UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-21750

Kayne Anderson Energy Total Return Fund, Inc.

(Exact name of registrant as specified in charter)

1800 Avenue of the Stars, Second Floor, Los Angeles, California		90067
(Address of principal executive offices)		(Zip code)

David Shladovsky, Esq.
KA Fund Advisors, LLC, 1800 Avenue of the Stars, Second Floor, Los Angeles, California 90067

(Name and address of agent for service)

Registrant’s telephone number, including area code: (310) 556-2721

Date of fiscal year end: November 30, 2007

Date of reporting period: November 30, 2007

     Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

     A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

Item 1. Reports to Stockholders.

     The report of Kayne Anderson Energy Total Return Fund, Inc. (the “Registrant”) to stockholders for the year ended November 30, 2007 is attached below.

CONTENTS

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report contains “forward-looking statements” as defined under the U.S. federal securities laws. Generally, the words “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 materially differ from the Fund’s historical experience and its present expectations or projections indicated in any forward-looking statement. These risks include, but are not limited to, changes in economic and political conditions; regulatory and legal changes; energy industry risk; commodity pricing risk; leverage risk; valuation risk; non-diversification risk; interest rate risk; tax risk; and other risks discussed in the Fund’s filings with the SEC. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The Fund undertakes no obligation to update or revise any forward-looking statements made herein. There is no assurance that the Fund’s investment objectives will be attained.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

LETTER TO STOCKHOLDERS

 

January 25, 2008

 

Dear Fellow Stockholders:

 

It was a tumultuous year for many of the energy-related sectors in which we invest, and we are pleased that we were able to navigate through the volatility and generate very strong returns. As an example of volatile sector performance, the MLP equity market showed tremendous strength in the first seven months of fiscal 2007, generating total returns of 20.3%, while the last five months of the fiscal year was one of the most difficult periods in recent memory. Additionally, the extremely strong performance of equities in the Marine Transportation sector during the first 11 months of fiscal 2007 was followed by a sharp downturn in November. In spite of the correction, the Marine Transportation sector generated total returns of 58.6% during the year. Canadian Royalty Trust equities showed several periods of strong performance, but ended up only 2.7% for the year. Finally, Coal equities improved substantially from August lows and ended the year up 32.4%.

 

Volatility in the market has continued in the first quarter of fiscal 2008, largely the result of weak performance of the overall equity markets, turbulence in the credit markets and fears of a global recession. As explained in greater detail later in this letter, we believe that the fundamentals for our underlying portfolio remain quite strong.

 

In light of this volatility, we are very pleased with our performance during fiscal 2007. One of the measures we employ to evaluate our performance is Net Asset Value Return, which is equal to the change in net asset value per share plus the dividends paid during the period being measured, assuming reinvestment in our dividend reinvestment program. During fiscal 2007, our Net Asset Value Return was 21.8%. During this period, our Net Asset Value per share increased from $25.44 to $29.01, and we paid cash dividends of $1.84 per share. Another measure of our performance is the Total Market Return, which is equal to the change in share price plus the dividends paid during the period, assuming reinvestment in our dividend reinvestment program. In spite of the turbulence in the overall equity and closed end fund markets, our Total Market Return was 10.2% during fiscal 2007.

 

Investments in equity securities were 87% of the Fund’s long-term investments and fixed income investments comprised the remaining 13%. The Fund’s long-term investments were categorized as follows: MLPs and MLP Affiliates (42%), Canadian Royalty Trusts (19%), Marine Transportation (19%), Coal Companies (5%) and U.S. Royalty Trusts and Other Energy Companies (15%).

 

Market Overview

 

One of the benefits of our portfolio is the diversification provided by investing in multiple energy-related sectors. This was demonstrated during fiscal 2007 as the total returns varied significantly by sector.

 

During the first seven months of fiscal 2007, the MLP equity markets (as measured by the Citigroup MLP Index, a market capitalization weighted index of 47 energy-related MLPs) had a total return of 20.3%. The MLP equity market declined substantially from its peak in mid-July, which resulted in a negative 8.3% total return for the Citigroup MLP Index for the last five months of fiscal 2007. In spite of the volatility in unit price performance, operating performance of the underlying portfolio companies was very strong throughout the year. The constituents in the Citigroup MLP Index increased distributions during the fiscal year by a weighted average of 11.3%. The sectors with the strongest distribution growth were the General Partner MLP sector and the Upstream MLP sector, which increased distributions by an average of 20.3% and 23.7%, respectively. During fiscal 2007, 48 of the 68 energy-related MLPs had distribution increases of 5% or more and 30 of those MLPs had distribution increases of greater than 10%.

