• Our business prospects and the prospects of our portfolio companies and their ability to achieve their objectives;

• Our ability to make investments consistent with our investment objective;

• The impact of investments that we expect to make;

• Our contractual arrangements and relationships with third parties;

• The dependence of our future success on the general economy and its impact on the energy industry;

• Our expected debt and equity financings and investments;

• The adequacy of our cash resources and working capital; and

• The timing of cash flows, if any, from the operations of our portfolio companies.

• We undertake no obligation to update or revise any forward-looking statements made herein.

Overview
Kayne Anderson Energy Development Company ("we," "us," and "our") is a non-diversified, closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. Our common stock began trading on the NYSE on September 21, 2006 through our initial public offering of 10,000,000 shares of common stock at $25.00 per share. By electing to be treated as a BDC, we are subject to provision of the 1940 Act, including the requirements that we must have at least 70% of assets in "eligible portfolio companies," generally defined as private companies with at principal place of business in the United States. On January 22, 2008, we announced that we no longer intend to be treated as a RIC under the Code. Our decision was primarily based on our belief that private MLPs present the most attractive investment opportunity for us and offer attractive risk-adjusted total returns for us and our stockholders. Prior to this election, however, compliance with certain requirements necessary to qualify as a RIC limited our ability to invest in additional private MLPs. As a result of this change, we will be taxed as a corporation for our fiscal year ended November 30, 2008 and for future fiscal years, paying federal and applicable state corporate taxes on our taxable income and capital gains. We will continue to be regulated as a BDC under the 1940 Act.

Our operations are externally managed and advised by our investment adviser, KA Fund Advisors, LLC ("KAFA"), pursuant to an investment management agreement. Our investment objective is to generate both current income and capital appreciation primarily through equity and debt investments. We will seek to achieve this objective by investing at least 80% of our total assets in securities of Energy Companies.
A key focus area for our investments in the energy industry is and will continue to be equity and debt investments in Midstream Energy Companies structured as limited partnerships. We also expect to continue to evaluate equity and debt investments in Other Energy Companies, and debt investments in Energy Companies. We seek to enhance our total returns through the use of leverage, which may include the issuance of shares of preferred stock, commercial paper or notes and other borrowings, including borrowings under our credit facility. We currently expect to use leverage in an aggregate amount equal to 25% - 30% of our total assets, which includes assets obtained through such leverage. As of May 31, 2009, our leverage to total assets was 24.0%. Portfolio and Investment Activity
Our investments as of May 31, 2009 were comprised of equity securities of $144.4 million and fixed income investments of $30.1 million. Certain of our fixed income securities accrue interest at variable rates determined on a basis of a benchmark, such as the London Interbank Offered Rate ("LIBOR"), or the prime rate, with stated maturities at origination that typically range from 5 to 10 years. Other fixed income investments accrue interest at fixed rates. As of May 31, 2009, 42%, or $12.5 million, of our interest-bearing portfolio is floating rate debt and 58%, or $17.6 million, is fixed rate debt.
Our portfolio allocations as of May 31, 2009 and November 30, 2008 are set forth below. For both periods our portfolio remains below its target of 70% for private MLPs. Over time, the Company intends to rotate out of certain public MLPs and fixed income securities and into additional private MLPs as attractive investment opportunities arise.

                                           Number of Portfolio Companies at             Percent of Long-Term Investments at
                                            May 31,              November 30,            May 31,                November 30,
                                             2009                    2008                 2009                      2008
Publicly Traded MLP and MLP Affiliate               33                      43                   30.0 %                    33.0 %
Private MLP                                          4                       4                   52.7                      50.6
Other Private Equity                                 1                       1                    0.1                       0.0
Fixed Income Investments                             9                       9                   17.2                      16.4

                                                    47                      57                  100.0 %                   100.0 %

Our Top Ten Portfolio Investments as of May 31, 2009 Listed below are our top ten portfolio investments as of May 31, 2009, represented as a percentage of our total assets.

