. On September 18, 2013, the Company renewed its agreement with KAFA for a period of one year. The agreement will expire on December 11, 2014 and may
be renewed annually thereafter upon approval of the Companys Board of Directors (including a majority of the Companys directors who are not interested persons of the Company, as such term is defined in the 1940 Act). In
conjunction with this renewal, the Company renewed the agreement with KAFA for an additional one-year term expiring on December 11,
26
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
2014 to waive 0.125% of its 1.375% management fee on average total assets in excess of $4,500,000, thereby reducing the management fee to 1.25% on average total assets in excess of $4,500,000.
For the nine months ended August 31, 2013, the Company paid management fees at an annual rate of 1.36% of the Companys average quarterly total assets.
For purposes of calculating the management fee the average total assets for each quarterly period are determined by averaging the total assets at the last day of that quarter with the total assets at the
last day of the prior quarter. The Companys total assets are equal to the Companys gross asset value (which includes assets attributable to or proceeds from the Companys use of preferred stock, commercial paper or notes and other
borrowings and excludes any net deferred tax asset), minus the sum of the Companys accrued and unpaid dividends and distributions on any outstanding common stock and accrued and unpaid dividends and distributions on any outstanding preferred
stock and accrued liabilities (other than liabilities associated with borrowing or leverage by the Company and any accrued taxes, including, a deferred tax liability). Liabilities associated with borrowing or leverage by the Company include the
principal amount of any borrowings, commercial paper or notes issued by the Company, the liquidation preference of any outstanding preferred stock, and other liabilities from other forms of borrowing or leverage such as short positions and put or
call options held or written by the Company.
C.
Portfolio Companies
From time to time, the Company may
control or may be an affiliate of one or more of its portfolio companies, as each of these terms is defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to control a portfolio
company if the Company and its affiliates owned 25% or more of its outstanding voting securities and would be an affiliate of a portfolio company if the Company and its affiliates owned 5% or more of its outstanding voting securities.
The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates (including the Companys investment adviser), principal underwriters and affiliates of those affiliates or
underwriters.
The Company believes that there are several factors that determine whether or not a security should be
considered a voting security in complex structures such as limited partnerships of the kind in which the Company invests. The Company also notes that the Securities and Exchange Commission (the SEC) staff has issued guidance
on the circumstances under which it would consider a limited partnership interest to constitute a voting security. Under most partnership agreements, the management of the partnership is vested in the general partner, and the limited partners,
individually or collectively, have no rights to manage or influence management of the partnership through such activities as participating in the selection of the managers or the board of the limited partnership or the general partner. As a result,
the Company believes that many of the limited partnership interests in which it invests should not be considered voting securities. However, it is possible that the SEC staff may consider the limited partner interests the Company holds in certain
limited partnerships to be voting securities. If such a determination were made, the Company may be regarded as a person affiliated with and controlling the issuer(s) of those securities for purposes of Section 17 of the 1940 Act.
In making such a determination as to whether to treat any class of limited partnership interests the Company holds as a voting security,
the Company considers, among other factors, whether or not the holders of such limited partnership interests have the right to elect the board of directors of the limited partnership or the general partner. If the holders of such limited partnership
interests do not have the right to elect the board of directors, the Company generally has not treated such security as a voting security. In other circumstances, based on the facts and circumstances of those partnership agreements, including the
right to elect the directors of the general partner, the Company has treated those securities as voting securities and, therefore, as affiliates. If the Company does not consider the security to be a voting security, it will not consider such
partnership to be an affiliate unless the Company and its affiliates own more than 25% of the outstanding securities of such partnership.
There is no assurance that the SEC staff will not consider that other limited partnership securities that the Company owns and does not treat as voting securities are, in fact, voting securities for the
purposes of Section 17 of the 1940 Act. If such determination were made, the Company will be required to abide by the restrictions on
27
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
control or affiliate transactions as proscribed in the 1940 Act. The Company or any portfolio company that it controls, and its affiliates, may from time to time engage in
certain of such joint transactions, purchases, sales and loans in reliance upon and in compliance with the conditions of certain exemptive rules promulgated by the SEC. The Company cannot make assurances, however, that it would be able to satisfy
the conditions of these rules with respect to any particular eligible transaction, or even if the Company were allowed to engage in such a transaction, that the terms would be more or as favorable to the Company or any company that it controls as
those that could be obtained in arms length transaction. As a result of these prohibitions, restrictions may be imposed on the size of positions that may be taken for the Company or on the type of investments that it could make.