 

There are numerous factors that we believe contributed to the decline in the unit prices of MLPs during the last five months of fiscal 2007, but virtually all are related directly or indirectly to credit market woes and declines in broader capital markets. The MLP equity market underperformed the broader equity market during this period, in part because MLPs experienced selling pressure that we believe was the result of multi-strategy hedge funds that liquidated MLP holdings in order to fund margin calls or to rotate into other sectors, as well as selling by retail investors. We also believe that some dedicated MLP funds contributed to the volatility in the sector during this period.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

LETTER TO STOCKHOLDERS — (CONTINUED)

 

The Canadian Royalty Trust sector performed well through mid-year, but was impacted beginning in August by broader market declines, declining natural gas prices and worldwide credit worries. After stock prices recovered in September and October, stock prices weakened again in November as the Alberta government approved substantial increases in oil and gas royalty rates and there were renewed concerns about high storage levels for natural gas. The changes to the royalty rates have drawn great protest from Canadian oil and gas producers and even caused EnCana Corporation, which is one of the largest producers in Canada, to threaten to reduce capital expenditures in Alberta by $1 billion. As a result of increasing pressure on operating costs, as well as the concerns relating to the ability to raise additional equity capital as a result of the prospective change in the taxation of royalty trusts, we saw significant consolidation in the sector during fiscal 2007, with five significant mergers being announced or completed. For fiscal 2007, we calculated that a market-weighted composite of 36 Canadian Royalty Trusts had a total return of 2.7%.

 

The Marine Transportation sector, which comprised 19% of long-term investments at fiscal year end, was sharply higher for the year. We calculated that the total return of a market-weighted composite of 33 Marine Transportation companies was 58.6% for fiscal 2007. This performance was largely attributable to the stock price performance of the dry bulk segment, which was driven by a 135% increase during fiscal 2007 in the Baltic Dry Index (which is an index that tracks dry bulk shipping rates) as a result of solid demand growth for the transportation of dry bulk commodities relative to vessel supply. Stock prices of dry bulk companies began to give back some of their gains in November; the Marine Transportation index declined by 9.9% during the month.

 

While only a small portion of our portfolio, the Coal sector had strong performance during fiscal 2007. Central Appalachian coal prices strengthened throughout the year. Much of this increase was driven by higher coal exports, which were up 14.0% for 2007 versus 2006 as a result of strong international demand and a weaker U.S. dollar. We calculated that a market-weighted composite of nine coal companies had a total return of 32.4% for fiscal 2007.

 

2008 Outlook

 

We expect the MLP equity market to continue to face challenges during the first half of 2008, as concerns remain over the impact of a recession, continued credit market woes and the continued need of MLPs to access the market for capital to fund growth.

 

We believe that third-party acquisition activity will continue to drive distribution growth in 2008, but that third-party acquisition activity will be at a lower level than 2007. We believe that after a short transition period, M&A multiples will decline to reflect the higher cost of capital. As a result, the accretive nature of the acquisitions will remain intact. Continuing a trend we saw in 2007, we think distribution growth will increasingly be driven by drop-down acquisitions (transactions where the general partner sells assets to the MLP) and internal growth projects. There has been a significant increase in the number of announced internal growth projects, which consist of expanding existing assets and constructing new assets. These opportunities typically have much higher expected returns (or lower multiples) than third-party acquisitions. We believe that MLPs will spend more than $10 billion on drop-down acquisitions and internal growth projects in 2008. As a result, we expect that distribution increases will be consistent with the double digit growth rates experienced in the past three years. While the ability to finance these projects may be more of an issue in 2008 than in 2007, we believe this provides us a greater opportunity to provide financing solutions to MLPs on a privately negotiated basis.

 

We believe that the total return prospects for Canadian Royalty Trusts are good, but that returns will vary substantially from trust to trust. As a result, we believe that stock selection will continue to be an important factor in generating strong returns in this sector. Canadian Royalty Trusts have been and will continue to be impacted by the prospect of weaker natural gas prices, higher royalties in Alberta and a relatively strong Canadian dollar that has mitigated the impact of higher oil prices and reduced drilling activity. While the risk remains that cash distributions will be reduced for some trusts as a result of these negative factors, we believe much of this risk is reflected in the lower prices of trusts compared to mid-year 2007. Some of this risk will be offset by a lower dependence upon acquisition activity and an increasing percentage of capital programs that are funded from internally generated cash

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

LETTER TO STOCKHOLDERS — (CONTINUED)

 

flow. We believe there could be significant upside with an upturn in realized natural gas prices or with any relief from the prospective taxation of the Canadian Royalty Trusts as corporations.

 

We continue to believe that the Marine Transportation sector has attractive long-term prospects, because it will continue to benefit from increasing global trade and economic growth. In the near term, we expect continued volatility in charter rates due to near-term uncertainty as to whether demand growth can absorb expected increases in shipping capacity and the impact of a potential recession in the United States on the global economy. In fact, these concerns have been reflected in stock price performance during the first quarter of fiscal 2008 and the Baltic Dry Index, which fell 43.4% from November 30, 2007 to January 25, 2008. This variability will continue to result in more volatile share price performance and dividends than in our other segments. To mitigate this, we will continue to focus our investments in companies that offer intermediate and long-term contracts that support attractive yields.

 

We expect that stock prices for Coal companies will remain strong as higher international coal prices, a weaker U.S. dollar and strong pricing for thermal coal deliveries into Europe drive domestic coal prices higher. We remain very positive on the long-term prospects for coal due to its abundant domestic supply and cost advantages relative to other energy sources.

