N-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM N-Q

 

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number 811-22467

 

 

Kayne Anderson Midstream/Energy Fund, Inc.

(Exact name of registrant as specified in charter)

 

 

811 Main Street, 14th Floor

Houston, Texas 77002

(Address of principal executive offices) (Zip code)

 

 

David Shladovsky, Esq.

KA Fund Advisors, LLC

811 Main Street, 14th Floor

Houston, Texas 77002

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: (713) 493-2020

Date of fiscal year end: November 30, 2019

Date of reporting period: February 28, 2019

 

 

 


TABLE OF CONTENTS

 

Item 1: Schedule of Investments   
Item 2: Controls and Procedures   
Item 3: Exhibits   
SIGNATURES   
EX-99.CERT   


Item 1.

Schedule of Investments.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

SCHEDULE OF INVESTMENTS

FEBRUARY 28, 2019

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

Description

                 No. of
Shares/Units
           Value  

Long-Term Investments — 143.7%

             

Equity Investments(1) — 140.6%

             

United States — 118.3%

             

Midstream Companies(2) — 80.3%

             

Antero Midstream GP LP(3)(4)

 

     409        $ 5,223  

Capital Product Partners L.P. — Class B Units(4)(5)(6)(7)

 

     3,939          35,455  

EnLink Midstream, LLC (8)

 

     1,298          14,478  

GasLog Partners LP(4)

 

     1,289          28,480  

Golar LNG Partners LP(4)

 

     1,197          15,439  

Höegh LNG Partners LP(4)

 

     1,062          18,940  

Kinder Morgan, Inc.(9)

 

     2,469          47,305  

KNOT Offshore Partners LP(4)

 

     1,709          30,939  

ONEOK, Inc.

 

     1,412          90,708  

Plains GP Holdings, L.P.(4)(10)

 

     2,205          51,141  

Plains GP Holdings, L.P. — Plains AAP, L.P.(4)(5)(10)(11)

 

     690          16,094  

SemGroup Corporation

 

     493          7,766  

Tallgrass Energy, LP(4)

 

     1,233          27,911  

Targa Resources Corp.

 

     1,252          50,374  

The Williams Companies, Inc.

 

     2,696          71,964  
             

 

 

 
                512,217  
             

 

 

 

Midstream MLPs(2)(12) — 35.1%

             

Andeavor Logistics LP

 

     208          7,318  

BP Midstream Partners LP

 

     317          5,192  

Buckeye Partners, L.P.(10)

 

     716          22,532  

Cheniere Energy Partners, L.P.

 

     284          12,576  

CNX Midstream Partners LP

 

     114          1,772  

Crestwood Equity Partners LP

 

     218          6,912  

DCP Midstream, LP

 

     513          16,518  

Energy Transfer LP

 

     2,256          33,366  

Enterprise Products Partners L.P.

 

     1,175          32,502  

EQT Midstream Partners, LP

 

     77          3,005  

Global Partners LP

 

     556          10,567  

Magellan Midstream Partners, L.P.

 

     170          10,342  

MPLX LP

 

     625          20,725  

Phillips 66 Partners LP

 

     243          11,925  

Shell Midstream Partners, L.P.

     494          8,836  

Summit Midstream Partners, LP

 

     224          2,374  

Western Midstream Partners, LP(13)

 

     511          17,089  
             

 

 

 
                223,551  
             

 

 

 

Other Energy Companies — 2.9%

             

Marathon Petroleum Corporation

 

     51          3,175  

Phillips 66(9)

 

     40          3,835  

Sempra Energy

 

     42          5,059  

Viper Energy Partners LP

 

     198          6,506  
             

 

 

 
                18,575  
             

 

 

 

Total United States (Cost — $738,198)

 

     754,343  
             

 

 

 


KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

SCHEDULE OF INVESTMENTS

FEBRUARY 28, 2019

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

 

 

Description

                       No. of
Shares/Units
     Value  

Canada — 22.3%

             

Midstream Companies(2) — 21.4%

             

Enbridge Inc.

