The following discussions should be read together with the unaudited consolidated financial statements and the notes thereto included in this report and with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K.

Forward-Looking Statements

Certain statements in this Form 10-Q include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as "forward-looking statements." These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties, and other factors that could cause our actual results to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "plan," "may," "will," "should," "expect" and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

• Our future operating results;

• 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 organized under the laws of the State of Maryland 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 February 28, 2009, our leverage to total assets was 25.0%.

Portfolio and Investment Activity

Our investments as of February 28, 2009 were comprised of equity securities of $148.9 million and fixed income investments of $22.8 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 February 28, 2009, 39%, or $8.8 million, of our interest-bearing portfolio is floating rate debt and 61%, or $14.0 million, is fixed rate debt.

Our portfolio allocations as of February 28, 2009 and November 30, 2008 are set forth below. For both periods our portfolio remains below its target of 70% for private MLPs. As valuations become more reasonable, we expect to rotate out of some of our public MLPs and into additional private MLPs.

                                                    Number of Portfolio
                                                       Companies at                        Percent of Long-Term Investments at
                                           February 28,            November 30,          February 28,              November 30,
                                               2009                    2008                  2009                      2008

Publicly Traded MLP and MLP Affiliate                 39                       43                   31.5 %                    33.0 %
Private MLP                                            4                        4                   54.8                      50.6
Other Private Equity                                   1                        1                    0.0                       0.0
Fixed Income Investments                               9                        9                   13.7                      16.4

                                                      53                       57                  100.0 %                   100.0 %

Our Top Ten Portfolio Investments as of February 28, 2009

Listed below are our top ten portfolio investments as of February 28, 2009,
represented as a percentage of our total assets.


                                                                                                             Percent
                                      Public/    Equity/                                  Amount             of Total
               Investment             Private     Debt             Sector             ($ in millions)       Assets(1)

1.     Direct Fuels Partners,         Private    Equity           Midstream          $            37.5            18.0 %
       L.P.(2)
2.     VantaCore Partners LP(3)       Private    Equity     Aggregates and Mining                 26.4            12.7
3.     International Resource         Private    Equity             Coal                          24.8            11.9
       Partners LP(4)
4.     Knight, Inc.                   Private    Debt             Midstream                        7.1             3.4
5.     Eagle Rock Energy Partners,    Public     Equity      Midstream/Upstrean                    6.9             3.3
       L.P.(5)
6.     Enterprise Products            Public     Equity           Midstream                        5.4             2.6
       Partners L.P.
7.     ProPetro Services, Inc.(6)     Private    Debt         Oilfield Services                    4.5             2.2
8.     Plains All American            Public     Equity           Midstream                        3.9             1.9
       Pipeline, L.P.
9.     Hilcorp Energy Company         Private    Debt             Upstream                         3.1             1.5
10.    Enbridge Energy Partners       Public     Equity           Midstream                        3.0             1.4
       L.P.

                                                                                     $           122.6            58.9 %

(1) Total assets were $208.1 million as of February 28, 2009.

(2) Our investment in Direct Fuels Partners, L.P. includes 2,500,000 common 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) Following the sale of Millennium Midstream Partners, L.P. to Eagle Rock 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 our estimated post-closing working capital adjustments, our investment in Eagle Rock consists of 1,530,274 unregistered common units of which 517,237 unregistered common units have been placed into escrow for up to 18 months pending claims that could reduce the purchase price. Our investment in Eagle Rock includes $4.7 million of unregistered common units, $2.1 million unregistered common units that have been placed into escrow and $0.1 million in common units that are freely tradeable.

(6) 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.

Results of Operations - For the three months ended February 28, 2009

Set forth below is an explanation of our results of operations for the three months ended February 28, 2009.

Investment Income. Investment income totaled $1.2 million and consisted primarily of interest income on our short-term investments in fixed income investments and net dividends and distributions. We received $4.6 million of cash dividends and distributions, of which $4.1 million was treated as a return of capital during the period.

Operating Expenses. Operating expenses totaled $1.8 million, including $0.8 million of base investment management fees; $0.4 million for interest expense and $0.6 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 included a deferred income tax benefit of $0.2 million.

Net Realized Losses. We had net realized losses from our investments of $1.6 million, net of $0.9 million of deferred tax benefit.

Net Change in Unrealized Losses. We had net unrealized losses of $3.4 million, net of tax. Net unrealized losses consisted of $5.2 million of unrealized losses from investments that were partially offset by a deferred tax benefit of $1.8 million.

Net Decrease in Net Assets Resulting from Operations. We had a decrease in net assets resulting from operations of $5.3 million. This decrease is composed of the net unrealized losses of $3.4 million; net realized losses of $1.6 million and net investment losses of $0.3 million as noted above.

Results of Operations - For the three months ended February 29, 2008

Set forth below is an explanation of our results of operations for the three months ended February 29, 2008.

Investment Income. Investment income totaled $2.7 million and consisted primarily of interest income on our short-term investments in fixed income investments and repurchase agreements. We earned $4.5 million of cash dividends and distributions, of which $4.3 million was treated as a return of capital during the period.

Operating Expenses. Operating expenses totaled $3.7 million, including $1.4 million of base investment management fees; $1.7 million for interest expense and $0.6 million for other operating expenses. 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.

Net Investment Loss. Our net investment loss totaled $0.6 million. Investment income of $2.7 million was reduced by total operating expenses of $3.7 million and offset by a deferred income tax benefit of $0.4 million.

Net Realized Gains (Losses). We had net realized gains from our investments of $1.3 million, which was net of a deferred tax expense of $0.8 million.

Net Change in Unrealized Gains (Losses). We had net unrealized losses from our investments of $6.4 million. This net unrealized loss consisted of $4.1 million of losses from our investments and a net deferred tax benefit of $1.5 million. We also had a deferred tax expense of $3.8 million relating to our conversion from a RIC to a taxable corporation, effective December 1, 2007.

Net Decrease in Net Assets Resulting from Operations. Our net decrease in net assets resulting from operations was $5.7 million. This decrease is composed primarily of the net unrealized losses of $6.4 million, and, to a lesser extent, net realized gains of $1.3 million and net investment loss of $0.6 million as noted above.

Liquidity and Capital Resources

As of February 28, 2009, we had approximately $5.1 million invested in short-term repurchase agreements. As of March 31, 2009, we had approximately $5.5 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 February 28, 2009, we had $52.0 million of borrowings under our Investment Facility at an interest rate of 1.73%, and we had a borrowing base of $61.9 million. As of March 31, 2009, we had $52.0 million of borrowings at an interest rate of 1.77%, and our borrowing base was $65.5 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 months ended February 28, 2009, we accrued and paid $0.8 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 February 28, 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 February 28, 2009 over the following periods for the Investment Facility.

                                                                  Payments by Period ($ in millions)
                                                          Less Than 1                                            More Than 5
                                           Total             Year             1-3 years         3-5 years           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 February 28, 2009, we had a borrowing base of $61.9 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 February 28, 2009 we paid distributions totaling $3.5 million ($0.35 per common share).

On April 2, 2009, we declared our quarterly distribution of $0.35 per common share for the period December 1, 2008 to February 28, 2009 for a total of $3.5 million. The distribution is payable on April 30, 2009 to shareholders of record on April 17, 2009.

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. We expect that a significant portion of future distributions to shareholders will constitute a tax-deferred return of capital.

Off-Balance Sheet Arrangements

At February 28, 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.