| February 28, 2010 | | | | | | | | | | | | | | | | | | |
| Units/ | | | | | | | | | | | | | | Units/ | | | |
| Equity Interest/ | | | | | | | | | | | Gross | | Equity Interest/ | | | |
| Principal | | | | | | | | | | | Distributions | | Principal | | | |
| Balance | | Gross | | Gross | | Realized Gain | | or Interest | | Balance | | Fair Value |
| 11/30/09 | | Additions | | Reductions | | (Loss) | | Received | | 2/28/10 | | 2/28/10 |
| High Sierra Energy, LP | | 1,042,685 | | | $ | — | | $ | — | | | $ | — | | | $ | 656,892 | | | 1,042,685 | | | $ | 24,325,831 |
| International Resource Partners LP | | 500,000 | | | | — | | | — | | | | — | | | | 200,000 | | | 500,000 | | | | 10,520,000 |
| LONESTAR Midstream Partners, LP(1)(2) | | 1,327,900 | | | | — | | | (787,133 | ) | | | (16,224 | ) | | | — | | | 1,327,900 | | | | 376,000 |
| LSMP GP, LP(1)(2) | | 180 | | | | — | | | (17,254 | ) | | | (1,221 | ) | | | — | | | 180 | | | | 68,000 |
| Mowood, LLC Subordinated Debt | $ | 8,800,000 | | | | 750,000 | | | (4,250,000 | ) | | | — | | | | 191,431 | | $ | 5,300,000 | | | | 5,300,000 |
| Mowood, LLC Equity Interest | | 99.5 | % | | | — | | | (4,750,000 | ) | | | 1,578,001 | | | | 112,500 | | | 100 | % | | | 5,847,523 |
| Quest Midstream Partners, L.P.(2) | | 1,216,881 | | | | — | | | — | | | | — | | | | — | | | 1,216,881 | | | | 6,339,950 |
| VantaCore Partners LP Common Units | | 933,430 | | | | — | | | — | | | | — | | | | 443,379 | | | 933,430 | | | | 16,409,700 |
| VantaCore Partners LP Incentive | | 988 | | | | — | | | — | | | | — | | | | — | | | 988 | | | | 208,403 |
| Distribution Rights(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | $ | 750,000 | | $ | (9,804,387 | ) | | $ | 1,560,556 | | | $ | 1,604,202 | | | | | | $ | 69,395,407 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | See Note 9 — Investment Transactions for additional information. |
| (2) | | Currently non-income producing. |
| November 30, 2009 | | | | | | | | | | | | | | | | | | | | |
| Units/ | | | | | | | | | | | | | | | | Units/ | | | |
| Equity Interest/ | | | | | | | | | | | | | Gross | | Equity Interest/ | | | |
| Principal | | | | | | | | | | | | | Distributions | | Principal | | | |
| Balance | | Gross | | Gross | | Realized Gain | | or Interest | | Balance | | Fair Value |
| 11/30/08 | | Additions | | Reductions | | (Loss) | | Received | | 11/30/09 | | 11/30/09 |
| High Sierra Energy, LP | | 1,042,685 | | | $ | — | | $ | — | | | $ | — | | | $ | 2,579,159 | | | 1,042,685 | | | $ | 24,461,390 |
| International Resource Partners LP | | 500,000 | | | | — | | | — | | | | — | | | | 800,000 | | | 500,000 | | | | 9,984,402 |
| LONESTAR Midstream Partners, LP(1)(2) | | 1,327,900 | | | | — | | | (1,128,428 | ) | | | (363,932 | ) | | | — | | | 1,327,900 | | | | 1,102,000 |
| LSMP GP, LP(1)(2) | | 180 | | | | — | | | (55,353 | ) | | | 25,360 | | | | — | | | 180 | | | | 124,000 |
| Mowood, LLC Subordinated Debt | $ | 7,050,000 | | | | 1,750,000 | | | — | | | | — | | | | 807,848 | | $ | 8,800,000 | | | | 8,800,000 |
| Mowood, LLC Promissory Notes | $ | 1,235,000 | | | | — | | | (1,235,000 | ) | | | — | | | | — | | | — | | | | — |
| Mowood, LLC Equity Interest | | 99.6 | % | | | — | | | — | | | | — | | | | 450,000 | | | 99.5 | % | | | 8,253,910 |
| Quest Midstream Partners, L.P.(2) | | 1,180,946 | | | | — | | | — | | | | — | | | | — | | | 1,216,881 | | | | 5,987,055 |
| VantaCore Partners LP Common Units | | 933,430 | | | | — | | | — | | | | — | | | | 1,820,189 | | | 933,430 | | | | 16,256,482 |
| VantaCore Partners LP Incentive | | 988 | | | | — | | | — | | | | — | | | | — | | | 988 | | | | 147,654 |
| Distribution Rights(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | $ | 1,750,000 | | $ | (2,418,781 | ) | | $ | (338,572 | ) | | $ | 6,457,196 | | | | | | $ | 75,116,893 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | See Note 9 — Investment Transactions for additional information. |
| (2) | | Currently non-income producing. Additional units held at 11/30/09 resulted from paid-in-kind distribution to private investors in October 2009. |
9. Investment Transactions
For the three months ended February 28, 2010, the Company purchased (at cost) securities in the amount of $750,000 and sold securities (at proceeds) in the amount of $9,839,190 (excluding short-term debt securities). For the three months ended February 28, 2009, the Company purchased (at cost) securities in the amount of $1,131,168 and sold securities (at proceeds) in the amount of $588,032 (excluding short-term debt securities).