                                           Public/   Equity/                                Amount              Percent of
Investment                                 Private    Debt            Sector            ($ in millions)      Total Assets(1)
1. Direct Fuels Partners, L.P.(2)          Private   Equity          Midstream         $            35.6                 16.4 %
2. VantaCore Partners LP(3)                Private   Equity    Aggregates and Mining                27.1                 12.5
3. International Resource Partners LP(4)   Private   Equity            Coal                         27.0                 12.5
4. Knight, Inc.                            Private   Debt            Midstream                       7.3                  3.4
5. Enterprise Products Partners L.P.       Public    Equity          Midstream                       5.4                  2.5
6. Hilcorp Energy Company                  Private   Debt            Upstream                        4.8                  2.2
7. Plains All American Pipeline, L.P.      Public    Equity          Midstream                       4.6                  2.1
8. ProPetro Services, Inc.(5)              Private   Debt        Oilfield Services                   4.5                  2.1
9. Eagle Rock Energy Partners, L.P.(6)     Public    Equity     Midstream/Upstream                   4.4                  2.0
10. Energy Future Holdings Corp.           Private   Debt              Other                         4.1                  1.9

                                                                                       $           124.8                 57.6 %

(1) Total assets were $216.6 million as of May 31, 2009.

(2) Our investment in Direct Fuels Partners, L.P. includes 2,500,000 Class A Common Units and 96,448 Class A Convertible Preferred Units, which represents a 38% limited partnership interest, and 200 incentive distribution rights (20% of total outstanding incentive distribution rights).

(3) Our investment in VantaCore Partners LP includes 1,464,673 Common Units, which represents a 39% limited partnership interest, and 1,823 incentive distribution rights (18% of total outstanding incentive distribution rights).

(4) Our investment in International Resource Partners LP includes 1,500,000 Class A Common Units, which represents a 28% limited partnership interest, and 10 incentive distribution rights (10% of total outstanding incentive distribution rights).

(5) Our investment in ProPetro Services, Inc. includes a senior secured second lien term loan ($35.0 million principal and $4.5 million fair value) and 2,904,620 warrants to which we have assigned no value.

(6) Following the sale of Millennium Midstream Partners, L.P. to Eagle Rock
Energy
Partners, L.P.
("Eagle
Rock"), which
was completed
on October 1,
2008, our
investment
initially
consisted of
1,700,050
unregistered
Common Units,
of which
687,022 were
placed in
escrow for a
period of 18
months.
Following
certain
post-closing
adjustments,
our investment
in Eagle Rock
consists of
1,013,037
unregistered
Common Units
which may be
sold pursuant
to Rule 144
and 491,462
unregistered
Common Units
have been
placed into
escrow for up
to 18 months
from closing,
pending claims
that could
reduce Eagle
Rock's
purchase price
of Millennium.

Results of Operations - For the three and six months ended May 31, 2009 Set forth below is an explanation of our results of operations for the three and six months ended May 31, 2009, respectively.
Investment Income. Investment income totaled $1.1 million and $2.3 million and consisted primarily of interest income on our fixed income investments and net dividends and distributions. We received $3.8 million and $8.4 million of cash dividends and distributions, of which $3.4 million and $7.5 million was treated as a return of capital during the period.

Operating Expenses. Operating expenses totaled $1.6 million and $3.4 million, including $0.8 million and $1.6 million of base investment management fees; $0.3 million and $0.7 million for interest expense and $0.5 million and $1.1 million for other operating expenses. Base investment management fees were equal to an annual rate of 1.75% of average total assets. Net Investment Loss. Our net investment loss totaled $0.3 million and $0.6 million and included a deferred income tax benefit of $0.2 million and $0.4 million.
Net Realized Losses. We had net realized losses from our investments of $5.9 million and $7.6 million, net of $4.0 million and $4.9 million of deferred tax benefit. During the second quarter, we elected to monetize certain public MLP investments that had either eliminated or substantially decreased their quarterly distributions. These sales accounted for the majority of our realized losses during the quarter.
Net Change in Unrealized Gains. We had net unrealized gains of $14.5 million and $11.2 million. This net unrealized gain consisted of $23.6 million and $18.4 million of unrealized gains from investments and a deferred tax expense of $9.1 million and $7.2 million.
Net Increase in Net Assets Resulting from Operations. We had an increase in net assets resulting from operations of $8.3 million and $3.0 million. This increase is composed of the net unrealized gains of $14.5 million and $11.2 million; net realized losses of $5.9 million and $7.6 million and net investment losses of $0.3 million and $0.6 million as noted above.
Results of Operations - For the three and six months ended May 31, 2008 Set forth below is an explanation of our results of operations for the three and six months ended May 31, 2008, respectively.
Investment Income. Investment income totaled $1.2 million and $3.8 million and consisted primarily of interest income on our short-term investments in fixed income investments and repurchase agreements. We received $4.9 million and $9.3 million of cash dividends and distributions, of which $4.7 million and $9.0 million was treated as a return of capital during the period. Our interest income for the second quarter 2008 decreased by $1.5 million compared to the first quarter 2008, and $1.1 million of this decrease was attributable to our election to no longer accrue interest on our ProPetro investment. Operating Expenses. Total operating expenses totaled $3.6 million and $7.3 million, including $1.3 million and $2.7 million of base investment management fees; $0.9 million and $2.6 million for interest expense and $0.6 million and $1.2 million for other operating expenses. We also incurred $0.8 million of bad debt expense related to interest accrued during the first quarter of 2008 on our fixed income investment in ProPetro. For the six months ended, interest expense included the write-off of capitalized debt issuance costs of $0.3 million related to the termination of the Treasury Facility. Base investment management fees were equal to an annual rate of 1.75% of average total assets. We did not pay a management fee or any incentive fee with respect to any investments made under the Treasury Facility, which we terminated effective January 31, 2008.
Net Investment Loss. Our net investment loss totaled $1.5 million and $2.1 million, which consisted of $1.2 million and $3.8 million of investment income. This investment income was reduced by total operating expenses of $3.6 million and $7.3 million and offset by deferred income tax benefits of $0.9 million and $1.3 million.
Net Realized Gains (Losses). We had net realized gains from our investments of $0.9 million and $2.2 million, which was net of deferred tax expense of $0.5 million and $1.3 million.

Net Change in Unrealized Gains (Losses). We had net unrealized gains from our investments of $5.8 million for the three months ended and net unrealized losses of $0.6 million for the six months ended, both of which are net of tax. Significant unrealized gains on our private MLPs were partially offset by unrealized losses on our ProPetro investment and public MLP portfolio. For the three months ended, the net unrealized gains consisted of $9.2 million of gains from our investments and a net deferred tax expense of $3.4 million. For the six months ended, the net unrealized losses consisted of $5.1 million of gains from our investments; a net deferred tax expense of $1.9 million and a deferred tax expense of $3.8 million relating to our conversion from a RIC to a taxable corporation, effective December 1, 2007.
Net Increase (Decrease) in Net Assets Resulting from Operations. For the three months ended, our net increase in net assets resulting from operations for the period was $5.2 million. This increase is composed of the net unrealized gains of $5.8 million; net realized gains of $0.9 million and net investment losses of $1.5 million as noted above.
For the six months ended, our net decrease in net assets resulting from operations for the period was $0.6 million. This decrease is composed of the net unrealized losses of $0.6 million; net realized gains of $2.2 million and net investment losses of $2.2 million as noted above. Liquidity and Capital Resources
As of May 31, 2009, we had approximately $9.5 million invested in short-term repurchase agreements. As of June 30, 2009, we had approximately $8.8 million in repurchase agreements. Our repurchase agreements are collateralized by U.S. Treasury notes, and our counterparty is J.P. Morgan Securities Inc. The Investment Facility has initial availability of up to $100 million with the ability to increase credit available under the Investment Facility to an amount not to exceed $250 million by obtaining additional commitments from existing lenders or new lenders. The Investment Facility has a three year term (expiring on June 4, 2010) and bears interest, at our option, at either (i) LIBOR plus 125 basis points or (ii) the prime rate plus 25 basis points.
The obligations under the Investment Facility are secured by substantially all of our assets, and are guaranteed, generally, by any of our future subsidiaries. The Investment Facility contains affirmative and reporting covenants and certain financial ratios and restrictive covenants, including: (a) maintaining an asset coverage ratio of not less than 2.50:1.0; (b) maintaining minimum liquidity at certain levels of outstanding borrowings; (c) maintaining a minimum of shareholders' equity; and (d) other customary restrictive covenants. The Investment Facility also contains customary representations and warranties and events of default.
As of May 31, 2009, we had $52.0 million of borrowings under our Investment Facility at an interest rate of 1.57%, and we had a borrowing base of $74.4 million. As of June 30, 2009, we had $52.0 million of borrowings at an interest rate of 1.56%, and our borrowing base was $74.3 million. The maximum amount that we can borrow under our Investment Facility is limited to the lesser of our commitment amount of $100 million and our borrowing base. Contractual Obligations
Investment Management Agreement. We have entered into an investment management agreement with KAFA under which we have material future rights and commitments. Pursuant to the investment management agreement, KAFA has agreed to serve as our investment adviser and provide on our behalf significant managerial assistance to our portfolio companies to which we are required to provide such assistance. Payments under the investment management agreement may include (1) a base management fee, (2) an incentive fee, and (3) reimbursement of certain expenses. For the three and six months ended May 31, 2009, we accrued and paid $0.8 million and $1.6 million in base management fees and did not accrue or pay any incentive fees. We do not pay management fees on deferred taxes.

As of May 31, 2009, we did not have, or have not entered into, any long-term debt obligations, long-term liabilities, capital or operating lease obligations or purchase obligations that require minimum payments or any other contractual obligation at the present, within the next five years or beyond other than the borrowings outstanding under our Investment Facility described above under "Liquidity and Capital Resources."
The following table summarizes our obligations as of May 31, 2009 over the following periods for the Investment Facility.

                                                      Payments by Period ($ in Millions)
                                               Less Than                                               More Than
                              Total             1 Year            1-3 Years         3-5 Years           5 Years
Investment Facility(1)      $     52.0                   -       $      52.0                  -                  -

(1) The maximum amount that we can borrow under our credit facility is limited to the lesser of the commitment amount of $100 million and our borrowing base. As of May 31, 2009, we had a borrowing base of $74.4 million.

Distributions
Payment of future distributions is subject to board approval, as well as meeting the covenants of the Company's senior debt. During the quarter ended May 31, 2009 we paid distributions totaling $3.5 million ($0.35 per common share). On July 1, 2009, we declared our quarterly distribution of $0.30 per common share for the period March 1, 2009 to May 31, 2009 for a total of $3.0 million. The distribution is payable on July 30, 2009 to shareholders of record on July 17, 2009. It is anticipated that substantially all of this distribution will be treated as a return of capital for tax purposes.
The component of our distribution that comes from our current or accumulated earnings and profits will be taxable to a stockholder as corporate dividend income. This income will be treated as qualified dividends for Federal income tax purposes at a rate of l5%. The special tax treatment for qualified dividends is scheduled to expire on December 31, 2010. Distributions that exceed our current or accumulated earnings and profits will continue to be treated as a tax-deferred return of capital to the extent of a stockholder's basis. Off-Balance Sheet Arrangements
At May 31, 2009, we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material effect on our financial condition. Critical Accounting Policies
The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of our Annual Report on Form 10-K for the fiscal year ended November 30, 2008 sets out a complete description of our critical accounting policies, with respect to which there have been no material changes since the filing of our Form 10-K.