As of August 31, 2013, the Company believes that MarkWest Energy Partners, L.P. and PVR Partners, L.P. meet the criteria described above
and are therefore considered affiliates of the Company.
Clearwater Trust
At August 31, 2013, the
Company held approximately 63% of the Clearwater Trust. The Company believes that it is an affiliate of the trust under the 1940 Act by virtue of its majority interest in the trust.
Emerge Energy Services LP
Kevin S. McCarthy is Chairman of the Board of Directors and President and Chief
Executive Officer of the Company. Mr. McCarthy also serves as a director on the board of Emerge Energy Services GP LLC (Emerge GP), the general partner of Emerge Energy Services LP (Emerge). Various affiliated funds managed
by KAFA, including the Company, own units of Emerge. The Company believes that it is an affiliate of Emerge under the 1940 Act by virtue of Mr. McCarthys participation on the board of Emerge GP.
Plains All American GP LLC and Plains All American Pipeline, L.P.
Robert V. Sinnott is Chief Executive Officer of
Kayne Anderson Capital Advisors, L.P. (KACALP), the managing member of KAFA. Mr. Sinnott also serves as a director on the board of Plains All American GP LLC (Plains GP LLC), the general partner of Plains All American
Pipeline, L.P. (PAA). Members of senior management of KACALP and KAFA and various affiliated funds managed by KACALP, including the Company, own units of Plains GP LLC. The Company believes that it is an affiliate of Plains GP LLC and
PAA under the 1940 Act by virtue of (i) the Companys and other affiliated Kayne Anderson funds ownership interests in Plains GP LLC and (ii) Mr. Sinnotts participation on the board of Plains GP LLC.
6. Income Taxes
The Companys taxes include current and deferred income taxes. Current income taxes reflect the estimated income tax liability of the Company as of a measurement date. Deferred income taxes reflect
(i) taxes on net unrealized gains, which are attributable to the difference between fair market value and tax basis, (ii) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (iii) the net tax benefit of accumulated net operating losses.
At August 31, 2013, the Company had a current income tax liability of $8,314. The payable is the result of estimated taxable income under alternative minimum tax (AMT) for the nine months
ended August 31, 2013. Components of the Companys tax assets and liabilities as of August 31, 2013 are as follows:
|
|
|
|
|
Current tax liability
|
|
$
|
(8,314
|
)
|
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards Federal
|
|
|
15,679
|
|
Net operating loss carryforwards State
|
|
|
1,108
|
|
AMT credit carryforwards
|
|
|
10,106
|
|
Deferred tax liabilities:
|
|
|
|
|
Net unrealized gains on investment securities, interest rate swap contracts and option contracts
|
|
|
(1,000,268
|
)
|
|
|
|
|
|
Total deferred tax liability, net
|
|
$
|
(973,375
|
)
|
|
|
|
|
|
28
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
At August 31, 2013, the Company had federal net operating loss carryforwards of $46,198 (deferred tax asset of $15,679). Realization of the deferred tax assets and net operating loss carryforwards are
dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The federal net operating loss carryforwards have expiration dates ranging from 2029 to 2032. In addition, the Company has state net operating
loss carryforwards of $36,014 (deferred tax asset of $1,108). These state net operating loss carryforwards have expiration dates ranging from the current year to 2032.
At August 31, 2013, the Company had AMT credit carryforwards of $10,106. AMT credits can be used to reduce regular tax to the extent that regular tax exceeds the AMT in a future year. AMT credits do not
expire.
The Company primarily invests in equity securities issued by MLPs, which generally are treated as partnerships for
federal income tax purposes. As a limited partner of MLPs, the Company includes its allocable share of such MLPs income or loss in computing its own taxable income or loss. Additionally, for income tax purposes, the Company reduces the cost
basis of its MLP investments by the cash distributions received, and increases or decreases the cost basis of its MLP investments by its allocable share of the MLPs income or loss. During the fiscal year ended November 30, 2012, the Company
reduced its cost basis for income tax purposes by $203,442 associated with cash distributions received from MLP investments. During the same period, the Company had additional cost basis reductions of $146,470 due to net allocated losses from its
MLP investments.