On February 9, 2010, Mowood, LLC closed the sale of its wholly owned subsidiary, Timberline Energy, LLC, to Landfill Energy Systems, LLC. Timberline is an owner and developer of projects that convert landfill gas to energy. Mowood will continue its ownership and operation of Omega Pipeline Company, LLC (“Omega”), a local distribution company which serves the natural gas and propane needs of Fort Leonard Wood and other customers in south central Missouri. The Company received proceeds from the sale of $9,000,000, which were used to pay off the outstanding balance on its credit facility and to fund an additional investment of $750,000 in Omega to facilitate growth. The Company intends to invest the remaining proceeds according to its stated investment policies, which may include investments in publicly-traded securities. Over the next two years, the Company could receive additional proceeds of up to $2.4 million, based on contingent and escrow terms. In connection with the transaction, the Company entered into a guarantee agreement with the purchaser to unconditionally guarantee the sellers performance under the sale agreement, including certain related seller obligations in the Purchase Agreement.
On July 17, 2008, LONESTAR Midstream Partners LP (“LONESTAR”) closed a transaction with Penn Virginia Resource Partners, L.P. (NYSE: PVR) for the sale of its gas gathering and transportation assets. LONESTAR distributed substantially all of the initial sales proceeds to its limited partners but did not redeem partnership interests. On July 24, 2008, the Company received a distribution of $10,476,511 in cash, 468,001 newly issued unregistered common units of PVR, and 59,503 unregistered common
17
units of Penn Virginia GP Holdings, L.P. (NYSE: PVG). On July 24, 2008, the Company recorded the cash and the unregistered PVR and PVG common units it received at a cost basis equal to the fair value on the date of receipt, less a discount for illiquidity. The Company reduced its basis in LONESTAR by $20,427,674, approximately 82 percent of the respective relative value of the entire transaction, resulting in a realized gain of $1,104,244. The Company also reduced its basis in LSMP GP, LP by $403,488, approximately 71 percent of the respective relative value of the entire transaction, resulting in a realized gain of $1,007,962.
On February 3, 2009, the Company received a distribution of 37,305 freely tradable common units of PVR and 4,743 freely tradable common units of PVG. The Company recorded the PVR and PVG common units it received at a cost basis equal to the fair value on the date of receipt. The Company reduced its basis in LONESTAR by $746,180, approximately 3 percent of the respective relative value of the entire transaction, resulting in a realized loss of $184,201. The Company also reduced its basis in LSMP GP, LP by $14,996, approximately 3 percent of the respective relative value of the entire transaction, resulting in a realized gain of $11,057.
On July 17, 2009, the Company received a distribution of 37,304 freely tradable common units of PVR and 4,744 freely tradable common units of PVG. The Company recorded the PVR and PVG common units it received at a cost basis equal to the fair value on the date of receipt. The Company reduced its basis in LONESTAR by $746,180, approximately 3 percent of the respective relative value of the entire transaction, resulting in a realized loss of $179,731. The Company also reduced its basis in LSMP GP, LP by $14,996, approximately 3 percent of the respective relative value of the entire transaction, resulting in a realized gain of $14,303.
On December 31, 2009, the Company received a cash distribution from LONESTAR of $804,387. The Company reduced its basis in LONESTAR by $803,357, approximately 3 percent of the respective relative value of the entire transaction, resulting in a realized loss of $16,224. The Company also reduced its basis in LSMP GP, LP by $18,475, approximately 3 percent of the respective relative value of the entire transaction, resulting in a realized loss of $1,221.
There are also two future contingent payments due from LONESTAR which are based on the achievement of specific revenue targets by or before June 30, 2013. No payments are due if these revenue targets are not achieved. If received, the Company’s expected portion would total approximately $9,638,829, payable in cash or common units of PVR (at PVR’s election). The fair value of the LONESTAR and LSMP GP, LP units as of February 28, 2010 is based on unobservable inputs related to the potential receipt of these future payments relative to the sales transaction.
On October 1, 2008, Millennium sold its partnership interests to Eagle Rock Energy Partners, L.P. (“EROC”) for approximately $181,000,000 in cash and approximately four million EROC unregistered common units. In exchange for its Millennium partnership interests, the Company received $13,687,081 in cash and 373,224 EROC unregistered common units with an aggregate basis of $5,044,980 for a total implied value at closing of approximately $18,732,061. In addition, approximately 212,404 units with an aggregate cost basis of 2,920,555 were placed in escrow for 18 months from the date of the transaction. This includes a reserve the Company placed against the units held in the escrow for estimated post-closing adjustments. The Company originally invested $17,500,000 in Millennium (including common units and incentive distribution rights), and had an adjusted cost basis at closing of $15,161,125 (after reducing its basis for cash distributions received since investment that were treated as return of capital). At the transaction closing, the Company recorded a realized gain for book purposes of $6,491,491, including a reserve the Company placed against the restricted cash and units held in the escrow for estimated post-closing adjustments. Subsequent to November 30, 2008, the Company increased the reserve against the units held in escrow for additional post-closing adjustments and a realized loss related to the reclassification of investment income and return of capital recognized based on the 2008 tax reporting information received from Millennium resulting in a revised cumulative realized gain for book purposes of $5,661,808. Of this amount, a realized loss for book purposes of $7,191 was recorded for the three months ended February 28, 2010. For purposes of the capital gain incentive fee, the realized gain totals $3,600,657, which excludes that portion of the fee that would be due as a result of cash distributions which were characterized as return of capital. Pursuant to the Investment Advisory Agreement, the capital gain incentive fee is paid annually only if there are realization events and only if the calculation defined in the agreement results in an amount due. No capital gain incentive fees have been paid to date.