 

Fiscal 2007 Financial Highlights

 

MLP equity securities, which are generally treated as partnerships for federal income tax purposes, comprised 24.3% of our total assets as of November 30, 2007. As a limited partner in the MLPs, we are allocated our pro rata share of the MLP’s taxable income. During fiscal 2007, we estimated that 90% of the MLP distributions received will be treated as a return of capital for tax purposes. Some of our non-MLP equity investments also have dividends or distributions that are treated as a return of capital, in percentages that range between 3% and 100%. For financial reporting purposes, we reflect our dividends and distributions net of the return of capital portion. As a result, only a portion of the cash dividends and distributions received from MLPs and non-MLP equity investments are included in investment income. The portion of the distributions and dividends we received that are treated as a return of capital are reflected as a reduction in the cost basis of our portfolio securities, which has the effect of increasing realized and unrealized gains by that same amount.

 

During fiscal 2007, the Fund had a net increase in net assets resulting from operations of $189.1 million. The components of this increase are (i) net investment income of $34.8 million, (ii) net realized gains of $38.5 million and (iii) net change in unrealized gains of $115.8 million.

 

During fiscal 2007, our net investment income was $34.8 million. This consisted of gross dividends and distributions of $67.1 million, or $38.4 million of net dividends and distributions after the deduction of $24.7 million of cash dividends and distributions received by us that were treated as a return of capital and after $4.0 million of foreign taxes. Interest income on fixed income investments and repurchase agreements was $15.0 million. Expenses were $18.6 million, including $14.4 million of investment management fees (net of fee waivers). Investment management fees (net of fee waivers) were equal to an annual rate of 1.19% of total average assets.

 

Net realized gains during fiscal 2007 were $38.5 million, consisting of realized gains on investments of $34.4 million, losses of $0.1 million on foreign currency transactions, gains on options written of $3.0 million, and $1.2 million of gains pursuant to interest rate swap contracts.

 

Net change in unrealized gains during fiscal 2007 was $115.8 million, consisting of unrealized gains on investments of $122.3 million offset by a decrease in the mark-to-market value of the interest rate swap contracts of $6.0 million and unrealized losses on options written of $0.5 million.

 

During fiscal 2007, we paid four quarterly dividends to our common stockholders, which totaled $1.84 per share. On January 11, 2008, we paid a dividend of $0.49 per share to stockholders of record on December 31, 2007. The payment of this dividend represents our seventh dividend increase and a 20.6% increase from our initial quarterly dividend paid on October 14, 2005. Management intends to continue paying quarterly dividends and

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

LETTER TO STOCKHOLDERS — (CONCLUDED)

 

expects to increase its dividends to the extent permitted by increases in the dividends and distributions from the Fund’s portfolio investments.

 

We look forward to continuing to execute on our business plan of achieving high total returns by investing in MLPs, Royalty Trusts and Other Energy Companies. We invite you to visit our website at www.kaynefunds.com for the latest updates.

 

Sincerely,

 

 

Kevin S. McCarthy

Chairman of the Board of Directors,

President and Chief Executive Officer

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

PORTFOLIO SUMMARY

NOVEMBER 30, 2007

(UNAUDITED)

 

Portfolio Investments, by Category

 

 

Top 10 Holdings, by Issuer

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

MANAGEMENT DISCUSSION

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2007

 

This discussion contains forward looking statements and good faith estimates. The reader is referred to the disclosure on such matters at the beginning of this annual report.

 

Overview

 

Kayne Anderson Energy Total Return Fund, Inc. (the “Fund”) is a non-diversified, closed-end fund with an investment objective to obtain a high total return with an emphasis on current income by investing primarily in securities of companies engaged in the energy industry. The Fund’s investments include master limited partnerships and limited liability companies taxed as partnerships (“MLPs”), MLP affiliates, U.S. and Canadian royalty trusts and income trusts (collectively, “royalty trusts”), marine transportation companies, and other companies that derive at least 50% of their revenues from operating assets used in, or providing energy-related services for, the exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining or marketing of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products or coal. It is the Fund’s intention to be treated as and to qualify each year for special tax treatment afforded a Regulated Investment Company under Subchapter M of the Internal Revenue Code. As long as the Fund meets certain requirements that govern its source of income, diversification of assets and timely distribution of earnings to stockholders, the Fund will not be subject to U.S. federal income tax.

 

During the fiscal year ended November 30, 2007, the Fund’s investments, as well as additional capital from the Fund’s revolving credit line, increased the long-term investments of the Fund to $1.3 billion at November 30, 2007 compared to $1.1 billion at November 30, 2006. At November 30, 2007, equity and fixed income investments were 87% and 13%, respectively, of the Fund’s long-term investments. At November 30, 2007, the Fund’s long-term investments were as follows:

 

Long-term Investments

 

 