 

     1,605        59,359  

Pembina Pipeline Corporation

 

     1,172        42,949  

TransCanada Corporation

 

     764        34,153  
             

 

 

 
                136,461  
             

 

 

 

Other Energy Company — 0.9%

 

       

Jupiter Resources Inc.(5)(6)(14)

 

     1,261        5,361  
             

 

 

 

Total Canada (Cost — $124,046)

 

     141,822  
             

 

 

 

Total Equity Investments (Cost — $862,244)

 

     896,165  
             

 

 

 
             
             Interest
Rate
    Maturity
Date
     Principal
Amount
        

Debt Instruments — 3.1%

             

United States — 3.1%

             

Upstream —2.8%

             

California Resources Corporation(5)(10)

 

     8.000     12/15/22      $ 12,500        10,016  

Montage Resources Corporation(15)

 

     8.875       7/15/23        8,600        7,783  
             

 

 

 
                17,799  
             

 

 

 

Midstream Company(2) — 0.3%

             

Epic Crude Services, LP(5)

 

     (16  )       2/21/26        2,000        1,980  
             

 

 

 

Total Debt Investments (Cost — $20,127)

 

     19,779  
             

 

 

 

Total Long-Term Investments (Cost — $882,371)

 

     915,944  
             

 

 

 
             
      Strike
Price
     Expiration
Date
    No. of
Contracts
     Notional
Amount(17)
        

Liabilities

             

Call Option Contracts Written(18)

             

United States

             

Midstream Company

             

Kinder Morgan, Inc.

   $ 19.00        3/15/19       500      $ 958        (20
             

 

 

 

Other Energy Company

             

Phillips 66

     100.00        3/15/19       300        2,891        (11
             

 

 

 

Total Call Option Contracts Written (Premiums Received — $51)

 

     (31
             

 

 

 

Debt

 

     (204,923

Mandatory Redeemable Preferred Stock at Liquidation Value

 

     (75,000

Other Assets in Excess of Other Liabilities

 

     1,585  
             

 

 

 

Net Assets Applicable to Common Stockholders

 

   $ 637,575  
             

 

 

 

 

  (1)

Unless otherwise noted, equity investments are common units/common shares.

 

  (2)

Securities are categorized as “Midstream” if they (i) derive at least 50% of their revenues or operating income from operating Midstream Assets or (ii) have Midstream Assets that represent the majority of their assets.


KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

SCHEDULE OF INVESTMENTS

FEBRUARY 28, 2019

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

 

  (3)

On March 12, 2019, Antero Midstream GP LP (“AMGP”) and Antero Midstream Partners LP (“AM”) completed their previously announced merger whereby AMGP acquired all of the outstanding AM common units. In connection with the transaction, AMGP converted into a corporation and the combined entity was renamed Antero Midstream Corporation with its shares trading under the ticker symbol “AM”.

 

  (4)

This company is structured like an MLP, but is not treated as a publicly-traded partnership for regulated investment company (“RIC”) qualification purposes.

 

  (5)

The Fund’s ability to sell this security is subject to certain legal or contractual restrictions. As of February 28, 2019, the aggregate value of restricted securities held by the Fund was $68,906 (7.4% of total assets), which included $28,090 of Level 2 securities and $40,816 of Level 3 securities.

 

  (6)

Fair valued security.

 

 

  (7)

Class B Units are convertible on a one-for-one basis into common units of Capital Product Partners L.P. (“CPLP”) and are senior to the common units in terms of liquidation preference and priority of distributions (liquidation preference of $9.00 per unit). On March 27, 2019, CPLP and DSS Holdings L.P. (“DSS”) completed their previously announced combination whereby CPLP spun off its crude and product tanker business into a separate publicly listed company, which merged with DSS. In connection with this transaction, all of the Fund’s CPLP Class B Units were redeemed for cash at $9.00 per unit.

 

  (8)

On January 25, 2019, EnLink Midstream, LLC (“ENLC”) and EnLink Midstream Partners, LP (“ENLK”) completed their previously announced merger whereby ENLC acquired all common units of ENLK that ENLC did not previously own.