10. Credit Facility
On December 1, 2008, the Company had a $50,000,000 committed credit facility with U.S. Bank, N.A., who served as a lender, agent and lead arranger. The revolving credit facility had a variable annual interest rate equal to the one-month LIBOR plus 1.75 percent and a non-usage fee equal to an annual rate of 0.375 percent of the difference between the total credit facility commitment and the average outstanding balance at the end of each day for the preceding fiscal quarter. The credit facility contained a covenant precluding the Company from incurring additional debt.
On March 20, 2009, the Company entered into a 90-day extension of its amended credit facility. Terms of the extension provided for a secured revolving credit facility of up to $25,000,000. Effective June 20, 2009, the Company entered into a 60-day extension of its amended credit facility. The terms of the extension provided for a secured revolving credit facility of up to $11,700,000.
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The credit agreement, as extended, had a termination date of August 20, 2009. Terms of these extensions required the Company to apply 100 percent of the proceeds from any private investment liquidation and 50 percent of the proceeds from the sale of any publicly traded portfolio assets to the outstanding balance of the facility. In addition, each prepayment of principal of the loans under the amended credit facility would permanently reduce the maximum amount of the loans under the amended credit agreement to an amount equal to the outstanding principal balance of the loans under the amended credit agreement immediately following the prepayment. During these extensions, outstanding loan balances accrued interest at a variable rate equal to the greater of (i) one-month LIBOR plus 3.00 percent, and (ii) 5.50 percent.
On August 20, 2009, the Company entered into a six-month extension of its amended credit facility through February 20, 2010. Terms of the extension provided for a secured revolving facility of up to $5,000,000. The amended credit facility required the Company to apply 100 percent of the proceeds from the sale of any investment to the outstanding balance of the facility. In addition, each prepayment of principal of the loans under the amended credit facility permanently reduced the maximum amount of the loans under the amended credit agreement to an amount equal to the outstanding principal balance of the loans under the amended credit agreement immediately following the prepayment. During this extension, outstanding loan balances accrued interest at a variable rate equal to the greater of (i) one-month LIBOR plus 3.00 percent, and (ii) 5.50 percent. On February 10, 2010, the Company paid off the remaining balance under the credit facility with proceeds from the sale of investments and the credit facility was terminated.
For the three months ended February 28, 2010, the average principal balance and interest rate for the period during which the credit facility was utilized were $4,205,634 and 5.50 percent, respectively.
11. Common Stock
The Company has 100,000,000 shares authorized and 9,078,090 shares outstanding at February 28, 2010 and November 30, 2009.
| Shares at November 30, 2008 | 8,962,147 |
| Shares issued through reinvestment of distributions | 115,943 |
| Shares at November 30, 2009 and February 28, 2010 | 9,078,090 |
| | |
12. Warrants
At February 28, 2010, the Company had 945,594 warrants issued and outstanding. The warrants became exercisable on February 7, 2007 (the closing date of the Company’s initial public offering of common shares), subject to a lock-up period with respect to the underlying common shares. Each warrant entitles the holder to purchase one common share at the exercise price of $15.00 per common share. Warrants were issued as separate instruments from the common shares and are permitted to be transferred independently from the common shares. The warrants have no voting rights and the common shares underlying the unexercised warrants will have no voting rights until such common shares are received upon exercise of the warrants. All warrants will expire on February 6, 2013.
| Warrants outstanding at November 30, 2009 and February 28, 2010 | 945,594 |
| | |
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| | For the three | | For the three |
| | months ended | | months ended |
| | February 28, 2010 | | February 28, 2009 |
| Net increase (decrease) in net assets applicable to | | | | | | | |
| common stockholders resulting from operations | | $ | 4,017,523 | | $ | (9,471,915 | ) |
| Basic weighted average shares | | | 9,078,090 | | | 8,962,147 | |
| Average warrants outstanding(1) | | | — | | | — | |
| Diluted weighted average shares | | | 9,078,090 | | | 8,962,147 | |
| Basic and diluted net increase (decrease) in net assets | | | | | | | |
| applicable to common stockholders resulting from | | | | | | | |
| operations per common share | | $ | 0.44 | | $ | (1.06 | ) |
| (1) | | Warrants to purchase shares of common stock at $15.00 per share were outstanding during the periods reflected in the table above, but were not included in the computation of diluted earnings per share because the warrants’ exercise price was greater than the average market value of the common shares and, therefore, the effect would be anti-dilutive. |
14. Subsequent Events
The Company has performed an evaluation of subsequent events through April 8, 2010, which is the date the financial statements were issued.
On March 1, 2010, the Company paid a distribution in the amount of $0.13 per common share, for a total of $1,180,152. Of this total, the dividend reinvestment amounted to $144,744.
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ADDITIONAL INFORMATION (Unaudited)
Director and Officer Compensation
The Company does not compensate any of its directors who are “interested persons” (as defined in Section 2 (a) (19) of the 1940 Act) or any of its officers. For the three months ended February 28, 2010, the aggregate compensation paid by the Company to the independent directors was $34,500. The Company did not pay any special compensation to any of its directors or officers.
Forward-Looking Statements
This report contains “forward-looking statements.” By their nature, all forward-looking statements involve risk and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements.
Certifications
The Company’s Chief Executive Officer submitted to the New York Stock Exchange in 2009 the annual CEO certification as required by Section 303A.12(a) of the NYSE Listed Company Manual.
The Company has filed with the SEC the certification of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act.
Proxy Voting Policies
A description of the policies and procedures that the Company uses to determine how to vote proxies relating to portfolio securities owned by the Company is available to stockholders (i) without charge, upon request by calling the Company at (913) 981-1020 or toll-free at (866) 362-9331 and on the Company’s Web site at www.tortoiseadvisors.com/tto.cfm; and (ii) on the SEC’s Web site at www.sec.gov.
