UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period to
Commission file number: 814-00672
NGP Capital Resources Company
(Exact name of registrant as specified in its charter)
| Maryland | 20-1371499 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | |
1221 McKinney Street, Suite 2975 Houston, Texas | 77010 | |
| (Address of principal executive offices) | (Zip Code) | |
(713) 752-0062
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The number of shares of the registrant’s Common Stock, $.001 par value, outstanding as of August 7, 2006 was 17,400,100.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated financial statements.
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEET
| June 30, 2006 | December 31, 2005 | |||||||
| (unaudited) | (audited) | |||||||
Assets: | ||||||||
Investments in portfolio securities at fair value (cost: $151,320,606 and $91,761,111, respectively) | $ | 151,895,216 | $ | 92,847,043 | ||||
Investments in corporate notes at fair value (cost: $21,707,675 and $21,727,976, respectively) | 18,522,400 | 20,537,900 | ||||||
Investments in U.S. treasury bills, at amortized cost which approximates fair value | 78,712,973 | 121,518,196 | ||||||
Total investments | 249,130,589 | 234,903,139 | ||||||
Cash and cash equivalents, at cost which approximates fair value | 3,856,708 | 13,350,588 | ||||||
Accounts receivable | — | 50,965 | ||||||
Interest receivable | 829,278 | 609,545 | ||||||
Prepaid assets | 206,151 | 576,029 | ||||||
Total assets | $ | 254,022,726 | $ | 249,490,266 | ||||
Liabilities and stockholders’ equity (net assets): | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 418,421 | $ | 407,580 | ||||
Management and incentive fees payable | 1,118,105 | 399,173 | ||||||
Dividends payable | 3,132,018 | 4,785,028 | ||||||
Credit facility payable | 7,000,000 | — | ||||||
Total liabilities | 11,668,544 | 5,591,781 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity (net assets) | ||||||||
Common stock, $.001 par value, 250,000,000 shares authorized; 17,400,100 issued and outstanding | 17,400 | 17,400 | ||||||
Paid-in capital in excess of par | 244,309,260 | 244,309,260 | ||||||
Undistributed net investment income (loss) | 638,187 | (324,031 | ) | |||||
Net unrealized (depreciation) of portfolio securities and corporate notes | (2,610,665 | ) | (104,144 | ) | ||||
Total stockholders’ equity (net assets) | 242,354,182 | 243,898,485 | ||||||
Total liabilities and stockholders’ equity (net assets) | $ | 254,022,726 | $ | 249,490,266 | ||||
Net asset value per share | $ | 13.93 | $ | 14.02 | ||||
(See accompanying notes to consolidated financial statements)
2
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2006 | June 30, 2005 | June 30, 2006 | June 30, 2005 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Investment income | ||||||||||||||||
Interest income | $ | 5,802,683 | $ | 3,666,009 | $ | 10,661,187 | $ | 7,844,765 | ||||||||
Dividend income | 60,998 | — | 60,998 | — | ||||||||||||
Other income | 136,078 | — | 273,627 | — | ||||||||||||
| 5,999,759 | 3,666,009 | 10,995,812 | 7,844,765 | |||||||||||||
Operating expenses | ||||||||||||||||
Management fees | 1,118,105 | 900,000 | 2,235,124 | 1,800,000 | ||||||||||||
Organization costs | — | — | — | 1,111 | ||||||||||||
Professional fees | 236,126 | 294,466 | 357,828 | 467,552 | ||||||||||||
Insurance expense | 144,234 | 144,105 | 288,589 | 288,159 | ||||||||||||
Credit facility fees | 81,071 | 39,766 | 160,074 | 40,753 | ||||||||||||
General and administrative expenses | 531,866 | 398,112 | 1,075,944 | 761,342 | ||||||||||||
Total operating expenses | 2,111,402 | 1,776,449 | 4,117,559 | 3,358,917 | ||||||||||||
Net investment income | 3,888,357 | 1,889,560 | 6,878,253 | 4,485,848 | ||||||||||||
Net realized capital gain on portfolio securities and corporate notes | — | 140,036 | — | 143,570 | ||||||||||||
Net (decrease) in unrealized (depreciation) on portfolio securities and corporate notes | (1,360,159 | ) | (87,655 | ) | (2,506,521 | ) | (1,386,440 | ) | ||||||||
Net increase in stockholders’ equity (net assets) resulting from operations | $ | 2,528,198 | $ | 1,941,941 | $ | 4,371,732 | $ | 3,242,978 | ||||||||
Net increase in stockholders’ equity (net assets) resulting from operations per common share | $ | 0.15 | $ | 0.11 | $ | 0.25 | $ | 0.18 | ||||||||
(See accompanying notes to consolidated financial statements)
3
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (NET ASSETS)
(unaudited)
| Common Stock | Paid-in Capital | Undistributed Net Investment | Net Realized | Unrealized Appreciation (Depreciation) of Portfolio Securities | Total Stockholders’ | ||||||||||||||||||
| Shares | Amount | in Excess of Par | Income (Loss) | Capital Gain | and Corporate Notes | Equity (Net Assets) | |||||||||||||||||
Balance at December 31, 2005 | 17,400,100 | $ | 17,400 | $ | 244,309,260 | $ | (324,031 | ) | $ | — | $ | (104,144 | ) | $ | 243,898,485 | ||||||||
Net increase (decrease) in stockholders’ equity (net assets) resulting from operations | — | — | — | 6,878,253 | — | (2,506,521 | ) | 4,371,732 | |||||||||||||||
Dividends declared | — | — | — | (5,916,035 | ) | — | — | (5,916,035 | ) | ||||||||||||||
Balance at June 30, 2006 | 17,400,100 | $ | 17,400 | $ | 244,309,260 | $ | 638,187 | $ | — | $ | (2,610,665 | ) | $ | 242,354,182 | |||||||||
(See accompanying notes to consolidated financial statements)
4
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months ended June 30, 2006 (unaudited) | For the Six Months ended June 30, 2005 (unaudited) | |||||||
Cash flows from operating activities | ||||||||
Net increase (decrease) in stockholders’ equity (net assets) resulting from operations | $ | 4,371,732 | $ | 3,242,978 | ||||
Adjustments to reconcile net increase (decrease) in stockholders’ equity (net assets) resulting from operations to net cash used in operating activities: | ||||||||
Decrease (increase) in accounts receivable | 50,965 | 80,000 | ||||||
(Increase) decrease in interest receivable | (219,733 | ) | (538,551 | ) | ||||
Increase (decrease) in dividend payable | — | 2,175,013 | ||||||
Decrease (increase) in investment balance due to payment-in-kind interest | (84,755 | ) | — | |||||
Decrease (increase) in investment balance due to payment-in-kind dividend | (60,998 | ) | — | |||||
Decrease (increase) in prepaid assets | 369,878 | 88,269 | ||||||
Increase (decrease) in accounts payable | 729,773 | 28,658 | ||||||
Net amortization of premiums, discounts and fees | (272,220 | ) | (265,937 | ) | ||||
Decrease (increase) in unrealized appreciation on portfolio securities and corporate notes | 2,506,521 | 1,386,440 | ||||||
Purchase of investments in portfolio securities | (59,123,623 | ) | (10,663,631 | ) | ||||
Redemption of investments in portfolio securities | 2,402 | 10,871,805 | ||||||
Net sale (purchase) of investments in agency and auction rate securities | — | 41,301,002 | ||||||
Purchase of investments in corporate notes | — | (51,167,818 | ) | |||||
Sale of investments in corporate notes | — | 10,259,960 | ||||||
Net sale (purchase) of investments in U.S. treasury bills | 42,805,222 | (124,927,222 | ) | |||||
Net cash provided by (used in) operating activities | (8,924,836 | ) | (118,129,034 | ) | ||||
Cash flows from financing activities | ||||||||
Draw on credit facility | 7,000,000 | — | ||||||
Offering costs from the issuance of common stock | — | (7,606 | ) | |||||
Dividends paid | (7,569,044 | ) | (4,263,025 | ) | ||||
Net cash provided by (used in) provided by financing activities | (569,044 | ) | (4,270,631 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (9,493,880 | ) | (122,399,665 | ) | ||||
