Kayne Anderson's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Kayne Anderson Energy Development Company (KED)

Q2 2012 Results Earnings Call

July 24, 2012 5:00 PM ET

Executives

Monique Vo – Vice President, Investor Relations

Kevin McCarthy – President and CEO

Terry Hart – Chief Financial Officer

Analysts

Selman Akyol – Stifel Nicolaus

Presentation

Operator

Good afternoon. My name is Hop, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2012 Earnings Call for Kayne Anderson Energy Development Company. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Monique Vo. You may begin your conference.

Monique Vo

Thank you, Hop. Good afternoon, everyone. And welcome to the earnings call for the Kayne Anderson Energy Development Company for the quarter ended May 31, 2011.

Before we begin, I'd like to remind you that our call will include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events. These and other statements not relating strictly to historical or current facts are intended as forward-looking.

Generally, words such as believe, expect, intend, estimate, anticipate, project, will, and similar expressions identify forward-looking statements, which generally are not historical in nature.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ from the company's historical experience, its present expectations or projections.

For a description of the factors that may cause such a variance, I would direct you to the forward-looking statement discussion in our annual and quarterly reports. These reports are available free of charge through our website at kaynefunds.com and at sec.gov.

You should not place undue reliance on forward-looking statements. The company undertakes no obligation to update or revise any forward-looking statements. There is no assurance that the company's investment objectives will be attained.

With that, I will now turn the conference over to our President and Chief Executive Officer, Kevin McCarthy.

Kevin McCarthy

Thanks, Monique, and good afternoon, everybody. Thank you for joining us today for our second quarter 2012 earnings call.

I’ll start today's call with a review of the MLP sector in the broader energy markets during our second fiscal quarter, which ended May 31st. I will also touch briefly on market performance during June and July before we review KED’s performance. Then, Terry Hart, our CFO will discuss our financial performance and guidance before opening the line up to questions.

With that, let’s turn to review of market conditions. The optimism that we saw in the equity markets during the first quarter faded during the second quarter, as the U.S. economic data weakened and concerns about Europe intensified. The S&P 500 Index declined 4.1% during the quarter after rising 9.5% in the first quarter.

MLPs were much weaker in the broader market, with the Alerian MLP Index down 10.5% during the quarter. On a total return basis, which includes cash distributions, MLP returns were negative 9.2% for the quarter while the S&P 500 return was negative 3.5%.

In our view, MLPs faced selling pressure along with the rest of the energy sector as commodity prices fell during the quarter. In addition, MLPs were very active issuing equity in the first two months of the quarter, and as the market declined and the new deal was traded poorly, the sector came under additional selling pressure.

Since the end of our second quarter, MLPs in the broader markets have rebounded nicely. As of July 20th, last Friday, the MLP Index was up 9.5%. Since May 31st, while the S&P 500 Index was up 4%. As of last Friday, the MLP Index is now up almost 14% from its lows in early June and up almost 12% for the fiscal year on a total return basis.

While MLPs have performed quite well over the past six to seven weeks, we continue to find MLP valuations quite compelling. Currently, MLPs have an average yield of 6.1% and a distribution growth forecasted at 7% over the next year. With yield plus growth or y plus g prospects in the low double digits, we think MLPs compared very favorable relative to other equity investment alternative.

Relative to other income alternatives, MLPs are trading at higher than normal yield. The 10-year U.S. Treasury is trading at a yield of 1.5% and the yield spread to MLP is 460 basis points. This compares to the historical average closer to 220 basis points.

Relative to other income producing equity securities such as REITs and utilities, MLPs traded yield spreads at 270 and 250 basis points respectively, despite having much stronger historical and projected growth rates.

MLP distribution growth remained strong during the quarter with 41 MLPs increasing distributions, compared to 35 in the prior quarter. The average distribution increase was 6.4% on an annualized basis, which was the same level as we saw in the prior quarter.

Distribution announcements for the second calendar quarter have just begun but all signs point towards a continuation of the distribution growth. Based on our research, we continue to expect that midstream MLPs will increase their distributions by 7% in calendar 2012.

M&A activity in the MLP space continued to accelerate during the quarter with 31 announced transactions. Like last quarter, there were several very large transactions including Energy Transfer’s acquisition of Sunoco for $5.3 billion, Williams $2.5 billion acquisition of Caiman Energy, Suburban’s purchase of Inergy’s Propane operations for $1.8 billion and Penn Virginia’s $1.0 billion purchase of Chief’s Marcellus gathering assets.

Read the rest of this transcript for free on seekingalpha.com

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