Although the Company currently has a net deferred tax liability, it periodically reviews the recoverability
of its deferred tax assets based on the weight of available evidence. When assessing the recoverability of its deferred tax assets, significant weight is given to the effects of potential future realized and unrealized gains on investments and the
period over which these deferred tax assets can be realized, as the expiration dates for the federal capital and operating loss carryforwards range from five to nineteen years.
Based on the Companys assessment, it has determined that it is more likely than not that its deferred tax assets will be realized through future taxable income of the appropriate character.
Accordingly, no valuation allowance has been established for the Companys deferred tax assets. The Company will continue to assess the need for a valuation allowance in the future. Significant declines in the fair value of its portfolio of
investments may change the Companys assessment regarding the recoverability of its deferred tax assets and may result in a valuation allowance. If a valuation allowance is required to reduce any deferred tax asset in the future, it could have
a material impact on the Companys net asset value and results of operations in the period it is recorded.
Total income
taxes were different from the amount computed by applying the federal statutory income tax rate of 35% to the net investment loss and realized and unrealized gains (losses) on investments before taxes for the three and nine months ended August 31,
2013, as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31,
2013
|
|
|
Nine Months
Ended
August 31,
2013
|
|
Computed federal income tax at 35%
|
|
$
|
29,390
|
|
|
$
|
306,810
|
|
State income tax, net of federal tax
|
|
|
1,665
|
|
|
|
17,722
|
|
Non-deductible distributions on mandatory redeemable preferred stock and other
|
|
|
(234
|
)
|
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
30,821
|
|
|
$
|
327,835
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2013, the cost basis of investments for federal income tax purposes was $3,202,001. The cost
basis for federal income tax purposes is $344,212 lower than the cost basis for GAAP reporting purposes primarily due to the additional basis adjustments attributable to the Companys share of the allocated losses from
29
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
its MLP investments. At August 31, 2013, gross unrealized appreciation and depreciation of investments and options for federal income tax purposes were as follows:
|
|
|
|
|
Gross unrealized appreciation of investments
|
|
$
|
2,682,445
|
|
Gross unrealized depreciation of investments
|
|
|
(10,567
|
)
|
|
|
|
|
|
Net unrealized appreciation of investments
|
|
$
|
2,671,878
|
|
|
|
|
|
|
From time to
time, certain of the Companys investments may be restricted as to resale. For instance, private investments that are not registered under the Securities Act, cannot be offered for public sale in a non-exempt transaction without first being
registered. In other cases, certain of the Companys investments have restrictions such as
lock-up
agreements that preclude the Company from offering these securities for public sale.
At August 31, 2013, the Company held the following restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Acquisition
Date
|
|
Type of
Restriction
|
|
Number of
Units
(in 000s)
|
|
|
Cost Basis
|
|
|
Fair
Value
|
|
|
Fair Value
Per Unit
|
|
|
Percent
of Net
Assets
|
|
|
Percent
of Total
Assets
|
|
Level 3 Investments
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buckeye Partners, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Units
|
|
(2)
|
|
(3)
|
|
|
984
|
|
|
$
|
45,006
|
|
|
$
|
68,855
|
|
|
$
|
70.00
|
|
|
|
2.1
|
%
|
|
|
1.2
|
%
|
Capital Products Partners L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Units
|
|
(2)
|
|
(3)
|
|
|
3,030
|
|
|
|
23,268
|
|
|
|
28,758
|
|
|
|
9.49
|
|
|
|
0.8
|
|
|
|
0.5
|
|
Clearwater Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Interest
|
|
(4)
|
|
(5)
|
|
|
N/A
|
|
|
|
3,266
|
|
|
|
2,110
|
|
|
|
N/A
|
|
|
|
0.1
|
|
|
|
0.0
|
|
Plains All American GP LLC
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units
|
|
(2)
|
|
(5)
|
|
|
24
|
|
|
|
29,308
|
|
|
|
108,280
|
|
|
|
4,457
|
|
|
|
3.3
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
100,848
|
|
|
$
|
208,003
|
|
|
|
|
|
|
|
6.3
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Securities are valued using inputs reflecting the Companys own assumptions as more fully described in Note 2 Significant Accounting Policies and Note 3
Fair Value.