Cash and cash equivalents, beginning of the period | 13,350,588 | 136,314,402 | ||||||
Cash and cash equivalents, end of period | $ | 3,856,708 | $ | 13,914,737 | ||||
(See accompanying notes to consolidated financial statements)
5
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2006
Portfolio Company (1) | Energy Industry Segment | Investment (2) (4) | Principal | Cost | Fair Value (3) | ||||||||
Crescent Resources, LLC | Oil & Gas Production and Development | Senior Subordinated- Secured Term Loan (LIBOR + 9.5%, due 12/20/2008) | $ | 48,250,000 | $ | 47,557,881 | $ | 47,557,881 | |||||
Venoco Inc. | Oil & Gas Production and Development | Senior Notes (8.75%, due 12/15/2011) | 8,000,000 | 7,957,619 | 7,760,000 | ||||||||
Venoco Inc. | Oil & Gas Production and Development | Senior Notes (8.75%, due 12/15/2011) | 4,000,000 | 3,929,909 | 3,880,000 | ||||||||
TierraMar Energy LLC | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (LIBOR + 6%, due 5/13/2008) | 8,572,000 | 8,399,790 | 8,399,790 | ||||||||
| Overriding Royalty Interest (6) | 20,000 | 18,920 | 200,000 | ||||||||||
| Warrants (5) | 10,000 | 10,000 | 200,000 | ||||||||||
C-Gas LLC | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (LIBOR + 5.5%, due 4/25/2009) Overriding Royalty Interest (6) | 20,844,493 | 20,527,695 | 20,527,695 | ||||||||
| 45,000 | 44,727 | 200,000 | |||||||||||
Atchee CBM LLC | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (LIBOR + 5.5%, due 4/25/2009) | 2,083,036 | 2,043,096 | 2,043,096 | ||||||||
| Overriding Royalty Interest (5) (6) | 5,000 | 5,000 | 5,000 | ||||||||||
Chroma Exploration & Production, Inc. | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (LIBOR + 6%, due 9/21/2008) | 12,475,000 | 12,238,512 | 12,238,512 | ||||||||
| Overriding Royalty Interest (6) | 87,500 | 84,472 | 400,000 | ||||||||||
| 8,133 Shares Series A Participating Convertible Preferred Stock | — | 2,094,248 | 2,094,248 | ||||||||||
| 8.11 Shares Common Stock | — | — | — | ||||||||||
Piceance Basin Properties, LLC | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (11.3868%, due 10/31/2010) | 5,395,180 | 5,442,134 | 5,442,134 | ||||||||
Limited Partnership Units (19,900 units) | 40,876 | 21,133 | |||||||||||
| Warrants (5) | 25,000 | 25,000 | |||||||||||
Rabbit Island Properties, LP | Oil & Gas Production and Development | Senior Secured Revolving Credit Facility (LIBOR + 6.25%, due 3/27/2007) | 12,500,000 | 12,385,150 | 12,385,150 | ||||||||
(See accompanying notes to consolidated financial statements)
6
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
June 30, 2006
(Continued)
Portfolio Company (1) | Energy Industry Segment | Investment (2) (4) | Principal | Cost | Fair Value (3) | ||||||||
Resaca Exploitation, LP | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (LIBOR + 6.00%, due 5/01/12) | 18,880,000 | 18,492,871 | 18,492,871 | ||||||||
| Overriding Royalty Interest (6) | 30,000 | 30,000 | |||||||||||
Senior Secured Term Loan (LIBOR + 9.00%, due 8/01/07) | 6,000,000 | 5,868,356 | 5,868,356 | ||||||||||
Overriding Royalty Interest (6) | 30,000 | 30,000 | |||||||||||
Senior Subordinated- Secured Convertible Term Loan (6.00% Cash, 8.00% PIK, due 05/01/2012) | 4,000,000 | 4,000,000 | 4,000,000 | ||||||||||
Crossroads Energy, LP | Oil & Gas Production and Development | Senior Secured Multiple-Advance Term Loan (LIBOR + 5.50%-Cash, 7.5%-PIK, due 6/29/09) | 142,350 | 84,350 | 84,350 | ||||||||
| Overriding Royalty Interest (6) | 10,000 | 10,000 | |||||||||||
Total targeted investments (60.04% of total investments) | $ | 151,320,606 | $ | 151,895,216 | |||||||||
Issuing Company | Industry Segment | Investment (4) | Principal | Cost | Value | ||||||||
Pioneer Nat Res | Energy | Senior Notes, 7.2%, due 2028 | 10,000,000 | 11,693,991 | 9,379,600 | ||||||||
XTO Energy | Energy | Senior Notes, 5.0%, due 2015 | 10,000,000 | 10,013,684 | 9,142,800 | ||||||||
Total corporate notes ( 7.32% of total investments) | $ | 21,707,675 | $ | 18,522,400 | |||||||||
Issuing Company | Industry Segment | Investment | Principal | Cost | Value | ||||||||
US Treasury Bills | Government | US Treasury Bills, 4.22%, due 07/06/2006 | 9,000,000 | 8,994,800 | 8,994,800 | ||||||||
US Treasury Bills | Government | US Treasury Bills, 4.76%, due 07/06/2006 | 7,790,000 | 7,728,753 | 7,728,753 | ||||||||
US Treasury Bills | Government | US Treasury Bills, 4.58%, due 07/06/2006 | 12,396,000 | 12,388,235 | 12,388,235 | ||||||||
US Treasury Bills | Government | US Treasury Bills, 4.24%, due 07/06/2006 | 11,978,000 | 11,971,054 | 11,971,054 | ||||||||
US Treasury Bills | Government | US Treasury Bills, 4.26%, due 07/06/2006 | 24,022,000 | 24,007,987 | 24,007,987 | ||||||||
US Treasury Bills | Government | US Treasury Bills, 4.21%, due 07/06/2006 | 13,630,000 | 13,622,144 | 13,622,144 | ||||||||
Total government securities (31.12% of total investments) | $ | 78,712,973 | $ | 78,712,973 | |||||||||
Total cash (1.52% of total investments) | $ | 3,856,708 | $ | 3,856,708 | |||||||||
Total investments, cash and cash equivalents | $ | 255,597,962 | $ | 252,987,297 | |||||||||
Other liabilities in excess of assets | $ | (10,633,115 | ) | ||||||||||
Net assets | $ | 242,354,182 | |||||||||||
| (1) | None of our portfolio companies are controlled by or affiliated with us as defined by the Investment Company Act of 1940. |
| (2) | Percentages represent interest rates in effect at March 31, 2006, and due dates represent the contractual maturity dates. |
| (3) | Fair value of targeted investments is determined by or under the direction of the Board of Directors. |
| (4) | All investments are in entities with primary operations in the United States of America. |
| (5) | Non-income producing securities. |
| (6) | Securities are subject to restrictions as to their sale. |
(See accompanying notes to consolidated financial statements)
7
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
| For the Six Months ended June 30, 2006 (unaudited) | For the Six Months ended June 30, 2005 (unaudited) | Year ended December 31, 2005 | Period August 6, 2004 (commencement of operations) through December 31, 2004 | |||||||||||||
Per Share Data | ||||||||||||||||
Net asset value, beginning of period | $ | 14.02 | $ | 14.03 | $ | 14.03 | $ | 15.00 | ||||||||
Underwriting discounts, commissions related to initial public offering | — | — | — | (0.82 | ) | |||||||||||
Other costs related to initial public offering | — | — | — | (0.13 | ) | |||||||||||
Net asset value after initial public offering | 14.02 | 14.03 | 14.03 | 14.05 | ||||||||||||
Net investment income | 0.39 | 0.26 | 0.60 | (0.03 | ) | |||||||||||
Net realized and unrealized gain (loss) on portfolio securities | (0.14 | ) | (0.08 | ) | 0.05 | 0.01 | ||||||||||
Net increase in net assets resulting from operations | 0.25 | 0.18 | 0.65 | (0.02 | ) | |||||||||||
Dividends declared | (0.34 | ) | (0.25 | ) | (0.66 | ) | — | |||||||||
Net asset value, end of period | $ | 13.93 | $ | 13.96 | $ | 14.02 | $ | 14.03 | ||||||||
Market value, beginning of period | $ | 13.13 | $ | 15.37 | $ | 15.37 | $ | 15.00 | ||||||||
Market value, end of period | $ | 14.63 | $ | 14.93 | $ | 13.13 | $ | 15.37 | ||||||||
Market value return (1) | 14.29 | % | -1.28 | % | -10.67 | % | 2.47 | % | ||||||||
Net asset value return (1) | 1.91 | % | 1.12 | % | 4.49 | % | -6.47 | % | ||||||||
Ratios and Supplemental Data | ||||||||||||||||
($ and shares in thousands) | ||||||||||||||||
Net assets, end of period | $ | 242,354 | $ | 243,011 | $ | 243,898 | $ | 244,039 | ||||||||