MLP equity securities, which are generally treated as partnerships for federal income tax purposes, comprised 25% of the Fund’s long-term investments as of November 30, 2007. As a limited partner in the MLPs, the Fund is allocated its pro rata share of the MLP’s taxable income. During the fiscal year ended November 30, 2007, the Fund estimated that 90% of the MLP distributions received would be treated as a return of capital for tax purposes. During fiscal 2007, certain of the Fund’s royalty trusts and marine transportation companies had dividends or distributions that were estimated to be a return of capital for tax purposes. For financial reporting purposes, the Fund reflects its dividends and distributions net of the return of capital portion. As a result, only 10% of the cash distributions from MLPs received during the fiscal period and only a portion of the dividends and distributions received from certain non-MLP equity investments are included in investment income. The portion of the distributions and dividends that we received that are treated as a return of capital are reflected as a reduction in the cost basis of the Fund’s portfolio securities, which has the effect of increasing realized and unrealized gains by that same amount.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

MANAGEMENT DISCUSSION — (CONCLUDED)

 

Performance Review

 

One of the measures we employ to evaluate our performance is Net Asset Value Return, which is equal to the change in net asset value per share plus the dividends paid during the period being measured, assuming reinvestment at prices obtained through our dividend reinvestment program. During fiscal 2007, our Net Asset Value Return was 21.8%. During this period, our net asset value per share increased by $3.57, or 14.0%, from $25.44 at November 30, 2006 to $29.01 at November 30, 2007. Another measure of our performance is the Total Market Return, which is equal to the change in share price plus the dividends paid during the period, assuming reinvestment in our dividend reinvestment program. In spite of the turbulence in the overall equity and closed end fund markets, our Total Market Return was 10.2% during fiscal 2007.

 

The Fund paid quarterly dividends totaling $1.84 per share to its common stockholders during fiscal 2007.

 

Financial Review

 

During the fiscal year ended November 30, 2007, the Fund had a net increase in net assets resulting from operations of $189.1 million before dividends to preferred stockholders of $16.1 million. The components of this increase are (i) net investment income of $34.8 million, (ii) net realized gains of $38.5 million, and (iii) net change in unrealized gains of $115.8 million.

 

The Fund earned net investment income of $34.8 million during fiscal 2007. This consisted of net dividends and distributions of $38.4 million (net of $4.0 million of foreign taxes), which was after the deduction of $24.7 million of cash dividends and distributions received by the Fund that were treated as a return of capital. Interest income on repurchase agreements and fixed income investments was $15.0 million. Expenses were $18.6 million, including $14.4 million of investment management fees (net of fee waivers).

 

Net realized gains during fiscal 2007 were $38.5 million, consisting of realized gains on investments of $34.4 million, gains on options of $3.0 million, gains of $1.2 million from payments pursuant to interest rate swap contracts and losses of $0.1 million on foreign currency transactions.

 

Net change in unrealized gains during fiscal 2007 was $115.8 million, consisting of unrealized gains on investments of $122.3 million, offset by losses on options of $0.5 million and a decrease in the mark-to-market value of the interest rate swap contracts of $6.0 million. To partially hedge itself against interest rate risk, the Fund had entered into interest rate swap contracts with a notional value of $210 million. At November 30, 2007, these contracts had a weighted average fixed rate of 4.67% and a weighted average duration of 4.3 years.

 

Recent Events

 

On December 6, 2007 and January 22, 2008, the Fund entered into two additional interest rate swap agreements with a notional value of $25 million and $30 million, at a fixed interest rate of 3.85% and 3.20%, respectively. Each of these interest rate swap agreements has a maturity of three years. Under the agreements, the Fund receives floating rate of interest and pays a fixed rate of interest on the notional value of the swaps.

 

On January 11, 2008, the Fund paid a dividend to its common stockholders in the amount of $0.49 per share, for a total of $15.8 million. Pursuant to the Fund’s dividend reinvestment plan, $5.4 million was reinvested, consisting of 209,275 shares of common stock that were purchased in the open market to satisfy such reinvestment plan.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

SCHEDULE OF INVESTMENTS

NOVEMBER 30, 2007

(amounts in 000’s)

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

SCHEDULE OF INVESTMENTS — (CONTINUED)

NOVEMBER 30, 2007

(amounts in 000’s)

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

SCHEDULE OF INVESTMENTS — (CONTINUED)

NOVEMBER 30, 2007

(amounts in 000’s)

 

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

SCHEDULE OF INVESTMENTS — (CONTINUED)

NOVEMBER 30, 2007

(amounts in 000’s)

 

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

SCHEDULE OF INVESTMENTS — (CONTINUED)

NOVEMBER 30, 2007

(amounts in 000’s)

 

 

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

SCHEDULE OF INVESTMENTS — (CONCLUDED)

NOVEMBER 30, 2007

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

NOVEMBER 30, 2007

(amounts in 000’s, except share and per share amounts)

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

STATEMENT OF OPERATIONS

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2007

(amounts in 000’s)

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

STATEMENT OF CHANGES IN NET ASSETS

APPLICABLE TO COMMON STOCKHOLDERS

(amounts in 000’s, except share amounts)

 

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

STATEMENT OF CASH FLOWS

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2007

(amounts in 000’s)

 

 

 

Supplemental disclosure of cash flow information:

 

Non-cash financing activities not included herein consist of reinvestment of distributions of $14,111 pursuant to the Fund’s dividend reinvestment plan.