|
(2)
|
Securities acquired at various dates during the nine months ended August 31, 2013 and/or in prior fiscal years.
|
(3)
|
Unregistered or restricted security of a publicly-traded company.
|
(4)
|
On September 28, 2010, the Bankruptcy Court finalized the plan of reorganization of Clearwater Natural Resources, LP (Clearwater). As part of the plan
of reorganization, the Company received an interest in the Clearwater Trust consisting of cash and a coal royalty interest as consideration for its unsecured loan to Clearwater. See Note 5 Agreements and Affiliations.
|
(5)
|
Unregistered security of a private company or trust.
|
(6)
|
In determining the fair value for Plains GP LLC, the Companys valuation is based on publicly available information. Robert V. Sinnott, the CEO of KACALP, is a
member of Plains GP LLCs board of directors (see Note 5 Agreements and Affiliations). Certain private investment funds managed by KACALP may value its investment in Plains GP LLC based on non-public information, and, as a
result, such valuation may be different than the Companys valuation.
|
8. Derivative
|
Financial Instruments
|
As
required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification, the following are the derivative instruments and hedging activities of the Company. There were no outstanding options at August 31, 2013.
See Note 2 Significant Accounting Policies.
30
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
Option Contracts
Transactions in option contracts for the three and nine months ended August 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2013
|
|
Number of
Contracts
|
|
|
Premium
|
|
Put Options Purchased
|
|
|
|
|
|
|
|
|
Options outstanding at May 31, 2013
|
|
|
|
|
|
$
|
|
|
Options purchased
|
|
|
230
|
|
|
|
3
|
|
Options exercised
|
|
|
(230
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 31, 2013
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Call Options Written
|
|
|
|
|
|
|
|
|
Options outstanding at May 31, 2013
|
|
|
3,200
|
|
|
$
|
367
|
|
Options written
|
|
|
9,640
|
|
|
|
816
|
|
Options subsequently repurchased
(1)
|
|
|
(2,170
|
)
|
|
|
(262
|
)
|
Options exercised
|
|
|
(3,314
|
)
|
|
|
(272
|
)
|
Options expired
|
|
|
(7,356
|
)
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 31, 2013
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The price at which the Company subsequently repurchased the options was $96 which resulted in net realized gains of $166.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 31, 2013
|
|
Number of
Contracts
|
|
|
Premium
|
|
Put Options Purchased
|
|
|
|
|
|
|
|
|
Options outstanding at November 30, 2012
|
|
|
|
|
|
$
|
|
|
Options purchased
|
|
|
230
|
|
|
|
3
|
|
Options exercised
|
|
|
(230
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 31, 2013
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Call Options Written
|
|
|
|
|
|
|
|
|
Options outstanding at November 30, 2012
|
|
|
4,100
|
|
|
$
|
406
|
|
Options written
|
|
|
40,524
|
|
|
|
3,787
|
|
Options subsequently repurchased
(1)
|
|
|
(15,580
|
)
|
|
|
(1,433
|
)
|
Options exercised
|
|
|
(21,688
|
)
|
|
|
(2,111
|
)
|
Options expired
|
|
|
(7,356
|
)
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
Options outstanding at August 31, 2013
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The price at which the Company subsequently repurchased the options was $470, which resulted in net realized gains of $963.
|
Interest Rate Swap Contracts
The Company may enter into interest rate swap contracts to
partially hedge itself from increasing expense on its leverage resulting from increasing interest rates. At the time the interest rate swap contracts reach their scheduled termination, there is a risk that the Company would not be able to obtain a
replacement transaction or that the terms of the replacement transaction would not be as favorable as on the expiring transaction. In addition, if the Company is required to terminate any swap contract early, then the Company could be required to
make a termination payment. As of August 31, 2013, the Company did not have any interest rate swap contracts outstanding.
During the first and second quarters of fiscal 2013, the Company entered into interest rate swap contracts ($175,000 notional amount) in
anticipation of a private placement of Senior Notes. On March 22, 2013, these interest rate swap contracts were terminated in conjunction with the pricing of the private placement, and resulted in a $32 realized gain.
31
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
The Company did not have any derivative instruments outstanding as of August 31, 2013. The following tables set forth the effect of the Companys derivative instruments on the Statement of
Operations.