Average net assets | 243,126 | 243,525 | 243,969 | $ | 76,367 | |||||||||||
Common shares outstanding at end of period | 17,400 | 17,400 | 17,400 | 17,400 | ||||||||||||
General and administrative expenses/average net assets (2) | 1.56 | % | 0.62 | % | 1.31 | % | 0.37 | % | ||||||||
Total operating expenses/average net assets (2) | 3.42 | % | 1.36 | % | 2.83 | % | 1.89 | % | ||||||||
Net investment income /average net assets (2) | 5.71 | % | 1.84 | % | 4.27 | % | -0.77 | % | ||||||||
Net increase in net assets resulting from operations/average net assets (2) | 3.63 | % | 1.33 | % | 4.65 | % | -0.39 | % | ||||||||
Portfolio turnover rate | 0.00 | % | 4.46 | % | 13.77 | % | 0.00 | % | ||||||||
| (1) | Return calculations assume reinvestment of dividends and are not annualized. |
| (2) | Annualized for interim periods. |
(See accompanying notes to consolidated financial statements)
8
NGP CAPITAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Note 1: Organization
NGP Capital Resources Company (the “Company”) was organized as a Maryland corporation in July 2004. The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes the Company has elected to be treated as a regulated investment company, (“RIC”), under the Internal Revenue Code of 1986, as amended (the “Code”) for 2005 and later years. The Company has several subsidiaries, all created in 2005, that are single member limited liability companies and wholly owned limited partnerships established to hold certain portfolio investments or provide services to the Company in accordance with specific rules prescribed for a company operating as a RIC. These subsidiaries are: NGPC Funding GP, LLC, a Texas limited liability company; NGPC Nevada, LLC, a Nevada limited liability company; NGPC Funding, LP, a Texas limited partnership; NGPC Asset Holdings GP, LLC, a Texas limited liability company; and NGPC Asset Holdings, LP, a Texas limited partnership. The Company consolidates the results of its subsidiaries for financial reporting purposes. The financial results of the Company’s portfolio investments are not consolidated in the Company’s consolidated financial statements.
The Company was created to invest primarily in small and mid-size energy companies, which are generally defined as companies that have net asset values or annual revenues of less than $500 million and are not issuers of publicly traded securities. The Company’s investment objective is to generate both current income and capital appreciation through debt investments with certain equity components.
The Company is managed and advised, subject to the overall supervision of the Company’s Board of Directors, by NGP Investment Advisor, LP (the “Manager”), a Delaware limited partnership owned by Natural Gas Partners, LLC and NGP Administration, LLC (the “Administrator”), the Company’s administrator.
Note 2: Significant Accounting Policies
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from the accompanying unaudited interim consolidated financial statements. The unaudited consolidated financial statements in this quarterly report have been prepared consistent with the accounting policies reflected in the Company’s annual financial statements included in the Company’s Form 10-K for the year ended December 31, 2005 filed with the SEC and should be read in conjunction therewith. In management’s opinion, the unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such consolidated financial statements. Interim results are not necessarily indicative of results for a full year.
The following is a summary of the significant accounting policies followed by the Company in the preparation of its consolidated financial statements:
Use of Estimates
The consolidated financial statements have been prepared in accordance with GAAP that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes to the consolidated financial statements. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at cost which approximates fair value.
9
Prepaid Assets
Prepaid assets consist of premiums paid for directors’ and officers’ insurance and fidelity bonds with a policy term of one year and fees associated with the establishment of the credit facility. Such premiums and fees are amortized monthly on a straight line basis.
Concentration of Credit Risk
The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Valuation of Investments
Investments are carried at fair value, as determined in good faith by the Company’s Board of Directors. On a quarterly basis, the investment team of our Manager prepares valuations for all of the assets in the Company’s portfolio and presents the valuations to the Company’s Valuation Committee and Board of Directors. The valuations are determined and recommended by the Valuation Committee to the Board of Directors, which reviews and ratifies the final portfolio valuations.
Investments in securities for which market quotations are readily available are recorded in the financial statements at such market quotations as of the valuation date adjusted for appropriate liquidity discounts, if applicable. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the Manager prepares valuation analyses, as generally described below.
Using the most recently available financial statements, forecasts and, when applicable, comparable transaction data, the Manager prepares valuation analyses for the various securities in the Company’s investment portfolio. These valuation analyses are prepared using traditional valuation methodologies which rely on estimates of the asset values and enterprise values of portfolio companies issuing securities.
The methodologies for determining asset valuations include estimates based on the liquidation or sale value of a portfolio company’s assets, the discounted value of expected future net cash flows from the assets and third party valuations of the portfolio company’s assets, such as engineering reserve reports of oil and gas properties. The Manager considers some or all of the above valuation methods to determine the estimated asset value of a portfolio company.
The methodologies for determining enterprise valuations include estimates based on valuations of comparable public companies, recent sales of comparable companies, the value of recent investments in the equity securities of the portfolio company and the asset valuation methodologies described above. The Manager considers some or all of the above valuation methods to determine the estimated enterprise value of a portfolio company.
Debt Securities: The Company values non-convertible debt securities at cost plus amortized original issue discount, or OID, to the extent that the estimated asset or enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. The Company values convertible debt securities at the higher of: 1) cost plus amortized OID, to the extent that the estimated asset or enterprise value of the portfolio company equals or exceeds the outstanding debt of the portfolio company; and 2) the Company’s pro rata share, upon conversion, of the residual equity value of the portfolio company available after deducting all outstanding debt from its estimated enterprise value. If the estimated asset or enterprise value is less than the sum of the value of the Company’s debt investment and all other debt securities of the portfolio company pari passu or senior to the Company’s debt investment, the Company reduces the value of its debt investment beginning with its junior-most debt investment such that the asset or enterprise value less the value of the outstanding pari passu or senior debt is zero.