 

During the fiscal year ended November 30, 2007, state taxes paid were $123 and interest paid was $978.

 

See accompanying notes to financial statements.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

 

 

See accompanying notes to financial statements.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

FINANCIAL HIGHLIGHTS — (CONCLUDED)

(amounts in 000’s, except share and per share amounts)

 

 

 

See accompanying notes to financial statements.

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS

 

NOVEMBER 30, 2007

(amounts in 000’s, except option contracts written, share and per share amounts)

 

 

Kayne Anderson Energy Total Return Fund, Inc. (the “Fund”) was organized as a Maryland corporation on March 31, 2005 and commenced operations on June 28, 2005. The Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified closed-end investment company. The Fund’s investment objective is to obtain a high total return with an emphasis on current income. The Fund seeks to achieve this objective by investing primarily in securities of companies engaged in the energy industry, principally including publicly-traded energy-related master limited partnerships and limited liability companies taxed as partnerships (“MLPs”), MLP affiliates, energy-related U.S. and Canadian royalty trusts and income trusts (collectively, “royalty trusts”) and other companies that derive at least 50% of their revenues from operating assets used in, or providing energy-related services for, the exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining or marketing of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products or coal (collectively with MLPs, MLP affiliates and royalty trusts, “Energy Companies”). Effective December 31, 2006, Kayne Anderson Capital Advisors, L.P. (“KACALP” or the “Former Adviser”) assigned the Investment Management Agreement to its subsidiary, KA Fund Advisors, LLC (“KAFA “or the “Adviser”). That assignment occurred only for internal organizational purposes and did not result in any change of corporate officers, portfolio management personnel or control. The Fund’s shares of common stock are listed on the New York Stock Exchange, Inc. (“NYSE”) under the symbol “KYE.”

 

 

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 at 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. Calculation of Net Asset Value — The Fund determines its net asset value as of the close of regular session trading on the NYSE (normally 4:00 p.m. Eastern time) no less frequently than the last business day of each month, and makes its net asset value available for publication monthly. Net asset value is computed by dividing the value of the Fund’s assets (including accrued interest and dividends), less all of its liabilities (including accrued expenses, dividends payable and any borrowings) by the total number of common shares outstanding.

 

C. 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 asked prices on such day, except for short sales and call option contracts written, for which the last quoted asked price is used. 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. Fixed income securities with a remaining maturity of 60 days or more are valued by the Fund using a pricing service. Fixed income securities maturing within 60 days will be valued on an amortized cost basis. The Fund 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 Fund for which reliable market quotations are not readily available, valuations are determined in a

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

manner that most fairly 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:

 

 

Unless otherwise determined by the Board of Directors, securities that are convertible into or otherwise will become publicly tradable (e.g., through subsequent registration or expiration of a restriction on trading) are valued through the process described above, using a valuation based on the market value of the publicly traded security less a discount. The discount is initially equal in amount to the discount negotiated at the time the purchase price is agreed to. To the extent that such securities are convertible or otherwise become publicly traded within a time frame that may be reasonably determined, KAFA may determine an amortization schedule for the discount in accordance with a methodology approved by the Valuation Committee.

 

At November 30, 2007, the Fund held 3.4% of its net assets applicable to common stockholders (2.4% of total assets) in securities valued at fair value as determined pursuant to procedures adopted by the Board of Directors, with an aggregate fair value of $31,584.

 

Exchange traded options and futures contracts are valued at the closing price in the market where such contracts are principally traded.

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosure about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The changes to current generally accepted accounting principles from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. As of December 1, 2007, the Fund adopted SFAS No. 157. The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of this standard did not have any material effect on the Fund’s net asset value.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

D. Repurchase Agreements — The Fund has agreed to purchase securities from financial institutions subject to the seller’s agreement to repurchase them at an agreed-upon time and price (“repurchase agreements”). The financial institutions with whom the Fund 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 Fund to possible loss because of adverse market action or delays in connection with the disposition of the underlying securities.

 

E. Short Sales — A short sale is a transaction in which the Fund 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 Fund may arrange through a broker to borrow the securities to be delivered to the buyer. The proceeds received by the Fund for the short sale are retained by the broker until the Fund replaces the borrowed securities. In borrowing the securities to be delivered to the buyer, the Fund becomes obligated to replace the securities borrowed at their market price at the time of replacement, whatever the price may be.

 

All short sales are fully collateralized. The Fund maintains 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 Fund is liable for any dividends or distributions paid on securities sold short.

 

The Fund may also sell short “against the box” (i.e., the Fund enters into a short sale as described above while holding an offsetting long position in the security which it sold short). If the Fund enters into a short sale “against the box,” the Fund segregates an equivalent amount of securities owned as collateral while the short sale is outstanding. At November 30, 2007, the Fund had no open short sales.

 

F. Option Writing — When the Fund writes an option, an amount equal to the premium received by the Fund 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 Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized 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 Fund has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, 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 6 — Option Contracts Written for more detail on option contracts written.