Privacy Policy
The Company is committed to maintaining the privacy of its stockholders and safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Company collects, how the Company protects that information and why, in certain cases, the Company may share information with select other parties.
Generally, the Company does not receive any non-public personal information relating to its stockholders, although certain non-public personal information of its stockholders may become available to the Company. The Company does not disclose any non-public personal information about its stockholders or a former stockholder to anyone, except as required by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent).
The Company restricts access to non-public personal information about its stockholders to employees of its Adviser with a legitimate business need for the information. The Company maintains physical, electronic and procedural safeguards designed to protect the non-public personal information of its stockholders.
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Statements contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” in Part I, Item 1A. of our most recent Annual Report filed on Form 10-K.
We may experience fluctuations in our operating results due to a number of factors, including the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Overview
We have elected to be regulated as a business development company (“BDC”) and we are classified as a non-diversified closed-end management investment company under the Investment Company Act of 1940. As a BDC, we are subject to numerous regulations and restrictions. Unlike most investment companies, we are, and intend to continue to be, taxed as a general business corporation under the Internal Revenue Code of 1986.
We seek to invest in companies operating in the U.S. energy infrastructure sector, primarily in privately-held and micro-cap public companies focused on the midstream and downstream segments, and to a lesser extent the upstream and coal and aggregates segments. Companies in the midstream segment of the energy infrastructure sector engage in the business of transporting, processing or storing natural gas, natural gas liquids, crude oil, refined petroleum products and renewable energy resources. Companies in the downstream segment of the energy infrastructure sector engage in distributing or marketing such commodities, and companies in the upstream segment of the energy infrastructure sector engage in exploring, developing, managing or producing such commodities. The energy infrastructure sector also includes producers and processors of coal and aggregates, two business segments that also are eligible for master limited partnership (“MLP”) status. We seek to invest in companies in the energy infrastructure sector that generally produce stable cash flows as a result of their fee-based revenues and proactive hedging programs which help to limit direct commodity price risk.
Performance Review and Investment Outlook
Our first quarter resulted in a significant improvement of both our net asset value and our stock price. Net asset value as of February 28, 2010 was $9.60 per share, as compared to $9.29 at November 30, 2009. The increase in net asset value is largely attributable to an increase in our private company valuations, most notably International Resource Partners LP and Mowood (which continues to own and operate Omega Pipeline Company). Total investment return, based on net asset value and assuming reinvestment of distributions, was 5.28 percent for the quarter ending February 28, 2010. In the first quarter, we saw continued investor interest in the BDC sector with improved trading relative to net asset value and over $500 million of equity raised in the sector in January and February. Our stock price as of February 28, 2010 was $6.85, compared to $6.23 as of November 30, 2009. Our total investment return, based on market value and assuming reinvestment of distributions, was 12.02 percent for the three months ended February 28, 2010.
As previously reported, Mowood closed the sale of its wholly owned subsidiary, Timberline Energy, LLC, to Landfill Energy Systems in February 2010. We received $9.0 million in cash distributions from Mowood. We used a portion of the proceeds to pay off our credit facility, which had an outstanding balance of $4.6 million as of November 30, 2009. We also invested $750,000 this quarter in Mowood, in the form of subordinated debt, to facilitate growth projects at Omega. The remainder of the proceeds received from the sale of Timberline were invested in publicly-traded securities after our quarter-end. Over the next two years, we could receive additional proceeds of up to $2.4 million based on the contingent and escrow terms contained in the sale agreement.
Another positive development in our portfolio was Quest Midstream Partners completing its transformation into a publicly traded C-corp, PostRock Energy Corp. (NASDAQ: PSTR). PSTR is the new corporation formed for the purpose of wholly owning all three Quest entities. PostRock announced on March 5, 2010 that shareholders of Quest Resource Corporation (“QRCP”) and Quest Energy Partners, L.P. (“QELP”) and unitholders of Quest Midstream Partners approved the merger and PostRock began trading on March 8, 2010. Upon closing of the merger, we received 490,769 freely tradable common units of PSTR in exchange for our 1,216,881 common units of Quest Midstream.
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As of February 28, 2010, the value of our investment portfolio (excluding short-term investments) was $76.9 million, including equity investments of $71.6 million and debt investments of $5.3 million. Our portfolio is diversified among approximately 57 percent midstream and downstream investments, 8 percent upstream, and 35 percent in aggregates and coal. The weighted average yield (to cost) on our investment portfolio (excluding short-term investments) as of February 28, 2010 was 6.9 percent. A summary of our investments follows:
| | | | | | | | | | | | Current |
| | | | | | Amount | | | | | Yield on |
| Name of Portfolio | | Nature of its | | Securities | | Invested | | Fair Value | | Amount |
| Company (Segment) | | Principal Business | | Held by Us | | (in millions) | | (in millions)(1) | | Invested(2) |
Abraxas Petroleum Corporation
(Upstream)(3) | | Acquisition, development, exploration, and production of oil and gas principally in the Rocky Mountain, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States | | Common Units | | $ | 2.9 | | $ | 3.4 | | 0.0 | % |
| | | | | | | | | | | | | | |
Eagle Rock Energy Partners, L.P.