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Accounted for
as
Hedging Instruments
|
|
Location of Gains/(Losses) on
Derivatives Recognized in Income
|
|
For the Three Months Ended
August 31, 2013
|
|
|
|
Net
Realized
Gains/(Losses)
on
Derivatives
Recognized
in
Income
|
|
|
Change
in
Unrealized
Gains/(Losses)
on
Derivatives
Recognized
in
Income
|
|
Call options
|
|
Options
|
|
$
|
815
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Accounted for
as
Hedging Instruments
|
|
Location of Gains/(Losses) on
Derivatives Recognized in Income
|
|
For the Nine Months Ended
August 31, 2013
|
|
|
|
Net
Realized
Gains/(Losses)
on
Derivatives
Recognized
in
Income
|
|
|
Change
in
Unrealized
Gains/(Losses)
on
Derivatives
Recognized
in
Income
|
|
Call options
|
|
Options
|
|
$
|
1,612
|
|
|
$
|
(27
|
)
|
Interest rate swap contracts
|
|
Interest rate swap contracts
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,644
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
9. Investment Transactions
For the nine months ended August 31, 2013, the Company purchased and sold securities in the amounts of $1,542,733 and $902,702 (excluding
short-term investments and options).
10. Credit Facility
At August 31, 2013, the Company had a $250,000 unsecured revolving credit facility (the Credit Facility). The Credit Facility
has a three-year term, maturing on March 4, 2016. Under the Credit Facility, the interest rate varies between LIBOR plus 1.60% and LIBOR plus 2.25%, depending on the Companys asset coverage ratios. The Company pays a fee of 0.30% per
annum on any unused amounts of the new Credit Facility.
For the nine months ended August 31, 2013, the average amount
outstanding under the Credit Facility was $88,091 with a weighted average interest rate of 2.04%. As of August 31, 2013, the Company had $13,000 outstanding under the Credit Facility at an interest rate of 1.79%. See Financial Highlights for the
Companys asset coverage ratios under the 1940 Act.
11. Senior Unsecured Notes
At August 31, 2013, the Company had $1,175,000 aggregate principal amount of Senior Notes outstanding. On April 16, 2013, the Company
executed a definitive agreement for the private placement of $235,000 of Senior Notes. In conjunction with the execution of this agreement, on April 16, 2013, the Company received funding of $110,000 (the April Funding) of the
$235,000 total offering amount. Proceeds from the April Funding were used to make new portfolio investments and to repay outstanding indebtedness. The remaining $125,000 was funded on June 13, 2013 and was used to refinance $125,000 principal
amount of the Series K Senior Notes which would have matured on June 19, 2013. On August 22, 2013, the Company completed an offering of $175,000 of Series HH Senior Notes to qualified institutional buyers in a private offering pursuant to Rule
144A under the Securities Act. The net proceeds from the offering were used to make new portfolio investments, to repay outstanding indebtedness and for general corporate purposes.
32
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
The table below sets forth the key terms of each series of the Senior Notes at August 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Principal
Outstanding,
November 30,
2012
|
|
|
Principal
Redeemed
|
|
|
Principal
Issued
|
|
|
Principal
Outstanding,
August 31,
2013
|
|
|
Estimated
Fair Value
August 31,
2013
|
|
|
Fixed/Floating
Interest Rate
|
|
Maturity
Date
|
K
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
5.991%
|
|
6/19/13
|
M
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
62,500
|
|
|
4.560%
|
|
11/4/14
|
N
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
50,400
|
|
|
3-month LIBOR + 185 bps
|
|
11/4/14
|
O
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
68,000
|
|
|
4.210%
|
|
5/7/15
|
P
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
45,300
|
|
|
3-month LIBOR + 160 bps
|
|
5/7/15
|
Q
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,500
|
|
|
3.230%
|
|
11/9/15
|
R
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
26,100
|
|
|
3.730%
|
|
11/9/17
|
S
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
62,900
|
|
|
4.400%
|
|
11/9/20
|
T
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
42,800
|
|
|
4.500%
|
|
11/9/22
|
U
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
60,300
|
|
|
3-month LIBOR + 145 bps
|
|
5/26/16
|
V
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
73,200
|
|
|
3.710%
|
|
5/26/16
|
W
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
106,900
|
|
|
4.380%
|
|
5/26/18
|
X
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
14,000
|