Equity Securities: The Company values investments in preferred and common equity securities (including warrants or options to acquire equity securities) based on its pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value.
Property-Based Equity Participation Rights: The Company values investments in overriding royalty and net profits interests based on the asset valuation methodologies discussed above.
Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned.
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Securities Transactions, Interest and Dividend Income Recognition
All securities transactions are accounted for on a trade-date basis. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Premium and discount are accreted into interest income using the effective interest method. Detachable warrants, other equity securities or property interests such as overriding royalty interests obtained in conjunction with the acquisition of debt securities are recorded separately from the debt securities at their initial fair value, with a corresponding amount recorded as a discount to the associated debt security. Income from overriding royalty interests is recognized as received and the recorded assets are charged depletion using the unit of production depletion method. The portion of the loan origination fees paid that represent additional yield or discount on a loan are deferred and accreted into interest income over the life of the loan using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized premium or discount is recorded as a realized gain or loss. Market premiums or discounts on acquired loans or fixed income investments are accreted into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. Accruing interest or dividends on investments is deferred when it is determined that the interest or dividend is not collectible. Collectibility of the interest and dividends is assessed, based on many factors including the portfolio company’s ability to service its loan based on current and projected cash flows as well as the current valuation of the company’s assets. For investments with payment-in-kind, or PIK, interest, the Manager bases income accruals on the valuation of the PIK notes or securities received from the borrower. If the portfolio company’s asset valuation indicates a value that is not sufficient to cover the contractual interest due on the PIK notes, management will not accrue interest income on the notes.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, considering unamortized fees and prepayment premiums, and without regard to unrealized appreciation or depreciation previously recognized, including investments charged off during the year, net of recoveries. Net unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period including the reversal of previously recorded unrealized appreciation or depreciation, when capital gains or losses are realized.
Fee Income Recognition
Fees primarily include financial advisory, transaction structuring, loan administration, commitment and prepayment fees. Financial advisory fees represent amounts received for providing advice and analysis to companies and are recognized as earned when such services are performed provided collection is probable. Transaction structuring fees represent amounts received for structuring, financing, and executing transactions and are generally payable only if the transaction closes. Such fees are deferred and accreted into interest income over the life of the loan using the effective interest method. Commitment fees represent amounts received for committed funding and are generally payable whether or not the transaction closes. On transactions that close within the commitment period, commitment fees are deferred and accreted into interest income over the life of the loan using the effective interest method. Commitment fees on transactions that do not close are generally recognized over the time period the commitment is outstanding. Prepayment and loan administration fees are recognized as they are received. In the second quarter of 2006, the Company accreted approximately $181,000 of fee income into interest income.
Dividends
Dividends to stockholders are recorded on the ex-dividend date. For tax purposes the Company intends to continue to qualify as a RIC under the Code for 2005 and later years. In order to maintain the Company’s status as a RIC, the Company is required to distribute at least 90% of its investment company taxable income. In addition, the Company must distribute at least 98% of its taxable income (both ordinary income and net capital gains) to avoid excise tax. The Company intends to make distributions to stockholders on a quarterly basis of substantially all net operating taxable income. The Company also intends to make distributions of net realized capital gains, if any, at least annually. However, the Company may in the future decide to retain capital gains for investment and designate such retained dividends as a deemed distribution. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is based on the annual taxable earnings estimated by the Manager. Based on that estimate, a dividend is declared each quarter and paid shortly thereafter.
For the period ending December 31, 2004, the Company was treated as a “C” corporation and had no taxable income and therefore did not declare a dividend for that period. On March 18, 2005, the Company declared a dividend of $0.12 per common share, which was paid in cash on April 15, 2005 to stockholders of record on March 31, 2005. On June 17, 2005, the
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Company declared a dividend of $0.125 per common share, which was paid on July 15, 2005 to stockholders of record on June 30, 2005. On September 19, 2005, the Company declared a dividend of $0.14 per common share, which was paid on October 14, 2005 to stockholders of record on September 30, 2005. On December 15, 2005, the Company declared a dividend of $0.275 per common share, which was paid on January 4, 2006 to stockholders of record on December 27, 2005. On March 10, 2006, the Company declared a dividend of $0.16 per common share which was paid on April 14, 2006 to shareholders of record on March 31, 2006. On June 16, 2006, the Company declared a dividend of $0.18 per common share which was paid on July 14, 2006 to shareholders of record on June 30, 2006.
The Company has established an “opt out” dividend reinvestment plan for its common stockholders. As a result, if the Company declares a cash dividend, a stockholder’s cash dividend will be automatically reinvested in additional shares of the Company’s common stock unless the stockholder, or his or her broker, specifically “opts out” of the dividend reinvestment plan and elects to receive cash dividends. It is customary practice for many brokers to opt out of dividend reinvestment plans on behalf of their clients unless specifically instructed otherwise.
The Company’s plan provides for the plan agent to purchase shares in the open market for credit to the accounts of plan participants unless the average of the closing sales prices for the shares for the five days immediately preceding the payment date exceeds 110% of the most recently reported net asset value per share. To date, all shares credited to participants’ accounts have been purchased in the open market. No new shares have been issued pursuant to the dividend reinvestment plan.
For the June 2005 dividend, holders of 1,215,870 shares, or approximately 7.0% of outstanding shares, participated in the dividend reinvestment plan. As a result, of the $2,175,013 total amount distributed, $151,984 was used by the dividend reinvestment plan agent to acquire shares in the open market for credit to the accounts of the plan participants. For the September 2005 dividend, holders of 1,488,904 shares, or approximately 8.6% of outstanding shares, participated in the dividend reinvestment plan. As a result, of the $2,436,014 total amount distributed, $208,447 was used by the dividend reinvestment plan agent to acquire shares in the open market for credit to the accounts of the plan participants. For the December 2005 dividend, holders of 1,660,140 shares, or approximately 9.5% of outstanding shares, participated in the dividend reinvestment plan. As a result, of the $4,785,028 total amount distributed, $456,540 was used by the dividend reinvestment plan agent to acquire shares in the open market for credit to the accounts of the plan participants. As of March 31, 2006, holders of 1,618,940 shares, or approximately 9.3% of outstanding shares, were participants in the Company’s dividend reinvestment plan. As a result, of the $2,784,016 total amount distributed, $259,030 was used by the dividend reinvestment plan agent to acquire shares in the open market for credit to the accounts of the plan participants. As of June 30, 2006, holders of 1,410,227 shares, or approximately 8.1% of outstanding shares, were participants in the Company’s dividend reinvestment plan. As a result, of the $3,132,018 total amount distributed, $253,841 was used by the dividend reinvestment plan agent to acquire shares in the open market for credit to the accounts of the plan participants.
Note 3: Credit Facility
On May 17, 2005, the Company entered into a Revolving Credit Agreement (the “Credit Agreement”), among the Company, the lenders party thereto and SunTrust Bank, as administrative agent for the lenders.