(Upstream/Midstream) | | Gatherer and processor of natural gas in north, south and east Texas and Louisiana and producer and developer of upstream and mineral assets located in 17 states | | Unregistered
Common Units
(held in escrow) | | | 0.7 | | | 0.3 | | 0.7 | |
| | | | | | | | | | | | | | |
| EV Energy Partners, L.P. (Upstream) | | Acquirer, producer and developer of oil and gas properties in the Appalachian Basin, the Monroe field in Louisiana, Michigan, the Austin Chalk, South Central Texas, the Permian Basin, the San Juan Basin and the Mid-continent area | | Common Units | | | 2.7 | | | 2.4 | | 8.8 | |
| | | | | | | | | | | | | | |
| High Sierra Energy, LP (Midstream) | | Marketing, processing, storage and transportation of hydrocarbons and processing and disposal of oilfield produced water with operations primarily in Colorado, Wyoming, Oklahoma, Florida and Mississippi | | Common Units | | | 24.8 | | | 24.3 | | 10.6 | |
| | | | | | | | | | | | | | |
High Sierra Energy GP, LLC
(Midstream)(4) | | General Partner of High Sierra Energy, LP | | Equity Interest | | | 2.0 | | | 1.4 | | 3.0 | |
| | | | | | | | | | | | | | |
International Resource Partners LP
(Coal) | | Operator of both metallurgical and steam coal mines and related assets in Central Appalachia | | Class A Units | | | 10.0 | | | 10.5 | | 8.0 | |
| | | | | | | | | | | | | | |
LONESTAR Midstream Partners, LP
(Midstream)(5) | | LONESTAR Midstream Partners, LP sold its assets to Penn Virginia Resource Partners, L.P (PVR) in July 2008. LONESTAR has no continuing operations, but currently holds rights to receive future payments from PVR relative to the sale | | Class A Units | | | 2.2 | | | 0.4 | | N/A | |
| | | | | | | | | | | | | | |
| LSMP GP, LP (Midstream)(5) | | Indirectly owns General Partner of LONESTAR Midstream Partners, LP | | GP LP Units | | | 0.1 | | | 0.1 | | N/A | |
| | | | | | | | | | | | | | |
Mowood, LLC (Midstream/
Downstream)(6) | | Natural gas distribution and gas marketing in central Missouri | | Equity interest | | | 1.0 | | | 5.9 | | 9.0 | |
| | | | | | | | | | | | | | |
| | | | | Subordinated Debt | | | 5.3 | | | 5.3 | | 14.0 | |
| | | | | | | | | | | | | | |
Quest Midstream Partners, L.P.
(Midstream)(3) | | Operator of natural gas gathering pipelines in the Cherokee Basin and interstate natural gas transmission pipelines in Oklahoma, Kansas and Missouri | | Common Units | | | 22.2 | | | 6.3 | | 0.0 | |
22
| | | | | | | | | | | | Current |
| | | | | | Amount | | | | | Yield on |
| Name of Portfolio | | Nature of its | | Securities | | Invested | | Fair Value | | Amount |
| Company (Segment) | | Principal Business | | Held by Us | | (in millions) | | (in millions)(1) | | Invested(2) |
VantaCore Partners LP
(Aggregates) | | Acquirer and operator of aggregate companies, with quarry and asphalt operations in Clarksville, Tennessee and sand and gravel operations located near Baton Rouge, Louisiana | | Common Units and
Incentive Distribution
Rights | | $ | 18.4 | | $ | 16.6 | | 9.6 | % |
| | | | | | | | | | | | | | |
| | | | | | $ | 92.3 | | $ | 76.9 | | | |
| | | | | | | | | | | | | | |
| (1) | | Fair value as of February 28, 2010. |
| (2) | | The current yield has been calculated by annualizing the most recent distribution during the period and dividing by the amount invested in the underlying security. Actual distributions to us are based on each company’s available cash flow and are subject to change. |
| (3) | | Currently non-income producing. |
| (4) | | Includes original purchase of 3 percent equity interest, sale of 0.6274 percent equity interest in July 2007 and subsequent capital calls. |
| (5) | | LONESTAR Midstream Partners, LP sold its assets to Penn Virginia Resource Partners, L.P in July 2008. LONESTAR has no continuing operations, but currently holds rights to receive future payments from PVR relative to the sale. The cost basis and the fair value of the LONESTAR and LSMP GP, LP units as of February 28, 2010 are related to the potential receipt of those future payments. Since this investment is not deemed to be “active”, the yield is not meaningful and we have excluded it from our weighted average yield to cost on investments as described below in Results of Operations. |
| (6) | | Current yield on our equity interest represents an equity distribution on our invested capital. We expect that, pending cash availability, such equity distributions will recur on a quarterly basis at or above such yield. |
Portfolio Company Monitoring
Our Adviser monitors each portfolio company to determine progress relative to meeting the company’s business plan and to assess the company’s strategic and tactical courses of action. This monitoring may be accomplished by attendance at Board of Directors meetings, ad hoc communications with company management, the review of periodic operating and financial reports, an analysis of relevant reserve information and capital expenditure plans, and periodic consultations with engineers, geologists, and other experts. The performance of each private portfolio company is also periodically compared to performance of similarly sized companies with comparable assets and businesses to assess performance relative to peers. Our Adviser’s monitoring activities are expected to provide it with information that will enable us to monitor compliance with existing covenants, to enhance our ability to make qualified valuation decisions, and to assist our evaluation of the nature of the risks involved in each individual investment. In addition, these monitoring activities should enable our Adviser to diagnose and manage the common risk factors held by our total portfolio, such as sector concentration, exposure to a single financial sponsor, or sensitivity to a particular geography.
As part of the monitoring process, our Adviser continually assesses the risk profile of each of our private investments. We intend to disclose, as appropriate, those risk factors that we deem most relevant in assessing the risk of any particular investment. Such factors may include, but are not limited to, the investment’s current cash distribution status, compliance with loan covenants, operating and financial performance, changes in the regulatory environment or other factors that we believe are useful in determining overall investment risk.