|
|
|
14,200
|
|
|
2.460%
|
|
5/3/15
|
Y
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
20,300
|
|
|
2.910%
|
|
5/3/17
|
Z
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,200
|
|
|
3.390%
|
|
5/3/19
|
AA
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
3.560%
|
|
5/3/20
|
BB
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
35,100
|
|
|
3.770%
|
|
5/3/21
|
CC
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
76,000
|
|
|
|
76,200
|
|
|
3.950%
|
|
5/3/22
|
DD
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
73,200
|
|
|
2.740%
|
|
4/16/19
|
EE
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
48,200
|
|
|
3.200%
|
|
4/16/21
|
FF
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
62,300
|
|
|
3.570%
|
|
4/16/23
|
GG
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
42,500
|
|
|
3.670%
|
|
4/16/25
|
HH
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
175,000
|
|
|
|
175,000
|
|
|
3-month LIBOR + 125 bps
|
|
8/19/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
890,000
|
|
|
$
|
125,000
|
|
|
$
|
410,000
|
|
|
$
|
1,175,000
|
|
|
$
|
1,191,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders of the fixed rate Senior Notes are entitled to receive cash interest payments semi-annually (on
June 19 and December 19) at the fixed rate. Holders of the floating rate Senior Notes are entitled to receive cash interest payments quarterly (on March 19, June 19, September 19 and December 19) at the floating rate. During
the nine months ended August 31, 2013, the weighted average interest rate on the outstanding Senior Notes was 3.73%.
As of August 31, 2013, each series of Senior Notes were rated AAA by FitchRatings. In the event the credit rating on any
series of Senior Notes falls below A-, the interest rate on such series will increase by 1% during the period of time such series is rated below A-. The Company is required to maintain a current rating from one rating agency
with respect to each series of Senior Notes.
The Senior Notes were issued in private placement offerings to institutional
investors and are not listed on any exchange or automated quotation system. The Senior Notes contain various covenants related to other indebtedness, liens and limits on the Companys overall leverage. Under the 1940 Act and the terms of the
Senior Notes, the Company may not declare dividends or make other distributions on shares of its common stock or make purchases of such shares if, at any time of the declaration, distribution or purchase, asset coverage with respect to the
outstanding Senior Notes would be less than 300%.
The Senior Notes are redeemable in certain circumstances at the option of
the Company. The Senior Notes are also subject to a mandatory redemption to the extent needed to satisfy certain requirements if the Company fails to meet an asset coverage ratio required by law and is not able to cure the coverage deficiency by the
applicable deadline, or fails to cure a deficiency as stated in the Companys rating agency guidelines in a timely manner.
33
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
The Senior Notes are unsecured obligations of the Company and, upon liquidation, dissolution or winding up of the Company, will rank: (1) senior to all of the Companys outstanding preferred
shares; (2) senior to all of the Companys outstanding common shares; (3) on a parity with any unsecured creditors of the Company and any unsecured senior securities representing indebtedness of the Company; and (4) junior to any
secured creditors of the Company.
At August 31, 2013, the Company was in compliance with all covenants under the Senior
Notes agreements.
12. Preferred Stock
At August 31, 2013, the Company had 15,960,000 shares of mandatory redeemable preferred stock outstanding, with a total liquidation value of $399,000 ($25.00 per share). On April 3, 2013, the
Company completed a public offering of 5,000,000 shares of Series F mandatory redeemable preferred stock at a price of $25.00 per share. Net proceeds from the offering were used primarily to redeem all 4,000,000 shares of Series D mandatory
redeemable preferred stock ($100,000 liquidation value). The redemption price per share was equal to the liquidation value, plus (i) accumulated unpaid dividends of $578, calculated using the current rate of 4.95% accrued to, but not including,
the redemption date and (ii) a redemption premium of $500 (0.5% of the liquidation value). On September 16, 2013, the Company completed a public offering of 2,000,000 shares of Series G mandatory redeemable preferred stock with a $50,000 liquidation
value. See Note 14 Subsequent Events.
The table below sets forth the key terms of each series of the mandatory
redeemable preferred stock at August 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation Value
|
|
|
Estimated
Fair Value
August 31,
2013
|
|
|
Rate
|
|
Mandatory
Redemption
Date
|
|
Series
|
|
November 30,
2012
|
|
|
Shares
Redeemed
|
|
|
Shares
Issued
|
|
|
August 31,
2013
|
|
|
|
|
A
|
|
$
|
104,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
104,000
|
|
|
$
|
112,000
|
|
|
5.57%
|
|
|
5/7/17
|
|
B
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
8,300
|
|
|
4.53%
|
|
|
11/9/17
|
|
C
|
|
|
42,000
|
|
|
|
|
|
|
|
|
|
|
|
42,000
|
|
|
|
43,800
|
|
|
5.20%
|
|
|
11/9/20
|
|
D
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.95%
|
|
|
6/1/18
|
|
E
(1)
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
120,336
|
|
|
4.25%
|
|
|
4/1/19
|
|
F
(2)
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
119,800
|
|
|
3.50%
|
|
|
4/15/20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
374,000
|
|
|
$
|
100,000
|
|
|
$
|
125,000
|
|
|
$
|
399,000
|
|
|
$
|
404,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Series E mandatory redeemable preferred stock is publicly traded on the NYSE under the symbol KYNPRE. The fair value is based on the price of $25.07 on
August 31, 2013.
|
(2)
|
Series F mandatory redeemable preferred stock is publicly traded on the NYSE under the symbol KYNPRF. The fair value is based on the price of $23.96 as
of August 31, 2013.
|
Holders of the series A, B and C mandatory redeemable preferred stock are entitled to
receive cumulative cash dividend payments on the first business day following each quarterly period (February 28, May 31, August 31 and November 30). Holders of the series D and E mandatory redeemable preferred stock are entitled to
receive cumulative cash dividend payments on the first business day of each month.
The table below outlines the terms of each
series of mandatory redeemable preferred stock. The dividend rate on the Companys mandatory redeemable preferred stock will increase if the credit rating is downgraded below A by FitchRatings. Further, the annual dividend rate for
all series of mandatory redeemable preferred stock will increase by 4.0% if no ratings are maintained, and the annual dividend rate will increase by 5.0% if the Company fails to make dividend or certain other payments. The Company is required to
maintain a current rating from one rating agency with respect to each series of mandatory redeemable preferred stock.
34
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
|
|
|
|
|
|
|
Series A, B and C
|
|
Series E and F
|
Rating as of August 31, 2013 (FitchRatings)
|
|
AA
|
|
AA
|
Ratings Threshold
|
|
A
|
|
A
|
Method of Determination
|
|
Lowest Credit Rating
|
|
Highest Credit Rating
|
Increase in Annual Dividend Rate
|
|
0.5% to 4.0%
|
|
0.75% to 4.0%
|
The mandatory redeemable preferred stock rank senior to all of the Companys outstanding common
shares and on parity with any other preferred stock. The mandatory redeemable preferred stock is redeemable in certain circumstances at the option of the Company and is also subject to a mandatory redemption if the Company fails to meet a total
leverage (debt and preferred stock) asset coverage ratio of 225% or fails to maintain its basic maintenance amount as stated in the Companys rating agency guidelines.
Under the terms of the mandatory redeemable preferred stock, the Company may not declare dividends or pay other distributions on shares of its common stock or make purchases of such shares if, at any time
of the declaration, distribution or purchase, asset coverage with respect to total leverage would be less than 225%.
The
holders of the mandatory redeemable preferred stock have one vote per share and will vote together with the holders of common stock as a single class except on matters affecting only the holders of mandatory redeemable preferred stock or the holders
of common stock. The holders of the mandatory redeemable preferred stock, voting separately as a single class, have the right to elect at least two directors of the Company.
At August 31, 2013, the Company was in compliance with the asset coverage and basic maintenance requirements of its mandatory redeemable preferred stock.