Under the Credit Agreement, the lenders agreed to extend credit to the Company in an initial aggregate principal or face amount not exceeding $60,000,000 at any one time outstanding. The Credit Agreement is a 364-day revolving credit facility (with a stated maturity date of May 15, 2006) and is secured by substantially all of the Company’s assets. The Company has extended the stated maturity of the credit facility to September 29, 2006. The credit facility is guaranteed by certain of the Company’s subsidiaries. Initially, the credit facility is collateralized by and limited by the amount of cash and cash equivalent collateral. However, at such time as the Company’s consolidated ratio of net asset value to total indebtedness is at least 3.5:1.0, such cash collateral requirement may be released at the discretion of the administrative agent. During the time the credit facility is secured by cash collateral, pricing will be set at 25 basis points over LIBOR, and, after release of the cash collateral, pricing will be set at a spread of 125 to 250 basis points over LIBOR based on the ratio of total indebtedness to net asset value. The Credit Agreement contains affirmative and reporting covenants. The Credit Agreement also contains certain financial ratio and restrictive covenants, including: (a) maintaining a ratio of net asset value to total indebtedness (excluding hedging liabilities) of not less than 2.25:1.0, (b) maintaining a ratio of net asset value to total indebtedness (including hedging liabilities) of not less than 2.0:1.0, (c) maintaining a ratio of net income plus interest, taxes, depreciation and amortization expenses (“EBITDA”) to interest expense of not less than 3.0:1.0, (d) if the maturity of the credit facility is extended, maintaining a ratio of total indebtedness to EBITDA to be determined, (e) limitations on additional indebtedness, (f) limitations on liens, (g) limitations on mergers and other fundamental changes, (h) limitations on dividends during events of default and material events of default, (i) limitations on disposition of assets other than in the normal course of business, (j) limitations on transactions with affiliates, (k) limitations on agreements that prohibit liens on properties of the Company and its subsidiary guarantors, (l) limitations on sale and leaseback transactions and (m) limitations on speculative hedging transactions.
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As of June 30, 2006, the Company had $7 million outstanding under the Credit Agreement. The Credit Agreement is used to supplement the Company’s equity capital to make additional portfolio investments as well as to prospectively preserve investment flexibility in future periods.
Note 4: Issuance of Common Stock
On August 6, 2004, the Company, in its initial capitalization transaction, sold 100 shares to Natural Gas Partners, LLC for $15.00 per share. On November 9, 2004, the Company’s Registration Statement (Registration No. 333-118279) was declared effective by the SEC in connection with the public offering of 16,000,000 shares of common stock (plus up to 2,400,000 additional shares of common stock upon the exercise of the underwriters’ over-allotment option), which commenced on November 10, 2004. The number of securities registered, including the shares of common stock subject to the underwriters’ over-allotment option, was 18,400,000, of which 17,400,000 were sold to the public at a price of $15.00 per share.
The net proceeds from the initial public offering of the shares of common stock, after deducting expenses of approximately $2,308,000 and underwriting discounts and commissions of $0.825 per share, were approximately $244,337,000.
Note 5: Investment Management
The Company has entered into an investment advisory agreement with the Manager under which the Manager, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Manager receives a fee from the Company, consisting of two components, a base management fee and an incentive fee.
Under the investment advisory agreement, beginning on December 1, 2005 and thereafter, the base management fee is calculated quarterly as 0.45% of the average of total assets of the Company as of the end of the two previous quarters. Prior to December 1, 2005, the quarterly base management fee was equal to the lesser of $900,000, or 0.375% of such average. For services provided under the investment advisory agreement from November 9, 2004 through and including November 30, 2005, the base management fee was payable monthly in arrears. For services provided under the investment advisory agreement after that time, the base management fee is payable quarterly in arrears. Until June 30, 2005 (completion of two full fiscal quarters after the closing of the offering), the total assets upon which the quarterly base management fee was calculated was equal to the net proceeds of the offering. Thereafter, the base management fee was calculated based on the average value of the Company’s total assets at the end of the two most recently completed fiscal quarters.
The $1,118,105 payable to the Manager as of June 30, 2006 was for the base management fee for the second quarter of 2006.
The incentive fee under the investment advisory agreement consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the excess, if any, of the Company’s net investment income for the quarter that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of the Company’s net assets.
For this purpose, net investment income means interest income, dividend income, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, managerial assistance, monitoring, and consulting fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement, any interest expense and dividends paid on issued and outstanding preferred stock, if any, but excluding the incentive fee). Net investment income includes, in the case of investments with a deferred interest feature (such as premium and discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation.
The Manager agreed that payment of the investment income related portion of the incentive fee would not commence until December 1, 2005. There were no investment income incentive fees earned in December 2005. The incentive fees due in any fiscal quarter thereafter will be calculated as follows:
| • | no incentive fee in any fiscal quarter in which our net investment income does not exceed the hurdle rate. |
| • | 20% of the amount of the Company’s net investment income, if any, that exceeds the hurdle rate in any fiscal quarter. |
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These calculations are appropriately pro rated for any period of less than three months.
The second part of the incentive fee (the “Capital Gains Fee”) is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date), and equals (1) 20% of (a) the Company’s net realized capital gain (realized capital gains less realized capital losses) on a cumulative basis from the closing date of the Company’s initial public offering to the end of such fiscal year, less (b) any unrealized capital depreciation at the end of such fiscal year, less (2) the aggregate amount of all Capital Gains Fees paid to the Manager in prior fiscal years. The $29,655 capital gains incentive fee earned for the year 2005 was paid to the Manager in March 2006 pursuant to the terms of the agreement.
Realized capital gains on a security are calculated as the excess of the net amount realized from the sale or other disposition of such security over the amortized cost for the security. Realized capital losses on a security are calculated as the amount by which the net amount realized from the sale or other disposition of such security is less than the amortized cost of such security. Unrealized capital depreciation on a security is calculated as the amount by which the original cost of such security exceeds the fair value of such security at the end of a fiscal year. All period-end valuations are determined by the Company in accordance with GAAP and the 1940 Act.
The Manager has agreed that, beginning on November 9, 2006, and to the extent permissible under federal securities laws and regulations, including Regulation M, it will utilize 30% of the fees it receives from the capital gains portion of the incentive fee (up to a maximum of $5 million of fees received in the aggregate) to purchase shares of the Company’s common stock in open market purchases through an independent trustee or agent. Any sales of such stock will comply with any applicable six-month holding period under Section 16(b) of the Securities Act of 1933 and all other restrictions contained in any law or regulation, to the fullest extent applicable to any such sale. Any change in this voluntary agreement will not be implemented without at least 90 days prior notice to stockholders and compliance with all applicable laws and regulations.
The Company has entered into an administration agreement with the Administrator, under which the Administrator furnishes the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities and performs, or oversees the performance of, administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to the Company’s stockholders and reports filed with the SEC.
In addition, the Manager assists in determining and publishing the Company’s net asset value, oversees the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to the Company’s stockholders and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Payments under the administration agreement are equal to amounts based upon the allocable portion of the Administrator’s costs and expenses in performing its obligations under the administration agreement. The Administrator bills the Company for charges under the administration agreement monthly in arrears.
Of the $1,536,526 in accounts payable as of June 30, 2006, $118,554 is due to the Administrator for expenses incurred on the Company’s behalf for the month of June 2006.
Note 6: Organizational Expenses and Offering Costs
A portion of the net proceeds of the offering were used for organizational expenses and offering costs of approximately $705,000 and $2,308,000, respectively, recognized in fiscal year 2004. For the year 2005, the Company recognized organizational expenses and offering costs of approximately $1,100 and $7,600, respectively. Organizational expenses were expensed as incurred. Offering costs were charged to paid-in capital in excess of par. There were no organizational expenses or offering costs incurred for the quarter ended June 30, 2006.
Note 7: Federal Income Taxes
The Company intends to qualify for tax purposes as a RIC under the Code for 2005 and later years. As a RIC, the Company generally will not be subject to federal income tax on the portion of its investment company taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required, among other things, to distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset diversification requirements.
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Differences between the effective income tax rate and the statutory Federal tax rate for the periods ending June 30, 2005 and June 30, 2006 were as follows:
For the Six Months ended June 30, 2006 | For the Six Months ended June 30, 2005 | |||||
| (unaudited) | (unaudited) | |||||
Statutory federal rate on loss from continuing operations | 34 | % | 0 | % | ||
Effect of net deferred tax assets | (34 | )% | 0 | % | ||
Effective tax rate on earnings from continuing operations | 0 | % | 0 | % | ||
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are as follows:
| June 30, 2006 (unaudited) | December 31, 2005 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carry forwards | $ | 157,862 | $ | 157,862 | ||||
Net organization costs | 147,775 | 171,738 | ||||||
Total gross deferred tax assets | 305,637 | 329,601 | ||||||
Less valuation allowance | (305,637 | ) | (329,601 | ) | ||||
Net deferred tax assets | (0 | ) | (0 | ) | ||||
Deferred tax liabilities: | ||||||||
Unrealized gains, net | — | — | ||||||
Prepaid expenses | — | — | ||||||
Total gross deferred tax liabilities | — | — | ||||||
Net deferred tax assets | $ | (0 | ) | $ | (0 | ) | ||
The Company’s consolidated subsidiary, NGPC Asset Holdings, LP, (“NGPCAH”) is subject to federal income taxes. For the period ended June 30, 2006, NGPCAH operated at a profit and thus, at June 30, 2006, NGPCAH had a tax liability of approximately $24,000. Management does not believe that NGPCAH will have taxable income as of December 31, 2006 and, accordingly, NGPCAH recorded no provision for income taxes for the period ended June 30, 2006.
Note 8: Commitments and Contingencies
As of June 30, 2006, the Company had investments in or commitments to fund loan facilities to ten portfolio companies totaling $176 million, on which $153 million was drawn. In addition, the Company has continuing obligations under the investment advisory agreement with the Manager and the administration agreement with the Administrator. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Manager, the Administrator and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with them will be entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Manager’s or Administrator’s services under the agreements or otherwise as the Company’s investment adviser or administrator. The agreements also provide that the Manager, the Administrator and their affiliates will not be liable to the Company or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of the Company’s investments, or any action taken or
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omitted to be taken by the Manager or the Administrator in connection with the performance of any of their duties or obligations under the agreements or otherwise as investment adviser or administrator to the Company, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, the Company enters into a variety of undertakings containing a variety of representations that may expose the Company to some risk of loss. The amount of future loss, if any arising from such undertakings, while not quantifiable, is not expected to be significant.
Note 9: Reclassifications
GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on total net assets or net asset value per share. At December 31, 2005, $586,225 has been reclassified from Undistributed net investment income (loss) to Paid-in capital in excess of par. These reclassifications are primarily due to non-deductible meal expenses, organization costs, and income and expenses from a wholly owned subsidiary.
Note 10: Subsequent Events
In late July 2006, NGPC closed a $30 million Senior Secured Credit Facility (the “Facility”) with Rubicon Energy Partners, LLC (“Rubicon”), a private Fort Worth, Texas based oil and gas producer. NGPC acted as agent and sole lender for the Facility. Initial availability under the Facility is $23 million, with approximately $22 million funded at closing. The Facility is secured by first liens on substantially all of Rubicon’s properties. In addition to the Facility, NGPC, through its wholly owned subsidiary NGPC Asset Holdings II, LP, purchased 4,000 membership units in Rubicon, (the “Membership Units”), for $4 million, representing 50% of the outstanding Membership Units of Rubicon. Proceeds from the Facility and the sale of Membership Units will be used by Rubicon to acquire and develop oil and gas assets located in the Permian and Fort Worth Basins in Texas.
Additionally, Rabbit Island, LP has repaid its $25 million facility, $12.5 million net to NGPC, as a result of the sale of most of its oil and gas properties. The facility was fully drawn at the time the debt was repaid.
Following these transactions, NGPC has committed and made available for funding an approximate total of $191 million to ten portfolio companies, with approximately $167 million outstanding. Since inception, NGPC has funded a total of $214 million to portfolio companies representing 87% of its original $244 of equity capital, and received repayments of $46 million.
Note 11: Supplemental Disclosure of Cash Flow Information
Non-cash operating activities for the quarter ended June 30, 2006, included amortization of original issue discount of $180,963, depletion of basis in overriding royalty interests of $1,327, amortization of prepaid credit facility fees and insurance premiums of $170,655, payment-in-kind interest of $60,974, and payment-in-kind dividends of $60,998. Non-cash operating activities for the quarter ended June 30, 2005 included amortization of original issue discount of $24,557 and amortization of prepaid credit facility fees and insurance premiums of $171,267.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report.
Forward-Looking Statements
Certain statements in this report that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to,
| • | uncertainties associated with the timing of transaction closing; |
| • | changes in the prospects of our portfolio companies; |
| • | changes in interest rates; |
| • | changes in regional, national, or international economic conditions and their impact on the industries in which we invest; |
| • | the future operating results of our portfolio companies and their ability to achieve their objectives; change in the conditions of the industries in which we invest; |
| • | the adequacy of our cash resources and working capital; |
| • | the timing of cash flows, if any, from the operations of our portfolio companies; |
| • | the ability of our Manager to locate suitable investments for us and to monitor and administer the investments; and |
| • | other factors enumerated in our filing with the Securities and Exchange Commission. |
We may use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may” and similar expressions to identify forward-looking statements. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from our historical experience and present expectations. Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the SEC.
Overview
We are a financial services company created to invest primarily in debt securities of small and mid-size private energy companies. We have elected to be treated as a business development company under the 1940 Act and, as such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for tax purposes we operate so as to be treated as a RIC under the Code. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income and capital gains we distribute to our stockholders.
Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. A key focus area for our targeted investments in the energy industry is domestic exploration and production businesses and midstream businesses that gather, process and transport oil and gas. We also evaluate investment opportunities in such businesses as coal, power, electricity, energy services and alternative energy. Our investments will generally range in size from $10 million to $50 million, although a few investments may be substantially in excess of this range. Our targeted investments primarily consist of debt instruments, including senior and subordinated loans combined in one facility with an equity component, subordinated loans and subordinated loans with equity components and preferred stock or similar securities.
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to energy companies, the level of acquisition and divestiture activity for such companies, the level and volatility of energy commodity prices, the general economic environment and the competitive environment for the types of investments we make. We believe that, for energy companies, the availability of debt capital from banks, mezzanine providers and alternative investment vehicles such as hedge funds has generally increased over the last twelve months and has put downward pressure on spreads. However, we do not expect this increased availability of capital to impair our ability to make good long-term investment decisions with our capital. We remain committed to ourunder writing and investment disciplines in selectively investing in appropriate risk-reward opportunities within the energy sector.
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We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and capital gains or losses on any debt or equity securities that we acquire in portfolio companies and subsequently sell. Our investments, if in the form of debt securities, typically have a term of three to seven years and bear interest at a fixed or floating rate. To the extent achievable, we seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including commitment, origination, structuring, administration or due diligence fees; fees for providing managerial assistance; and possibly consultation fees.
Portfolio and Investment Activity
During the three months ended June 30, 2006, we added two companies to our portfolio. In May, we acted as arranger and agent for an $85 million senior secured credit facility and a $10 million senior subordinated secured convertible term loan to Resaca Exploitation, LP, to acquire and develop oil and gas assets located in west Texas and New Mexico. The initial availability totaled approximately $76 million with an additional $10 million available under the convertible term loan. We have committed to fund 40%, or a total of $34 million, with the remaining commitments provided by other investors. As of June 30, 2006, our shares of the amounts funded were $24.88 million on the senior secured facility and $4 million on the term loan. In June, we closed a $12 million senior secured credit facility with Crossroads Energy, LP, to develop oil and gas assets located along the Gulf Coast of Texas. Initial availability under the facility is $2.4 million and as of June 30, 2006, $142,000 was drawn on the facility.
As of June 30, 2006 our portfolio was invested as follows: 20.4% in senior subordinated secured notes, 29.3% in senior secured multiple-advance term loans, 4.9% in senior secured revolving credit facilities, 0.8% in participating convertible preferred stock, 4.6% in senior notes, 7.3% in corporate notes, 31.2% in U.S. Treasury Bills, and 1.5% in cash and cash equivalents. At June 30, 2006, the weighted average yield on targeted portfolio investments, exclusive of capital gains, was 13.0%. The weighted average yield of our corporate notes was 5.4%. The weighted average yield of our U.S. Treasury Bills and cash equivalents was 4.4%. The weighted average yield on our total capital invested at June 30, 2006 was 9.6%. Yields are computed using interest rates as of the balance sheet date and include amortization of loan discount points, original issue discount and market premium or discount, weighted by their respective costs when averaged.
Results of Operations
Investment Income
We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and capital gains or losses on any debt or equity securities that we acquire in portfolio companies and subsequently sell. Our targeted investments, if in the form of debt securities, typically have a term of three to seven years and bear interest at a fixed or floating rate. To the extent achievable, we seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including due diligence fees, fees for providing managerial assistance, and possibly consultation fees. Any such fees generated in connection with our investments are recognized as earned.
Investment income for the quarter ended June 30, 2006 was $6.0 million with $4.6 million attributable to targeted investments in portfolio companies and $1.4 million attributable to investments in cash equivalents and corporate notes. This compares to interest income for the quarter ended June 30, 2005 of $3.7 million with $2.0 million attributable to targeted investments in portfolio companies and $1.7 million attributable to investments in cash equivalents, agency notes and auction rate securities and corporate notes.
For the six months ended June 30, 2006, investment income increased by $3.2 million, or 41%, to $11.0 million from $7.8 million for the same period in 2005. For the six months ended June 30, 2006, we recorded $8.0 million attributable to targeted investments in portfolio companies and $3.0 million attributable to investments in cash equivalents and corporate notes. This compares to $4.8 million attributable to targeted investments in portfolio companies and $3.0 million attributable to investments in cash equivalents and corporate notes for the same period in 2005.
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Operating Expenses
For the quarter ended June 30, 2006, operating expenses were $2.1 million compared to $1.8 million for the quarter ended June 30, 2005. The 2006 amount consisted of investment advisory and management fees of $1.1 million and insurance expenses, administrative services fees, professional fees, directors’ fees, organization costs and other general and administrative expenses of $1.0 million. In comparison, those amounts were $0.9 million and $0.9 million, respectively, for the quarter ended June 30, 2005.
For the six months ended June 30, 2006, operating expenses were $4.1 million compared to $3.4 million for the same period of 2005. The 2006 total is comprised of investment advisory and management fees of $2.2 million and insurance expenses, administrative services fees, professional fees, directors’ fees, organization costs and other general and administrative expenses of $1.9 million. In comparison, those amounts were $1.8 million and $1.6 million, respectively, for the six months ended June 30, 2005.
Operating expenses for the three and six month periods represented our allocable portion of the total organizational and operating expenses incurred by us, our manager, and our administrator, as determined by our Board of Directors and representatives of our manager and our administrator. In addition, according to the terms of the investment advisory agreement, beginning on December 1, 2005 and thereafter the base management fee will be calculated quarterly as 0.45% of the average of the total assets of the Company as of the end of the two previous quarters, an increase from the lesser of $900,000 or 0.375% of such average.
Net Investment Income
For the second quarter of 2006, net investment income was $3.9 million compared to $1.9 million for the same quarter of 2005 due to increased interest on the higher portfolio balances partially offset by higher management fees and general and administrative expenses. Net investment income for the six months ended June 30, 2006 was $6.9 million compared to $4.5 million for six months ended June 30, 2005.
Unrealized Appreciation or Depreciation on Investments
For the quarter ended June 30, 2006, net unrealized depreciation was ($1.4) million, compared to ($.1) million for the second quarter of 2005. The ($1.3) million increase is attributable to ($0.9) million in changes in market prices of our investments in senior notes and ($0.4) million in changes in market prices of our corporate notes. For the six months ended June 30, 2006, net unrealized depreciation was ($2.5) million compared to ($1.4) million for the same period of 2005 with the ($1.1) million increase due to ($1.0) million in changes in market prices of our investments in senior notes and ($0.1) million in changes in market prices of our corporate notes.
Net Realized Gains
No realized capital gains or losses were recorded for the quarter or six months ended June 30, 2006. For the quarter ended June 30, 2005, we realized a capital gain of $140,000 on the sale of $10 million in corporate notes. For the six months ended June 30, 2005, net realized capital gains were $144,000.
Net Increase in Stockholders’ Equity from Operations
For the quarter ended June 30, 2006, we had a net increase in stockholders’ equity (net assets) resulting from operations of $2.5 million, or $0.15 per share, compared to $1.9 million, or $0.11 per share for the quarter ended June 30, 2005. For the six months ended June 30, 2006, the net increase in stockholders’ equity (net assets) resulting from operations was $4.4 million, or $0.25 per share, compared to $3.2 million, or $0.18 per share for the six months ended June 30, 2005.
Financial Condition, Liquidity and Capital Resources
During the first six months of this fiscal year, we generated cash from operations, including interest earned on our portfolio securities, as well as our investments in corporate notes, U.S. government securities and other high quality debt securities that mature in one year or less. At June 30, 2006, we had cash and cash equivalents of $3.9 million, investments in U.S. Treasury Bills of $78.7 million and investments in corporate notes of $18.5 million.
As of June 30, 2006, the Company had investments in or commitments to fund loan facilities to ten portfolio companies totaling $176 million, on which $153 million was drawn. We expect to fund our investments in 2006 from the balance of the net proceeds from our IPO, income earned on our portfolio and temporary investments and from borrowings under our senior secured revolving credit facility. In May 2005, we entered into a senior credit facility having an initial term of one year providing for borrowings of up to $60 million. The Company has extended the stated maturity of the credit
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facility to September 29, 2006. The credit facility is secured by substantially all of our assets. Initially, the credit facility is collateralized by cash and cash equivalent investments and the interest rate applicable to borrowings is LIBOR plus 25 basis points. Once we are more fully invested, as long as the ratio of net asset value to total indebtedness is at least 3.5 to 1, the interest rate applicable to borrowings will be LIBOR plus a range of 125 to 250 basis points, depending on the ratio of total debt to net asset value. The credit facility contains covenants and events of default customary for financings of this type. The Credit Agreement will be used to supplement the Company’s equity capital to make additional portfolio investments. As of June 30, 2006, the Company had $7 million outstanding under the Credit Agreement. In the future, we may also fund a portion of our investments with issuances of equity or senior debt securities. We may also securitize a portion of our investments in mezzanine or senior secured loans or other assets. We expect our primary use of funds to be investments in portfolio companies, cash distributions to holders of our common stock and payment of fees and other operating expenses.
Dividends
We intend to be taxed as a regulated investment company under Subchapter M of the Code for 2005 and beyond. As a RIC, we will be required to distribute annually at least 90% of our investment company taxable income and at least 98% of our capital gain net income to avoid excise tax. We intend to make distributions to our stockholders on a quarterly basis of substantially all of our net operating taxable income. We also currently intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain capital gains for investment and designate such retained dividends as a deemed distribution.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a business development company under the 1940 Act and due to provisions in our credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
Portfolio Credit Quality
We maintain a system to evaluate the credit quality of our loans. This system is intended to reflect the performance of a portfolio company’s business, the collateral coverage of a loan, and other factors considered relevant. As of June 30, 2006, all of our investments in portfolio companies were performing satisfactorily; however, investments approximating $25 million have been placed on the Company’s watch list due to slower than expected development of the assets supporting the investments. We expect the assets to eventually perform as planned and believe there is adequate collateral coverage and little to no risk of loss of capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information provided in Item 7.A of the Company’s Annual Report on Form 10-K for the year ended December 21, 2005.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported on a timely basis and accumulated and made known to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on an evaluation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report conducted by our management, with the participation of the Chief Executive and Chief Financial Officers, the Chief Executive and Chief Financial Officers believe that these controls and procedures were effective as of June 30, 2006.
In evaluating changes in internal control over financial reporting during the quarter ended June 30, 2006, management identified no changes in its internal control over financial reporting that occurred during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a defendant in any material legal proceeding, nor to our knowledge, is any material legal proceeding threatened against us.
Item 1A. Risk Factors.
There have been no material changes to the Company’s risk factors as disclosed in Item 1A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 9, 2004, our Registration Statement (Registration No. 333-118279) was declared effective by the SEC in connection with our initial public offering of 16,000,000 shares of common stock (plus up to 2,400,000 additional shares of common stock upon the exercise of the underwriters’ over-allotment option), which commenced trading on November 10, 2004. The initial public offering did not terminate prior to the sale of all the securities registered. The initial public offering consisted solely of one class of common stock. The number of securities registered, including the shares of common stock subject to the underwriters’ over-allotment option, was 18,400,000, of which 17,400,000 were sold to the public. The aggregate price of the offering amount registered was $276,000,000 and the aggregate offering price of the shares sold was $261,000,000.
During the first six months of 2006, we funded investments in portfolio companies in the amount of $59.1 million, paid management fees to our advisor in the amount of $1.5 million and general and administrative expenses of $1.9 million (including payments to the administrator). At June 30, 2006, we had cash and cash equivalents of $3.9 million, investments in U.S. Treasury Bills of $78.7 million, investments in corporate notes of $18.5 million, and targeted investments in portfolio companies of $151.9 million.
We did not repurchase any shares during the period covered by this report.
Item 3. Defaults Upon Senior Securities.
Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders.
| (a) | The annual meeting of the shareholders of the Company was held on Wednesday, May 17, 2006. |
| (b) | Proxies were solicited by the Board of Directors of the Company pursuant to Regulation 14A under the Securities and Exchange Act of 1934; there was no solicitation in opposition to the Board of Directors’ nominees for director as listed in the proxy statement; and such nominees were duly elected as reported below. |
| (c) | Out of a total of 17,400,100 shares of the Company’s common stock outstanding and entitled to vote, 16,590,998 shares were present in person or by proxy, representing approximately 95% of the outstanding shares. |
The Board is divided into three classes, which we refer to as Class I, Class II and Class III directors. The matter voted on by the shareholders at the 2006 annual meeting, as fully described in the proxy statement for the annual meeting, was the election of two Class II directors. The following table presents the number of shares voted for and withheld for each nominee for director.
| NOMINEES FOR DIRECTOR | NUMBER OF VOTES FOR | NUMBER OF VOTES WITHHELD | ||
| David R. Albin | 15,978,765 | 621,273 | ||
| C. Kent Conine | 15,955,435 | 644,603 |
The initial term of the Class I director, Edward W. Blessing, expires at the Company’s 2008 annual meeting of stockholders, and the initial terms of the Class III directors, Mr. Kenneth A. Hersh and Mr. James R. Latimer, III, expire at the Company’s 2007 annual meeting of stockholders.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
| No. | Exhibit | |||
| 3.1 | - | Articles of Incorporation of NGP Capital Resources Company dated as of July 15, 2004 (filed as Exhibit (a)(1) to the Company’s Registration Statement on Form N-2 dated November 9, 2004 (Registration No. 333-118279) and incorporated herein by reference) | ||
| 3.2 | - | Articles of Amendment and Restatement of NGP Capital Resources Company dated as of October 29, 2004 (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 3.3 | - | Bylaws of NGP Capital Resources Company (filed as Exhibit (b) to the Company’s Registration Statement on Form N-2 dated August 16, 2004 (Registration No. 333-118279) and incorporated herein by reference) | ||
| 10.1 | - | Investment Advisory Agreement dated as of November 9, 2004, between NGP Capital Resources Company and NGP Investment Advisor, LP (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.2 | - | Administration Agreement dated as of November 9, 2004, by and between NGP Capital Resources Company and NGP Administration, LLC (filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.3 | - | License Agreement dated as of November 9, 2004, by and between NGP Capital Resources Company and Natural Gas Partners, LLC (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.5 | - | Form of Indemnity Agreement (filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.6 | - | Revolving Credit Agreement dated as of May 16, 2005, by and between NGP Capital Resources Company, the lenders from time to time party hereto and SunTrust Bank (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, and incorporated herein by reference) | ||
| 31.1 | - | Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Executive Officer | ||
| 31.2 | - | Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Financial Officer | ||
| 32.1 | - | Section 1350 Certification by the Chief Executive Officer | ||
| 32.2 | - | Section 1350 Certification by the Chief Financial Officer | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NGP CAPITAL RESOURCES COMPANY | ||
| By: | /s/ John H. Homier | |
| John H. Homier | ||
| President and Chief Executive Officer | ||
| NGP CAPITAL RESOURCES COMPANY | ||
| By: | /s/ Stephen K. Gardner | |
| Stephen K. Gardner | ||
| Chief Financial Officer and Treasurer | ||
Date: August 7, 2006
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Index to Exhibits
| No. | Exhibit | |||
| 3.1 | - | Articles of Incorporation of NGP Capital Resources Company dated as of July 15, 2004 (filed as Exhibit (a)(1) to the Company’s Registration Statement on Form N-2 dated November 9, 2004 (Registration No. 333-118279) and incorporated herein by reference) | ||
| 3.2 | - | Articles of Amendment and Restatement of NGP Capital Resources Company dated as of October 29, 2004 (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 3.3 | - | Bylaws of NGP Capital Resources Company (filed as Exhibit (b) to the Company’s Registration Statement on Form N-2 dated August 16, 2004 (Registration No. 333-118279) and incorporated herein by reference) | ||
| 10.1 | - | Investment Advisory Agreement dated as of November 9, 2004, between NGP Capital Resources Company and NGP Investment Advisor, LP (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.2 | - | Administration Agreement dated as of November 9, 2004, by and between NGP Capital Resources Company and NGP Administration, LLC (filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.3 | - | License Agreement dated as of November 9, 2004, by and between NGP Capital Resources Company and Natural Gas Partners, LLC (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.5 | - | Form of Indemnity Agreement (filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) | ||
| 10.6 | - | Revolving Credit Agreement dated as of May 16, 2005, by and between NGP Capital Resources Company, the lenders from time to time party hereto and SunTrust Bank (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, and incorporated herein by reference) | ||
| 31.1 | - | Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Executive Officer | ||
| 31.2 | - | Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Financial Officer | ||
| 32.1 | - | Section 1350 Certification by the Chief Executive Officer | ||
| 32.2 | - | Section 1350 Certification by the Chief Financial Officer | ||
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