 

G. Security Transactions and Investment Income — 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. Dividend and distribution income is recorded on the ex-dividend date. Interest income is recognized on the accrual basis, including amortization of premiums and accretion of discounts. Distributions received from the Fund’s investments in MLPs and royalty trusts generally are comprised of income and return of capital. For the fiscal year ended November 30, 2007, the Fund estimated that 90% of the MLP distributions received and 5% of Canadian Royalty Trust distributions received would be treated as a return of capital. The Fund recorded as return of capital the amount of $24,706 of dividends and distributions received from its investments. Included in this amount is an increase of $645 attributable to distributions received in fiscal 2006 based on tax reporting information received by the Fund in fiscal 2007. The return of capital of $24,706 resulted in an equivalent reduction in the cost basis of the associated investments. Net Realized Gains and Net Change in Unrealized Gains in the accompanying Statement of Operations were increased by $4,585 and $20,121, respectively, attributable to the recording of such dividends and distributions as reduction in the cost basis of investments. The Fund records investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP and royalty trust and other industry sources. These estimates may

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

subsequently be revised based on information received from MLPs and royalty trusts after their tax reporting periods are concluded.

 

H. Dividends and Distributions to Stockholders — Dividends and distributions to common stockholders are recorded on the ex-dividend date. The character of dividends made during the year may differ from their ultimate characterization for federal income tax purposes. Dividend and distributions to stockholders of each series of the Fund’s Auction Rate Preferred Stock are accrued on a daily basis and are determined as described in Note 9 — Preferred Stock. The Fund’s dividends may be comprised of return of capital and ordinary income, which is based on the earnings and profits of the Fund. The Fund is unable to make final determinations as to the tax character of the dividend until the January after the end of the current fiscal year. The Fund informs its common stockholders of the tax character of dividends during that fiscal year in January following such fiscal year.

 

I. Partnership Accounting Policy — The Fund records its pro-rata share of the income/(loss) and capital gains/(losses), to the extent of dividends it has received, allocated from the underlying partnerships and adjusts the cost of the underlying partnerships accordingly. These amounts are included in the Fund’s Statement of Operations.

 

J. Taxes — It is the Fund’s intention to continue to be treated as and to qualify each year for special tax treatment afforded a Regulated Investment Company under Subchapter M of the Internal Revenue Code. As long as the Fund meets certain requirements that govern its source of income, diversification of assets and timely distribution of earnings to stockholders, the Fund will not be subject to U.S. federal income tax.

 

Income and capital gain distributions made by Regulated Investment Companies often differ from the aggregate GAAP basis net investment income and net realized gains. For the Fund, the principal reason for these differences is the return of capital treatment of dividends and distributions from MLPs, royalty trusts and certain other of its investments. As of November 30, 2007, accumulated dividends and distributions to preferred and common stockholders exceeded accumulated net investment income and net realized gains for GAAP purposes by $16,390. Net investment income and net realized gains for GAAP purposes may differ from taxable income for federal income tax purposes due to wash sales, disallowed partnership losses from MLPs and foreign currency transactions. As of November 30, 2007, the principal temporary differences were realized losses that were recognized for book purposes, but disallowed for tax purposes due to wash sale rules, and disallowed partnership losses related to the Fund’s MLP investments. For purposes of characterizing the nature of the dividend to investors, the amounts in excess of the Fund’s earnings and profits for federal income tax purposes is treated as a return of capital. Earnings and profits differ from the taxable income due principally to adjustments related to the Fund’s investments in MLPs

 

The tax basis of the components of distributable earnings can differ from the amounts reflected in the Statement of Assets and Liabilities due to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At November 30, 2007, the components of the distributable earnings on a tax basis, for the Fund were as follows:

 

 

For the fiscal year ended November 30, 2007, the tax character of the total $58,842 dividends and distributions paid to common stockholders was $43,513 (ordinary income) and $15,329 (capital gains). For the fiscal year ended November 30, 2007, the tax character of the $16,101 dividend paid to preferred stockholders was $11,907 (ordinary income) and $4,194 (capital gains).

 

For the fiscal year ended November 30, 2006, the tax character of the total $54,093 dividends and distributions paid to common stockholders was $53,005 (ordinary income) and $1,088 (return of capital). For the fiscal year

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

ended November 30, 2006, the tax character of the $13,721 dividend paid to preferred stockholders was ordinary income.

 

At November 30, 2007, the identified cost of investments for federal income tax purposes was $1,106,982, and the cash received on option contracts written was $847. At November 30, 2007, gross unrealized appreciation and depreciation of investments and options for federal income tax purposes were as follows:

 

 

Dividend income received by the Fund from sources within Canada is subject to a 15% foreign withholding tax.

 

Interest income on Canadian corporate obligations may be subject to a 10% withholding tax unless an exemption is met. The most common exemption available is for corporate bonds that have a tenure of at least 5 years, provided that not more than 25% of the principal is repayable in the first five years and provided that the borrower and lender are not “associated.” Further, interest is exempt if derived from debt obligations guaranteed by the Canadian government.

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This standard defines the threshold for recognizing the benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50 percent likely to be realized. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. The Fund adopted FIN 48 as of December 1, 2007, and the adoption of the interpretation did not have a material effect on the Fund’s net asset value.