High Sierra Energy, LP (“High Sierra”)
High Sierra is a holding company with diversified midstream energy assets focused on the transportation, storage and marketing of hydrocarbons. The company’s businesses include a natural gas liquids logistics, transportation and marketing business operating throughout the lower 48 states, a natural gas storage facility in Mississippi, an ethanol terminal in Nevada, crude oil and natural gas liquids trucking businesses in Kansas and Colorado, crude oil gathering, transportation and marketing services, primarily focused in the Mid-Continent, Western and Gulf Coast regions, water treatment, transportation and disposal businesses serving oil and gas producers in Wyoming and Oklahoma, and two asphalt processing, packaging and distribution terminals in Florida. We hold board of directors’ observation rights for High Sierra.
During our first fiscal quarter, High Sierra maintained its quarterly cash distribution of $0.63 per unit, which was paid in February 2010. For the year ended December 31, 2009, the company reported aggregate, unaudited EBITDA results, before mark-to-market adjustments and minority interests, and excluding results of unconsolidated entities, approximately at budget. Results within the various business units were mixed, with favorable results at the company’s Anticline water treatment facility in Pinedale, Wyoming, and Centennial Energy (natural gas liquids marketing) units generally offsetting weaker-than-budgeted performance from several other business units. National Coal County, an Oklahoma based water transportation and disposal service company acquired in 2007, continued to struggle with reported results significantly below expectations, driven in part by a reduction in drilling activities in its service territory. At High Sierra Crude Oil & Marketing, favorable gross margins were offset by higher-than-budgeted delivery expenses. The prolonged downturn of construction in Florida continues to produce lower results in High Sierra’s asphalt business. Monroe Gas Storage (“MGS”), an underground natural gas storage joint venture, began commercial operations in 2009. MGS was not consolidated by High Sierra during 2009. On March 1, 2010, High Sierra assumed the role of operator of the facility. It is expected that the change will result in consolidation of MGS’s financial results by High Sierra going forward.
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High Sierra continues to work on refinancing its bank credit facilities. Subsequent to February 28, 2010, the terms of the working capital facility were amended and it was also extended to May 31, 2010. The frequency and amount of High Sierra’s distribution payments are subject to both operating performance and terms of financing arrangements.
International Resource Partners LP (“IRP”)
IRP’s surface and underground coal mine operations in southern West Virginia are comprised of metallurgical and steam coal reserves, a coal washing and preparation plant, rail load-out facilities and a sales and marketing subsidiary. We hold board of director’s observation rights for IRP.
For the year ended December 31, 2009, IRP reported EBITDA results well in excess of its budget. In January 2010, IRP purchased certain assets of Miller Brothers Coal, LLC in eastern Kentucky for approximately $22.7 million net cash and a 1.0 percent royalty on future sales from the property. Lightfoot Capital Partners purchased 980,000 new Class A units in IRP to finance the majority of the transaction. The assets include both leased and owned properties with capacity for seven surface and three underground mines. The acquisition is not expected to significantly contribute to IRP’s EBITDA until 2011. With this transaction, IRP’s existing reserves will be approximately 82.4 million tons.
Mowood, LLC (“Mowood”)
Mowood is the holding company of Omega Pipeline, LLC (“Omega”). We hold 100 percent of the equity interests in Mowood and currently hold a seat on its board of directors. In February 2010, Mowood sold its wholly owned subsidiary, Timberline Energy, LLC, to Landfill Energy Systems, LLC.
Omega is a natural gas local distribution company located on the Fort Leonard Wood military installation in south central Missouri. Omega serves the natural gas and propane needs of Fort Leonard Wood and other customers in the surrounding area. Omega was slightly behind budget through January 2010. Omega’s performance is expected to be at or above budget in the following months as construction and growth projects at the Fort make larger contributions to profitability. Following the sale of Timberline, we made an additional investment of $750,000 in Omega to facilitate growth.
Quest Midstream Partners, L.P. (“Quest Midstream”)
Quest Midstream was formed by the spin-off of QRCP’s midstream coal bed methane natural gas gathering assets in the Cherokee Basin. Quest Midstream owns more than 2,000 miles of natural gas gathering pipelines (primarily serving QELP, an affiliate) and over 1,100 miles of interstate natural gas transmission pipelines in Oklahoma, Kansas and Missouri.
On February 8, 2010, QRCP and QELP announced that the Securities and Exchange Commission declared effective the Registration Statement of PostRock Energy Corporation (“PostRock”) on Form S-4. PostRock is a new corporation formed for the purpose of wholly owning all three Quest entities. The Form S-4 registered with the SEC PostRock’s common stock to be issued in connection with the merger of QRCP, QELP, and Quest Midstream.
PostRock announced on March 5, 2010 that shareholders of QRCP and QELP and unitholders of Quest Midstream approved the merger and PostRock began trading on the NASDAQ under the symbol “PSTR” on March 8, 2010. Upon closing of the merger, we received 490,769 freely tradable common units of PostRock in exchange for our 1,216,881 common units of Quest Midstream. PostRock is not expected to pay cash dividends. The merger changes the risk profile of our investment from primarily a gathering company to an integrated company that has increased drilling risk and commodity exposure.
VantaCore Partners LP (“VantaCore”)
VantaCore was formed to acquire companies in the aggregate industry and currently owns a quarry and asphalt plant in Clarksville, Tennessee and sand and gravel operations located near Baton Rouge, Louisiana. We hold a seat on VantaCore’s board of directors.
VantaCore paid a quarterly cash distribution for their fourth quarter of $0.475 per unit, the minimum quarterly distribution, in February 2010. The operating results at VantaCore’s Clarksville facility continue to exceed budget, supported by two large projects and activity at the Fort Campbell military base. Overall construction activity in the area is down, but signs of improvement are becoming apparent with jobs for bid steadily increasing. Southern Aggregates continues to report disappointing results with volumes well below historical numbers. VantaCore has made significant changes to Southern Aggregates’ operations to reflect the lower volumes seen and VantaCore believes that 2010 will yield improved construction spending in the area.