13. Common Stock
At August 31, 2013, the Company had 184,040,000 shares of common stock authorized and 99,717,411 shares outstanding. As of that date, KACALP owned 4,000 shares. During fiscal 2013, the Company
completed two public offerings of common stock: 1) on March 12, 2013, the Company sold 4,543,995 shares of common stock at a price of $33.36 per share and 2) on July 15, 2013, the Company sold a 6,200,000 shares of common stock at a price of $36.00
per share. Transactions in common shares for the nine months ended August 31, 2013 were as follows:
|
|
|
|
|
Shares outstanding at November 30, 2012
|
|
|
88,431,413
|
|
Shares issued through reinvestment of distributions
|
|
|
542,003
|
|
Shares issued in connection with the offering of common stock
|
|
|
10,743,995
|
|
|
|
|
|
|
Shares outstanding at August 31, 2013
|
|
|
99,717,411
|
|
|
|
|
|
|
14. Subsequent Events
On September 16, 2013, the Company completed a public offering of 2,000,000 shares of Series G mandatory redeemable preferred stock. The
Series G shares pay cash dividends at a rate of 4.60% per annum and trade on the NYSE under the symbol KYN.PRG. The Series G shares have a mandatory redemption date of October 1, 2021. The net proceeds from the offering were used to make
new portfolio investments, to repay indebtedness, and for general corporate purposes.
On September 18, 2013, the
Company declared its quarterly distribution of $0.595 per common share for the third quarter of fiscal 2013 for a total quarterly distribution payment of $59,389. The distribution was paid on October 11, 2013 to common stockholders of record on
October 4, 2013. Of this total, pursuant to the Companys dividend reinvestment plan, $6,436 was reinvested into the Company through the issuance of 196,092 shares of common stock.
35
KAYNE ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
(amounts in 000s, except number of option contracts, share and per share amounts)
(UNAUDITED)
On September 24, 2013, the Company commenced an at-the-market offering of shares of common stock having an aggregate sales price of up to $50,000. The Company will pay the sales agent a total
commission of up to 2% of the gross sales price per share for shares sold pursuant to the program. As of October 17, 2013 the Company had issued 270,368 shares of common stock through this program and received $9,444 in net proceeds from these
issuances.
The Company has performed an evaluation of subsequent events through the date the financial statements were issued
and has determined that no additional items require recognition or disclosure.
36
KAYNE ANDERSON MLP INVESTMENT COMPANY
REPURCHASE DISCLOSURE
(UNAUDITED)
Notice is hereby given in accordance with Section 23(c) of the 1940 Act, that the Company may from time to time purchase shares of its common and preferred stock and its Senior Notes in the open
market or in privately negotiated transactions.
37
|
|
|
Directors and Corporate Officers
|
|
|
|
|
Kevin S. McCarthy
|
|
Chairman of the Board of Directors,
President and Chief Executive Officer
|
|
|
Anne K. Costin
|
|
Director
|
|
|
Steven C. Good
|
|
Director
|
|
|
Gerald I. Isenberg
|
|
Director
|
|
|
William H. Shea, Jr.
|
|
Director
|
|
|
Terry A. Hart
|
|
Chief Financial Officer and Treasurer
|
|
|
David J. Shladovsky
|
|
Chief Compliance Officer and Secretary
|
|
|
J.C. Frey
|
|
Executive Vice President,
Assistant Secretary and Assistant Treasurer
|
|
|
James C. Baker
|
|
Executive Vice President
|
|
|
Ron M. Logan, Jr.
|
|
Senior Vice President
|
|
|
Jody C. Meraz
|
|
Vice President
|
|
|
Investment Adviser
KA Fund Advisors, LLC
811 Main Street, 14th Floor
Houston, TX 77002
|
|
Administrator
Ultimus Fund Solutions, LLC
225 Pictoria Drive, Suite 450
Cincinnati, OH 45246
|
|
|
1800 Avenue of the Stars, Third Floor
Los Angeles, CA 90067
|
|
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
6201 15
th
Avenue
Brooklyn, NY 11219
|
|
|
Custodian
JPMorgan Chase Bank, N.A.
14201 North Dallas Parkway, Second Floor
Dallas, TX 75254
|
|
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
601 S. Figueroa Street, Suite 900
Los Angeles, CA 90017
|
|
|
|
|
Legal Counsel
Paul Hastings LLP
55 Second Street, 24th Floor
San Francisco, CA 94105
|
Please visit us on the web at
http://www.kaynefunds.com
or call us toll-free at 1-877-657-3863.
This report, including the financial statements herein, is made available to stockholders of the Company for their
information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Company or of any securities mentioned in this report.
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