 

K. Foreign Currency Translations — The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, assets and liabilities at the rate of exchange as of the valuation date; and (ii) purchases and sales of investment securities, income and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions.

 

The Fund does not isolate that portion of gains and losses on investments in equity and debt securities which is due to changes in the foreign exchange rates from that which is due to changes in market prices of equity securities. Accordingly, realized and unrealized foreign currency gains and losses with respect to such securities are included in the reported net realized and unrealized gains and losses on investment transactions balances.

 

Net realized foreign exchange gains or losses represent gains and losses from transactions in foreign currencies and foreign currency contracts, foreign exchange gains or losses realized between the trade date and settlement date on security transactions, and the difference between the amounts of interest and dividends recorded on the Fund’s books and the U.S. dollar equivalent of such amounts on the payment date.

 

Net unrealized foreign exchange gains or losses represent the difference between the cost of assets and liabilities (other than investments) recorded on the Fund’s books from the value of the assets and liabilities (other than investments) on the valuation date.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

L. Offering Costs — Offering costs incurred in connection with the sale of shares of common stock and the issuance of each series of the preferred stock were charged to paid-in capital when the shares were issued.

 

M. Derivative Financial Instruments — The Fund uses derivative financial instruments (principally interest rate swap contracts) to manage interest rate risk. The Fund has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Fund does not hold or issue derivative financial instruments for speculative purposes. All derivative financial instruments are recorded at fair value with changes in value during the reporting period are included as unrealized gains or losses in the Statement of Operations. The Fund 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.

 

N. Indemnifications — Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnification to other parties. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred, and may not occur. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

 

 

The Fund’s investment objective is to obtain a high level of total return with an emphasis on current income paid to its stockholders. Under normal circumstances, the Fund intends to invest at least 80% of the aggregate of its net assets and borrowings (“total assets”) in securities of Energy Companies. The Fund invests in equity securities such as common stocks, preferred stocks, convertible securities, warrants, depository receipts, and equity interests in MLPs, MLP affiliates, royalty trusts and other Energy Companies. Additionally, the Fund may invest up to 30% of its total assets in debt securities of Energy Companies. It may directly invest up to 25% (or such higher amount as permitted by any applicable tax diversification rules) of its total assets in equity or debt securities of MLPs. The Fund may invest up to 50% of its total assets in unregistered or otherwise restricted securities of Energy Companies. It will not invest more than 15% of its total assets in any single issuer. The Fund may, for defensive purposes, temporarily invest all or a significant portion of its assets in investment grade securities, short-term debt securities and cash or cash equivalents. To the extent the Fund uses this strategy, it may not achieve its investment objectives.

 

 

A. Investment Management Agreement — The Fund has entered into an Investment Management Agreement with KAFA under which the Adviser, subject to the overall supervision of the Fund’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Fund. For providing these services, the Adviser receives a management fee from the Fund.

 

Pursuant to the Investment Management Agreement, the Fund has agreed to pay the Adviser, as compensation for the services rendered by it, a management fee, payable monthly, equal on an annual basis to 1.25% of the average monthly total assets of the Fund. During the second year of investment activities (from June 30, 2006 until June 29, 2007), KAFA has contractually agreed to waive or reimburse the Fund for fees and expenses in an amount equal on an annual basis to 0.125% of its average monthly total assets. For the fiscal year ended November 30, 2007, the fee waiver amounted to $852.

 

For purposes of calculating the management fee, the “average total assets” for each monthly period are determined by averaging the total assets at the last business day of that month with the total assets at the last business day of the prior month (or as of the commencement of operations for the initial period if a partial month). The total assets of the Fund shall be equal to its average monthly gross asset value (which includes assets attributable to or proceeds from the Fund’s use of preferred stock, commercial paper or notes issuances and other borrowings), minus

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

the sum of the Fund’s accrued and unpaid dividends on any outstanding common stock and accrued and unpaid dividends on any outstanding preferred stock and accrued liabilities (other than liabilities associated with borrowing or leverage by the Fund). Liabilities associated with borrowing or leverage include the principal amount of any borrowings, commercial paper or notes that issued by the Fund, 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 Fund.

 

B. Portfolio Companies — From time to time, the Fund may “control” or may be an “affiliate” of one or more portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Fund would be presumed to “control” a portfolio company if the Fund owned 25% or more of its outstanding voting securities and would be an “affiliate” of a portfolio company if the Fund 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 Fund’s investment adviser), principal underwriters and affiliates of those affiliates or underwriters.

 

The Fund believes that there is significant ambiguity in the application of existing SEC staff interpretations of the term “voting security” to complex structures such as limited partnership interests of the kind in which the Fund invests. As a result, it is possible that the SEC staff may consider that certain securities investments in limited partnerships are voting securities under the staff’s prevailing interpretations of this term. If such determination is made, the Fund 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 light of the ambiguity of the definition of voting securities, the Fund does not intend to treat any class of securities that it holds as “voting securities” unless the security holders of such class have the ability, under the partnership agreement, to remove the general partner (assuming a sufficient vote of such securities, other than securities held by the general partner, in favor of such removal) or the Fund has an economic interest of sufficient size that otherwise gives it the de facto power to exercise a controlling influence over the partnership. The Fund believes this treatment is appropriate given that the general partner controls the partnership, and without the ability to remove the general partner or the power to otherwise exercise a controlling influence over the partnership due to the size of an economic interest, the security holders have no control over the partnership.