 

  (9)

Security or a portion thereof is segregated as collateral on option contracts written.

 

(10)

The Fund believes that it is an affiliate of Buckeye Partners, L.P. (“BPL”), Plains AAP, L.P. (“PAGP-AAP”) and Plains GP Holdings, L.P. (“PAGP”). The Fund does not believe that it is an affiliate of California Resources Corporation.

 

(11)

The Fund’s ownership of PAGP-AAP is exchangeable on a one-for-one basis into either PAGP shares or Plains All American Pipeline, L.P. (“PAA”) units at the Fund’s option. The Fund values its PAGP-AAP investment on an “as exchanged” basis based on the higher public market value of either PAGP or PAA. As of February 28, 2019, the Fund’s PAGP-AAP investment is valued at PAA’s closing price.

 

(12)

Unless otherwise noted, securities are treated as a publicly-traded partnership for RIC qualification purposes. To qualify as a RIC for tax purposes, the Fund may directly invest up to 25% of its total assets in equity and debt securities of entities treated as publicly-traded partnerships. The Fund had 24.1% of its total assets invested in publicly-traded partnerships at February 28, 2019. It is the Fund’s intention to be treated as a RIC for tax purposes.

 

(13)

On February 28, 2019, Western Gas Partners, LP (“WES”) and Western Gas Equity Partners, LP (“WGP”) completed their previously announced merger whereby WGP acquired all of the publicly - held common units of WES in a unit-for-unit exchange. Immediately following the merger, WGP changed its name to Western Midstream Partners, LP with its units trading under the ticker symbol “WES”.

 

(14)

On December 19, 2018, Jupiter Resources Inc. and its affiliates (“Jupiter”) completed a recapitalization transaction. As a result of the reorganization, the Fund received 1,261 common shares of Jupiter Resources Inc. and cash equal to the semi-annual interest payment that was scheduled to be paid on October 1, 2018. The common shares are not publicly traded and are subject to certain restrictions. As of October 2, 2018, the Fund stopped accruing interest relating to the debt security.

 

(15)

On February 28, 2019, Eclipse Resources Corporation (“Eclipse Resources”) and Blue Ridge Mountain Resources, Inc. (“Blue Ridge”) completed their previously announced merger. In conjunction with the merger, Eclipse Resources changed its name to Montage Resources Corporation.

 

(16)

Floating rate first lien senior secured term loan. Security pays interest at a rate of LIBOR + 500 basis points with a 1.00% LIBOR floor (7.78% as of February 28, 2019).

 

(17)

The notional amount of call option contracts written is the product of (a) the number of contracts written, (b) 100 (each contract entitles the option holder to 100 units/shares) and (c) the market price of the underlying security as of February 28, 2019.

 

(18)

Security is non-income producing.


From time to time, the Fund’s ability to sell certain of its investments is subject to certain legal or contractual restrictions. For instance, private investments that are not registered under the Securities Act of 1933, as amended (the “Securities Act”), cannot be offered for public sale in a non-exempt transaction without first being registered. In other cases, certain of the Fund’s investments have restrictions such as lock-up agreements that preclude the Fund from offering these securities for public sale.

At February 28, 2019, the Fund held the following restricted investments:

 

Investment

  Acquisition
Date
  Type of
Restriction
  Number of
Units,
Principal ($)
(in 000s)
    Cost Basis
(GAAP)
    Fair
Value
    Fair Value
Per Unit
    Percent
of Net
Assets
    Percent
of Total
Assets
 

Level 2 Investments

               

Equity Investments

               

Plains GP Holdings, L.P. — Plains AAP, L.P.(1)

  (2)    (3)      690     $ 2,302     $ 16,094     $ 23.34       2.5     1.7

Senior Notes(4)

               

California Resources Corporation

  (2)    (5)      12,500       9,726       10,016       n/a       1.6       1.1  

Epic Crude Services, LP

  2/27/19   (6)      2,000       1,980       1,980       n/a       0.3       0.2  
       

 

 

   

 

 

     

 

 

   

 

 

 

Total

 

  $ 14,008     $ 28,090         4.4     3.0
       

 

 

   

 

 

     

 

 

   

 

 

 

Level 3 Investments(7)

               

Equity Investments

               

Capital Product Partners L.P.

               

Class B Units

  (2)    (5)      3,939     $ 18,931     $ 35,455     $ 9.00       5.6     3.8

Jupiter Resources Inc.

  (8)    (6)      1,261       14,620       5,361       4.25       0.8       0.6  
       

 

 

   

 

 

     

 

 

   

 

 

 

Total

 

    33,551       40,816         6.4       4.4  
       

 

 

   

 

 

     

 

 

   

 

 

 

Total of all restricted investments

 

  $ 47,559     $ 68,906         10.8     7.4
       

 

 

   

 

 

     

 

 

   

 

 

 

 

(1)

The Fund values its investment in Plains AAP, L.P. (“PAGP-AAP”) on an “as exchanged” basis based on the higher public market value of either Plains GP Holdings, L.P. (“PAGP”) or Plains All American, L.P. (“PAA”). As of February 28, 2019, the Fund’s PAGP-AAP investment is valued at PAA’s closing price.

 

(2)

Security was acquired at various dates in current and/or prior fiscal years.

 

(3)

The Fund’s investment in PAGP-AAP is exchangeable on a one-for-one basis into either PAGP shares or PAA units at the Fund’s option. Upon exchange, the PAGP shares or PAA units will be freely tradable.

 

(4)

These securities have a fair market value determined by the mean of the bid and ask prices provided by an agent or a syndicate bank, a principal market maker, an independent pricing service or an independent broker. These securities have limited trading volume and are not listed on a national exchange.

 

(5)

Unregistered or restricted security of a publicly-traded company.

 

(6)

Unregistered security of a private company.

 

(7)

Securities are valued using inputs reflecting the Fund’s own assumptions.

 

(8)

On December 28, 2018, as part of a recapitalization transaction, the Fund received shares from Jupiter Resources Inc.


At February 28, 2019, the cost basis of investments for federal income tax purposes was $889,166. At February 28, 2019, gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

Gross unrealized appreciation

   $ 138,993  

Gross unrealized depreciation

     (112,216
  

 

 

 

Net unrealized appreciation

   $ 26,777  
  

 

 

 

The cost basis for federal income tax purposes is estimated based on information available from the Fund’s portfolio companies. In some cases, this information is very limited. Accordingly, the actual cost basis may prove higher or lower than the estimated cost basis included above.

As required by the Fair Value Measurement and Disclosures of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 820”), the Fund has performed an analysis of all assets and liabilities measured at fair value to determine the significance and character of all inputs to their fair value determination.

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 Fund 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 Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The following table presents the Fund’s assets and liabilities measured at fair value on a recurring basis at February 28, 2019, and the Fund presents these assets and liabilities by security type and description on its Schedule of Investments. 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

   $ 896,165      $ 839,255      $ 16,094 (1)     $ 40,816  

Debt investments

     19,779               19,779        
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets at fair value

   $ 915,944      $ 839,255      $ 35,873     $ 40,816  
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities at Fair Value

          

Call option contracts written

   $ 31      $      $ 31     $  

 

(1)

The Fund’s investment in Plains AAP, L.P. (“PAGP-AAP”) is exchangeable on a one-for-one basis into either Plains GP Holdings, L.P. (“PAGP”) shares or Plains All American Pipeline, L.P. (“PAA”) units at the Fund’s option. The Fund values its PAGP-AAP investment on an “as exchanged” basis based on the higher public market value of either PAGP or PAA. As of February 28, 2019, the Fund’s PAGP-AAP investment is valued at PAA’s closing price. The Fund categorizes its investment as a Level 2 security for fair value reporting purposes.

The following table presents the Fund’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended February 28, 2019.

 

      Equity
Investments
 

Balance — November 30, 2018

   $ 35,455  

Purchases

      

Issuances

      

Transfers in from Level 2

     6,599  

Transfers out to Level 1 and 2

      

Realized gains (losses)

      

Unrealized gains (losses), net

     (1,238
  

 

 

 

Balance — February 28, 2019

   $ 40,816  
  

 

 

 

The $6,599 transfer in from Level 2 relates to the Fund’s investment in a senior unsecured note issued by Jupiter Resources Inc. (Level 2). On December 28, 2018, the Fund exchanged this debt investment for Jupiter Resources Inc. common stock as part of a recapitalization transaction. The common stock investment in Jupiter Resources Inc. is not traded and is considered a Level 3 security. The Fund utilizes the beginning of reporting period method for determining transfers between levels.

The $1,238 of net unrealized losses relate to investments that are still held at the end of the reporting period.


As required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification (ASC 815), the following are the derivative instruments and hedging activities of the Fund.

The following table sets forth the fair value of the Fund’s derivative instruments:

 

Derivatives Not Accounted for as
Hedging Instruments

  

Statement of Assets and Liabilities

Location

  

Fair Value as of

February 28, 2019

Call options written

   Call option contracts written    $(31)

The following table sets forth the effect of the Fund’s derivative instruments on the Fund’s operations:

 

           For the Three Months Ended
February 28, 2019
 

Derivatives Not Accounted for as
Hedging Instruments

  

Location of Gains/(Losses) on
Derivatives Recognized in Income

   Net Realized
Gains/(Losses) on
Derivatives
Recognized in
Income
     Change in
Unrealized
Gains/(Losses) on
Derivatives
Recognized in
Income
 

Call options written

   Options    $ 240      $ 21  

The Fund’s investments are concentrated in the energy sector. The focus of the Fund’s portfolio within the energy sector may present more risks than if the Fund’s portfolio were broadly diversified across numerous sectors of the economy. A downturn in the energy sector would have a larger impact on the Fund than on an investment company that does not focus on the energy sector. 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 Fund invests a relatively high percentage of its assets in the securities of a limited number of issuers, the Fund may be more susceptible than a more widely diversified investment company to any single economic, political or regulatory occurrence. At February 28, 2019, the Fund had the following investment concentrations:

 

Category

  

Percent of

Long-Term

Investments

Securities of energy companies

   100.0% 

Equity securities

     97.8%

Debt securities

       2.2%

Securities of MLPs(1)

     24.4%

Largest single issuer

       9.9%

Restricted securities

       7.5%

 

(1)

Securities of MLPs consist of entities that are structured as limited partnerships and limited liability companies that are publicly traded and are treated as partnerships for federal income tax purposes, and their affiliates.

Securities valuation policies and other investment related disclosures are hereby incorporated by reference to the Fund’s annual report previously filed with the Securities and Exchange Commission on form N-CSR on January 25, 2019 with a file number 811-22467.

Other information regarding the Fund is available in the Fund’s most recent annual report. This information is also available on the Fund’s website at www.kaynefunds.com; or on the website of the Securities and Exchange Commission at www.sec.gov.

 

Item 2.

Controls and Procedures.

(a)  As of a date within 90 days of the filing date of this report, the principal executive officer and the principal financial officer concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) were effective based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) or 15d-15(b) under the Securities and Exchange Act of 1934, as amended.

(b)  There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 3.

Exhibits.

The certifications for the principal executive officer and the principal financial officer of the registrant as required by Rule 30a-2(a) under the 1940 Act are filed as exhibits to this report.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

/S/    KEVIN S. MCCARTHY

Name:   Kevin S. McCarthy
Title:   Chairman of the Board of Directors
and Chief Executive Officer
Date:   April 25, 2019

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/S/    KEVIN S. MCCARTHY

Name:   Kevin S. McCarthy
Title:   Chairman of the Board of Directors
and Chief Executive Officer
Date:   April 25, 2019

 

/S/    TERRY A. HART

Name:   Terry A. Hart
Title:   Chief Financial Officer, Treasurer and Assistant Secretary
Date:   April 25, 2019