Results of Operations
Comparison of the Three Months Ended February 28, 2010 and February 28, 2009
Investment Income: Investment income decreased $391,690 for the three months ended February 28, 2010 compared to the three months ended February 28, 2009. The decrease in investment income is primarily due to the sale of portfolio investments to pay down outstanding leverage. The weighted average yield to cost on our investment portfolio (excluding short-term investments) as of February 28, 2010 was 6.9 percent, as compared to 7.8 percent at February 28, 2009. The decrease in the weighted average yield to cost is primarily related to the sale of higher yielding publicly traded securities to pay down outstanding leverage.
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Net Expenses: Net expenses decreased $237,551 during the three months ended February 28, 2010 as compared to the three months ended February 28, 2009. The decrease is primarily related to a reduction in base management fees payable to the Adviser and a decrease in interest expense resulting from the paydown of our outstanding leverage.
Distributable Cash Flow: Our portfolio generates cash flow to us from which we pay distributions to stockholders. When our Board of Directors determines the amount of any distribution we expect to pay our stockholders, it reviews distributable cash flow (“DCF”). DCF is distributions received from investments less our total expenses. The total distributions received from our investments include the amount received by us as cash distributions from equity investments, paid-in-kind distributions, and dividend and interest payments. Total expenses include current or anticipated operating expenses, leverage costs and current income taxes on our operating income. Total expenses do not include deferred income taxes or accrued capital gain incentive fees. We do not include in distributable cash flow the value of distributions received from portfolio companies which are paid in stock as a result of credit constraints, market dislocation or other similar issues.
We disclose DCF in order to provide supplemental information regarding our results of operations and to enhance our investors’ overall understanding of our core financial performance and our prospects for the future. We believe that our investors benefit from seeing the results of DCF in addition to GAAP information. This non-GAAP information facilitates management’s comparison of current results with historical results of operations and with those of our peers. This information is not in accordance with, or an alternative to, GAAP and may not be comparable to similarly titled measures reported by other companies.
The following table represents DCF for the three months ended February 28, 2010 as compared to the three months ended February 28, 2009:
| | For the three | | For the three |
| | months ended | | months ended |
| Distributable Cash Flow | | February 28, 2010 | | February 28, 2009 |
| Total from Investments | | | | | | | | |
| Distributions from investments | | $ | 1,488,756 | | | $ | 2,691,635 | |
| Interest income from investments | | | 191,431 | | | | 201,598 | |
| Dividends from money market mutual funds | | | 217 | | | | 725 | |
| Other income | | | 10,392 | | | | 15,000 | |
| Total from Investments | | | 1,690,796 | | | | 2,908,958 | |
| |
| Operating Expenses Before Leverage Costs | | | | | | | | |
| Advisory fees (net of expense reimbursement by Adviser) | | | 258,268 | | | | 327,308 | |
| Other operating expenses | | | 174,568 | | | | 217,582 | |
| Total Operating Expenses, before Leverage Costs | | | 432,836 | | | | 544,890 | |
| Distributable cash flow before leverage costs | | | 1,257,960 | | | | 2,364,068 | |
| Leverage Costs | | | 45,619 | | | | 171,116 | |
| Distributable Cash Flow | | $ | 1,212,341 | | | $ | 2,192,952 | |
| |
| Distributions paid on common stock | | $ | 1,180,152 | | | $ | 2,061,294 | |
| | | | | | | | | |
| Payout percentage for period(1) | | | 97 | % | | | 94 | % |
| | | | | | | | | |
| DCF/GAAP Reconciliation | | | | | | | | |
| Distributable Cash Flow | | $ | 1,212,341 | | | $ | 2,192,952 | |
| Adjustments to reconcile to Net Investment Income, before Income Taxes: | | | | | | | | |
| Distributions paid in stock(2) | | | — | | | | 28,136 | |
| Return of capital on distributions received from equity investments | | | (998,640 | ) | | | (1,853,248 | ) |
| Net Investment Income, before Income Taxes | | $ | 213,701 | | | $ | 367,840 | |
| | | | | | | | | |
| (1) | | Distributions paid as a percentage of Distributable Cash Flow. |
| (2) | | The only distributions paid in stock for the three months ended February 28, 2009 were from Abraxas Energy Partners, L.P. which were paid in stock as a result of credit constraints and therefore were not included in DCF. |
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Distributions: The following table sets forth distributions for the three months ended February 28, 2010 as compared to the three months ended February 28, 2009.
| Record Date | | Payment Date | | Amount |
| February 19, 2010 | | March 1, 2010 | | $0.1300 |
| February 23, 2009 | | March 2, 2009 | | $0.2300 |
Net Investment Income: Net investment income for the three months ended February 28, 2010 was $181,007 after deferred tax expense as compared to $266,657 after deferred tax expense for the three months ended February 28, 2009. The variance in net investment income is primarily related to a decrease in investment income and corresponding decreases in net expenses during the current fiscal periods as described above.
Net Realized and Unrealized Gain (Loss): We had net unrealized appreciation of $2,491,319 (after deferred taxes) for the three months ended February 28, 2010 as compared to net unrealized depreciation of $9,376,241 (after deferred taxes) for the three months ended February 28, 2009. We had net realized gains for the three months ended February 28, 2010 of $1,345,197 (after deferred taxes) as compared to net realized losses for the three months ended February 28, 2009 of $362,331 (after deferred taxes). The net realized gains for the current period are primarily attributable to the sale of Mowood’s subsidiary, Timberline, as described in the Portfolio Company Monitoring section above.
Liquidity and Capital Resources
We may raise additional capital to support our future growth through equity offerings, rights offerings, and issuances of senior securities to the extent permitted by the 1940 Act and subject to market conditions. We generally may not issue additional common shares at a price below our net asset value (net of any sales load (underwriting discount)) without first obtaining approval of our stockholders and Board of Directors.
Contractual Obligations
We do not have any significant contractual payment obligations as of February 28, 2010.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Borrowings
For the three months ended February 28, 2010, the average principal balance and interest rate for the period during which the credit facility was utilized were $4,205,634 and 5.50 percent, respectively. We used proceeds from the sale of portfolio investments to pay off and terminate the credit facility on February 10, 2010.
Recent Developments
On March 1, 2010, the Company paid a distribution in the amount of $0.13 per common share, for a total of $1,180,152. Of this total, the dividend reinvestment amounted to $144,744.
On February 8, 2010, QRCP and QELP announced that the Securities and Exchange Commission declared effective the Registration Statement of PostRock on Form S-4. PostRock is a new corporation formed for the purpose of wholly owning all three Quest entities. The Form S-4 registered with the SEC PostRock’s common stock to be issued in connection with the merger of QRCP, QELP, and Quest Midstream.
PostRock announced on March 5, 2010 that shareholders of QRCP and QELP and unitholders of Quest Midstream approved the merger and PostRock began trading on the NASDAQ under the symbol “PSTR” on March 8, 2010. Upon closing of the merger, we received 490,769 freely tradable common units of PSTR in exchange for our 1,216,881 common units of Quest Midstream. PostRock is not expected to pay cash dividends. The merger changes the risk profile of our investment from primarily a gathering company to an integrated company that has increased drilling risk and commodity exposure.
Critical Accounting Policies
The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments. While our critical accounting policies are discussed below, Note 2 in the Notes to Financial Statements included in this report provides more detailed disclosure of all of our significant accounting policies.
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Valuation of Portfolio Investments
We invest primarily in illiquid securities including debt and equity securities of privately-held companies. These investments generally are subject to restrictions on resale, have no established trading market and are fair valued on a quarterly basis. Because of the inherent uncertainty of valuation, the fair values of such investments, which are determined in accordance with procedures approved by our Board of Directors, may differ materially from the values that would have been used had a ready market existed for the investments.
Securities Transactions and Investment Income Recognition
Securities transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis. Distributions received from our equity investments generally are comprised of ordinary income, capital gains and return of capital from the portfolio company. We record investment income and returns of capital based on estimates made at the time such distributions are received. Such estimates are based on information available from each portfolio company and/or other industry sources. These estimates may subsequently be revised based on information received from the portfolio companies after their tax reporting periods are concluded, as the actual character of these distributions are not known until after our fiscal year end.
Federal and State Income Taxation
We, as a corporation, are obligated to pay federal and state income tax on our taxable income. Our tax expense or benefit is included in the Statement of Operations based on the component of income or gains (losses) to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Our business activities contain elements of market risk. We consider fluctuations in the value of our equity securities and the cost of capital under our credit facility to be our principal market risk.
We carry our investments at fair value, as determined by our Board of Directors. The fair value of securities is determined using readily available market quotations from the principal market if available. The fair value of securities that are not publicly traded or whose market price is not readily available is determined in good faith by our Board of Directors. Because there are no readily available market quotations for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our Board of Directors under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have readily available market quotations, the fair value of our investments may differ significantly from the fair values that would have been used had a ready market quotation existed for such investments, and these differences could be material.
As of February 28, 2010, the fair value of our investment portfolio (excluding short-term investments) totaled $76,924,737. We estimate that the impact of a 10 percent increase or decrease in the fair value of these investments, net of capital gain incentive fees and related deferred taxes, would increase or decrease net assets applicable to common stockholders by approximately $4,807,027.
Debt investments in our portfolio may be based on floating or fixed rates. Loans bearing a floating interest rate are usually based on LIBOR and, in most cases, a spread consisting of additional basis points. The interest rates for these debt instruments typically have one to six-month durations and reset at the current market interest rates. As of February 28, 2010, we had no floating rate debt investments outstanding.
We consider the management of risk essential to conducting our businesses. Accordingly, our risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15 of the Securities Exchange Act of 1934) during the fiscal quarter ended February 28, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are not currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding threatened against us.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 30, 2009, which could materially affect our business, financial condition or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We did not sell any securities during the three months ended February 28, 2010 that were not registered under the Securities Act of 1933.
We did not repurchase any of our common shares during the three months ended February 28, 2010.
Not applicable.
Not applicable
| Exhibit | | Description |
| 10.1 | | Expense Reimbursement Agreement dated as of February 17, 2010 by and between Tortoise Capital Resources Corporation and Tortoise Capital Advisors, LLC.(1) |
| |
| 10.2 | | Membership Interest Purchase Agreement, dated as of December 31, 2009, by and between Landfill Energy Systems LLC and Mowood, LLC, as amended by the First Amendment to Membership Interest Purchase Agreement, dated as of February 9, 2010, by and between Landfill Energy Systems, LLC and Mowood, LLC. Portions of this exhibit have been omitted subject to a pending request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, and in connection with that request an unredacted copy of this exhibit has been filed with the SEC. |
| |
| 31.1 | | Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is filed herewith. |
| |
| 31.2 | | Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, is filed herewith. |
| |
| 32.1 | | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is furnished herewith. |
| (1) | | Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K, filed March 26, 2010. |
All other exhibits for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and therefore have been omitted.
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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.
| TORTOISE CAPITAL RESOURCES CORPORATION |
| |
| |
| Date: April 8, 2010 | By: | /s/ Terry Matlack | |
| | | Terry Matlack |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
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