 

C. Other Affiliates — For the fiscal year ended November 30, 2007, KA Associates, Inc., an affiliate of the Adviser, earned approximately $25 in brokerage commissions from portfolio transactions executed on behalf of the Fund.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

 

From time to time, certain of the Fund’s investments may be restricted as to resale, particularly private investments that are not registered under the Securities Act of 1933 and cannot, as a result, be offered for public sale in a non-exempt transaction without first being registered. Such restricted investments are valued in accordance with the procedures established by the Board of Directors and more fully described in Note 2 — Significant Accounting Policies. The table below shows the number of units held, the acquisition date, cost basis, and fair value as of November 30, 2007, fair value per unit of such security, percent of net assets applicable to common stockholders and percent of total assets which the security comprises.

 

 

 

 

 

Transactions in written call options for the fiscal year ended November 30, 2007 were as follows:

 

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONTINUED)

 

 

For the fiscal year ended November 30, 2007, the Fund purchased and sold securities in the amount of $706,550 and $631,131 (excluding short-term investments, options and interest rate swaps), respectively.

 

 

The Fund has an uncommitted revolving credit line with Custodial Trust Company (an affiliate of the administrator, Bear Stearns Funds Management Inc.), under which the Fund may borrow from Custodial Trust Company an aggregate amount of up to the lesser of $200,000 or the maximum amount the Fund is permitted to borrow under the 1940 Act, subject to certain limitations imposed by the lender. The credit line is secured by Fund assets held in custody by Custodial Trust Company. For the fiscal year ended November 30, 2007, the average amount outstanding was $17,108 with a weighted average interest rate of 6.27%. As of November 30, 2007, the Fund had outstanding borrowings on the revolving credit line of $41,000 and the interest rate was 5.78%. Any loans under this line are repayable on demand by the lender at any time.

 

 

On December 22, 2005 the Fund has issued three series of auction rate preferred stock (“Preferred Stock”) for a total of $300,000. Each series (Series A, Series B and Series C) consists of 4,000 outstanding shares and each in the amount of $100,000. The Fund has authorized a total of 21,000 shares of Preferred Stock. The Preferred Stock has rights determined by the Board of Directors. The Preferred Stock has a liquidation value of $25,000 per share plus any accumulated, but unpaid dividends, whether or not declared.

 

Holders of the Preferred Stock are entitled to receive cash dividend payments at an annual rate that may vary for each rate period. The dividend rates of Series A, B and C Preferred Stock as of November 30, 2007 were 5.37%, 5.45%, and 5.25%, respectively. The weighted average dividend rates of Series A, B and C Preferred Stock for the fiscal year ended November 30, 2007, were 5.25%, 5.31% and 5.32%, respectively. Each rate includes the applicable rate based on the latest results of the auction, and does not include commissions paid to the auction agent in the amount of 0.25%. Under the 1940 Act, the Fund may not declare dividends or make other distribution on shares of common stock or purchases of such shares if, at any time of the declaration, distribution or purchase, asset coverage with respect to the outstanding preferred stock would be less than 200%.

 

The Preferred Stock is redeemable in certain circumstances at the option of the Fund. The Preferred Stock is also subject to a mandatory redemption if the Fund fails to meet an asset coverage ratio required by law, or fails to cure deficiency as stated in the Fund’s rating agency guidelines in a timely manner.

 

The holders of Preferred Stock have voting rights equal to the holders of common stock (one vote per share) and will vote together with the holders of shares of common stock as a single class except on matters affecting only the holders of preferred stock or the holders of common stock.

 

KAYNE ANDERSON ENERGY TOTAL RETURN FUND, INC.

 

NOTES TO FINANCIAL STATEMENTS — (CONCLUDED)

 

 

The Fund has entered into interest rate swap contracts to partially hedge itself from increasing interest expense on its leverage resulting from increasing short-term interest rates. 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 Fund. In addition, if the counterparty to the interest rate swap contracts defaults, the Fund would not be able to use the anticipated receipts under the swap contracts to offset the interest payments on the Fund’s leverage. At the time the interest rate swap contracts reach their scheduled termination, there is a risk that the Fund 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 Fund is required to terminate any swap contract early, then the Fund could be required to make a termination payment. As of November 30, 2007, the Fund has entered into eight interest rate swap contracts with UBS AG as summarized below. For all eight swaps, the Fund receives a floating rate, based on one-month LIBOR.

 

 

At November 30, 2007, the weighted average duration of the interest rate swap contracts was 4.3 years and the weighted average fixed interest rate was 4.67%.

 

 

The Fund has 199,979,000 shares of common stock authorized. Of the 32,205,867 shares of common stock outstanding at November 30, 2007, KACALP owned 4,000 shares. Transactions in common shares for the fiscal year ended November 30, 2007, were as follows: